Section 271C

What a section 271C notice is

TDS — Penalty for Failure to Deduct. Penalty proposed for not deducting TDS. It is a critical-severity notice in the tds family under the Income Tax Act 1961.

If you ignore it: Penalty levied.

Time to reply: this notice type carries no standard period. The date is printed on the notice itself and you must read it off the document. Reasonable cause defence is the usual route. Check whether the allegation is failure to DEDUCT or failure to DEPOSIT — the two are treated differently and the distinction matters.

Section 271C — the law in short

What the courts have decided on section 271C, in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• US Technologies International Pvt Ltd v CIT Supreme CourtHelps taxpayer
  You deducted the TDS but paid it late. Is penalty under s.271C leviable?
  No. Section 271C(1)(a) is attracted by a failure to deduct, not by late payment of tax already deducted. But interest under s.201(1A) still runs, and prosecution under s.276B remains available — this is not an amnesty.
• Singapore Airlines Ltd v CIT Supreme CourtCuts both ways
  My agents keep the difference between the price they charge customers and the net price they pay me — do I have to deduct TDS on money that never passed through my hands?
  Yes. The Supreme Court held on 14 November 2022 that the supplementary commission retained by IATA travel agents — the excess of the actual fare charged to the passenger over the net fare payable to the airline — is "commission" under section 194H, and the airlines were bound to deduct tax at source on it. Section 194H is read with section 182 of the Contract Act: where the contract shows a principal-agent relationship, the definition is attracted. But because the agents had paid tax on those amounts, no recovery of the shortfall could be made from the airlines; only interest under section 201(1A) survives, and the section 271C penalties were quashed.
• CIT v Bank of Nova Scotia Supreme CourtHelps taxpayer
  I have paid the short-deducted tax and the interest to close the matter — can the department still levy penalty under section 271C?
  No, not on findings like these. The Supreme Court dismissed the Revenue's appeal on 7 January 2016, holding there was no substantial question of law and that the Commissioner (Appeals) and the Tribunal had assessed the facts and the law properly and correctly. The Tribunal had cancelled the section 271C penalty on the footing that the case was not about recovery under section 201(1) or compensatory interest under section 201(1A) — both already paid to end the dispute — and that penalty requires contumacious conduct on the part of the assessee to be established, following the Delhi High Court in Itochu Corporation and Mitsui & Company.
• CIT v Eli Lilly & Co (India) P Ltd Supreme CourtCuts both waysSuperseded by amendment
  The TDS officer says I under-deducted under s.192. If my estimate was made honestly, does that answer the demand, the interest and the penalty?
  It answers the penalty, not the tax and not the interest. The Supreme Court treated s.192(1) as requiring the employer to estimate the salary — an exercise akin to computation — and held that where there was a shortfall the officer proceeds under s.201(1) to recover it and interest under s.201(1A) runs from the date the tax was deductible to the date the tax was actually paid. On penalty it held that s.271C should not be invoked where the issue was a nascent one and the employers had acted bona fide.
• Raitha Seva Sahakara Sangha Niyamita v Union of India High CourtHelps taxpayerValidity unconfirmed
  My society's bank has marked a lien on its current account for s.194N tax on cash withdrawals which the bank itself never deducted. Can a bank do that, and is the society liable?
  No, on both counts. The Karnataka High Court held that the bank had no statutory authority to create a lien over the amount lying in its customer's current account. The obligation under s.194N is cast on the paying bank and is to be discharged at the time of payment; the consequence the Court identified is a penalty on the bank under s.271C, imposed by a Joint Commissioner, and the section does not contemplate either a deduction liability or a penalty on the customer.
• Pune Municipal Corporation v ACIT (TDS), Pune High CourtHelps taxpayerValidity unconfirmed
  I have been held an assessee in default under s.201 for not deducting s.194C and s.194LA tax when I issued TDR certificates instead of paying money. Is there an answer where the payment is wholly in kind?
  The Bombay High Court found a strong prima facie case and stayed the s.201 order, the demand and the s.271C penalty notice. Its prima facie view is that the words 'or by any other mode' in s.194C and in s.194LA must be read ejusdem generis with payment in cash or by cheque or draft, so those sections do not operate where the payment is made in kind by issuing transferable development rights. The court drew support for that reading from s.194B and s.194R, which do contain express machinery for a benefit paid wholly in kind and which is conspicuously absent from s.194C and s.194LA.
• CIT (TDS) v Turner General Entertainment Networks India High CourtHelps taxpayerSuperseded by amendment
  The show-cause notice came a year after the AO referred the matter to the JCIT. Which date starts the s.275(1)(c) clock?
  The reference, not the show-cause notice. The expression 'action for the imposition of penalty is initiated' in s.275(1)(c) refers to the date on which the first introductory step for such action is taken. The Assessing Officer's reference to the Joint Commissioner was that step, so the penalty order passed on the footing of the later show-cause notice was out of time.
• Puri Constructions Pvt Ltd v Addl CIT High CourtHelps departmentValidity unconfirmed
  I paid External Development Charges to HUDA/HSVP because the Town and Country Planning Department told me to. I have no contract with HUDA. Does s.194C still oblige me to deduct tax at source?
  Yes. The Delhi High Court rejected the developers' challenge and held that EDC payments fall within s.194C. The privity argument does not work: s.194C looks for a contract under which the contractor carries out work, not for a contract between the payer and the payee. Nor does s.196 rescue the developer, because HSVP is a legal entity distinct from the Government of Haryana. This is a different question from the one decided in DLF Homes Panchkula, which held EDC is not 'rent' under s.194-I. The two decisions sit side by side and do not conflict.
• A.M. Enterprises v State of Jharkhand High CourtHelps taxpayerSuperseded by amendment
  I paid the TDS with interest before sanction and no penalty was ever levied. Can they prosecute?
  On this combination of facts, no. The High Court quashed the s.276B/278B prosecution because the tax with interest had been deposited before sanction under s.279(1), no penalty proceedings had ever been initiated, and the delay was explained. If a cancelled penalty destroys the basis of a prosecution, the position is stronger where no penalty was ever adjudicated at all.
• CIT v Media World Wide P Ltd High CourtHelps taxpayerValidity unconfirmed
  I pay uplinking and bandwidth charges for my channel. Is that 194C work or 194J technical services?
  S.194C. The Court held first that no technical service was rendered at all: a standard, automated facility that anyone may use on payment of the prescribed fee is not a service rendered to the payer, whatever equipment is involved. Only then did it turn to s.194C, whose inclusive definition of 'work' specifically includes broadcasting and telecasting. Tax was rightly deducted under s.194C and there was no short deduction.
• N C Shaw and Co Beverages P Ltd v ITO (TDS) ITATHelps taxpayer
  I manufacture liquor and settle volume-linked scheme discounts with my distributors by credit note. The TDS officer says those credit notes are commission under s.194H and has made me an assessee in default. Is he right?
  No, on these facts. The Kolkata Bench held that a post-sale discount in cash or in kind, given to a buyer with whom the seller deals on a principal-to-principal basis, is a normal sales discount that reduces the sale price and is not commission or brokerage within Explanation (i) to s.194H, so there was no obligation to deduct and no default under s.201(1) or interest under s.201(1A); the consequential s.271C penalty went with it. Note what this order is not: although the assessee argued s.194R and s.194Q at length, the Tribunal decided the case entirely on s.194H and its operative paragraphs say nothing about either provision.
• ACIT v SDV International Logistics Ltd ITATHelps taxpayerValidity unconfirmed
  My employees claim HRA and home loan interest together. Must I treat that as a double benefit?
  No, not on these facts. The point was ground 2 of a composite order under s.201 and s.271C. The first appellate authority had held the exemption and the interest deduction to be two independent provisions, each with its own conditions, and the Tribunal upheld that because the department could not controvert it, so the short deduction and the consequential penalty both fell away. The employees concerned had let out the houses they owned and were living in rented premises, with the whole of the interest set against rental income and the exemption claimed on the rent they actually paid.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.