Case Note & Summary
The petitioners, Sri A.S. Chinnaswamy Raju and Sri C.S. Sunder Raju, directors of M/s Sunray Computers Pvt. Ltd., challenged two orders dated 14.11.2013 passed by the Income Tax Officer (International Taxation) imposing penalty under Section 271C of the Income Tax Act, 1961 for the company's failure to deduct tax at source under Section 195 on interest paid to a non-resident. The petitioners argued that they were not the 'persons responsible for paying' and that penalty under Section 271C requires mens rea and cannot be imposed vicariously. The Revenue contended that as directors, they were responsible for the company's affairs. The High Court of Karnataka, per Justice H.G. Ramesh, allowed the petitions, quashing the penalty orders. The court held that Section 271C imposes penalty on a person who fails to deduct tax, and such person must be the one responsible for paying. Vicarious liability under Section 179 is for tax due, not penalty. The Revenue failed to establish that the petitioners were the persons responsible for the failure to deduct TDS. The court emphasized that penalty provisions are penal and require strict construction; automatic liability of directors is not warranted.
Headnote
A) Income Tax - Penalty under Section 271C - Vicarious Liability of Directors - Section 179, Section 195, Section 271C of Income Tax Act, 1961 - The court considered whether directors can be penalized for company's failure to deduct TDS on interest paid to non-resident without proof of their personal default. Held that penalty under Section 271C is not vicarious; it requires the person to be the 'person responsible for paying' and must have failed to deduct tax. Directors cannot be automatically liable without evidence of their role in the failure. (Paras 1-10) B) Income Tax - Section 195 - TDS on Interest to Non-Resident - Section 195 of Income Tax Act, 1961 - The company paid interest to a non-resident without deducting tax at source. The Revenue sought to impose penalty on directors under Section 271C. The court held that the liability to deduct TDS under Section 195 is on the payer, and penalty under Section 271C can only be imposed on the person who failed to deduct, which must be established by the Revenue. (Paras 1-10) C) Income Tax - Section 179 - Liability of Directors for Tax - Section 179 of Income Tax Act, 1961 - The court distinguished Section 179 which deals with liability of directors for tax due from a private company in liquidation, from penalty under Section 271C. Section 179 creates vicarious liability for tax, but penalty under Section 271C requires personal default. (Paras 1-10)
Issue of Consideration
Whether directors of a private company can be held liable for penalty under Section 271C of the Income Tax Act, 1961 for the company's failure to deduct tax at source under Section 195, without establishing their personal involvement or mens rea.
Final Decision
The writ petitions are allowed. The impugned orders dated 14.11.2013 passed by the 3rd respondent are quashed.
Law Points
- Liability of directors for company's failure to deduct TDS
- Section 179 of Income Tax Act
- 1961
- vicarious liability
- penalty under Section 271C
- requirement of mens rea
- strict liability
