Consequences of Non-Compliance to TDS (Section 201)

Failure to comply with Tax Deducted at Source (TDS) provisions under Section 201 of the Income-tax Act leads to significant consequences for the deductor. If a person required to deduct or pay tax does not do so, they are deemed an assessee in default. This can incur penalties under Section 221 and mandatory simple interest under Section 201(1A): 1% per month for delay in deduction (from due date to actual deduction date) and 1.5% per month for delay in payment (from deduction date to actual payment date). This interest is mandatory and cannot be claimed as a business expenditure.

Furthermore, non-compliance can result in the disallowance of expenditure under Section 40. For payments to non-residents, 100% of the expenditure (excluding salary) is disallowed if TDS is not deducted or paid on time. For payments to residents, 30% of the expenditure is disallowed. Salary paid outside India or to a non-resident in India is 100% disallowed if TDS is not deducted or paid by the due date.

There are certain exceptions: a deductor may not be considered an assessee in default if the payee has filed their income tax return, included the income, and paid the tax due, and the deductor provides a certificate from an accountant. In such cases, only interest is levied. The disallowance of expenditure is not permanent; it can be reversed in the year the tax is eventually paid. The time limit for passing an order deeming a person an assessee in default for resident payees is the later of seven years from the end of the financial year of payment/credit, or two years from the end of the financial year in which a correction statement is delivered. From April 1, 2025, this limit will be six years for all payees.

Consequences of Non-Compliance to TDS

201. Consequences of failure to deduct or pay

[1][(1) Where any person, including the principal officer of a company,—

(a) who is required to deduct any sum in accordance with the provisions of this Act; or

(b) referred to in sub-section (1A) of section 192, being 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, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default in respect of such tax:

[2][Provided that any person, including the prin-cipal officer of a company, who fails to deduct the whole or any part of the tax in ac-cordance with the provisions of this Chapter on the sum paid to a [3][payee] or on the sum credited to the account of a [4][payee] shall not be deemed to be an assessee in default in respect of such tax if such [5][payee]—

(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 in-come,

and the person furnishes a certificate to this effect from an accountant in such form as may be prescribed[6]:]

Provided [7][further] that no penalty shall be charged under section 221 from such person, unless the Assessing Officer is satisfied that such person, without good and sufficient reasons, has failed to deduct and pay such tax.]

[8][(1A) Without prejudice to the provisions of sub-section (1), if any
such person, principal officer or company as is referred to in that sub-section does not deduct the whole or any part of the tax or after deducting fails to
pay the tax as required by or under this Act, he or it shall be liable to pay simple inter-est,—

[9](i) at one per cent for every month or part of a month on the amount of such tax from the date on which such tax was de-ductible to the date on which such tax is deducted; and

(ii) at one and one-half per cent for every month or part of a month on the amount of such tax from the date on which such tax was deducted to the date on which such tax is actually paid, and such interest shall be paid before furnishing the statement in accordance with the provisions of sub-section (3) of section 200:]

[10][Provided that in case any person, includ-ing the principal officer of a company fails to deduct the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid to a [11][payee] or on the sum credited to the account of a [12][payee] but is not deemed to be an assessee in default under the first proviso of sub-section (1), 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 [13][payee]:]

[14][Provided further that where an order is made by the Assessing Officer for the default under sub-section (1), the interest shall be paid by the person in accordance with such order.]

(2) Where the tax has not been paid as aforesaid after it is deducted, [15][the amount of the tax together with the amount of simple interest thereon referred to in sub-section (1A)] shall be a charge upon all the assets of the person, or the company, as the case may be, referred to in sub-section (1).]

[16][(3) No order shall be made under sub-section (1) deeming a person to
be an assessee in default for failure to deduct the whole or any part of the tax from [17][a person resident in India, at any time after the expiry of seven years] from the end of the financial year in which payment is made or credit is given [18][or two years from the end of the financial year in which the correction statement is delivered under the [19][first] proviso to sub-section (3) of section 200, whichever is later].]

[20][(4) The provisions of sub-clause (ii) of sub-section (3) of section 153 and of Explanation 1 to section 153 shall, so far as may, apply to the time limit prescribed in sub-section (3).]

[21][Explanation.—For the pur-poses of this section, the expression “accoun-tant” shall have the meaning assigned to it in the Explanation to sub-section (2) of section 288.]

A deductor would broadly face the following consequences:

Sr. No.	Consequence	Section
1.	Assessee in Default	201
2.	Disallowance of expenditure	40
3	Penalty	271C
4.	Penalty	271H
5.	Fee	234E

The same is divided into following parts:

• Provisions applicable to person deemed to be an “assessee in default”.
• Provisions applicable to a person not deemed to be an “assessee in de-fault”.
• Penalties applicable, whether the Assessee is in default or not.
• Consequences for failure to furnish statements and other penalties.

1. Assessee in default

As per section 201, a payer who fails to deduct whole or any part of the tax at source is treated as an assessee-in-default. However, the payer who fails to deduct the whole or any part of the tax on the payment made to a payee (whether resident or non-resident) shall not be deemed to be an assessee-in-default in respect of tax not deducted by him, if the following conditions are satisfied:

The recipient has furnished his return of income under section 139.

The recipient has taken into account the above income in its return of income.

The recipient has paid the taxes due on the income declared in such return of income.

The recipient furnishes a certificate to this effect from an accountant in Form No. 26A.

In other words, in case of non-deduction of tax at source or short deduction of tax, in case of a payee, if all the discussed conditions are satisfied, then the payer will not be treated as an assessee-in-default. However, in such a case, even if the payer is not treat-ed as an assessee-in-default, he will be liable to pay interest under section 201(1A). In this case, interest shall be payable from the date on which such tax was deductible to the date of furnishing of return of income by such payee. Interest in such a case will be levied at 1% for every month or part of the month.

(a) Levy of interest:

Levy of interest under section 201(1A) is mandatory in nature and that the interest is to be paid whether the Assessee is an assessee in default or not.

As per section 201 of the Income-tax Act, if a deductor fails to deduct tax at source or af-ter the deducting the same fails to deposit it to the Government’s account then he shall be deemed to be an assessee-in-default and liable to pay simple interest as follows:

(i) at 1% for every month or part of a month on the amount of such tax from the date on which such tax was deductible to the date on which such tax is deduct-ed; and

(ii) at 1.5% for every month or part of a month on the amount of such tax from the date on which such tax was deducted to the date on which such tax is actu-ally paid.

• Levy of interest is mandatory in nature:

Levy of interest under section 201(1A) is mandatory and that the interest is to be paid whether the Assessee is an assessee in default or not.

• Interest – deduction as business expenditure: Whether the interest paid under section 201(1A) can be claimed as deductible expenditure – Relying on the various judgments, it has been held that the interest paid under section 201(1A) takes colour from its principal amount i.e., income tax and hence such interest cannot assume the character of business expenditure and hence is not allowable.
• For calculating interest, any fraction of a month is deemed to be a full month. Any amount on which interest is to be calculated is rounded off to the nearest multiple of `100/- and for this purpose any fraction of `100 is ignored.
• Interest shall be paid as per order of the Assessing Officer
• If the Assessing Officer has passed an order treating assessee in-default, then the interest shall be paid by the assessee in accordance with the said order. [In-serted by the Finance Act, 2022, w.e.f. Assessment Year 2022-23]
• Filing of TDS statement with payment of interest.
• Every deductor has to furnish quarterly statement in respect of tax deducted by him i.e., TDS return. As per section 201(1A), interest for delay in payment of TDS should be paid before filing the TDS return.
• It is to be noted that interest for failing to pay TDS, after its deduction, starts from the date on which TDS is deducted; not from the due date of payment TDS specified under section 200. It is to be noted that if there is a delay of one day to deposit the TDS, in that case the assessee has to pay interest for two months.

#	Amount of TDS	Date of earlier of payment or credit	Date when TDS is deducted	Date when TDS is paid	Interest under section 201(1A)
1	10,000	15.6.2023	25.6.2023	7.7.2023	TDS is deducted late by 10 days but is paid on time (within 7 days from the end of the month in which TDS is deducted). Interest under section 201(1A) 1% p.m. of Rs. 10,000 for 1 month (date on which TDS was deductible to the date on which TDS is deducted; part of month is taken as 1 month) = `100
2	10,000	15.6.2023	15.6.2023	5.11.2023	TDS is deducted on time but is paid late (beyond 7.7.2023, i.e., 7 days from the end of the month in which TDS is deducted). Interest under section 201(1A) = 1.5% p.m. of Rs. 10,000 for 6 months (date on which TDS is deducted to the date on which TDS is actually paid; part of month is taken as 1 month) = Rs. 900
3	10,000	15.9.2023	15.9.2023	7.10.2023	TDS is deducted on time and also paid on time (within 7 days from the end of the month in which TDS is deducted). Interest is not chargeable under section 201(1A).
4	10,000	15.3.2024	15.3.2024	30.4.2024	TDS is deducted on time and also paid on time (due date is 30 April since income is credited or paid in March). Interest is not chargeable under section 201(1A).

(b) Levy of Penalty:

• Where a person is deemed to be an Assessee in default under section 201(1) then the Assessee is liable to pay penalty under section 221 in addition to the tax and interest under section 201(1A). The amount of penalty payable shall not exceed the amount of tax in arrears. Once a default occurs, penalty is payable even where the As-sessee has subsequently paid the tax in arrears, whether before or after the imposition of the penalty. However, the Assessee is to be granted a reasonable opportunity of being heard to prove to the satisfaction of the ITO that the default was for good and sufficient reason.
• The term ‘good and sufficient reasons’ is not defined and depends upon the facts of each case. The following reasoning/circumstances have been considered as a good and sufficient reason by the courts:

√ TDS post deduction was not paid by the Assessee on account of a financial stringency. It was held as a good and sufficient reason in the matter of Sequoia Construction Co. Limited (Delhi High Court) (158 ITR 496).

√ Fair and honest estimate based on backdrop of various judicial decisions is a good and sufficient reason – Nestle India (ITAT Delhi)

√ However, TDS not deducted based on the ignorance – it was ‘not’ held to be a case of good and sufficient ground – Tata Chemicals Limited (Mum ITAT).

(c) One month’s relief of interest in case of delayed payment of TDS

The Hon’ble ITAT-Ahmedabad Bench in the case of Bank of Baroda Deputy CIT [2017] 88 taxmann.com 103 (Ahmedabad-Trib.) held that the interest charge-able under section 201(1A) of the Income-tax Act should be levied from the date of de-duction of tax to the date on which such tax is actually paid to the Government.

Following are the examples that may help to understand the levy of interest under sec-tion 201(1A)—

1. Date of Deduction-05-11-2017
Due Date of depositing TDS-07-12-2017
Actual Date of Deposit 07-12-2017
Period of Interest-No Interest shall be levied as the TDS is deposited within the pre-scribed time limit.

2. Date of Deduction-05-11-2017
Due Date of depositing TDS-07-12-2017
Actual Date of Deposit 10-12-2017
Period of Interest-2 Months, as the period from which the tax is deducted to the date on which such tax is actually paid exceeds one month.

3. Date of Deduction-15-11-2017
Due Date of depositing TDS-07-12-2017
Actual Date of Deposit-12-12-2017
Period of Interest – Period from which the tax is deducted to the date on which such tax is actually paid does not exceeds one month. Accordingly. only one month’s interest under section 201(1A) shall be levied.

4. Date of Deduction-05-11-2017
Due Date of depositing TDS-07-12-2017
Actual Date of Deposit 10-01-2018
Period of Interest-3 Months

Conclusion: Levy of interest us. 201(IA) for the second month can arise only if the period of time between the date on which tax was deducted and the date on which tax was paid to the Government exceeds one month.

(d) Definition of Month

It is to be noted definition of “month” has been a subject of debate. In the Act, the defini-tion of a month is not provided.In such a case, the question arises that whether a month should be counted as a calendar month in accordance with the General Clauses Act or a period of thirty days while computing the interest.

The e-TDS return is processed by CPC – TDS using the TDS Reconciliation Analysis and Correction Enabling System (‘TRACES’). The software used by the CPC, consider a month as a calendar month, which has made things difficult for the assessee. In this connection the expression month refers ‘a month reckoned according to the British cal-endar’ and ‘a month reckoned as per British calendar’ are not the same thing and can-not be used interchangeably. While the former refers to a calendar month by itself, the latter refers to a period of time which qualified to be treated as a month. The subtle dis-tinction between the scope of these two expressions cannot be ignored.

(e) Judicial Interpretation of the word ‘Month’

Various courts and tribunals have provided different definitions for the term “month,” which is taken into consideration in various sections of the Act. The Revenue has always tried to use the word in a way that is beneficial to it because of this peculiarity, whether that be as a calendar month or 30 days.

(f) Cases where the word ‘Month’ has been consid-ered as a calendar month

Recently, in the case of Kartick Chandra Mondal v Principal Commissioner of In-come-tax, [2020] 113 taxmann.com 586 (Kolkata – Trib.), the ITAT Kolkata Bench has held that

“9. …. We note that the term “Month” has not been defined in section 54EC of the Act. However, we note that Hon’ble Allahabad High Court in the case of CIT v Munnalal Shrikishan [1987] 167 ITR 415 has defined the term “Month” as calendar month. The findings of the court are as follows:

“Before we deal with the questions raised at the instance of the Revenue, we may dis-pose of a preliminary objection raised by learned counsel for the assessee. Sri B. N. Bhatnagar, learned counsel for the assessee, submitted that in view of the fact that no-tice of refusal by the Tribunal under section 256(1) of the IT Act was served on the CIT on June 25, 1986, the application filed by it on January 1, 1987, was barred by limitation by six days. It was urged that the period prescribed under section 256(2) is six months which ought to be taken as 180 days. Learned counsel placed reliance on a decision of this Court in the case of CIT v Laxmi Rattan Cotton Mills Co. Ltd. (1974) 97 ITR 285, in support of his contention that the limitation should be calculated treating each of the six months as meaning 30 days. We are unable to agree with this contention. The decision cited by learned counsel for the assessee was in the context of section 271(1)(a) which deals with an entirely different subject. This Court, construing that provision, held that inas-much as penalty leviable under section 271(1)(a) has to be calculated by deducting the amount of tax already paid and not with respect to the gross tax assessable, the word “month” occurring in section 271(1)(a) must be taken to mean a period of 30 days. The contextual setting of section 271(1) is entirely distinct and different from section 256(2). There is nothing in the context of section 256(2) to warrant the meaning assigned to the word “month” in the aforesaid decision to an application filed under section 256(2) of the Act. In our opinion, the reference to six months in section 256(2) is to six calendar months. The preliminary objection is, therefore, overruled.”

Therefore, about the interpretation of the word “month, there is nothing in the context of section 256(2) to warrant the conclusion that the word “month” in it refers to a period of thirty days. Therefore, reference to six months in section 256(2) is to six calendar months and not one hundred and eighty days. In view of the above judgment in the case of Munnalal Shrikishan (supra), we are of the view that the term “Month” means calendar month (and not period of thirty days), which should be applied for the purpose of section 54EC of the Act.”

(Emphasis applied)

In the case of Aquatech Engineers v Additional Commissioner of In-come Tax (ITAT Mumbai), ITA No. 8029/Mum/2011, Dated 19/06/2013, it has been held that,

“3.2 The second component of the controversy stands determined by the co-ordinate Bench of the tribunal in the case of Yahya E. Dhariwala (supra), wherein, being guided by the fact that the provision of section 54EC is a beneficial provi-sion, it sought to grant the benefit of doubt with regard to the word ‘month’ occurring in the provision, by construing it as a calendar month; the word being undefined. A period of six clear months from the first week of March, 2008, would, therefore, end only 30.09.2008, i.e., the date of allotment of the NHAI bonds.

(Emphasis applied)

In the case of Alkaben B. Patel v ITO, ward – 14(2) [2014] 43 tax-mann.com 333, While computing the time for the purpose of section 54EC, ITAT Ah-medabad (SB) has held that the time limit of ‘six months’ in section 54EC means ‘six British Calendar months’ in view of the General Clauses Act, 1897. It has held that in the absence of any definition of the word ‘month’ in the Act, the definition of the General Clauses Act, 1897 will be applicable. Legislature in its wisdom has chosen to use the world ‘month’. This was done keeping in view the definition in section 3(35) of the Gen-eral Clauses Act, 1897. It has rejected the Revenue’s interpretation that ‘month’ should be understood in the ordinary sense i.e. the month is a period from a specified date in a month to the date numerically corresponding date in the following month.

(2) Cases where the word ‘Month’ has been considered as 30 days

In the case of CIT v Laxmi Ratan Cotton Mills co. Ltd. [1974] 97 ITR 285 (ALL.), Allahabad High Court has held that

“we are of the view that the word “month” as occurring in this sub-section must be taken to mean a period of thirty days. This provision was enacted for the purpose of imposing a penalty on an assessee who had not filed his return during the prescribed time, and was enacted to serve as a deterrent for such lapses. The penalty is imposable for every month during which the default continues. If the meaning ascribed to this word in the General Clauses Act is adopted, it may in some cases lead to a defaulting assessee es-caping penalty altogether, in spite of default. To take an illustration: Let us assume that time is given to an assessee up to the 30th of January in a particular year for filing a re-turn and he defaults. He, thereafter, files his return on the 27th February. If the word “month” occurring in the section is taken to mean a full calendar month, the assessee in such a case would not be liable for any amount of penalty. Such a result is not contem-plated by the language of the sub-section, for the sub-section in clear and unambiguous terms makes every assessee liable for penalty during the period of default. In the cir-cumstances, it is not appropriate to import the meaning of the word “month” given in the General Clauses Act in the sub-section, for it does not fit in with the context and scheme of the section, and results in some cases in setting at naught the purpose of the enactment. We are thus of the view that the Tribunal was not right in holding that the word “month” occurring in this sub-section refers to the English calendar month.”

(Emphasis applied)

Further in the case of Kesharwani Zarda Bhandar v Commissioner of Income-tax [2013] 30 taxmann.com 387, the Allahabad High Court has held that

“The charging of interest for four months was a clear error of law on the facts of the case in which the Assessing Officer had failed to take into account that the return was due to be filed by 31-7-1979. Whereas it was filed on 31-12-1979, by taking the month to mean a period of 30 days, interest was to be required to be charged for five months and not for four months.”

(g) Time limit to pass an order under section 201(1)

If an assessee does not deduct TDS or after deducting fails to pay TDS, then he shall be deemed as an assessee in default for which interest and penalty shall be levied. Section 201(3) specifies the time limit to pass an order under section 201(1) in case of a payee who is a resident under the ITA. That time limit is the later of the following:

(a) Seven years from the end of the FY in which payment is made or credit is given or

(b) Two years from the end of the FY in which the correction statement is filed under the proviso to section 200(3),

There is no time limit to pass an order under section 201(1) in case where the payee is a non-resident. This creates uncertainty for non-residents.

The Finance (No. 2) Act, 2024 amended Section 201(3) to substitute the term “a person resident in India” with “any person” indicating that both residents and non-residents will now be subject to time-limit specified for passing the order.

The Finance (No. 2) Act, 2024 has also reduced the time limit speci-fied under section 201(3) of the Act from 7 years to 6 years. Therefore, the order under section 201(1) of the Act shall not be passed after the expiry of 6 years from the end of the financial year in which payment is made or credit is given or 2 years from the end of the financial year in which the correction statement is furnished under section 200(3) of the Act, whichever is later.

This amendment will take effect from 1st April 2025.

1. However, no time-limits have been prescribed for passing an order under sec-tion 201(1) where-

(a) the deductor has deducted but not deposited the tax deducted at source, as this would be a case of defalcation of government dues,

(b) the employer has failed to pay the tax wholly or partly, under sub- section (1A) of section 192, as the employee would not have paid tax on such perquisites,

2. Disal-lowance of expenditure on which Tax is not deducted or paid

Under the Act, tax is required to be deducted at source by the payer on behalf of the pay-ee in case of certain payments and paid to the Government. To enforce deduction of tax at source by the payer, it is provided that deduction of certain payments will be disal-lowed if tax has not been deducted or paid. The disallowance is rolled back when the tax is paid. There are following provisions dealing with different categories of payments. These are explained below:-

(a) Section 40(a)(i)- Payments/Credits made to Non – Resident, not being a Company or to a foreign Company

If there is default in the TDS deduction or payment by the payer in respect of the pay-ment/credit of interest, Royalty, Fee for technical Services or any other sum chargeable under this Act (Other than Salary) to non-Resident, not being a Company or to a foreign Company, then 100% of such expenditure is disallowed in the hands of the payer.

• The meaning of the word ‘interest’ is very wide and would include interest on unpaid purchase price payable in any manner which would include any means of irrevo-cable letter of credit. Interest is not part of purchase price and is assessable as interest. Failure to deduct tax on such interest payable outside India shall not entitle the as-sessee to claim deduction of interest. Section 2(28A) defining “interest” does not in-clude the discounting charges on discounting of Bills of Exchange.

Example:- X Company discounted its export sales bills with a company in Singapore and received a payment net of discounting charges. The Assessing Officer disallowed such expenses under Section 40(a)(i), for not deducting tax at source under Section 195. As the discounting charges cannot be analogous to interest expenses, the obligation to deduct tax under Section 195 would not arise and the X Company cannot be denied de-duction of such expenses.

b) Section 40(a)(ia)- Payments/Credits made to Res-ident

• If there is default in the TDS deduction or payment by the payer in respect of the payment/ credit on which tax is deductible at source under Chapter XVII-B to Resi-dent, then 30% of such expenditure is disallowed in the hands of the payer.

(c) Section 40(a)(iii)- Payment of Salary:

• Any Salary payable outside India or to a Non- Resident in India shall be disal-lowed, if tax has not been deducted or paid on or before the due date prescribed for such deductions. It is to be noted that TDS is to be deducted and deposited before 7th of next month (or 30th April in case of payment in March) on sum payable as salary to any non-resident. Otherwise 100% of expense will be disallowed and shall not be allowed even if deposited before the due date of filing of Income tax return under section 139(1) . It is to be noted that if TDS deposited late even by one day, the salary shall not be allowed as deduction .Now a question arises that whether TDS on Salary to Non-Resident should be deducted as per Section 195 or Section 192.In this connection ,it is to be noted that Section 195 specifically excludes Salary. Therefore, TDS on payment of Salary to Non- Resident should be deducted as per Section 192.

Mr X (Non-Resident) was employed by ABC Ltd. M/s ABC Ltd was liable to deduct TDS on Salary paid of `3,00,000/ to Mr X for the month of June 2024. M/S ABC Ltd remitted TDS to government on 8th July 2024. Whether such expense is disallowed to ABC Ltd..?

• As per the provisions, TDS should be remitted on or before 7th of the subse-quent month.
• In the given scenario, TDS has been remitted on 8th July which is not within the due date.
• Therefore, salary of `2,00,000-00 shall be fully disallowed.

(d) When is payment is disallowed:

• Disallowance is made in following two situations:

(i) Tax has not been deducted in the previous year or;

(ii) Tax has been deducted in the previous year but has not been paid on or before the due date to furnish return under section 139(1) for such previous year

• In such case 100% of such sum is disallowed under section 40(a)(i) & 40(a)(iii) and 30% of such sum is disallowed under section 40(a)(ia)

It is to be noted that no disallowance is made in the previous year in which the expenditure is incurred if:

1. Tax has been deducted and paid in that previous year, or

2. Tax has been deducted in that previous year and paid by the due date to furnish return of that previous year.

TDS Default	Non Resident	Resident	Allowability of expenditure in the year of payment
Situation 1: Tax is deductible but not deducted during previous year	100% of such expenditure is disallowed in the current year	30% of such expenditure is disallowed in the current year	If tax is deducted in any subsequent year, the expenditure (which is disallowed in the current year) will be deducted in the year of deposit of TDS.
Situation 2: Tax is deductible and is so deducted during the current year but it is not deposited on or before the due date of submission of return of income under section 139(1)	100% of such expenditure is disallowed in the current year	30% of such expenditure is disallowed in the current year	If tax is deposited with the Government after the due date of submission of return of income, the expenditure (which is disallowed in the current year) will be deductible in the year of deposit to government.

ILLUSTRATION: Determine the PY in which the expenditure on payment of royalty of Rs. 1,00,000 incurred during the PY 2023- 24 M/S X & Co., on which tax is deductible at source, will be allowed in the following situations. Due date to furnish return for X & Co. is 31 October.

#	Status of payee	Tax deducted by payer on	Tax paid by payer on	Action by payee, if any	Deduction admissible	Remarks
1	NR	1.2.2024	1.3.2024	–	1,00,000 in PY 2023-24	Tax is deducted and paid in PY 2023-24. No disallowance under sec-tion 40(a)(i).
2	ROR	1.2.2024	1.10.2024	–	1,00,000 in PY 2023-24	Tax is deducted in PY 2023-24 and paid on or before the due date to furnish return of such PY. No disallowance under section 40(a)(ia).
3	NR	1.2.2024	1.12.2024	–	1,00,000 in PY 2024-25	Tax is deducted in PY 2023-24 but paid after due date to furnish return of such PY. Allowed under section 40(a)(i) in the PY in which tax is paid.
4	RNOR	1.5.2023	1.12.2025	–	70,000 in PY 2023-24; 30,000 in PY 2025-26	Tax is deducted in PY 2023-24 but paid after due date to furnish return of such PY. 30% is disallowed under section 40(a)(ia) for PY 2023-24 but allowed in PY in which tax is paid.
5	ROR	1.5.2023	1.10.2023 (40%); 1.03.2024 (60%)	–	82,000 (40,000) 42,000) in PY 2023-24; 18,000 in PY 2024-25	For 40%: Tax is deducted in PY 2023-24 and paid on or before due date to furnish return of such PY: No disallowance under section 40(a)(ia). 40,000 allowed. For 60%: Tax is deducted in PY 2023-24 but paid after due date to furnish return of such PY. 30% is disallowed (70% is allowed) under section 40(a)(ia) for PY 2023-24 but al-lowed in PY in which tax is paid (18,000, i.e., 30% of 60% of 1,00,000)
6	ROR	Not deducted	Not paid	–	70,000 in PY 2023-24	Tax is not deducted and not paid. 30% is disallowed under section 40(a)(ia).
7	ROR	Not deducted	Not paid	Return furnished on 1.10.2024 after including `1,00,000 and paying tax due.	70,000 in PY 2023-24; 30,000 in PY 2024-25	Tax is not deducted by payer in PY 2023-24 but payee has furnished return after including such sum in his income in return and has paid tax due. 30% is dis-allowed in PY 2023-24 and allowed under section 40(a)(ia) in PY in which return is fur-nished by payee.

(e) When disallowance is rolled back?

Sum that was disallowed (under section 40(a)(i) & 40(a)(ia)) as above is subsequently allowed as deduction in the following situations:

I. Tax has been deducted in any subsequent previous year

II. Tax had been deducted in the relevant previous year but is paid after the due date to furnish return under section 139(1) for that previous year

In such case, deduction is allowed in the previous year in which such tax has been PAID

• Thus, disallowance is not permanent. Deduction is allowed when the tax is paid.
• Such deduction is allowed to the extent of disallowance made earlier i.e., 100% of the sum under section 40(a)(i) and 30% of sum under section 40(a)(ia).

(f) Escape Route to avoid disallowance due to non deduction & non payment of TDS :

We have noted that disallowance is made if tax has not been deducted in the relevant previous year. However, there is an exception to this rule. A relief has been given to the deductor of tax for non deduction & non payment of TDS. The said relief has been provided to avoid disallwance under section 40(a)(i) & 40(a)(ia) of the Act. To avail the benefit of this relief, one has to fulfill the following conditions:

1. Tax is deductible on the payments but it is not deducted (wholly or partly) by the payer

2. The payer is not deemed to be an assessee-in-default under the first proviso to section 201(1) of the Act. It is to be noted that the payer is not deemed to be an assessee-in-default if

(a) the payee has furnished his return of income under section 139;

(b) the payee has taken into account the above income in such return of income,

(c) the payee has paid the tax due on the income declared in such return of income, and

(d) the payer furnishes electronically a certificate to this effect from a chartered ac-countant in Form no 26A as prescribed in Rule 31ACB.

In such case, the assessee (payer) is deemed to have deducted and paid the tax on such sum on the date of furnishing of return by the payee. It is to be noted that the date of re-turn filing of the payee shall be deemed as the date of deduction and payment of TDS (which was neither deducted nor paid) of the payer (deductor).

The expenditure will be allowed in the year in which the return has been filed by the payee. Even if the payee has filed his return of income before the due date of return of in-come of payer (deductor), in that case also 70% of the expenditure shall be allowed as deduction in the year in which expenditure has been incurred and the disallowed expenditure will be allowed in the year in which the return of income has been filed by the payee.

Example 1: Mr. X paid `200000 interest on 31.03.2024 to Mr. Y. Mr. X has not deducted TDS on such payment. The due date under section 139(1) for filing the income tax return of Mr. X is 31^st October, 2024. In such a case, if Mr. Y files his return of income on 01^st September, 2023, then the Mr. X will be allowed 70% expenditure in P.Y. 2023-24 and 30% of such expenditure will be allowed in P.Y. 2024-25 in which return of income has been filed by Mr. Y. The 30% of expenditure will be allowed as deduction even if TDS has been neither deducted nor deposited by Mr. X.

Example 2: Suppose in above example Mr. Y files his return on 10^th December, 2024. In that case also, if Mr. Y is resident then 70% of expenditure will allowed in previous year 2023-24 & 30% will allowed in which return has been filed but the payee but if Mr. Y is Non Resident then 100% expenditure will dis-allowed in the previous year 2023-24 & this expenditure will be allowed in P.Y. 2024-25.

It is pertinent to note that expenditure disallowed to payer will be allowed as deduction in the year in which payee has filed his return of income, even if the payee has filed his ITR after due date of return filing. As per proviso to section 201(1), the payee has to file his return under section 139. Therefore, the expenditure will be allowed to payer even if the payee has filed belated return under section 139(4) or an updated return under section 139(8A) of the Act.

Thus, while the sum is disallowed in the year of incurring expenditure, it is allowed in the year of furnishing of return by the payee if the above conditions are satisfied.

It may be noted that as per section 40(a)(ia) the deduction of the expense is allowed if tax has been deducted during the previous year and paid on or before the due date specified under section 139(1). However, where an assessee is not deemed to be an as-sessee in default under the first proviso to section 201(1) then it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the payee. Therefore, according to the amendment the deduction of the expense will be allowed only in the year in which the return is filed by the payee. Although, this does not seem to be the legislative intent as the deductor will be disallowed the deduction in the year in which the expenditure is incurred but will be allowed the de-duction in the year in which the return is filed by the payee.

It has also been provided that deductor shall have to pay interest under section 201(1A) @1% per month or part of the month from the date the tax was so deductible to the furnishing of return of income by the payee. The interest shall be levied on the amount of TDS not deducted/ short deducted by the deductor.

The above extracts reveals that the section has provided two kinds of relief to the deductors/taxpayers by way of proviso under which the deduction of the entire expenditure will be available to the concerned Assessee. The reliefs provided are as follows:

• First – If the TDS has been deducted by the deductor on or before last day of the financial year and the same been paid to the corpus of the Government before the due date of filing of tax return as per section 139(1) of the Act, the expenditure would be allowed.
• Second – If no TDS has been deducted by the deductor on or before last day of the financial year the deductors are not deemed to be an Assessee in default under the first proviso to section 201(1) of the Act; subject to compliance of the prescribed condi-tions.

Illustration: M/S X & Co. Whose due date of filling return is 31^st October pays the following sums without deduction of TDS:

1. `10,00,000/- to Mr. A, a Chartered Accountant resident, as professional fee (Due date of filing of return for Mr. A. is 31^st July)

2. `15,00,000/- to Mr. Z Ltd. as rent (Due date of filing of return for Z Ltd. is 30th Nov.)

3. `20,00,000/- to Apple Mobile, a non-resident company, as royalty (Due date of filing of return by Apple Mobile is 31st Oct.)

The above sums were paid on 1st July, 2023 without deduction of TDS.

For previous year 31.03.2024, MR. A, Z Ltd. and Apple Mobile have included the above sums in their respective return of income and have paid tax thereon. Returns have been filed by A, Z Ltd. and Apple Mobile on 31^st August, 2024, 30th Nov., 2024 and 31st Oct., 2024 respectively.

M/S X & Co. Has Taken Certificate From Chartered Accountant To The Above Effect. Now Following Are The Consequences

Particular	Amount paid without deduction of TDS	Due date of return of payee	Return filling date of payee	Deemed Payment Date	Year of Allowability of Expenditure to X ltd
Mr A	10,00,000	31st July, 2024	31st August, 2024	31st August, 2024	70 % allowed in PY 2023-24 and 30% allowed in PY 2024-25
Z Ltd	15,00,000	30th November, 2024	30th November, 2024	30th November, 2024	70% allowed in PY 2023-24 30% allowed in PY 2024-25
Apple Mobile (Non-Resident)	20,00,000	31st October, 2024	31st October, 2024	31st October, 2024	100% allowed in PY 2024-25

1. M/s X & Company shall not be treated as an assessee in default for payment of 10,00,000/- made to Mr. A without deducting TDS. M/s X & Company shall pay interest @ 1% p.m. from 1st July, 2023 to 31^st August, 2024 on TDS amount. The expenditure of 7,00,000/- shall be allowed to M/s X & Co. in P.Y. 2023-24 and expenditure of Rs.3,00,000 in previous year 2023-24 as per second proviso to section 40(a)(ia).

2. M/s X & Company shall not be treated as an assessee in default for payment of 15,00,000 to Z Ltd. without deducting TDS. M/S X & Company shall pay interest @ 1% p.m. from 1st July, 2023 to 30th Nov, 2024 on TDS amount. 70% of the expenditure will be allowed in P.Y. 2023-24 and 30% of expenditure of 15,00,000/- shall be allowed to M/s X & Company in previous year 2024-25 as per provisions of section 40(a)(ia).

3. M/s X & Company shall not be treated an assessee in default for payment of 20,00,000 to Apple Mobile without deducting TDS. The company shall pay interest @ 1% p.m. from 1st July, 2023 to 31st October, 2024 on TDS amount. The expenditure of 20,00,000 shall be allowed to M/s X & Company in P.Y. 2024-25 as per second proviso to section 40(a)(i).

(g) ITAT: TDS obligation under section 194A stands discharged on furnishing of Form 15G, disallowance under section 40(a)(ia) invalid

B. Nanji A. Mehta Lodha & Co. [TS-476-ITAT-2021(Ahd)] Jun 25, 2021

Ahmedabad ITAT allows Assessee’s appeal, deletes disallowance of interest expenditure under section 40(a)(ia); Assessee- partnership firm engaged in construction, development and selling of real estate, claimed interest expenditure of Rs. 50.78 lacs for AY 2012-13, out of which on amount of Rs. 15 lacs, tax at source under section 194A was not deducted; Revenue disallowed Rs. 15 Lacs of interest expenditure under section 40(a)(ia); ITAT accepts Assessee’s submission that tax was not deducted at source on account of declaration furnished in prescribed Form no.15G; Relies on Gujarat HC ruling in Valibhai Khanbhai Mankat wherein it was held

“…once Form no. 15G has been received by the assessee, disallowance under s.40(a)(ia) of the Act is uncalled for, despite its alleged non-submission to the department.”; Holds that obligation under s.194A of the Act stands discharged for the purposes of Section 40(a)(ia) of the Act where prescribed form is furnished by the payee to the assessee, and that the disallowance under section 40(a)(ia) is not justified; thus allows Assessee’s appeal.: ITAT Ahd

(h) Net effect of the aforesaid provision is to allow deduction only when tax is paid, either by the payer or payee.

ILLUSTRATION: M/s XYZ appointed Mr. B for consultancy work. He failed to de-duct TDS from payment made to him but Mr. B has paid tax on his total income. Whether payment made to Mr. B will be disallowed in hands of Mr. X?

As per section 40(a)(ia), where any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical service is payable to a resident on which tax is deductible at source but such tax has not been deducted or after deduction has not been paid to the credit of central government by due date specified under section 139(1), 30% of such amount shall be disallowed.

However, where an assessee fails to deduct tax but the deductee has paid tax on such income by including the same in the return of income furnished by him, then assessee shall not be deemed as an assessee in default for the purpose of section 40(a)(ia).

Thus, when payee files his return, the amount which was disallowed in the hands of payer shall be allowed as a deduction in the financial year in which payee furnish his re-turn of income.

Example, if payee furnishes his return of income on July 15, 2023, it shall be deemed that the assessee has deducted and deposited the tax on July 15, 2023 and he shall be allowed deduction in the Financial Year 2023-24. A tax auditor is required to report the particulars of such disallowance in the tax audit report for FY 2022-23.

(i) Whether any expenditure would be treated as inadmissible under section 40(a)(ia) even if such expenditure isn’t payable as on March 31, 2025?

Clause 21(b) requires reporting of expenses which are not admissible as per the various sub-clauses to section 40(a). Section 40(a)(ia) deals with the disallowance of 30% of any sum payable to a resident on which TDS hasn’t been deducted or after deduction, not paid to Govt. on or before the due date of filing of ITR.

Since the section 40(a)(ia) uses the word ‘Payable’, assessee often argued that the provision is applicable only on such sums which are payable as on March 31 and no disallowance could be made for any sum which has been paid during the year.

The Apex Court has settled the above controversy in the decision of Palm Gas Service (81 taxmann.com 43) wherein it has held that the word ‘payable’ occurring in section 40(a)(ia) not only covers cases where amount is yet to be paid but also those cases where amount has actually been paid.

The Apex Court ruled that it is the statutory duty of the tax payer to withhold tax and de-posit it to the account of the government within the time specified under the law.

Although grammatically, the word ‘payable’ and ‘paid’ denote different meaning but when the entire scheme of obligation to withhold tax and paying it over to the Central Government is interpreted holistically, it cannot be held that the word ‘payable’ occurring in section 40(a)(ia) refers only to those cases where the amount is yet to be paid and does not cover the cases where the amount is actually paid.

The intention of the statue is to recover tax from the taxpayer for the income accruing or deemed to accrue in India.

While the Apex Court overruled the ratio of the judgments of the Allahabad High Court laid in Vector Shipping Service (P.) Ltd and that of Vishakhapatnam Tribunal Special Bench in case of Merlyn Shipping and Transport it relied on the decision of Punjab & Haryana High Court, in P.M.S. Diesels (supra).

The Apex Court decision blesses the ratio of the rulings by the Calcutta High Court in case of Crescent Export Syndicates and Gujrat High Court in case of Sikadarkhan N Tunvar, referred to above.

It may be noted that while CBDT Circular (although binding on the revenue authorities) made an attempt to douse controversy around the term payable by explicitly qualifying that amounts may be payable “at any time” during the year, it could not prevent the con-tinued stint of debate, since language is an imperfect tool of expressing legislative in-tent.

The Apex Court through the above ruling in case of Palm Gas ended this controversy.

(j) SECTION 44AD/44ADA w.r.t. SECTION. 40(a)(ia)

In ITO v Mark Construction [2012] 23 taxmann.com 398 (Kolka-ta) the assessee engaged in civil construction disclosed profits exceeding 8% by opting for section 44AD provisions. In the assessment, the Assessing Officer called for books of account of the assessee and the assessee took a plea that the income was offered under section 44AD and hence maintenance/production of books of account was not compulsory. The Assessing Officer made addition of `32,62,140 by invoking section 40(a)(ia). The tribunal held that since the assessee has disclosed profits more than 8% of the gross receipts, no disallowance under section 40(a)(ia) could be made.

(k) No TDS default disallowance under section 40(a)(ia) for assessee opting presumptive basis taxation under section 44AD.

Surat ITAT in the case of ShriBipin Chandra Hiralal Thakkar [TS-539-ITAT-2020(SUR)] rules in favour of assessee-individual [who offered income to tax on presumptive basis under section 44AD @ 8% on gross turnover), deletes TDS default disallowance under section 40(a)(ia) for AY 2013-14; Noting that assessee made interest payments on unsecured loans and job work expenses without de-ducting TDS under section 194A/194C, AO made disallowance under section 40(a)(ia); However, ITAT refers to the non-obstante” clause at the beginning of section 44AD over-riding the provisions of sections 28 to 43C; Relies on the judgement of SMS Bench Kolkata in the case of Jaharlal Mukherjee, wherein it was held ..the provisions of section 44AD of the Act overrides all other provisions contained in section 28 to 43C. Admittedly, the provisions of section 40(a)(ia)of the Act falls within this range of sections 28 to 43C of Chapter-XVII B of the I.T. Act.”; Rejects Revenue’s stand that the dues to the crown has no limitation and has precedence over all other allowance and claims”, opines that provisions of section 44AD have been enacted by the Legislature/Crown to provide benefit to small businessmen in terms of cost savings

(l) Whether payments made to transporters would be disallowed for non deduction of TDS..??

Payments made to transportation, freight, clearing and forwarding would not be disallowed if the transporter should not own more than ten goods carriages at any time during the year and the Assessee has obtained declaration and PAN from such transporter as required Under section 194C(6) and 194C(7) and the Assessee has reported the same in Form 26Q.

(m) Assessee in de-fault but no disallowance under section 40(a)(ia)

CIT v S.K. Tekriwal (2014) 361 ITR 432 (HC-Cal) The assessee had deducted tax under section 194C(2) payments made to sub-contractors. The AO held that the payments were falling u/h ‘Rent’ and Section 194-I was applicable & disallowed the payments proportionately by invoking the provisions of section 40(a)(ia). It was later held by tribunal that, If there is any shortfall due to any difference of opinion as to taxability of any item or nature of payments falling under various TDS provisions, assessee can be declared to be an assessee in default under section 201 but no disallowance can be made under section 40(a)(ia). Hence, it can be concluded that Section 40(a)(ia) can be invoked only in event of non-deduction of tax at source but not for lesser deduction of tax.

(n) TDS Compliance In Tax Audit Report (Particulars in Form No. 3CD)

Clause 21(b) of Form 3CD – Amounts inadmissible under section 40(a)(i), 40(a)(ia), 40(a)(ic), 40(a)(iia), 40(a)(iib), 40(a)(iii), 40(a)(iv), 40(a)(v). These sections broadly re-late to disallowances made in respect of expenditure or a part of an expenditure where tax was required to be deducted at source but the assessee failed to do so.

Amount Inadmissible under section 40(a)

(i) As payment to non-resident referred to in sub clause (i)

(ii) As payment referred to in sub clause (ia)

(iii) As payment referred to in sub clause (ib)

It is to be noted that the reporting under tax Audit Report is to be made for the entire amount of payment.

21 (b)(i) As payment to non- resident referred to in sub clause (i)

Date of payment *	Amount of payment *	Nature of payment *	Name of the payee *	PAN	Address Line-1 *	Address Line-2	City *	Pin *

• Details of payment on which tax is not deducted

In clause 21(b)(i)(A) auditor is required to check and report all the payments which are made to non-resident but TDS is not deducted on them. Under this clause, the auditor is required to give the following details for each such type of payment:

• date of payment
• amount of payment
• nature of payment
• name and address of the payee

(B) Details of payment on which tax has been deducted but has not been paid during the previous year or in the subsequent year before the expiry of time

Date of payment *	Amount of payment*	Nature of payment*	Name of the payee*	PAN	Address Line-1 *	Address Line-2	City *	Pin *	Amount of tax deducted

In clause 21(b)(i)(B) auditor is required to check and report all the payments which are made to non-resident on which TDS is deducted but the same is not deposited with the government. Under this clause, the auditor is required to give the following details for each such type of payment:

• date of payment
• amount of payment
• nature of payment
• name and address of the payee
• amount of tax deducted

Note: Under both the sub-clauses the entire payment made to a non-resident shall be disallowed.

21(b)(ii) As payment referred to in sub clause (ia)

(A) Details of payment on which tax is not deducted

Date of payment *	Amount of payment *	Nature of payment *	Name of the payee *	PAN	Address Line-1 *	Address Line-2	City *	Pin *

This sub-clause is applicable when any amount of payment is made to a resident on which tax is deductible but the same was not deducted, that amount would attract 30% of disallowance. Under this situation tax auditor has to report the following particulars:

• date of payment
• amount of payment
• nature of payment
• name and address of the payee

(B) Details of payment on which tax has been deducted but has not been paid on or before the due date specified in sub-section (1) of Section 139

Date of payment *	Amount of payment *	Nature of payment *	Name of the payee *	PAN	Address Line-1 *	Address Line-2	City *	Pin*	Amount of tax deducted	Amount of tax deposited, if any

This sub-clause is applicable when any amount of payment is made to a resident on which tax is was deducted but the same was not either fully or partially deposited to the government, that amount would attract 30% of disallowance. Under this situation tax auditor has to report the following particulars:

• date of payment
• amount of payment
• nature of payment
• name and address of the payer
• amount of tax deducted
• amount of tax deposited, if any

Note: This clause is applicable to only those sums which are dis-closed and are claimed as an expenditure.

(o) How to Claim Expenditure which was disallowed in Preceding Year?

In case the payer pays or credits any amount to payee without deduction of TDS, 30% of the expenditure is disallowed in case payee is a resident and 100% of expenditure is dis-allowed in case payee is non-resident. The amount disallowed under section 40a(i) or 40a(ia) in any preceding year can be allowed as deduction in previous year in which Re-turn of income has been filed by the payee, provided the other requirements of proviso to section 201(1) are fulfilled. The payer is required to obtain certificate from Chartered Accountant and file form 26A. The amount can be claimed as deduction by the payer in the return of income of the year in which payee has furnished his return of income. It is to be noted that date of return filing of payee shall be deemed as date of deduction and payment of TDS by the payer. In ITR Form, the amount will be entered against point 8B of Part A of Schedule OI (Other Information). This amount will auto-populate in Point 30 of Part A of Schedule BP (Income From Business or Profession) from point 8B of Schedule OI (Part A).

Part A of Schedule OI

8

B

Any amount disallowed under section 40 in any preceding previous year but allowable during the previous year

8B

0

Part A of Schedule BP

30

Any amount disallowed under section 40 in any preceding previous year but allowable during the previous year (8B of Part A-OI)

30

0

3. Penalty under section 271C

[271C. Penalty for failure to deduct tax at source

[(1) If any person fails to-

(a) deduct the whole or any part of the tax as required by or under the provisions of Chapter XVIIB; or

(b) [pay or ensure payment of, the whole] or any part of the tax as required by or under,

(i) sub-section (2) of section 115-0; [*]

(ii) [***] proviso to section 194B;

[(iii) the first proviso to sub-section (1) of section 194R; or

(iv) the proviso to sub-section (1) of section 1948; or

“[(v) sub-section (2) of section 194BA,]

then, 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 for ensure payment of] as aforesaid.]

[(2) Any penalty imposable under sub-section (1) shall be imposed by the [Joint] Com-missioner.]

[Provided that any penalty under sub-section (1) on or after the 1^st day of April, 2025, shall be imposed by the Assessing Officer.]

Section 271C of the IT Act provides that if any person fails to deduct the whole or part of the tax as required in terms of the Act, then 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.Section 271C provides for levy of penalty on any person under two scenarios, (i) if the person, who is required to deduct TAS, fails to deduct either whole or part of such tax amount; or (ii) if such person fails to pay either the whole or any part of the tax as is re-quired to be paid under proviso to Section 194B. Penalty under Section 271C can be lev-ied on the amount equal to the tax not deducted [as per Scenario (i)] or paid [ as per Scenario (ii)]. Scenario (ii) covers situation, wherein, payment is made in kind, or partly in cash and partly in kind, such as winnings from lottery or crossword puzzle etc. In such a situation, if the cash component is not there or is not sufficient to meet the liability for deduction of tax, then the person responsible for paying, before releasing the winnings, has to ensure that the tax amount has been paid in respect of such winnings, to the Government, on behalf of the recipient.

However, situation of non-payment of such tax amount, under such sections, was not covered in Scenario (ii) of Section 271C, as discussed above, even though Section 194R and Section 194S were already in force w.e.f. 1.07.2022. In order to plug this gap, amendment has been made in Section 271C, w.e.f 1.04.2023, to even cover such situa-tions of non-payment of tax under Section 194R and Section 194S. It is also to be noted that since Section 194BA has been introduced w.e.f. 1.04.2023, corresponding amendment has been inserted in Section 271C, to include such section from the date of its coming into force.

Penalty under section 271C(1)(a) can be imposed only for non-deduction of TDS, not for belated payment or non-payment of deducted TDS

M/s US Technologies International Pvt. Ltd. v Commissioner of Income Tax – [2023] 149 taxmann.com 144 (SC)

Facts of the Case

Assessee, a private limited company, was engaged in a software development busi-ness. It deducted tax at source (TDS) in respect of salaries, contract payments, etc., for the relevant Assessment Year. The assessee deposited the amount of TDS in instal-ments with a delay ranging from 5 days to 10 months.

During the survey conducted by the Assessing Officer (AO), the delay in depositing the amount of TDS was noticed, and interest under section 201(1A) was charged. Further Additional Commissioner of Income Tax (ACIT) levied a penalty equivalent to the amount of TDS under section 271C on the assessee.

The High Court further confirmed the penalty order imposed by ACIT. Aggrieved by the order, the assessee preferred an appeal to the Supreme Court.

Supreme Court Held

The Supreme Court held that section 271C(1)(a) is applicable in case of a failure on the part of the assessee to “deduct” the whole or any part of the tax as required under the provisions of the Act. The words used in Section 271C(1)(a) are very clear, and the rele-vant words used are “fails to deduct.” It does not speak about the belated remittance of the TDS.

Only a limited text involving Section 115O(2) or covered by the second proviso to Section 194B alone would constitute an instance where a penalty can be imposed in terms of Section 271C(1)(b), for the non-payment of TDS. The consequences of non-payment or belated remittance/payment of the TDS, the legislature has provided the same as in Sec-tion 201(1A) and Section 276B of the Act.

As per the settled position of law, the penal provisions are required to be construed strictly and literally. The cardinal principle of interpretation of the statute and, more par-ticularly, the penal provision, the penal provisions are needed to be read as they are. Nothing is to be added, or nothing is to be taken out of the penal provision.

The words “fails to deduct” occurring in Section 271C(1)(a) cannot be read into “failure to deposit/pay the tax deducted”. Therefore, on the plain reading of Section 271C, no penalty under section 271C(1)(a) can be levied on belated remittance of the TDS after the same is deducted by the assessee.

Issue: Where there is default in deduction of TDS penalty is payable under section 271C or section 221 or both?

→ Section 271C is a specific provision dealing with assessee’s failure of non-deduction or short-deduction of tax, therefore, to the extent a default is covered by the specific provision of section 271C, such default cannot be subject-matter of pen-alty under section 221(1).

Section 276B Prosecution: The assessee could also be prosecuted for the non-complying with the requirements of deducting and paying the TDS. However, the criminal proceedings can be initiated only when the default is of non-payment and not where the default is restricted to non- deduction of TDS. The prosecution under sec-tion 276B is rigorous imprisonment for at least 3 months and upto 7 years along with amount to be paid as fine.

Section 271H [Penalty]: Penalty for incor-rect information or failure to furnish statements, etc.

As per section 271H, where a person fails to file the statement of tax deducted/collect at source i.e. TDS/TCS return on or before the due dates prescribed in this regard, then as-sessing officer may direct such person to pay penalty under section 271H. Minimum penalty can be levied of `10,000 which can go upto `1,00,000. Penalty under section 271H will be in addition to late filing fees prescribed under section 234E. Apart from de-lay in filing of TDS/TCS return, section 271H also covers cases of filing incorrect TDS/TCS return. Penalty under section 271H can also be levied if the deductor/collector files an incorrect TDS/TCS return. In other words, minimum penalty of `10,000 and maximum penalty of upto `1,00,000 can be levied if the deductor/collector files an in-correct TDS/TCS return.

No penalty will be levied under section 271H for the failure to file the TDS/TCS return, if the person proves that after paying tax deducted/collected by him, along with the latefil-ing fee and interest (if any), to the credit of the Central Government, he had filed the TDS/TCS return before the expiry of a period of one year from the due date of filing the TDS/TCS return. In other words, no penalty under section 271H will be levied in case of delay in filing the TDS/TCS return if following conditions are satisfied.The tax deduct-ed/collected at source is paid to the credit of the Government. Late filing fees and inter-est (if any) is paid to the credit of the Government. The TDS/TCS return is filed before the expiry of a period of one year from the due date specified in this behalf. It should be not-ed that the above relaxation is applicable only in case of penalty levied under section 271H for delay in filing the TDS/TCS return and not in case of filing incorrect TDS/TCS statement. The Finance (No. 2) Act, 2024 has now reduced the time of one year to one month to get exemption from levy of penalty under section 271H.The amendment will apply with effect from April 1, 2025.

Apart from above relaxation, in following two cases the taxpayer can get relief from pen-alty under section 271H: Under section 273A(4) the Principal Commissioner of Income-tax or Commissioner of Income-tax has power to waive or reduce the penalty levied un-der the Income-tax Act. Penalty can be waived or reduced by the Commissioner of In-come-tax if the conditions specified in section 273A(4) in this regard are satisfied. Apart from shelter of section 273A(4), section 273B also provides immunity from penalty in genuine cases. As per section 273B, penalty under section 271H will not be levied if the taxpayer proves that there was a reasonable cause for failure.

5. Section 234E [Fees]: Fee for default in furnishing quarterly returns of TDS/TCS:

(a) This section 234E is applicable for quarterly returns of TDS/TCS.

(b) Section 234E provides that where a person fails to deliver the quarterly returns of TDS/TCS within the time prescribed, then he shall be liable to pay a fee of `200 for every day during which the failure continues. This is in addition to the penalty under section 271H.

(c) However, such fees shall not exceed the amount of TDS/TCS deductible/ collectible in the quarterly return.

(d) The fees under section 234E shall be paid before furnishing the quarterly returns of TDS/TCS.

(e) The fee under section 234E is mandatory and cannot be waived/reduced under any circumstances. However, fee under section 234E can be waived by CBDT, for any suffi-cient and appropriate cause, on an application made by the assessee.

The IT Department has made it mandatory on the deductors to pay late filing fees in form of a penalty of two hundred rupees per day beginning from the next day of the due date of filing the return. Such penalty should be paid before filing of the return. The only rescue is that the penalty Under section 234E cannot exceed the total amount of TDS for the relevant quarter. Let’s understand the total impact of this section in a tabular form.

Amount of total TDS for the Quarter	Due date of filing of TDS/ TCS return	Actual date of filing	Delay in days	Fee based on calculation of day	Max penalty payable restricted to total TDS for the quarter
10000	31.05.2023	10.06.2023	10	2000	2000
10000	31.05.2023	20.07.2023	50	10000	10000
10000	31.05.2023	31.12.2023	214	42800	10000

ITAT: Late Fee under section 234E for belated TDS-return filing to be reckoned from ‘delayed’ TDS payment date

Shri. Sandeep Samantha [TS-504-ITAT-2020(Bang)] Oct 01, 2020

Bangalore ITAT grants relief to assessee-individual, restricts the period for computation of late fee under section 243E [Fee for default in furnishing e-TDS statements] from the date of making ‘delayed’ TDS payment to the actual date of filing of e-TDS return for AY 2016-17; Accepts assessee’s submission that the quarterly statement has to be filed after the payment of TDS to the credit of Central Government, thus the levy should be computed for the delay from date of deposit of TDS till the date of filing of return; Relies on Delhi ITAT decision in case of Meghna Gupta, opines that ..the delay in filing of statement is to be counted from the date of payment of TDS because before the payment of TDS, the quarterly statement cannot be filed and if we compute the delay in this man-ner, the delay is of 12 days only ”; Thus upholds the levy of fees under section 234E to that extent i.e., for 12 days only and delete the balance amount of fees levied by the AO

Section 272BB:

Section 272BB provides for imposition of penalty on non-compliance of provisions of section 203A. Therefore a penalty will be imposed where a person fails to:

• obtain the tax deduction account number or tax collection account num-ber;

or

• fails to quote such number as required

The amount of penalty payable under section 272BB is be ₹10,000/-.

Note: No order imposing the penalty shall be passed unless an op-portunity of being heard is given in the matter to such person.

[1] Substituted by the Fi-nance Act, 2008, w.r.e.f. 1-6-2002.

[2] Inserted by the Finance Act, 2012, w.e.f. 1-7-2012.

[3] Substituted for “resident” by the Finance (No. 2) Act, 2019, w.e.f. 1-9-2019.

[4] Substituted for “resident” by the Finance (No. 2) Act, 2019, w.e.f. 1-9-2019.

[5] Substituted for “resident” by the Finance (No. 2) Act, 2019, w.e.f. 1-9-2019.

[6] See Form No. 26A and rule 31ACB.

[7] Inserted by the Finance Act, 2012, w.e.f. 1-7-2012.

[8] Substituted by the Fi-nance Act, 2010, w.e.f. 1-7-2010.

[9] See Circular No. 21/2017, dated 12-6-2017.

[10] Inserted by the Fi-nance Act, 2012, w.e.f. 1-7-2012.

[11] Substituted for “resi-dent” by the Finance (No. 2) Act, 2019, w.e.f. 1-9-2019.

[12] Substituted for “resi-dent” by the Finance (No. 2) Act, 2019, w.e.f. 1-9-2019.

[13] Substituted for “resi-dent” by the Finance (No. 2) Act, 2019, w.e.f. 1-9-2019.

[14] Inserted by the Fi-nance Act, 2022, w.e.f. 1-4-2022.

[15] Substituted for “it” by the Finance Act, 1966, w.e.f. 1-4-1966.

[16] Substituted by the Fi-nance (No. 2) Act, 2014, w.e.f. 1-10-2014.

[17] Being substituted by “any person, at any time after the expiry of six years” by the Finance (No. 2) Act, 2024, w.e.f. 1-4-2025.

[18] Inserted by the Fi-nance (No. 2) Act, 2019, w.e.f. 1-9-2019.

[19] Being inserted by the Finance (No. 2) Act, 2024, w.e.f. 1-4-2025.

[20] Inserted by the Fi-nance (No. 2) Act, 2009, w.e.f. 1-4-2010.

[21] Inserted by the Fi-nance Act, 2012, w.e.f. 1-7-2012.