Mumbai ITAT: The liability of the assessee u/s.201(1) is a pre-condition for imposition of penalty u/s.271C

ACIT (TDS) v. American School of Bombay Education Trust, on 31^st January, 2011

I.T.A.Nos.6349 to 6351/Mum/2009

Assessment Year: 1997-98 to 1999-2000)

Question/s before the Hon’ble Tribunal: Whether action u/s 201(1) deeming an assessee in default is a necessary precondition to the levy of penalty u/s 271C?

Relevant facts: Briefly stated facts of the case are that a survey action u/s.133A was taken upon the assessee on 24-01-2006. Orders u/s. 201(1) and 201(1A) were passed by the DCIT (TDS). Thereafter, penalty was levied u/s.271C, inter alia, in respect of the years under consideration. When the matter came up before the ld. CIT(A), the assessee contended that the Tribunal vide order dated 01-07- 2009 in ITA Nos.3622 to 3624/M/07 has observed that the initiation of proceedings in the instant years was beyond the period of 6 years and hence barred by limitation. Considering the fact that the Tribunal has quashed the orders u/s.201(1) and 201(1A) in respect of these years, the ld. CIT(A) ordered for the deletion of penalty u/s.271C in these years, against which the Revenue has come up in appeals before us.

Upholding the appeal of the assessee, the Hon’ble Tribunal held that:

Para 3: “A bare perusal of this provision indicates that penalty u/s.271C can be imposed only when there is a failure on the part of the assessee to deduct or pay the whole or any part of tax and, then, the quantum of penalty is equal to the amount of tax which such person failed to deduct or pay. From here, it emerges that there must be some sum which such person failed to deduct or pay. Such amount constitutes the basis for imposition of penalty u/s.271C. In other words, the liability of the assessee u/s.201(1) is a pre-condition for imposition of penalty u/s.271C… Once the assessee is not in default for failure to deduct or pay tax at source, naturally, there cannot any question of imposing penalty u/s.271C for the reason that the very basis of such penalty is the amount of tax which such person failed to deduct or pay as per law and when there is no such amount in existence, the possibility of imposing penalty will automatically be ruled out.”

The decision is available here.