TDS penalty on interest credited to trade creditors survives for unpaid balances, but not where the liability later ceased.

Penalty under section 271C for failure to deduct tax at source on interest credited to trade creditors was held sustainable in principle, but not for the portion relating to three parties where the interest provision was later reversed and no interest ultimately remained payable. For that part, the assessee's bona fide belief and the absence of surviving liability supported exclusion from penalty. For the remaining credit entries, the TDS obligation arose at the time of credit under the amended Explanation to section 194A, so penalty remained exigible. The Deputy Commissioner was also held competent to levy the penalty under the provision then in force, resulting in partial relief by recomputation of the penalty amount.

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Issues: (i) Whether penalty under section 271C could be sustained for failure to deduct tax at source on interest credited to trade creditors, and whether the assessee was liable to deduct tax on the amounts relating to the three parties where no interest was ultimately payable. (ii) Whether the Deputy Commissioner of Income Tax was competent to levy penalty under section 271C on the date of the penalty order.

Issue (i): Whether penalty under section 271C could be sustained for failure to deduct tax at source on interest credited to trade creditors, and whether the assessee was liable to deduct tax on the amounts relating to the three parties where no interest was ultimately payable.

Analysis: The assessee had credited interest to outstanding liability accounts in respect of trade creditors, but in relation to three parties the interest provision was later reversed and no interest was actually paid. The record showed that the assessee entertained a bona fide belief that tax was not deductible on that part of the interest, because the liability itself did not ultimately survive. For the remaining parties, however, the credit entries attracted the amended Explanation to section 194A, and the liability to deduct tax arose at the time of credit notwithstanding later payment. The penalty was therefore not fully sustainable for the three reversed items, but remained exigible for the balance.

Conclusion: The assessee succeeded in part, and the penalty was directed to be recomputed by excluding the amount relatable to the three parties where no interest was ultimately payable.

Issue (ii): Whether the Deputy Commissioner of Income Tax was competent to levy penalty under section 271C on the date of the penalty order.

Analysis: The penalty order was passed after sub-section (2) of section 271C had come into force, which empowered the Deputy Commissioner to impose the penalty. The contention based on the law applicable on the date of filing of the return was found inapposite because the case concerned penalty for failure to deduct tax at source, not concealment penalty.

Conclusion: The Deputy Commissioner was held competent to levy the penalty.

Final Conclusion: The penalty was sustained in principle, but relief was granted by excluding the portion relating to the three parties where the interest liability did not ultimately survive, resulting in partial relief to the assessee.

Ratio Decidendi: Where interest credited to trade creditors is later found not to be payable, penalty for failure to deduct tax at source cannot survive for that portion, while the deductor remains liable for amounts covered by the statutory TDS obligation at the time of credit.

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