Section 271C Penalty Invalid When Initiated Beyond Limitation Under Section 275(1)(c): ITAT Raipur

Background and Context

The Raipur Bench of the Income Tax Appellate Tribunal in the case of Jagdish Prasad Singhania Vs Additional Commissioner of Income Tax (TDS) addressed the validity of a penalty imposed under Section 271C of the Income Tax Act 1961 for failure to deduct tax at source on interest payments.

The central dispute revolved around whether the penalty order was barred by limitation under Section 275(1)(c) when there was a substantial time gap between:

  • The first action taken to initiate penalty, and
  • The actual passing of the penalty order.

The Tribunal ultimately held that the penalty was unsustainable and had to be deleted, primarily on the ground of limitation, while also examining the nature of the underlying addition and the conduct of the authorities.

The main question before the Tribunal was:

Whether the penalty levied under Section 271C for failure to deduct TDS on interest payments was time-barred under Section 275(1)(c), considering that the Assessing Officer had already set the penalty process in motion by making a reference, but the competent TDS authority issued the show-cause notice and passed the penalty order after an inordinate delay.

Key Facts of the Case

Business and Assessment Details

  • The assessee, proprietor of M/s Swastik Minerals, was engaged in business activities requiring truck finance through NBFCs.
  • For the relevant assessment year, the assessee claimed interest expenditure of ₹77,01,366/- paid to NBFCs against truck loans.
  • During scrutiny assessment under Section 143(3), the Assessing Officer (AO) noticed from the tax audit report (Form 3CD) that no TDS had been deducted on these interest payments.

Enquiry and Additions During Assessment

  1. Verification with NBFCs
    The AO carried out independent verification with the NBFCs to whom the interest was claimed to have been paid. Based on the replies, the AO concluded that:

    • The assessee had claimed excess interest of ₹14,11,167/-, over and above the interest actually charged by the NBFCs.

  2. Tax Treatment by AO

    • The amount of ₹14,11,167/- was treated as unexplained expenditure and added under Section 69C.
    • An additional disallowance of ₹65,000/- was made out of various expenses.
    • Notably, no disallowance was made under Section 40(a)(ia) in respect of the remaining interest of ₹62,90,199/- (₹77,01,366/- minus ₹14,11,167/-), even though the audit report had clearly flagged non-deduction of TDS.

  3. Assessment Completion

    • Assessment under Section 143(3) was completed on 29.12.2016.
    • The assessment order did not contain any direction or observation regarding initiation of penalty under Section 271C, nor did it discuss TDS default in the context of penalty.

Initiation of Penalty Proceedings Under Section 271C

Reference by Assessing Officer

  • On 27.06.2017, nearly six months after completing the assessment, the AO issued a formal letter to the Joint Commissioner / Additional Commissioner of Income Tax (TDS), Raipur.
  • In this communication, the AO:
    • Recorded that the assessee had failed to deduct TDS on interest payments to NBFCs.
    • Specifically mentioned that penalty under Section 271C was attracted.
    • Forwarded relevant records including the assessment order and tax audit report.
  • The reference was received by the TDS authority around July 2017.

Delay in Issuance of Show-Cause Notice