Section 271C — Penalty for Failure to Deduct Tax at Source
Case Laws & Commentary — Income-tax Act, 1961 (as amended by the Finance Act, 2026) — bharattax.co Treatise
Status: Live and important. Penalty equal to the amount of tax not deducted (or not paid as required under the second proviso to section 194B etc.) for failure to deduct the whole or any part of the tax under Chapter XVII-B. Imposed by the Joint Commissioner; subject to reasonable cause under section 273B.
Finance Act, 2026: No amendment by the Finance Act, 2026.
Mechanism: Failure to deduct (or to pay, in the limited section 194B-type cases) tax required under Chapter XVII-B → penalty equal to the tax not deducted/paid → unless reasonable cause is shown under section 273B.
Litigation profile: Heavily litigated and now controlled by a landmark Supreme Court decision: section 271C is confined to a failure to deduct (and the limited statutory non-payment cases), and does NOT extend to mere belated remittance of tax that was in fact deducted.
A. COMMENTARY
The decisive distinction: non-deduction versus delayed remittance
The 2023 Supreme Court decision in US Technologies International is the governing authority. Section 271C(1)(a) is attracted only where a person "fails to deduct" the whole or any part of the tax as required under Chapter XVII-B (and clause (b) covers the narrow non-payment cases under the second proviso to section 194B and the like). It does NOT cover the situation where tax was duly deducted but remitted late. Consequently, no section 271C penalty can be levied for mere belated payment of TDS after deduction; the consequences of late remittance are interest under section 201(1A) and, in appropriate cases, prosecution under section 276B — not a section 271C penalty.
Section 271C is within section 273B. A bona fide belief that tax was not deductible — for instance, a genuine and reasonable view on the taxability of a payment, the applicability of a treaty, or the character of a receipt — constitutes reasonable cause and defeats the penalty. The Hindustan Steel discretion and the cases on bona fide, debatable deductibility govern.
The penalty is imposed by the Joint Commissioner, not the Assessing Officer. It is distinct from the section 201(1) liability to be treated as an assessee-in-default and the section 201(1A) interest; a deductor may be liable under section 201 yet escape section 271C on reasonable cause, and (after US Technologies) cannot be penalised under section 271C at all for delayed remittance.
B. STATUTORY TEXT (verbatim)
Reproduced from the Income-tax Act, 1961 as amended up to the Finance Act, 2025; Finance Act, 2026 changes are noted above.
Penalty for failure to deduct tax at source.
271C. (1) If any person fails to—
(a) deduct the whole or any part of the tax as required by or under the provisions of Chapter XVII-B;
or
(b) pay or ensure payment of, the whole or any part of the tax as required by or under—
then, 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.
(2) Any penalty imposable under sub-section (1) shall be imposed by the Joint Commissioner:
Provided that any penalty under sub-section (1) on or after the 1st day of April, 2025, shall be imposed
by the Assessing Officer.
11. Word “or” omtt., by Act No. 08 of 2023, w.e.f. 1-4-2023.
Ins. w.e.f. 1-4-2023.
C. AUTHORITIES
The authorities are anchored by the Supreme Court on the scope of section 271C (failure to deduct, not delayed remittance) and on the requirement of contumacious conduct, supported by the leading "bona fide belief / reasonable cause" High Court line and Tribunal application.
1. Scope — section 271C does not reach delayed remittance
US Technologies International (P) Ltd v. CIT (2023) 453 ITR 644 (SC) / 2023 SCC OnLine SC 387 / (2023) 149 taxmann.com 144 (SC)
Holding Section 271C(1)(a) applies only to a failure to deduct tax at source; no penalty under section 271C is leviable for belated remittance of TDS in fact deducted. Late payment carries interest under section 201(1A) and possible prosecution under section 276B, not a section 271C penalty. (The Kerala High Court’s contrary view was set aside.)
Use The controlling authority; deletes 271C penalties founded on delayed remittance.
CIT v. Eli Lilly & Co. (India) (P) Ltd (2009) 312 ITR 225 (SC)
Holding The TDS machinery and its penal consequences operate on the obligation to deduct; section 271C is attracted to failures to deduct, with section 273B furnishing the reasonable-cause defence.
Use Locates section 271C within the deduction obligation and confirms the reasonable-cause shelter.
2. No penalty without contumacious conduct / where reasonable cause shown
CIT v. Bank of Nova Scotia (2016) 15 SCC 81 (SC)
Holding A section 271C penalty for failure to deduct TDS cannot be levied where the Department is unable to show contumacious conduct on the part of the assessee; the Tribunal’s deletion of penalty was upheld.
Use The Supreme Court "no contumacious conduct, no penalty" authority — a powerful defence.
CIT v. Itochu Corporation (2004) 268 ITR 172 (Delhi)(HC)
Holding For a section 271C penalty it must be shown that there was contumacious conduct; absent that, and where the default was bona fide, the penalty is deleted.
Use Leading High Court statement of the contumacious-conduct requirement.
Holding On similar facts to Itochu, a section 271C penalty was deleted for want of contumacious conduct and in the presence of a bona fide belief.
Use Companion High Court authority reinforcing the bona fide-belief defence.
3. Bona fide, debatable view on deductibility — reasonable cause (section 273B)
Principle — genuine, debatable view on deductibility
Proposition A genuine and reasonable belief that tax was not deductible (taxability, treaty application, characterisation of the payment) is reasonable cause under section 273B and defeats the section 271C penalty.
Use The standard defence where deductibility was genuinely arguable.
M/s Arrone Ceramic v. JCIT (TDS) (ITAT Rajkot, 23-8-2023)
Holding Where the assessee showed a bona fide cause for the TDS default, the Tribunal applied section 273B and held the section 271C penalty not leviable.
Use Recent Tribunal application of the reasonable-cause shelter.
Hindustan Steel Ltd v. State of Orissa (1972) 83 ITR 26 (SC)
Holding Penalty is not automatic; it is not to be imposed for a technical/venial breach or a bona fide default.
Use Reinforces the discretionary, non-automatic character of the 271C penalty.
Prepared for the bharattax.co Treatise on the Income-tax Act, 1961 (as amended by the Finance Act, 2026). Statutory text reproduced from the official Act; case-law holdings are the author’s summaries for professional use.
CHAPTER XXI — PENALTIES IMPOSABLE
Section 271C — Penalty for Failure to Deduct Tax at Source
Case Laws & Commentary — Income-tax Act, 1961 (as amended by the Finance Act, 2026) — bharattax.co Treatise
Status: Live and important. Penalty equal to the amount of tax not deducted (or not paid as required under the second proviso to section 194B etc.) for failure to deduct the whole or any part of the tax under Chapter XVII-B. Imposed by the Joint Commissioner; subject to reasonable cause under section 273B.
Finance Act, 2026: No amendment by the Finance Act, 2026.
Mechanism: Failure to deduct (or to pay, in the limited section 194B-type cases) tax required under Chapter XVII-B → penalty equal to the tax not deducted/paid → unless reasonable cause is shown under section 273B.
Litigation profile: Heavily litigated and now controlled by a landmark Supreme Court decision: section 271C is confined to a failure to deduct (and the limited statutory non-payment cases), and does NOT extend to mere belated remittance of tax that was in fact deducted.
A. COMMENTARY
The decisive distinction: non-deduction versus delayed remittance
The 2023 Supreme Court decision in US Technologies International is the governing authority. Section 271C(1)(a) is attracted only where a person "fails to deduct" the whole or any part of the tax as required under Chapter XVII-B (and clause (b) covers the narrow non-payment cases under the second proviso to section 194B and the like). It does NOT cover the situation where tax was duly deducted but remitted late. Consequently, no section 271C penalty can be levied for mere belated payment of TDS after deduction; the consequences of late remittance are interest under section 201(1A) and, in appropriate cases, prosecution under section 276B — not a section 271C penalty.
Reasonable cause under section 273B
Section 271C is within section 273B. A bona fide belief that tax was not deductible — for instance, a genuine and reasonable view on the taxability of a payment, the applicability of a treaty, or the character of a receipt — constitutes reasonable cause and defeats the penalty. The Hindustan Steel discretion and the cases on bona fide, debatable deductibility govern.
Who imposes; relationship to section 201
The penalty is imposed by the Joint Commissioner, not the Assessing Officer. It is distinct from the section 201(1) liability to be treated as an assessee-in-default and the section 201(1A) interest; a deductor may be liable under section 201 yet escape section 271C on reasonable cause, and (after US Technologies) cannot be penalised under section 271C at all for delayed remittance.
B. STATUTORY TEXT (verbatim)
Reproduced from the Income-tax Act, 1961 as amended up to the Finance Act, 2025; Finance Act, 2026 changes are noted above.
Penalty for failure to deduct tax at source.
271C. (1) If any person fails to—
(a) deduct the whole or any part of the tax as required by or under the provisions of Chapter XVII-B;
or
(b) pay or ensure payment of, the whole or any part of the tax as required by or under—
(i) sub-section (2) of section 115-O; ***
(ii) the proviso to section 194B;
(iii) the first proviso to sub-section (1) of section 194R; or
(iv) the proviso to sub-section (1) of section 194S; or
(v) sub-section (2) of section 194BA,
then, 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.
(2) Any penalty imposable under sub-section (1) shall be imposed by the Joint Commissioner:
Provided that any penalty under sub-section (1) on or after the 1st day of April, 2025, shall be imposed
by the Assessing Officer.
11. Word “or” omtt., by Act No. 08 of 2023, w.e.f. 1-4-2023.
Ins. w.e.f. 1-4-2023.
C. AUTHORITIES
The authorities are anchored by the Supreme Court on the scope of section 271C (failure to deduct, not delayed remittance) and on the requirement of contumacious conduct, supported by the leading "bona fide belief / reasonable cause" High Court line and Tribunal application.
1. Scope — section 271C does not reach delayed remittance
US Technologies International (P) Ltd v. CIT (2023) 453 ITR 644 (SC) / 2023 SCC OnLine SC 387 / (2023) 149 taxmann.com 144 (SC)
Holding Section 271C(1)(a) applies only to a failure to deduct tax at source; no penalty under section 271C is leviable for belated remittance of TDS in fact deducted. Late payment carries interest under section 201(1A) and possible prosecution under section 276B, not a section 271C penalty. (The Kerala High Court’s contrary view was set aside.)
Use The controlling authority; deletes 271C penalties founded on delayed remittance.
CIT v. Eli Lilly & Co. (India) (P) Ltd (2009) 312 ITR 225 (SC)
Holding The TDS machinery and its penal consequences operate on the obligation to deduct; section 271C is attracted to failures to deduct, with section 273B furnishing the reasonable-cause defence.
Use Locates section 271C within the deduction obligation and confirms the reasonable-cause shelter.
2. No penalty without contumacious conduct / where reasonable cause shown
CIT v. Bank of Nova Scotia (2016) 15 SCC 81 (SC)
Holding A section 271C penalty for failure to deduct TDS cannot be levied where the Department is unable to show contumacious conduct on the part of the assessee; the Tribunal’s deletion of penalty was upheld.
Use The Supreme Court "no contumacious conduct, no penalty" authority — a powerful defence.
CIT v. Itochu Corporation (2004) 268 ITR 172 (Delhi)(HC)
Holding For a section 271C penalty it must be shown that there was contumacious conduct; absent that, and where the default was bona fide, the penalty is deleted.
Use Leading High Court statement of the contumacious-conduct requirement.
CIT v. Mitsui & Co. Ltd (2005) 272 ITR 545 (Delhi)(HC)
Holding On similar facts to Itochu, a section 271C penalty was deleted for want of contumacious conduct and in the presence of a bona fide belief.
Use Companion High Court authority reinforcing the bona fide-belief defence.
3. Bona fide, debatable view on deductibility — reasonable cause (section 273B)
Principle — genuine, debatable view on deductibility
Proposition A genuine and reasonable belief that tax was not deductible (taxability, treaty application, characterisation of the payment) is reasonable cause under section 273B and defeats the section 271C penalty.
Use The standard defence where deductibility was genuinely arguable.
M/s Arrone Ceramic v. JCIT (TDS) (ITAT Rajkot, 23-8-2023)
Holding Where the assessee showed a bona fide cause for the TDS default, the Tribunal applied section 273B and held the section 271C penalty not leviable.
Use Recent Tribunal application of the reasonable-cause shelter.
Hindustan Steel Ltd v. State of Orissa (1972) 83 ITR 26 (SC)
Holding Penalty is not automatic; it is not to be imposed for a technical/venial breach or a bona fide default.
Use Reinforces the discretionary, non-automatic character of the 271C penalty.
Prepared for the bharattax.co Treatise on the Income-tax Act, 1961 (as amended by the Finance Act, 2026). Statutory text reproduced from the official Act; case-law holdings are the author’s summaries for professional use.