CIT Vs Viswapriya Financial Services & Securities Ltd. (Madras High Court)
The Madras High Court recently ruled in favor of Viswapriya Financial Services & Securities Ltd., holding that the company was not liable for a penalty under Section 271C of the Income Tax Act, 1961. The case revolved around the non-deduction of tax at source (TDS) under Section 194A on returns paid to investors. The Income Tax Department contended that the company had consciously avoided TDS obligations by advertising that returns on investments would not be subject to TDS. However, the court upheld the ruling of the Income Tax Appellate Tribunal (ITAT), which found that the company had acted in a bona fide manner based on legal advice, thus establishing a reasonable cause for non-compliance.
The dispute originated when the Assessing Officer classified Viswapriya Financial Services as a defaulter under Section 201(1) for failing to deduct and remit TDS on interest payments. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this view. The ITAT, however, acknowledged that the company had relied on a legal opinion before structuring its investment scheme. It ruled that while the non-deduction of TDS was an error, it did not warrant a penalty under Section 271C, which requires a willful failure to deduct tax. The Revenue challenged this decision in the High Court, arguing that ignorance of the law was not a valid defense.
