[aaykarbhavan] Non-compliance of TDS provisions – After effects by Darshanji

 

[2013] 36 taxmann.com 410  (Article)

Non-compliance of TDS provisions – After effects

DARSHAN JAIN

CA

Introduction

1. The provisions relating to tax deduction at source, popularly called as TDS and ironically pronounced as "Tedious", are all contained in Chapter XVII of the Income-tax Act. The concept of withholding tax also known as retention tax prevails in most of the countries and India is no exception. Generally, it is the duty of the person making payment to deduct tax, but in certain cases, the Act also requires the person in receipt of certain income to collect tax at specified rates. The liability to deduct tax at source is a vicarious liability, and, there was never a pressure to comply with the provisions of TDS, but this scenario has changed after the insertion of the brutal section 40(a)(ia), which envisages a complete disallowance in case of non-compliances. Of late, the department has issued numerous notices to the deductors/collectors and continues to do so even without redressing the ones already issued, thereby proving and aggravating the complexities faced by taxpayers in complying with the provisions of TDS/TCS.

The entire process has become extremely difficult for compliance at the ground level

2. There are multiple issues before the deductors' which, inter alia, begin with the onus to deduct tax at a correct rate, payment of tax under correct head, filing of timely returns with accuracy and issuance of TDS Certificates. The entire process has become extremely difficult to be complied at the ground level, especially for the MSME's who lack the infrastructure to comply with the complex provisions of TDS. We in India have to comply with several laws, and as a consequence we are always posed with a question, what if we don't comply? The cost of non-compliance is always weighed with the cost of compliance before a decision is taken. It is, therefore, extremely important to understand the consequences of failure to deduct tax at source and/or failure to comply with the other procedural provisions relating to TDS/TCS. The non-deduction/short deduction of tax could not only jeopardize the assessable income of the assessee but could also lead to levy of interest and/or initiation of penal proceedings.

Consequences of failure to deduct tax at source

3. The consequences of failure to deduct or pay tax are contained in provisions of section 201 of the Act. The provisions of section 201 are without prejudice to other provisions relating to penalty as contained in section 221 and section 271C of the Act.

The provision of section 201 is a complete Code in itself and can be broadly divided into following 4 sections :

♦ 201(1)	: Non-deductor's to be treated as assessee-in-default
♦ 201(1A)	: Non-deductor's to pay interest on the amounts in default
♦ 201(2)	: Charge on assets in case of default
♦ 201(3)	: Limitation on treating a person in default

3.1 The details of relevant sections in tabulated form

1.	Section 201(1)
	Consequence: Stamping as an - Assessee-in- Default	The person - who does not deduct, or Defaulting Person - does not pay, or  - after so deducting fails to pay, the whole or any part of the tax, as required by or under this Act, such person, shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee-in-default in respect of such tax. However, the judgments in Jagran Prakashan Ltd. v. Dy. CIT(TDS) [2012] 209 Taxman 92/21 taxmann.com 489 (All.) and in Hindustan Coca Cola Beverage (P.) Ltd. v. CIT [2007] 293 ITR 226/163 Taxman 355 (SC) do put an additional burden on the Assessing Officer, before he can invoke section 201(1), to demonstrate that the recipient of income has not paid due taxes thereon. The recovery provisions under section 201(1) can be invoked only when loss to revenue is established. This is possible only if the defaulting deductor supplies all the information regarding the recipient of income. In order to meet the ends of justice, a new proviso was added to section 201(1) providing for an exception to the deductor from being treated as an assessee-in-default, if such deductor proved that the recipient of income had paid the tax due on the payments received.
	Proviso to section 201(1) Exception to section 201(1) Similar to section 206C(6A)	The defaulting person shall not be treated as an assessee-in-default, if such sum is paid or credited to a resident, if such resident— (i)   has furnished his return of income under section 139;  (ii)   has taken into account such sum for computing income in such  return of income; and  (iii)   has paid the tax due on the income declared by him in such return of income, and the defaulting person furnishes a certificate to this effect from a Chartered Accountant in Form 26A The insertion of the proviso is indeed a paradigm shift in the provisions relating to TDS. However, these apply only from AY 2013-14 and unfortunately have not been made applicable retrospectively. Thus, the judgments in the cases of Hindustan Coca Cola Beverage (P.) Ltd. (supra) and Jagran Prakashan Ltd. (supra) still hold the key for the assessee while defending the SCN issued under section 201(1).
2.	Section 201(1A) Consequence: Liability to pay interest on the amount in default	In addition to being stamped as assessee-in-default the defaulting person shall also be liable to pay simple interest on the amount of defaulted tax,— Clause (i) @ 1% for every month or part of a month from the date on which such tax was deductible to the date on which such tax is deducted Clause (ii) @ 1.5% for every month or part of a month from the date on which such tax was deducted to the date on which such tax is actually paid. Notes: -   The interest has to be paid before furnishing the return. -   The payment of interest under the provision is not penal but compensatory in nature. There is, therefore, no question of waiver of such interest on the basis that the default was not intentional or on any other basis. In other words, the levy of interest under section 201(1A) is mandatory. -   Interest under section 201(1A) is merely compensatory and consequential in nature. See: Bennett, Coleman & Co. Ltd. v. Mrs.V.P. Damle, Third ITO [1986] 157 ITR 812/[1985] 21 Taxman 131 (Bom.) and CITv. American Express Bank Ltd. [2012] 204 Taxman 661/18 taxmann.com 21 (Delhi)
	Exception to payment of interest	Where the defaulting person is exempted from being an assessee-in-default under the first proviso to section 201(1A), the interest under clause (i) shall be payable from the date on which such tax was deductible to the date of furnishing of return of income by such resident. The above exception is not applicable to a case where tax has been deducted and not paid by the defaulting person.
3.	Section 201(2) Consequence: Charge on all assets till payment of tax	Where the tax has not been paid as aforesaid after it is deducted, there shall be a charge upon all the assets of the person to the extent of: amount of the tax not deducted and interest thereon as computed under sub-section (1A) clause (ii).
4.	Section 201(3) Consequence: Limitation on the department to raise demands	The order under sub-section (1) deeming a person to be as an assessee-in-default shall be made as follows :  Situation 1 Where the deductor has filed TDS return within a period of two years from the end of the financial year in which such TDS return has been filed Situation 2 Where TDS return has not been filed Within six years from the end of the financial year in which payment is made or credit is given

4. Other related provisions

4.1 Penalty under section 221(1) : The provisions of section 201(1), deeming a defaulting person as an assessee-in-default, require referral to the provision of section 221, which provides for penalty in cases where assessee is deemed to be in default. Thus, apart from the interest payable under sub-section (1A) of section 201 the assessee shall also be subject to penalty under section 221(1) of the Act. The provisions of section 221 are as under:

Section 221(1) Consequence: Upto 100% penalty for being an assessee-in-default.

When an assessee is in default, he shall, in addition to the amount of the arrears of tax and the amount of interest payable be liable by way of penalty.

Quantum of penalty: It may be any amount as the Assessing Officer may direct to be levied The total amount of penalty under section 221, however, shall not exceed the amount of tax in arrears. Procedure for Penalty: (i)   Before levying any penalty, the assessee shall be given a reasonable opportunity of being heard. (ii)   If the assessee proves to the satisfaction of the Assessing Officer that the default was for good and sufficient reasons, no penalty shall be levied under this section. What would constitute good and sufficient reason is a matter of fact and approach. It may be noted that the penalty under section 221 can be imposed by any AO including an ITO. However, the second proviso to section 201(1) mandates it for the AO to record his satisfaction, that the default in TDS compliance was done without good and sufficient reason, before the levy of penalty under section 221.

4.2 Penalty under sections 271C and 271CA

In addition to the penalty leviable under section 221 the defaulter can also be subjected to penalty under section 271C and section 271CA of the Act.

Section 271C Consequence: 100% penalty for failure to deduct tax

Reason: If a person fails to deduct the whole or any part of the tax as required by or under the provisions of Chapter XVII-B. Quantum: 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 as aforesaid. Authority: Penalty is leviable only by the Joint Commissioner. The above penalty could be levied only in case of non-deduction. The penalty may not be attracted in case of mere non-payment of tax.

Section 271CA Consequence: 100% penalty for failure to collect tax at source

Reason: If any person fails to collect the whole or any part of the tax as required by or under the provisions of Chapter XVII-BB Quantum: Such person shall be liable to pay, by way of penalty, a sum equal to the amount of tax which such person failed to collect as aforesaid. Authority: Penalty is leviable only by the Joint Commissioner.

4.2.1 Penalties under section 271C/271CA subject to provisions of section 273B :The penalties under section 271C/ 271CA are subject to the provisions of section 273B. Thus, if the assessee proves existence of a reasonable cause which was the reason for the failure referred to in the concerned provision no penalty might be imposed under the respective sections.

4.2.2 'Reasonable cause' - Definition of : It is a settled position that a "reasonable cause" as applied to human action is that which would constrain a person of an average intelligence and ordinary prudence. It can be described as a probable cause. It means an honest belief founded upon the reasonable grounds of the existence of a state of circumstances, which, assuming them to be true, would reasonably lead any ordinary prudent and cautious man, placed in the position of the person concerned, to come to the conclusion that same was the right thing to do. The cause shown has to be considered. Only if it is found to be frivolous, without substance or foundation, the prescribed consequences will follow. In other words, whether there exists a reasonable cause for non-compliance of a TDS provisions would depend on facts and circumstances of each case.

4.3 Prosecution of defaulting assessees' under sections 276B and 276BB : The levy of penalties for non-deduction/collection is not the end of the episode. The Act also provides for prosecution of defaulting assessees' under sections 276B and 276BB of the Act as shown in the following Table :

Section 276B Consequence: Punishment for failure to pay tax to the credit of the Central Government

Reason: When a person fails to pay to the credit of the Central Government the tax deducted at source by him as required by or under the provisions of Chapter XVII-B. Punishment: Rigorous imprisonment for a term which shall not be less than three months but which may extend to seven years and with fine. The above punishment shall be attracted only in a case where tax is deducted and not paid to the Central Government and not in case of non-deduction at all.

Section 276BB Consequence : Punishment for failure to pay the tax collected at source

Reason: When a person fails to pay to the credit of the Central Government the tax collected by him as required under the provisions of section 206C. Punishment: Rigorous imprisonment for a term which shall not be of less than three months but which may extend to seven years and with fine.

Consequences are co-extensive as well as inclusive

5. There have been instances where prosecutions have been launched by the department irrespective of the fact that the amount of TDS was not substantial and amounts in default had also been deposited. The recourse to prosecution practically is taken only when the non-compliance is material, intentional and tainted with mala fides. This is not necessary and prosecution can be taken up practically in each and every case of non-compliance.

All of the consequences are co-extensive and are potentially inclusive. The penalty under section 221 can be imposed along with the penalty under section 271C/271CA. However, there are indirect repercussions for not complying with the provisions of Chapter XVII. These repercussions depend on the nature of payments made by the assessee. The assessees' claiming deductions under the heads of 'Profits and Gains of Business or Profession' and 'Income from Other Source' have to be extra cautions while complying with the provisions of TDS.

5.1 Indirect consequences : The Act envisages draconian disallowances of certain payments where tax has not been deducted in accordance with the provisions of Chapter XVII-B of the Act. These indirect consequences, having direct impact on assessee's income, are dealt with hereunder:

Section 40(a)(i) Consequence: Disallowance of certain expenses paid without deduction of tax to a non-resident	The following amounts shall be disallowed if they are paid without deduction of tax or, after deduction, have not been paid on the due dates - Any interest, - royalty, - fees for technical services, or - other sum chargeable under this Act, which is payable,— (A) outside India; or (B) in India to a non-resident, not being a company or to a foreign company. The tax is deductible on such payments under section 195 of the Act at rates in force for such non-residents. The only relief for the assessee is that the deduction so disallowed in one year is allowable as deduction in any of the subsequent year in which tax is deducted and actually paid.
Section 40(a)(ia) Consequence : Disallowance of certain expenses paid without  deduction of tax to a resident	Any deduction of the nature of - interest, - commission or brokerage, - rent, - royalty, - fees for professional or technical services, or - amounts payable to a contractor or sub-contractor, shall be disallowed if tax has not been deducted on such payments or after deduction has not been paid on or before the due date for filing return under section 139(1)
Exception to disallowances for non-deduction	1.   The deduction so disallowed for non-deduction/non-payment in one year is allowable as deduction in any of the subsequent year in which tax is deducted and actually paid. 2.   A new proviso is added to section 40(a)(ia) in line with amendment to section 201(1) w.e.f. 1-4-2013 whereby if the assessee is not deemed to be an assessee-in-default by virtue of the payee discharging his obligation of payment of tax on the amounts paid without deducting tax, there would be no disallowance in the hands of assessee.

As the disallowance under 40(a)(ia), since its insertion, has always been a contentious issue pending before various Courts, the new proviso added to the said section w.e.f. 2013-14, has led to rationalization of the provision relating to disallowance in case of non-deduction of tax.

Disallowance of expenditure for non-deduction of tax under Chapter IV

6. There are following two provisions under Chapter IV- Computation of income from other sources, which provide for disallowance of an expenditure, otherwise allowable, but for non-deduction of tax :

Section 58(ii) Consequence: Disallowance of interest	The amount of interest payable outside India shall be disallowed if tax has not been paid or deducted under Chapter XVII-B
Section 58(iii) Consequence: Disallowance of salaries	Any payment which is chargeable under the head "Salaries", payable outside India, unless tax has been paid thereon or deducted there-from under Chapter XVII-B

Both the above provisions deal with only amounts payable outside India. Thankfully, there is no provision for disallowance of payments made to residents under the head 'Income from Other Sources'.

Miscellaneous penalties for administrative and technical defaults

7. The Act has also provided for miscellaneous penalties for administrative and technical defaults in filing of quarterly TDS/TCS returns and issue of TDS/TCS Certificates. The penal provisions are contained in sections 272A, 271H and 234E of the Act and summarized hereunder

Section 272A(2) Consequence: Penalty for non-submission of TDS / TCS returns and Certificate	Reasons for levy of penalty under section 272A  Sub-clause Nature of Default Remarks (c) Failure to furnish the returns in due time mentioned in section 206 or section 206C The return under section 206 refers to annual return that was required to be filed before 1-4-2005. The clause is virtually redundant in the current context. (f) Failure to deliver in due time a copy of the declaration mentioned in section 197A The copy of Form 15G/15H has to be delivered to the CCIT/CIT on or before the 7th day of month next following the month in which such Form was furnished by the deductee. (g) Failure to furnish a certificate as required by to section 203 [or section 206C] The TDS/TCS certificates in Forms 16, 16A and 27D have be furnished Annually/Quarterly, as the case may be. Rule 31/37D, provides for procedure for issuance of such certificates. (i) Failure to furnish a statement as required by sub-section (2C) of section 192 Non-provision of statement of perquisites in Form 12BA. Refer Rule 26A. (j) Failure to deliver in due time a copy of the declaration referred to in sub-section (1A) of section 206C Declaration by buyer in Form 27C to obtain goods without collection of tax to be delivered to the CCIT/ CIT within 7 days of the following month in which declaration is furnished. (k) Failure to deliver a copy of the statement within the time specified in sub-section (3)  of section 200 or the proviso to sub-section (3) of section 206C Failure to furnish TDS/TCS Return in Form 26/26Q/27EQ, as per the periodicity prescribed in Rule 31A / Rule 31AA. However, no penalty can be imposed under this clause for failure on or after 1st July, 2012, as a new section 271H has been inserted in the Act to take care of such failures Quantum: If a person commits any of the above failures he shall pay, by way of penalty, a sum of Rs. 100 for every day during which the failure continues. The total amount of penalty, however, shall not exceed the amount of tax deductible or collectible, as the case may be.
S. 271H Consequence: Penalty for failure to furnish TDS/TCS returns	Reason: 1. If a person fails to deliver a statement within the time prescribed for furnishing TDS/TCS Return; or 2. If a person furnishes incorrect information in the TDS / TCS return. Quantum: Such person shall be liable to pay, by way of penalty, a sum which shall not be less than Rs. 10,000 but which may extend to Rs.100,000.
	Exemptions: If the failure to furnish TDS/TCS return continues for a period of less than 1 year from the due date to furnish such return. Authority: 1. Income-tax Officer for penalty uptoRs. 10,000 2. AC/DC for penalty, upto Rs. 20,000 3. In all other cases with prior approval of the Joint Commissioner by an Assessing Officer.
Section 234E Consequence: Levy of fee in case of delay in filing TDS/TCS return	Reason: If a person fails to deliver a statement within the time prescribed for furnishing TDS/TCS return Quantum: Such person shall be liable to pay, by way of fee, a sum of two hundred rupees for every day during which the failure continues. However, the fee shall not exceed the amount of TDS/TCS, as the case may be. Others: - The fees has to be paid before furnishing of the return of TDS/TCS. - The charge of fees is mandatory on all returns due after 1-7-2012. It has to be paid in all cases of delay, irrespective of the existence of a reasonable cause. - The insertion of section 234E has led to the tightening of the noose over the deductor. Consequently, it has now become imperative to file the e-TDS/TCS returns on time.

Conclusion

8. Typically, TDS/TCS or any other withholding tax is a good tool in the hands of the government to collect revenue from the taxpayers before it is spent. In the Indian scenario it accounts for about 55% of the overall direct tax collection. While as the deductor is duty bound to comply with the provisions of TDS, it is also for the Government to frame laws conducive for the assessees to comply with. The magnitude of the notices issued by the Department in the recent past only indicates and proves that the entire process has been made extremely complex. The frequency and cost of compliance of TDS/TCS directly hits the deductors. Its impact is certainly aggravated in case of the MSME's. The scheme of withholding tax needs a complete revamp to revive it. Hopefully, a simple and cohesive system shall minimize the use of the above referred to provisions and make TDS less tediou exercise, both for the department as well as for the assessees.

 

Regards

Prarthana Jalan

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