Supreme Court upholds non-levy of penalty for delayed remittance of withholding tax since it is liable for prosecution

This Tax Alert summarizes a ruling of the Supreme Court (SC) dated 10 April 2023, in a batch of appeals, with the lead case being US Technologies International  (Taxpayer). The issue before the SC was whether the default of delayed remittance of withholding tax is liable to penalty under Section (S.) 271C of the Income Tax Act, 1961 (ITA), in addition to other consequences like interest and prosecution. 

In the facts of the case, the Taxpayer deposited withholding tax from payment of salary and other contractual payments with a delay of five days to ten months for tax year 2002-03. The tax authority levied penalty under S.271C for such default, in addition to interest. The Taxpayer unsuccessfully challenged the levy of penalty in the Kerala High Court (HC).

On further appeal by the Taxpayer, the SC held that the instant case was of belated remittance of withholding tax, and not a case of failure to deduct withholding tax. The SC held that S.271C itself makes a distinction between “fails to deduct” withholding tax and “fails to pay” other tax. Since the default in the present case is not a failure to deduct withholding tax, no penalty can be levied on the Taxpayer. The penal provisions are required to be construed strictly and literally. Wherever the legislature intended to provide for consequences for delayed remittance, it has provided so by way of interest and prosecution. The circumstance of failure to pay withholding tax on time cannot be read into S.271C.