The concept of TDS was introduced by government through Chapter-XVII-B with an aim to collect tax from the very source of income. As per this concept, a person (Deductor) who is liable to make payment of specified nature to any other person (deductee) shall deduct tax at source and remit the same into the account of the Central Government. The deductee from whose income tax has been deducted at source would be entitled to get credit of the amount so deducted on the basis of Form 26AS or TDS certificate issued by the Deductor.
In the current scenario, collection from TDS is the main source of revenue collection of direct tax for government.
As per the recent press release of CBDT dated 24/09/2021, Government has collected direct tax Rs. 6,45,679 crores between period of 1st April 2021 till 22/09/2021. Out of total collection of direct tax of Rs. 6,45,679 crores, collection through Tax Deducted at Source is Rs.3,19,239 crore which is almost 50% of total collection of direct tax. These data of revenue collection shows the importance of revenue collected through TDS for government.
You can notice that in the recent years, government has intensified efforts to enforce businesses’ obligation to deduct tax at source (TDS) and pay the same to the government as part of a drive to widen the direct tax base.
Being a tax revenue collection mechanism for government, the Chapter-XVII-B has contains many harsh provisions of penalty and prosecutions for any default in provisions of TDS/TCS.
A summary of penalty/prosecution provisions provided in Chapter-XVII-B is summarized below:
1. Section 201 (Consequences of failure to deduct or pay)
As per section 201 of the Income Tax Act, any person (including the principal officer of a company), who is required to deduct any sum in accordance with the provisions of this Act; or an employer,
- does not deduct, or
- 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, then, such person, shall be deemed to be an assessee in default in respect of such tax.
As per the first proviso of section 201, such person (payer/deductor) shall not be deemed to be assessee in default in respect of such tax, if such payee (deductee)
- has filed Income tax return for respective period
- has taken into account said sum for calculating income
- has paid tax due on returned income
and the person furnishes a certificate to this effect from an accountant in Form No-26A from Chartered accountant.
All of the aforesaid conditions of first proviso needs to be fulfilled by a deductor otherwise he will be treated as assessee in default.
Further, as per section 201(1A), deductor is also liable to pay interest on the TDS not deducted/short deducted or after deduction not deposited:
- 1% per month or part of month on TDS amount if TDS short deducted/not deducted
- 5% per month or part of month on TDS amount if TDS was deducted but not deposited.
As per sub section 2 of Section 201, where the tax has not been paid after deducted, the amount of tax along with interest thereon shall be charged upon all the assets of person or company as case may be.
As per the intention of law, TDS deducted by the deductor becomes the property of the Government of India immediately after deduction and till the said amount is deposited with the Government, deductor holds the TDS/TCS amount in trust on behalf of the Government and, the person from whom such tax was deducted had no right over the same.
Therefore, income tax department can recover the amount of TDS deducted but not deposited along with interest from the assets of the person liable for depositing of TDS by impounding assets of deductor.
2. Section 234E- Fee for default in furnishing statements.
As per section 201(3) of the Income Tax Act, any person deducting TDS after deposited the TDS with government is liable to file prescribed statements in prescribed time period.
The government has inserted section 234E effective from 01/07/2012 for levying fee of Rs. 200 days for each day of default in filing TDS statement.
Prior to the introduction of Section 234 E, penalty for non-filing of the TDS statements was Rs.100/- per day as provided for under Section 272 A(2) (K) of the Act. This particular section 272(A)(2)(k) of penalty of Rs. 100 per day for delay in filing TDS/TCS statements become ineffective with effect from 01/07/2012.
As per section 234 E of the Income Tax Act, without prejudice to the provisions of the Act, where a person fails to deliver or cause to be delivered a statement within the time prescribed section 200(3) or section 206C(3), he shall be liable to pay, by way of fee, a sum of two hundred rupees for every day during which the failure continues.
Ex: Due date of filing of TDS return for Quarter-1 FY 2021-22 in Form-26Q is 31th July 2021 and XYZ company filed it TDS statement in Form-26Q on 30/10/2021 the company is liable for payment of fees.
| Due date of TDS statement | Filing date of TDS statement | Delay in days | Fee as per section 234 E | Fees |
| 31/07/2021 | 30/10/2021 | 91 days | 200 | 18,200 |
It is worthwhile to note that there was no machinery provision u/s 200A of the Act for processing of TDS statement which empowered the AO to make adjustment on account of levy of late fee u/s 234E of the Act. The provision in statute by section 200A(1)(c) bought by the Finance Act, 2015 w.e.f. 01.06.2015, provision for making such adjustments while processing the TDS statement / return u/s 200A of the Act.
The Hon’ble Karnataka High Court in case of Fatehraj Singhvi & Ors. vs. UOI & Ors. 2016 (9) TMI 964 is in favour of the assessee holding that the amendments brought in statute w.e.f. 01.06.2015 are prospective in nature and as such, notices issued u/s 200A of the Act for computation and intimation of payment of late filing fee u/s 234E of the Act relating to the period of tax deduction prior to 01.06.2015 was not maintainable.
The Delhi ITAT in the case of The Delhi ITAT in the case of Raj Veer Singh Vs ACIT (ITAT Delhi) by following the decision rendered by Hon’ble Supreme Court in the case of Vegetable products Limited 88 ITR 192 (SC) that when there are conflicting decisions, the view taken in favour of the assessee should be followed, the impugned order passed by the ld. CIT (A) confirming the late fee levied by the AO u/s 200A read with section 234E as the defaults are prior to 01.06.2015, is not sustainable in the eyes of law, hence fee levied u/s 234E is ordered to be deleted. Consequently, the appeal filed by the assessee is allowed
In view of the aforesaid legal jurisprudence, we can say that section 234E late fees is applicable from 01.06.2015.
Further, as per section 234E of the Act, fees under section 234C cannot exceeds total amount of tax.
by following the decision rendered by Hon’ble Supreme Court in the case of Vegetable products Limited 88 ITR 192 (SC) that when there are conflicting decisions, the view taken in favour of the assessee should be followed, the impugned order passed by the ld. CIT (A) confirming the late fee levied by the AO u/s 200A read with section 234E as the defaults are prior to 01.06.2015, is not sustainable in the eyes of law, hence fee levied u/s 234E is ordered to be deleted. Consequently, the appeal filed by the assessee is allowed
In view of the aforesaid legal jurisprudence, we can say that section 234E late fees is applicable from 01.06.2015.
Further, as per section 234E of the Act, fees under section 234C cannot exceeds total amount of tax.
3. Penalty under section 271H for failure to furnish statement.
As per section 271H of the Income Tax Act, assessing officer may levy penalty if deductor/collector:
- Fail to file statements of TDS/TCS within time prescribed or
- Furnishes incorrect information in the statement
The minimum penalty under section 271H is Rs.10,000 and maximum penalty is Rs. 1,00,000/-.
Therefore, in any case penalty under section 271H cannot exceeds Rs. 1 lacs.
Further penalty under section 271H is not liable if deductor/collector has paid the due tax along with interest, fee to government and filed prescribed statement before expiry of 1 years of statements due dates.
4. Section 271C: Penalty for failure to deduct tax at source
As per section 271C of the Income Tax Act, if any person fails to-
- Deduct whole or part of tax required to be deducted
- Pay the whole or any part of tax
then such person shall be liable to pay penalty, a sum equal to amount of tax which such person fails to deduct or paid.
Accordingly, if in any case deductor fail to deduct due TDS or after deduction fail to deposit whole or part of TDS then assessing officer may levy penalty on deduction u/s 271C of the Income Tax Act equal to amount of tax.
Penalty under section 271C of the Income Tax Act is not automatic and if deductor/collector is able to proves that there was reasonable cause for the said failure the as per section 273B of the Income Tax Act penalty will not be imposed.
In a recent case of Sarv Estate Pvt. Ltd Vs JCIT (ITAT Delhi) (2020) held that penalty under section 271C of the Income Tax Act is not liable if assessee did have bonafide reason for not deducting the TDS. It has been held that it is necessary to establish ‘contumacious conduct’ on the part of the assessee for failure to deduct tax at source for levy of penalty u/s 271C of the act.
The Bangalore ITAT in the case of Canara Bank (Erstwhile Syndicate Bank) Vs ACIT (2020) held that bank has undertaken reasonable steps in terms of verifying the assessee’s claim towards their LFC claims and there is an error of judgment on part of the assessee bank in understanding and applying the provisions of section 10(5) of the Act & bank has not deducted TDS intentionally. Accordingly, there was reasonable cause in terms of section 273B of the Act for not deducting tax by the assessee Bank. In the result, the penalty so levied under section 271C is hereby directed to be deleted.
In a recent ruling of Biocon Ltd Hon’ble Bangalore ITAT (2021) held that penalty can’t be imposed for Non-Deduction of TDS as quantum of Payment not determinable. ITAT found that there is a sufficient and reasonable cause for not deducting TDS on the year-end provision. It is also observed that the assessee consistently follows this kind of accounting system for year-end provisions which are subsequently reversed in the subsequent year in the month of April, as and when the bills are received, and the payment is made to the payee by deducting TDS.
Therefore, in view settled legal precedents, we can say that penalty under section 271C read with section 273B of the Income Tax Act is not automatic and liable if there is reasonable cause on the party of deductor/collector for non-deduction of TDS.
5. Section 272A(2)(g) – Penalty for failure to furnish a certificate
As per section 272(A)(2)(g) of the Income Tax Act, if any person fail to furnish a certificate to deductee/Collectte shall be liable for penalty of Rs. 100/- for every day during which failure continues.
As per the provisions of section 203 of the Income Tax Act, 1961 read with rule 31A, Certificate of tax deducted at source is to be furnished within fifteen (15) days from the due date for furnishing the statement of tax deducted at source.
It is worthwhile to note that penalty for furnishing TDS/TCS certificate of Rs. 100/- per day is not per deductee/Collecttee. It is cumulative penalty of Rs. 100 per day if TDS/TCS certificate not furnished within prescribed time period irrespective of TDS/TCS certificate.
6. Prosecution under section 276B/276BB: Failure to pay tax to the credit of Central Government.
As per section 276B/276BB of the Income Tax Act, if a person fails to pay to credit of government, Tax deducted at source/TCS collected then he shall be punishable with rigorous imprisonment for a term of which shall not be less 3 months but which may be extend to 7 years and with fine.
In recent years income tax department has launched several prosecutions proceedings under section 276B of the Income Tax Act on the wilful and routine defaulter of TDS/TCS.
In a recent case of famous film producer Firoz Abdul Gafar Nadiadwala (2019), The COURT OF ADDL. CHIEF METROPOLITAN MAGISTRAT , MUMBAI held that Mens rea is not a requisite ingredient of the offence under section 276B of the Income Tax Act. Court is of the considered view that accused is liable for possible sentence of 3 months rigorous imprisonment and fine. It is the minimum punishment. The Court is not having discretion in reducing the sentence. Therefore, accused shall undergo rigorous imprisonment for a period of 3 months and fine of Rs.5,000/ (Rs. Five Thousand only) for having committed offence U/sec. 276B of Income Tax Act.
In case Sowparnika Projects and Infrastructure Pvt. Ltd. and Ors. v/s ACIT TDS Circle-3(1), Criminal Review Petition No. 456/2019 (Judgment), the Hon’ble Court of the LIX Additional City Civil and Session Judge, Bangalore City (District Court) upheld the launching of prosecution proceedings for delayed deposit of tax deducted at source (TDS) by the Company pertaining to Financial Year (FY) 2012-13.
Recently cases of delayed deposit of TDS with the government, the instances of initiation of prosecution proceedings against the directors has been on the rise. Since the IT Act does not make a distinction between a complete failure to deposit the TDS with the government OR a delayed deposit of TDS with the government, the tax authorities have generally been launching prosecution proceedings even in case of delayed deposit of TDS with the government.
The issue of applicability of prosecution proceedings under section 276B of the Income tax Act on non-deposit of TDS or delay deposit within the prescribe time period is a matter of debate for courts.
In many cases court held that prosecution proceedings u/s 276B of the Act can be initiated to failure to pay TDS amount in the prescribed time period, however in some cases, courts have quashed the prosecution launched for an offence for delay in deposit of TDS under section 276B of the Income Tax Act.
No penalty or prosecution shall be made or launched against the assessee for any failure referred to in section 276B if he proves that there was a reasonable cause for the said failure.
But if there is no reasonable cause for such failure, then the concept of compounding comes in the picture. Compounding of offences means that the assessee can, instead of serving imprisonment term, pay a fee to the revenue department and waive his prosecution charges.
A person shall not be proceeded against for an offence u/s 276B, 276BB except with the previous sanction of the Commissioner or Commissioner (Appeals) or the Appropriate Authority.
Conclusion
Considering the different penalty and prosecutions provisions of Chapter-XVII-B of the Income Tax Act, we can say timely and accurate compliance of TDS/TCS provisions is one of crucial activity for any business in today environment.
In recent years, department become more cautious and active on the tracking of TDS non-compliances through the aid of technology, data mining, survey etc. Therefore, it is advisable to follow the provision of TDS/TCS compliance in true spirt with proper care and advice.
