TDS penalty not sustainable where payees reported income and no default order under section 201(1) existed

Penalty under section 271C for alleged failure to deduct tax at source was held unsustainable where no order under section 201(1) had been passed treating the payer as an assessee in default and the recipients had already included the income in their returns. Applying the amended scheme of section 201, the Tribunal noted that once the payees had declared the income and paid tax, the payer could not be treated as in default for the underlying tax liability. As the foundation for penalty did not survive, the penalty was deleted.

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Issues: Whether penalty under section 271C of the Income-tax Act, 1961 was leviable when no order under section 201(1) had been passed treating the assessee as an assessee in default and the recipients had included the income in their returns.

Analysis: The appeals involved a common question relating to penalty for failure to deduct tax at source on interest payments made to non-banking financial companies. The record showed that only an order under section 201(1A) had been passed, while no order under section 201(1) declaring the assessee to be in default was found. The amended scheme of section 201 was applied by the Tribunal to note that where the payees had declared the income in their returns and paid tax, the payer could not be treated as in default. In such circumstances, the basis for imposing penalty under section 271C did not survive. Reliance was also placed on coordinate-bench decisions taking the same view in similar circumstances.

Conclusion: Penalty under section 271C was not sustainable and was deleted; the issue was decided in favour of the assessee.

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