Penalty and Prosecution for failure to deduct tax at source [ Section 271C and section 276B] - Income Tax - Ready Reckoner - Income Tax

Penalty for failure to deduct tax at source [ Section 271C ] Applicability Section 271C applies to any person who is required to deduct or pay tax under Chapter XVII-B or specified provisions. The term person is defined broadly in Section 2(31) of the Act to include individuals, companies, firms, associations of persons, and others. Thus, the obligation to deduct or pay TDS and the corresponding liability u/s 271C is not limited to corporate entities but extends to all categories of taxpayers. The provision is triggered in two principal scenarios: Failure to Deduct TDS: Where a person fails to deduct the whole or any part of the tax as required by or under the provisions of Chapter XVII-B. Failure to Pay or Ensure Payment of Tax: Where a person fails to pay or ensure payment of tax as required by or under certain specified provisions (e.g., Section 115O(2), Section 194B proviso, Section 194R, Section 194S, and Section 194BA). Penalty under Section 271C shall be imposed for the following defaults: a. Failure to Deduct TDS [Clause (a) of section 271C(1) ] Deduct the whole or any part of the tax as required by or under the provisions of Chapter XVII-B (i.e. Section 192 to 206B) ; or This is the principal limb of Section 271C, covering the failure to deduct tax at source as mandated by Chapter XVII-B. This chapter encompasses a wide array of payments, including but not limited to: Salaries (Section 192) Interest (Section 194A) Winnings from lotteries and games (Section 194B) Payments to contractors (Section 194C) Rent (Section 194I) Fees for professional or technical services (Section 194J) The provision is triggered irrespective of the quantum of tax involved-even a partial failure attracts penalty. b. Failure to Pay or Ensure Payment [Clause (b) of section 271C(1) ] This clause, inserted and amended over time, broadens the scope to include not just deduction but also payment or ensuring payment of tax under specific provisions, notably: Section 115O(2): Failure to pay dividend distribution tax Section 115O(2) ; (i.e. Deals with Dividend Distribution Tax (DDT), requiring companies to pay tax on distributed profits.) Section 194B Proviso: Failure to pay or ensure payment of tax in respect of the winnings in kind, whether wholly or partly, where cash part is not sufficient to meet the liability for deduction of tax in respect of whole winnings as referred to in proviso to Section 194B ; (i.e. Relates to the obligation to ensure tax payment on winnings from lotteries or games, especially where winnings are wholly or partly in kind) Section 194BA: Failure to ensure payment of tax in respect of the winnings from online game in kind, whether wholly or partly, where cash part is not sufficient to meet the liability for deduction of tax in respect of whole winnings from online games as referred to in Section 194BA(2) ; (i.e. TDS on winnings from online games ) Section 194R:- Failure to ensure payment of tax in respect of the benefit or perquisite in kind, whether wholly or partly, where cash part is not sufficient to meet the liability for deduction of tax in respect of whole of such benefit or perquisite as referred to in first proviso to Section 194R(1) ; (i.e. dealing with TDS on benefits/perquisites) Section 194S:- Failure to ensure payment of tax in respect of the consideration for transfer of virtual digital asset (VDA) in kind, whether wholly or partly, where cash part is not sufficient to meet the liability for deduction of tax in respect of such consideration for the transfer of VDA as referred to in proviso to Section 194S(1) . The inclusion of ensure payment recognizes practical scenarios where the payer may not directly deduct TDS but must ensure that tax is paid before releasing payments in kind or non-cash transactions. Quantum of Penalty Such person shall be liable to pay, by way of penalty, a sum equal to the amount of tax which such person failed to deduct or pay or ensure payment of, as aforesaid. [ Section 271C(1) ] Authority Empowered to Impose Penalty Upto 31.03.2025 - Any penalty imposable shall be imposed under section 271C(1) by the Joint Commissioner. [ Section 271C(2) ] From 01.04.2025 - now provides that the Assessing Officer shall have this power for penalties under section 271C(1) imposed on or after that date. [Inserted vide Section 82 of the Finance Act, 2025 ] Prosecution [ Section 276B ] If a person fails to pay to the credit of the Central Government, he shall be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extend to seven years and with fine. Guidelines for Compounding of any Offences under the Income-Tax Act, 1961. Procedural Safeguards and Exceptions Section 271C doesn t clearly mention any exceptions, but Section 273B allow for some relief. If a person can show they had a genuine reason for not following the rules, they might not have to pay the penalty. This means the law isn t completely rigid it takes into account honest mistakes and tries to be fair.