Income Tax Case Law Roundup: The 7-Day SCN Rule and the Section 271C TDS Penalty Distinction
Two High Court rulings this week give preparers concrete, usable ground on two very different fronts of income-tax litigation: procedural fairness in faceless assessment, and the scope of penalty under Section 271C for TDS defaults.
- AP HC: a 7-day SCN reply window under CBDT’s faceless assessment SOP is a mandatory natural-justice floor — a shorter window can void the order outright.
- Madras HC granted an interim stay on a ₹101.14 crore Section 271C penalty, reinforcing that 271C targets non-deduction, not delayed remittance of TDS already deducted.
- Action: check every pending 271C matter for the deduct-late-vs-never-deducted distinction, and audit faceless assessment SCNs for the 7-working-day compliance.
Andhra Pradesh HC: a 7-day SCN reply window is a natural-justice floor, not a courtesy
The Andhra Pradesh High Court set aside a faceless assessment order after finding that the show-cause notice gave the assessee only four working days to respond, against the seven working days prescribed under CBDT’s own Standard Operating Procedure for faceless assessment. The Court treated this as a breach of natural justice sufficient to invalidate the order outright, not a curable procedural irregularity.
What to do with pending matters
- Diarise the exact date every SCN is received and calculate the seven-working-day window immediately, excluding weekends and holidays as per the SOP.
- Where a shorter window has been given, object in writing before the reply deadline rather than waiting to raise it as a ground later — a contemporaneous objection strengthens the eventual challenge.
- Review any faceless assessment order under appeal for the same defect; it may be an independent ground even if not originally pleaded.
Madras HC: Section 271C penalty applies to non-deduction, not delayed remittance
In a matter involving Cognizant Technology Solutions, the Madras High Court granted an interim stay on a ₹101.14 crore penalty under Section 271C, relying on the reasoning that this penalty provision is directed at cases of failure to deduct tax at source, not cases where tax was deducted but remitted to the government late. The distinction draws on the Supreme Court’s earlier reasoning in the US Technologies International matter.
Why the distinction is significant
Revenue authorities have, in practice, sometimes treated delayed TDS deposit and outright non-deduction as interchangeable triggers for Section 271C proceedings. This ruling reinforces that they are legally distinct: delayed deposit already carries its own consequence under Section 201(1A) interest, and layering a 271C penalty on top of that — where deduction did in fact occur — sits on weaker statutory footing.
Action point
Re-examine any pending Section 271C proceedings against clients on this specific distinction: was tax deducted late-but-deposited, or never deducted at all? The former has a stronger basis for relief following this line of reasoning; the latter does not.
Both matters remain subject to further appellate developments. Verify current case status before citing to a client, and cross-check statutory references against incometax.gov.in.
Prepared by the Finoscape Editorial Team
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