Default of Tds , Compounding of an offence  and how Prosecution is imposed:

Default in TDS Collection and Deposit – How Punishable is This Offence

In the recent past it is observed that Income Tax Department is issuing show cause notices for launching prosecution u/s 276B of the Income Tax Act. Such notices are issued for defaults in payment of TDS. Prosecution has been launched even in cases where amount of default is low and period of default is of few days. Such an instance is found in Madhumilan Syntex Ltd. & Ors. Vs. Union of India & Anr. (2007) 208 CTR (SC) 417: (2007) 290 ITR 199 (SC).

Now the question arises whether in each and every cases prosecution proceedings can be initiated? There is no straight forward answer. Various courts have examined this issue. Points which can be used in favour of the assessee are summarized below:

1. TDS Default Amount and period is Important:

 CBDT has issued instruction no. 1335 of CBDT, dated 28-5-1980 to the effect that prosecution should not normally be proposed when the amounts involved are not substantial and the amount in default has also been deposited in the meantime to the credit of the Government.

In the case of Vijay Singh Vs Union of India & Anr (2005) 199 CTR (MP) 653 the Hon High Court gave its judgement in favour of assessee for a TDS default of 28,776/- for a period of 5 months and some days. Also see BEE GEE MOTORS & TRACTORS & ANR. vs. INCOME TAX OFFICER reported in (1995) 127 CTR (P&H) 224 : (1996) 218 ITR 155 (P&H) : (1995) 82 TAXMAN 493

2. Absence of Reasonable Cause of TDS Default:

The provisions of section 278AA lays down that no person shall be punishable for any failure referred to in section 276B if he proves that there was reasonable cause for such failure.

 It is essentially a question of fact to be decided in each case on consideration of material placed before the concerned authority. However the burden of proof that there was a reasonable cause for default is on assessee.

SEQUOIA CONSTRUCTION CO. LTD. & ORS. vs. P.P. SURI, INCOME TAX OFFICER reported in (1985) 47 CTR (DEL) 277 : (1986) 158 ITR 496 (DEL) : (1985) 21 TAXMAN 13 there was delay in deposit of TDS. In view of reasonable cause shown by assessee, penalty proceedings came to be dropped by both appellate authorities. In this respect the court held that “Dropping of penalty proceedings must weigh with trial Court while judging the reasonable cause prevailing with assessee. Milder proof of reasonable cause must be taken to have been established. Continuance of prosecution proceedings would be a sheer exercise in futility and harassment of assessee—Prosecution was quashed”

3. Unintentional TDS Default is not punishable:

In UNION OF INDIA vs. PYARELAL TARACHAND & ANR. (2003) 180 CTR (MP) 551: (2003) 264 ITR 525 (MP): (2004) 135 TAXMAN 97 the Hon High Court declined to interfere in the judgment where trial court acquitted the assessee because  it was not proved that the assessee has deliberately or intentionally committed the default.

4. Non deduction of TDS vs. TDS deducted and not paid

After amendment of s. 276B w.e.f. 1st April, 1989, only if a person deducts tax but does not pay the same there is an offence. Failure to deduct tax has ceased to be an offence after the said amendment and it only attracts penalty under s. 271C. During the course of audit many a times it is observed that TDS has not been deducted on expenses incurred/provided at the end of the year. What generally is done that TDS liability is created as on 31st March by debiting vendor account. And the TDS liability is paid in current date. Thus there is a default from 1st of April to the date of payment. This will also attract prosecution provisions u/s 276B. On the other hand if instead of making TDS provision at the end of the year i.e. 31st March, the TDS liability should have been created on current date and payment made. This will make prosecution provisions u/s 276 B inapplicable.  See also Kaushal Kumar Biyani vs union of India through ITO (2002) 174 (CTR) MP 552

5. No Prosecution if it is a Company assessee:

Prosecution can’t be initiated against the company. It has to be initiated in the name of Director or Principal Officer responsible for TDS compliances. For initiating prosecution proceedings against the director of the company, the assessee officer has to give notice u/s 2(35) expressing his intention to treat such directors of a company as “principal officers”. However, it would be sufficient compliance if in the show-cause notice issued to the company it is mentioned that the directors are to be considered as principal officers of the company.

 In absence of both, permission is not granted to appeal against the judgment passed by Addl. Chief Metropolitan Magistrate whereby respondent director of the company has been acquitted of the offence under s. 276B. (COMMISSIONER OF INCOME TAX vs. DELHI IRON WORKS (P) LTD. & ORS (2011) 331 ITR 5 (Del) : (2010) 195 TAXMAN 372 (Del)

Section 276B of the Income Tax Act, 1961, providing for the prosecution provision in case of default in payment of TDS under Chapter XVII-B and Chapter XII-D, was inserted by the Finance Act, 1968, for the first time by the legislature.

The text of section 276B as inserted by the Finance Act, 1968 is reproduced as under:

276B. If a person, without reasonable cause or excuse, fails to deduct or after deducting fails to pay the tax as required by or under the provisions of sub-section (9) of section 80E or Chapter XVII-B, he shall be punishable with rigorous imprisonment for a term which may extend to six months, and shall also be liable to fine which shall be not less than a sum calculated at the rate of fifteen per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid].

The provisions of section 276B of the Income Tax Act, have undergone multiple changes since last 5 decades and presently this section as per Finance Act 2017, reads as under:

276B. If 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, he shall be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extend to seven years and with fine.

The journey which this section 276B of the Income Tax Act, 1961 has transcended over the last 5 decades is clearly not in favour of the assessee and is not taxpayer friendly.

A perusal of the afore-stated legal position as enshrined u/s 276B, at two points of time i.e. at the time of its insertion in 1968 and at present in 2017, makes it abundantly clear that this provision has been made more stringent and more harsh with the passage of time.

This is evident as under:

(i) the expression “without reasonable cause or excuse” which was very much an integral part of the section at the time of its insertion in 1968, and is in line with the cardinal principal of equity, justice and good conscience has altogether been omitted at present.

(ii) the maximum tenure of imprisonment has been increased from 6 months to 7 years.

However, there is a non obstante provision as contained in section 278AA of the Income Tax Act, 1961, which clearly provides that no person shall be punishable for any failure referred to in section 276B if he proves that there was a reasonable cause for such failure.

There is a well known maxim which goes as “with great power comes greater responsibility.” The Power to Prosecute must be used judiciously, rationally and with due application of mind to meet the ends of justice.

The prosecution for default in paying TDS to the credit of the Central Government does not automatically follow such default and the provision has, therefore, been made under Section 279 of the Income-tax Act for sanction to be granted for such prosecution by the Chief Commissioner. It had repeatedly been held by the courts that whenever the decision was left to the subjective satisfaction of a statutory authority, it necessarily implied that such authority was required to apply its mind to all relevant factors before arriving at a decision. The grant of sanction for launching prosecution is a very serious & extreme measure having serious consequences which entails proper exercise of discretion upon consideration of all relevant materials, including mitigating circumstances in favour of the defaulter.

However, unfortunately, the present day tendency has become to put undue pressure for tax collections for meeting out budgetary targets for improving service records, by using the window of prosecution. This was clearly not the Legislative Intent behind insertion of Prosecution Provisions in the Income Tax Act, 1961.

Surprisingly and Shockingly, the Current Legal Provisions and the CBDT guidelines, w.r.t. section 276B of the Income Tax Act, concerning the default in payment of TDS in time, entails very serious and harsh consequences. Presently, there are numerous instances, where even for a delay of 2-3 months in depositing the TDS with the Exchequer, Prosecution Proceedings u/s 276B are being launched. This high handed approach is clearly not justifiable and desirable.

The present framework of law in the context of section 276B of the Income Tax Act, treats every assessee who has defaulted in payment of TDS, on equal footing, irrespective of the severity of default. This is totally unwarranted and uncalled for.

For judicious, equitable and effective implementation of the Prosecution Provision u/s 276B of the Income Tax Act, first and foremost, the defaulters must be categorized into different categories based on the nature and severity of default in terms of quantum, duration and intent parameters and depending upon the severity of the default, the penal consequences must follow.

In making these categorizations, the element of subjectivity within the categorization must be altogether done away with. Instead the entire categorization exercise must be standardized as is being done in Computer Assisted Scrutiny Selection (CASS).

In determining the categorization of defaulters, the status of pendency or otherwise of the regular undisputed income- tax refund of the defaulter assessee deserves to be given a significant and major consideration.

This can be better explained in terms of 2 Hypothetical Scenarios as under:

Scenario 1. An assessee X, defaults in deposition of TDS amounting to Rs 20 Lacs, and even after the lapse of more than 12 months, he has not deposited the principal TDS amount as well as the penal interest. No income tax refund is pending in his PAN.

Scenario 2. An assessee Y, defaults in deposition of TDS amounting to Rs 20 Lacs. He deposits the principal TDS amount as well as the penal interest @ 1.5% per month after a delay of 6 months. However, his regular undisputed income-tax refund of more than Rs. 20 Lacs or much more than Rs. 20.00 Lacs is also pending with the Exchequer, and it remains pending through-out the period of default in payment of TDS by him and thereafter.

In this case, assessee X in scenario 1 is obviously a willful defaulter and appropriate penal actions against him are warranted.

However, the question arises in the case of assessee Y in scenario 2. Whether it will be justifiable or rational to consider assessee Y as an assessee in default u/s 201 and whether it is lawful to launch prosecution proceedings u/s 276B against him. Going by the true legislative intent and the dictum of principle of natural justice, the answer shall be “NO” only. This is because, in real and effective terms, at no point of time, there is outstanding income-tax demand against assessee Y. The TDS demand of assessee Y can very easily be adjusted against his pending regular income-tax refund and so assessee Y must not be considered as an assessee in default and the question of launching of prosecution proceedings against assessee Y must not arise, more so when he has paid the principal TDS along with the penal interest @ 1.5% per month, whereas he is entitled for a comparatively very less interest on his income-tax refund @ 0.5% per month only.

The aforestated hypothetical scenario 2, ironically reflects the clearly evident lack of level playing field for the assessee. This is so because, if there is some default in payment of TDS in time by the assessee, he is liable to pay penal interest @ 1.5% per month and also suffers the disallowance of corresponding expenditure in computation of his taxable income. To add to that, he is also exposed to prosecution u/s 276B of the Income Tax Act and to avoid that the assessee is forced to apply for compounding wherein he is supposed to pay additional interest @ 3% per month along with the applicable compounding charges.

As opposed to this, if there is a delay in granting the income-tax refund by the Exchequer to the assessee, all he can hope for is a compensating interest @ 0.5% per month and that too after a lot of follow-up and litigation. There is no provision in Law for compounding against the Exchequer. No prosecution can be launched against the Exchequer and unlike the assessee, the Exchequer can’t be considered as an Exchequer in default.

There are cases, where the outstanding income-tax refund of the assessee is 3-4 times as that of his TDS liability. In such cases, the delay in granting the due income tax refund to the assessee impacts the business & the financial capability of the assessee very severely & adversely & also results in the credit facilities of the assessee becoming NPAs much to the detriment of the Exchequer as well as the assessee. In such cases, it would not be wrong to contend that the assessee’s inability to deposit the TDS in time, is primarily because the Exchequer has not provided his due income tax refund. In such cases, even if the Exchequer launches prosecution, it is not likely to sustain in the Court of Law & rather it will be difficult for the Exchequer to defend its own delay in granting refund of income tax to the assessee.

In order to restore some balance, atleast in cases where there is default in payment of TDS but simultaneously the regular income-tax refund is also pending in the name of the assessee, then the assessee must be given an option to get its outstanding TDS demand adjusted against its pending income tax refund and this will enable the recipient of income also to obtain his TDS credit in time. Currently, even after penalizing the deductor for his default in deposition of TDS by way of levy of penal interest @ 1.5% per month and disallowance of the corresponding expenditure and further more by subjecting him to compounding @ 3% per month in lieu of launching prosecution proceedings u/s 276B, no credit of TDS is being made available to the recipient of income. Thus, in true spirit, the whole purpose of subjecting the deductor to all these stringent repercussions gets defeated.

Furthermore, the online Form 26AS in which the credit of TDS being deducted from the income of the recipient, is reflected, instead of serving as a taxpayer friendly initiative, is infact causing undue hardship to the recipient of income. This is because, currently there are numerous instances where due to the inherent processing deficiencies in this online system, the TDS credit does not get reflected even after the same has been deposited by the deductor and the deductee gets deprived of his lawful TDS credit. Unfortunately, currently the non reflection of even the duly deducted and deposited TDS in online Form 26AS, is being used as a blanket excuse for not giving the fully lawful TDS credit. Before the induction of this online system, based on the manual TDS certificates, the deductee was atleast able to claim his otherwise lawful TDS credit. The vigour, aggressiveness and willingness as shown by the Exchequer in penalizing the Tax Deductor must also be reflected in giving hindrance free TDS credit to the deductee.

All what is required is a proper co-ordination between the TDS Wing and the Assessment Wing of the Exchequer and the removal of the procedural bottlenecks and streamlining of the functional capacities of the Exchequer. Currently u/s 245 of the Income Tax Act, the outstanding income tax demand of the assessee is being adjusted against his income tax refund. The same must also apply to the adjustment of the pending TDS demand as reflected in Traces against income tax refund. This will lead to the much needed avoidance of undue hardship to both the payer of income and recipient of income. Also, it will result in substantial reduction in the administrative work-load of the Exchequer and will enable it to direct its time and energy in harnessing tax revenues in a more efficient and productive manner.

An assessee who has deposited the deducted TDS with penal interest and has filed the TDS Returns, must not be considered as a defaulter anymore. He can’t be equated with a Tax Evader. Thousands of such prosecution notices are being sent by the Exchequer to the Business Community across the country w.e.f. FY 12-13. There are thousands of cases, wherein the harassment of Law abiding assessees, becomes clearly evident. Even the Exchequer is also being burdened unnecessarily.

Therefore, keeping in view the above, the concerned Revenue Authorities must review this existing stringent provision u/s 276B of the Income Tax Act and must consider doing appropriate modifications/changes in it so as to enable an effective action against the willful and habitual tax evaders only and not against the bonafide assessees who create wealth for the Nation. Then in true spirit, the Government’s Objective of enabling and facilitating Ease of Doing Business will be accomplished.

Recent Update : The income tax department has issued over 850 prosecution notices to firms in the private and government domain in Karnataka and Goa on charges of delay in remitting tax deducted at source (TDS) funds to the exchequer.

A senior official said notices where the tax department files court cases for default in TDS payments have been issued to defaulters who have deducted tax from the payees such as employees, professionals, contractors and others and have then delayed the remittance of tax in government coffers or the I-T department.

“The department has issued 859 prosecution show cause notices to various deductors which includes private entities, government agencies and public sector undertakings (PSUs) in Karnataka and Goa region. In 48 cases, the prosecution has been sanctioned and complaints have been filed in special economic offences courts,” the department said in a statement.

It said in 223 cases, deductors have filed applications for compounding of offences by paying taxes, apart from interest and penalty, at the rate of 3% per month from the due date of payment of TDS to the actual date of payment of TDS amount as compounding fees amid charges.

Such action, the official said, has been initiated in other parts of the country as well and the data is being compiled. In Delhi, Central Board of Direct Taxes (CBDT) chairman Sushil Chandra had recently written to the field offices of the department to step up an action and check TDS defaults by firms and employers, especially in cases where such payments have dropped by more than 15% as compared to last time.

With the current financial year drawing towards a close, the CBDT boss issued the directive so that TDS collections, which form a substantial chunk in the overall direct tax collections, meet the set regard of Rs3.50 lakh crore.

The I-T department has netted Rs2.85 lakh crore revenue till 31 January 2017 under the TDS category. As per rules, all sums deducted as income tax shall be paid to the credit of the central government within seven days from the end of the month in which the deduction is made or before the prescribed dates.

Failure to adhere to the above provisions are liable to attract prosecution proceedings under section 276B of the Income Tax Act, 1961 besides interest and penalty. The official said the courts have also cracked down on such instances in the past and in one case in Bengaluru, the court had convicted the defaulters to three years of rigorous imprisonment with a fine of Rs 50,000 each for the delayed payment of TDS to the government account.

Now the Question is what to do if you receive a notice u/s 276 B Prosecution:

1. First you need to Reconcile the o/s demand as per Consolidated Figures intimate by the department with your Books of accounts

2. Second Download the Justification Report from the Traces , if you are large tax payer , it is advisable to use DSC on the traces.

3. Various Software available in the market , Select one of them :

4. With the Help of Justification Report you come to know the actual reasons of o/s demand.

5. Before 01.06.2015 Intimation of Orders you may file an appeal for Late Filing Fees u/s 234 E of the act, 1961 , in Several of the cases Higher Authorities give relaxation to the assessee Companies. Procedure for filing the appeal will discuss in different article.

6. Please do not waste your time to request TDS CPC to delete the demand , they have no authority to delete any kind of demand.

7. You need to file an appeal to CIT –Appeal for late Filing fees orders intimated before 01.06.2015.

8. If Appeal not in your favour , then you can further filing an appeal to ITAT, High Court , Supreme Court , normally at ITAT that Late filing fees is deleted.

9. Now the main concern is Late Payment Interest and Short Deduction demand.

10. For Late Payment Interest you can adjust the o/s demand with your Unconsumed Challans available on the Portal , normally various Companies done the payment but not tagged the challan with o/s demand.

11. From the Point of View Short Deduction the reasons would be Wrong Pan No etc, Please check your records and file the Corrections.

12. From the point of Short Payment demand you may tag the wrong challan or short payment of Challan , so you need to pay the amount and tag the Challans to delete the demand.

13. After settlement of your above mention demands and demand u/s 220(2) will raise by the deptt , this is for 1 % per month interest on total default , Pr. CIT has the Power to waive that interest , but normally in exceptional cases they are waive or reduce that interest.

In Some cases AO issue the notice and assessee Company seeks for Compounding, following are the Guidelines for Compounding of an offence.

Guidelines  for  Compounding  of  Offences  under  Direct  Tax Laws, 2014

1. In the light of various references received from the field formation from time to time, existing guidelines on compounding of offences under Income-tax Act, 1961 (the Act) have been reviewed and in supersession of the same, including the guidelines issued vide F.No. 285/90/2008-IT(Inv.)/12 dated 16th May 2008, the following guidelines are issued for compliance by all concerned.

2. These guidelines shall come into effect from 01.01.2015 and shall be applicable to all applications for compounding received on or after the aforesaid date. The applications received before 01.01.2015 shall continue to be dealt with in accordance with the guidelines dated 16.05.2008.

3. Compounding Provision:

Section 279(2) of the Act provides that any offence under chapter XXII of the Act may, either before or after the institution of proceedings, be compounded by the CCIT/DGIT. As per section 2(15A) and 2(21) of the Act, Chief Commissioner of Income Tax includes Principal CCIT and Director General of Income tax includes Principal DGIT.

4. Compounding is not a matter of right:

Compounding of offences is not a matter of right. However, offences may be compounded by the competent authority on his satisfaction of the eligibility conditions prescribed in these guidelines keeping in view factors such as conduct of the person; nature and magnitude of the offence and facts and circumstances of each case.

5. Applicability of these guidelines to prosecutions under IPC:

Prosecution instituted under Indian Penal Code, if any, cannot be compounded as per these guidelines. However, section 321 of Criminal Procedure Code, 1973 provides for withdrawal of such prosecutions.

6. Classification of Offences:

The offences under Chapter-XXII of the Act are classified into two parts (Category’ A’ and Category ‘B’) for the limited purpose of compounding of the offences.

6.1 Category ‘A’

Offences punishable under the following sections are included in Category ‘A’:

Sl No. Section Description/Heading of section
i. 276 (Prior to 01/04/1976)- Failure to make payment or deliver returns or statements or allow inspection.
ii 276B (Prior to 01/0411989)  -Failure to deduct or pay tax
iii 276B (w.e.f. 01/04/1989 and up-to 30/5/1997)- Failure to pay tax deducted at source under chapter XVII-B
iv 276B Failure to pay tax deducted at source under chapter XVII-B or tax payable under section  115 -0 or 2nd proviso to section 194B to the credit of the Central  Government (w.e.f. 01/06/1997)
v 276BB Failure to pay the tax collected at source
vi 276DD (Prior to 1.04.1989) – Failure to comply with the provisions of section 269SS
vii 276E (Prior to 1.04.1989) – Failure to comply with the provisions of section 269T
viii 277 False statement in verification etc. with reference to Category ‘A’ offences
ix 278 Abetment of false return etc. with reference to Category ‘A’ Offences

6.2 Category ‘B’

Offences punishable under the following sections are included in Category ‘B’:

Sl No. Section Description/Heading of section
i. 275A Contravention of order made u/s 132(3)
ii 275B Failure Failure to comply with the provisions of Section 132 (1) (iib)
iii 276 Removal, concealment, transfer or delivery of property to thwart tax recovery
iv 276A Failure to comply with the provision of sections 178 (1) and 178(3)
v 276AA (prior to 01/1011986)-Failure to comply with the provisions of section 269 AB or section 269 I
vi 276AB Failure to comply with the provisions of sections 269UC, 269UE and 269UL
vii 276(C)(1) Wilful attempt to evade tax etc
viii 276(C)(2) Wilful attempt to evade payment of taxes etc
ix 276CC Failure to furnish returns of lncome
x 276CCC Failure to furnish returns of income in search cases in block assessment scheme
Xi 276D Failure to produce accounts and documents
xii 277 False statement in verification etc. with  reference to Category ‘B’offences
xiii 277A Falsification of books of account or documents etc.
xiv 278 Abetment  of  false  return  etc. with reference  to Category ‘B’offences

7. Eligibility Conditions for compounding:

The following conditions should be satisfied for considering compounding of an offence:-

i The person makes an application to the CCIT/DGIT having jurisdiction over the case for compounding of the offence(s) in the prescribed format (Annexure- I)

ii The person has paid the outstanding tax, interest, penalty and any other sum due, relating to the offence for which compounding has been sought

iii The person undertakes to pay the compounding charges including the compounding fee,the prosecution establishment expenses and the litigation expenses including counsel’s fee, if any, determined and communicated by the CCIT/DGIT concerned.

iv The person undertakes to withdraw appeal filed by him, if any, in case the same has a bearing on the offence sought to be compounded. In case such appeal has mixed grounds, some of which may not be related to the offence under consideration, the undertaking may be taken for appropriate modification in grounds of such appeal.

Offences generally not to be compounded:

i A Category ‘A’ offence sought to be compounded  by an applicant  in whose case compounding was allowed in the past, in an offence under the same section for which the present compounding has been requested, on 3 occasions or more.

ii A  Category ‘B’ offence other than the first offence as defined herein below:

First offence means offence under any of the Direct Tax Laws committed prior to (a) the date of issue of any show-cause notice for prosecution or (b) any intimation relating to prosecution by the Department to the person concerned or (c) launching of any prosecution, whichever is earlier;

OR

Offence not detected by the department but voluntarily disclosed by a person prior to the filing of application for compounding of offence in the case under any Direct Tax Acts. For this purpose, offence is relevant if it is committed by the same entity. The first offence is to be determined separately with reference to each section of the Act under which it is committed.

iii Offences committed by a person who, as a result of investigation conducted by any Central or State agency and as per information available with the CCIT/DGIT concerned, has been found involved, in any manner, in anti-national/terrorist activity.

iv  Offences committed by a person who, was convicted by a court of law for an offence under any law, other than the Direct Taxes laws, for which the prescribed punishment was imprisonment for two years or more, with or without fine, and which has a bearing on the offence sought to be compounded.

v Offences committed by a person which, as per information available with the CCIT/DGIT concerned, have a bearing on a case under investigation (at any stage including enquiry, filing of FIR/complaint) by Enforcement Directorate, CBI, Lokpal, Lokayukta or any other Central or State agency.

vi Offences committed by a person for which he was convicted by a court of law under Direct Taxes laws.

vii Offences committed by a person for which complaint was filed with the competent court 12 months prior to receipt of the application for compounding.

viii Offences committed by a person whose application for ‘plea-bargaining’ under Chapter XXI-A of ‘Code of Criminal Procedure’ is pending in a Court or a Court has recorded that a ‘mutually satisfactory disposition of such an application is not worked out’

ix Any other offence, which the CCIT/DGIT concerned considers not fit for compounding in view of its nature and magnitude.

9. Notwithstanding anything contained in these Guidelines, the Finance Minister may relax restrictions in para 8 above for compounding of an offence in a deserving case, on consideration of a report from the Board on the petition of an applicant.

10. Authority Competent to Compound an Offence:

The CCIT/DGIT having jurisdiction over the person, seeking compounding of an offence, is the competent authority for compounding of all Category ‘A’ and Category ‘B’ offences. However, an order in case of an application for compounding of an offence appearing in Category ‘B’ of para 6 supra, involving compounding charges (as explained in para 13 infra) in  excess of Rs.10,00,000 (Rs. ten lakhs) shall be passed by the CCITIDGIT concerned only on the recommendation of a committee comprising of 3 officers of the region concerned, namely (i) Principal CCIT, (ii) DGIT (Inv.) and (iii) CCIT/DGIT having jurisdiction over the case. In case such officers are not available within the region, the nearest DGIT or CCIT may be co-opted as Member.

10.1 Where Principal CCIT I DGIT(Inv) is the CCIT/DGIT having jurisdiction over the case, then another officer of the rank of CCIT may be co-opted as a member of the Committee. The CCIT/DGIT having jurisdiction over the case will act as the Member Secretary who will also co-opt such other member as the case may be, and convene the meeting, as well as maintain its minutes.

11. Compounding Procedure:

i On receipt of the application for compounding, the same shall be processed    by the Assessing Officer/Assistant or Deputy Director concerned and submitted promptly along-with duly filled in check-list (Annexure-2), to the authority competent to compound, through proper channel.

ii The competent authority shall duly consider and dispose of every application for compounding through a speaking order in the prescribed format (Annexure-3) within the time limit prescribed by the Board from time to time. In absence of such a prescription, the application should be disposed off within 180 days of its receipt. However, while passing orders on the compounding applications, the period of time allowed to the assessee for paying compounding charges shall be excluded from the limitation specified above.

iii Where compounding application is found to be acceptable, the competent authority shall intimate the amount of compounding charges to the applicant requiring him to pay the same within 60 days of receipt of such intimation. Under exceptional circumstances and on receipt of a written request for further extension of time, the competent authority may extend this period up-to further period of 120 days. Extension beyond this period shall not be permissible except with the previous approval of the Member (Inv), CBDT on a proposal of the competent authority concerned.

iv However, wherever the compounding charges are paid beyond 60 days as extended  by the  competent authority, the applicant shall have to pay additional compounding charge at the rate of 2% per month or part of the month of the unpaid amount of compounding charges.

v The competent authority shall pass the compounding order within 30 days of payment of compounding charges. Where compounding charge is not deposited within the time allowed, the compounding application may be rejected after giving the applicant an opportunity of being heard. The order of rejection shall be brought to the notice of the Court immediately through prosecution counsel in the cases where prosecution had been instituted.

132. Fees for compounding:

The fees for compounding of offences shall be as follows:

12.1 Section 276B- Failure to pay the tax deducted at source.

Section 276BB- Failure to pay the tax collected at source.

3% per month or part of a month of the amount of tax in default disclosed in the compounding application. After compounding ofthe said offence, if the same person comes forward for compounding of such offence through any subsequent application, the applicable rate for compounding of such an offence will be 5% per month or part of a month of the amount of tax in default. The period of default for calculating compounding fee in the category shall be calculated from the date of deduction to the date of deposit of tax deducted at source as is done in respect of calculating interest under section 201(1A)

12.2 Section 276C(1)- Wilful attempt to evade tax etc.

100% of the amount sought to be evaded.

12.3 Section 276C(2)- Wilful   attempt to evade payment of any tax etc.

3 % per month or part thereof of the amount of tax etc., the payment of which was sought to be evaded, for the period of default.

12.4 Section276CC- Failure to furnish returns of income.

12.4.1 2% per month or part of a month of the tax and interest determined on assessment or reassessment, in relation to return of income that was required to be furnished under section 139(1) or section 142(1) or section 148 or section 153A/153C as the case may be, existing on the date of conveyance of compounding charges to the applicant, determined after rectification u/s 154 of the Act, if any and as reduced by the tax deducted at source and advance tax, if any, paid during the financial year immediately preceding the assessment year, reckoned from the date immediately following the date on which the return of income was due to be furnished to the date of furnishing of the return or where no return was furnished, to the date of completion of the assessment.

12.4.2 Where, before the date of furnishing of the return or where no return was furnished before the date of completion of assessment, any tax is paid by the person u/s 140A, compounding fee shall be calculated in the manner prescribed above up-to the date on which the tax is so paid; and thereafter, the fee shall be calculated at the aforesaid rate on the amount of tax and interest determined on the assessment or re-assessment as the case may be, determined after rectification u/s 154 of the Act, if any, as reduced by the TDS, TCS, advance tax and tax paid u/s 140A before filing of the return of income or where no return was furnished from the date of completion of assessment or reassessment.

12.5 Section276CCC- Failure to furnish return of income as required under section 158BC.

The fee for this offence shall be calculated in the same manner as for  offences u/s 276CC.

12.6 Section276DD- Failure to comply with the provisions of Section 26988 (prior to 01/04//89).

A  sum  equal  to  20%  of  the  amount  of  any  loan  or  deposit  accepted  m contravention of the provisions of Section 269SS.

12.7 Section276E-  Failure  to  comply with the  provisions  of  Section  269T (prior to 01/04/89)

A sum equal to 20% of the amount of deposit repaid in contravention of the provision of Section 269T.

12.8 Section 277- False statement in verification etc.

Section 278- Abetment of false return etc.

12.8.1 Where same set of facts and circumstances attract under section 277 as well as section 278, the compounding fee shall be charged for offences under these sections by treating them as one offence.

12.8.2 Where same set of facts and circumstances attract prosecution under section 277 in addition to the offence in connection with which prosecution under section 277 got attracted in case of the same person, no separate compounding fee shall be charged for offence under section 277. For example where a person is charged with an offence under section 276C(1) as also under section 277, for the same set of facts and circumstances, the compounding fees shall be charged only for the offence under section 276C(1) at the rates prescribed for the said section.

12.8.3 Where same set of facts and circumstances attract prosecution under any offence  as  well  as  u/s  277  and  /or  278,  normally,  a  compounding fee@10% of the ‘compounding fee for the main offence’ shall be charged from each of the person charged under sections 278B or 278C. However, the  authority  competent  to compound,  after considering the extent of involvement of any or all co-accused, may enhance or reduce or waive the amount of compounding fee to be charged from any or all the co­ accused. The compounding fees chargeable from the co-accused shall be in addition to the compounding fees which may be chargeable from the main accused.

12.8.4 In case where no offence under any other sections of I.T. Act is involved except under section 277 or 278, the compounding fee shall be decided by the authority competent to compound having regard to the amount of tax which would have been evaded as a result of such offence u/s 277 or 278.

12.9 Offences, other than those described in para 12.1 to 12.8, for which no compounding fee has been prescribed, the authority competent to compound may determine the amount of compounding fee having regard to the nature and magnitude of the offence, subject to levy of a minimum compounding fee of Rs. 25,000/- for each such offence.

12.10 The prescribed compounding charges shall be applicable while compounding any offence. However, in extreme and exceptional cases of genuine financial hardship, the compounding charges may be suitably reduced with approval of the Finance Minister.

13. Compounding  Charges:

The compounding charges shall include compounding fee, pro ecution establishment expenses and litigation expenses including Counsel’s fee. Prosecution establishment expenses will be charged at the rate 10% of the compounding fees subject to a minimum of Rs.25,000/- in addition to litigation expenses including Counsel’s fees paid/payable by the Department in connection with offence(s) compounded by a single order. In a case where the litigation expenses are not readily ascertainable, the competent authority may arrive at litigation expenses, inter alia, on the basis of rates prescribed by the Government and on the basis of available records with the government and the counsels.

14. Applicability of Guidelines to offences under other direct tax laws

These guidelines shall apply mutatis mutandis to offences under  other Direct Tax Laws and the compounding fee for offences under the other Direct Tax Laws will  be same  as prescribed  supra for the corresponding  provisions  of offences under the Income-tax Act, 1961.

15. The application for compounding in the cases of co-accused shall be considered along with the main case or immediately after a decision has been taken in the main case.

16. The PCCsIT/CCsIT/PDGsIT/DGsIT are requested to circulate the above revised Guidelines along with its annexure Nos. 1, 2 and 3 among all the officers of their region for compliance.

Identification of cases:

1.1. CPC-TDS/TRACES will generate a list of prosecutable cases for mandatory processing for prosecution (List-A) in accordance with the criteria laid down by the CBDT vide it’s instruction dated 07.02.2013 or any other modified criteria, if the same is done in view of suggestions made in this regard. Such identification shall be done within one month of the filing of the quarterly TDS statement. CPC – TDS following the Instruction dated 07.02.2013, adopted following two parameters for identifying prosecutable case for mandatory processing:-

(i) where Late Payment Interest had not been paid completely/not paid at all till that date;

(ii)  where deduction had been made but no challan was available in the account of the deductor i.e. the amount was not at all paid to the Government account. (Vide F.No. CPC(TDS)/Prose_cases/2014-15 dated 15.09.2014, limit of Rs. 1,00,000/-  for the cases of Late Payment Interest and for Short Payment all the cases have been approved.)

1.2 CPC-TDS will generate another list of cases (List-B) involving defaults of delay in payment of Rs. 25,000 to Rs. 1,00,000/- along with default sheets for the year as well as preceding year and subsequent year ( if details are available), within one month of the filing of the quarterly TDS statement, to help AO(TDS) to identify cases fit for prosecution based on facts and circumstances of the case. The AO(TDS) can identify the cases from second list and also from the information gathered from external sources to complete identification of second category of cases and enter them in prosecution register maintained manually or on utility to be provided by CPC-TDS.

3.3 It may be noted that the TDS cases, otherwise dealt by the International Taxation Division, with respect to payments made to non-residents also required to be dealt with in the same manner as other cases under Chapter-XV II of the Income Tax Act, 1961.

2.2. In cases of default in furnishing the quarterly TDS statement, CPC-TDS shall generate the list of such non-filers within one month from due date and communicate to the AO(TDS) for issue of notice and further pursuit.

Procedure for launching prosecution

3.1 After identification of potential cases for prosecution by the CPC – TDS in case of mandatory processing or otherwise, it should be entered in the ‘Prosecution register’ maintained in Form–C (page 74 of the Prosecution Manual) and to be reported to the CIT(TDS) who shall also maintain the prosecution register in Form–D (page 75 of the Prosecution Manual). Till a specific module in CPC-TDS is made functional for having control on prosecution proceedings, the entries may be made in manual register.

3.2 Following information/documents regarding the deductor may be collected by the AO(TDS) once the case is identified for processing :

(a) Details of the company/ firm/ individual

Name        of the company/ Present PAN TAN
firm/individual address Number Number

 (b) Details of its directors/ partners/ proprietor etc.

Name of Directors/ Partners/ Proprietor as applicable for the relevant year Date of birth PAN & residential address

 (c) Accounts of the deductor for the relevant year showing late payments.

(d) Copies of the TDS statement filed by assessee deductor.

 (e) Copies of challans of late deposit of TDS by the assessee deductor.

(f) Copies of the intimations showing late payment interest for all the quarters of the relevant assessment year, if it is available.

(g) Copies of Audit report, if they show default.

(h)  While collecting above information, AO(TDS) may also collect other details that may help the CIT(TDS) take a considered decision as also assist subsequent compounding proceedings (if any) viz. (a) whether the default was only in one year and no defaults took place later, (b) whether the deductor has himself rectified the mistake and deposited the tax along with interest prior to issue of notice by the department, (c) whether the same offence has been compounded earlier and if yes, how many time etc.

3.3 The AO(TDS) after collecting the above information/documents shall issue show cause notices to the person responsible for deduction (directors/principal officers/partners/members/ karta), within 45 days of receipt of the list of prosecutable cases from CPC-TDS in accordance with Sections 278B/278C r.w.s. 276B/276BB of the Income-tax Act, 1961.

3.4 It may be ensured that the reply is furnished within 30 days of the issue of the show cause notice. In case no reply is furnished within 30 days, it shall be presumed that the person responsible for deduction has no cause to state and the matter may be pursued further.

3.5 The AO(TDS) shall examine the reasons/reply for non-compliance and will prepare the proposal in Form ‘F’ (as prescribed in Prosecution Manual) and send it to the CIT(TDS) through proper channel. Separate proposal should be submitted for separate assessment years. The Form ‘F’ will indicate inter alia, the following:

(a) The facts indicating the commission of offence.

(b) Chronology of events, primary & secondary evidences to establish the offence.

(c) Present stage of the proceedings relating to the commission of offence.

(d) List of documentary evidences including depositions, submissions to prove the offence.

(e) List of witnesses on which the departmental case depends.

(f) Any other facts or evidence to establish the offence.

(g) It has to be clearly mentioned in the proposal whether the offence is second or subsequent offence in terms of Section 278A.

An entry can be made by the AO(TDS) in the Form ‘C’ (manual register or the specific module for prosecution as and when developed on TRACES) as soon as the proposal is moved.

3.6 While the AO(TDS) will mandatorily refer all the cases of TDS default exceeding Rs.1 lakh to CIT(TDS), cases of defaults between Rs.25000-Rs.1lakh shall be referred to the CIT(TDS) only if he is satisfied that it is a case fit for prosecution. The report to CIT(TDS) shall be submitted within 60 days of the issue of show cause notice. Time granted to furnish the reply may be excluded from this time limit.

3.7The CIT(TDS) is the competent authority to accord sanction u/s 279(1). He shall:

1. If he is of the opinion that the case is prima facie fit for prosecution, then, issue show cause notice(s) to all proposed accused(s) u/s 276B/276BB r.w.s. 278B of the I.T. Act as to why sanction for launching of prosecution should not be accorded. The show cause notice can be generated from the online module on TRACES, as and when the facility is made available.

2. He shall after hearing the assessee and after proper application of mind clearly enunciate that while processing the cases for prosecution u/s 276B/276BB r.w.s. 278B, a fair and judicious view has been taken in view of the provisions of Section 278AA before filing the complaint(s). This should get reflected in both the sanction orders passed by the Commissioners/Directors under Section 279(1) and the complaints filed with the competent Courts:

3. There is no statutory requirement for obtaining opinion of the Counsel before granting sanction for prosecution. However, given the fact that TDS offences are technical in nature, such reference could be made in complex situations like identification of accused(s) etc to avoid legal infirmities in prosecution proposals/complaints. In such cases, it should be ensured that the opinion should be obtained from the Counsel within 30 days. If after examining the opinion of the Standing Counsel, he is satisfied that it is a fit case for prosecution, he shall pass a speaking order u/s 279(1) separately for each assessment year.

4. In case he is not satisfied after receiving reply, he shall drop the proceedings.

An entry shall be made by the CIT(TDS) in the prosecution register or in the utility as and when available in TRACES on passing of such orders as mentioned in para (b) above or as soon as the decision to drop proceedings is made. The CIT(TDS) shall complete the process and pass an order u/s 279 sanctioning prosecution or dropping the show cause notice within 60 days of receipt of the proposal.

3.8 The assessee deductor can at any stage of the proceedings, file a compounding application before the Pr. Chief Commissioner of Income-tax/Chief Commissioner of Income-tax. Instruction vide F.No.285/35/2013-IT(Inv.V)/108 dt. 23.12.2014 should be followed in dealing with the compounding applications. If a person who has committed an offence(s) under S.276B/276BB files an application for compounding of the said offence(s), the application should be processed on priority basis and mandatorily be disposed off within the time frame as prescribed by the Central Action Plan guidelines. During the pendency of the compounding application, the CIT(TDS) shall keep the prosecution proposal pending. However, if the application is not decided within the prescribed time, the CIT(TDS) shall proceed to file the complaint. As soon as an application for compounding is moved, an entry should be made in the prosecution register maintained manually or in the utility as and when available in TRACES. Entries of subsequent action on compounding application shall also be made in such register.

3.9 The CIT(TDS) after according sanction u/s 279(1) shall send back the records to the authority seeking sanction with sanction order in duplicate, one for filing in the Court with complaint and other for the record.

3.10 The AO(TDS) shall, after entering receipt of the sanction order in the prosecution register maintained by him, ensure that the complaint is launched in the competent Court having jurisdiction over the place where the offence is committed.

3.11 The CIT(TDS) & the AO(TDS) shall both make an entry in the respective registers maintained manually or in the utility as and when available in TRACES.

3.12 Similarly, if any such prosecutable offence comes to light during the proceedings before the appellate authorities, revision authorities or any other proceedings, same shall also be treated at par with other prosecutable cases as enumerated under Chapter-XVII of the Income Tax Act, 1961 and action shall be initiated in accordance with procedure as laid vide this SOP.

TIME FRAME :-

4. The time period for the entire process from identification to passing of order u/s 279(1)/279(2) should be as under:

S.No. Section Time          limit         for submitting       proposal
for sanction u/s 279(1)
Time limit for according sanction        u/s
279(1)
Time limit for launching Prosecution Authority       to
submit proposal         &
launch prosecution
1 276B Within       90    days    of generation    of   list    on
CPC-TDS detection of offence    or receipt     of
information from any other    source/    income
tax authority
Within 60 days of receipt of information from              the AO(TDS) Within 30 days of        receiving approval        u/s 279(1) AO(TDS) having jurisdiction.
2 276BB -do- -do- -do- -do-

STANDARD OPERATING PROCEDURE DEFINING THE ROLES OF DIFFERENT TDS AUTHORITIES IN ADDRESSING THE ISSUE OF PROSECUTION AND COMPOUNDING OF TDS CASES

1. Role of Principal CCIT/CCIT(TDS):

(i) Taking quarterly review meeting with CIT(TDS) monitoring progress in all cases identified for prosecution.

(ii) Apprising the Zonal Member of the progress/ outcome made during the month through monthly DO. Copy of such progress shall also be sent to Pr. DGIT(Admn.), New Delhi for information and monitoring.

(iii) Disposing all compounding petitions received expeditiously and within the time period prescribed in the Central Action Plan. While disposing off compounding petitions, speaking orders are expected to contain those facts based on which a fair and judicious view has been taken in accordance with relevant provisions of the Income Tax Act, 1961.

II.  Role of CIT(TDS)

(i)  Ensuring that the Guidelines issued vide F.No.285/35/2013-IT(Inv.V)/108 dt. 23.12.2014 are adhered to.

(ii) Monitoring the action in the cases of mandatory processing for prosecution generated by the CPC-TDS on a monthly basis.

(iii) Guiding AO(TDS) to shortlist the cases for processing of prosecution on the basis of list-B and identified on the basis information received from external sources such as spot verification/survey and monitoring action thereon.

(iv) Maintaining a register in Form-D or in online utility as and when made available in TRACES wherein record of all cases identified for prosecution should be kept.

(v) Processing all the proposal received by him and if he is of the opinion that the case is prima facie fit for prosecution, issue show cause notices to the accused(s) u/s 276B/276BB r.w.s. 278B or 278C as to why sanction for launching of prosecution should not be accorded.

(vi) Seeking opinion of the Prosecution or Standing Counsel, as the case may be, about suitability of the case for launching of prosecution and as well as strength of the case against accused(s). Ensuring that the opinion is obtained from the Counsel within 30 days.

(vii) Examining the opinion of the Standing Counsel and on satisfaction that it is a fit case for prosecution, passing speaking orders u/s 279(1) in the case of accused(s) for each assessment year separately. In case he is not satisfied, he shall drop the proceedings.

(viii) Completing the process and passing an order u/s 279 sanctioning prosecution or dropping the show cause notice within 60 days of receipt of the proposal.

(ix) Making an entry for the following events in the manual register or in the utility created in TRACES:

1. On receipt of proposal from the AO(TDS).

2. On issue of show cause notice to the accused / co-accused.

3. On passing of sanction order u/s 279(1) or on dropping of the proceedings as the case may be.

4. On receipt of compounding application / report on the compounding application.

5. On filing of complaint / launching of prosecution before the competent court.

6. On receipt of order of competent Court

7. On appeal, if any appeal is filed.

III. Role of Addl.CIT(TDS)

(i)  Discussing cases of list-B generated by CPC-TDS and list prepared on the basis of information received from external sources such as spot verification/survey with AO(TDS) and also guiding them in short listing the cases fit for prosecution.

(ii) Monitoring timely action in all the cases involving mandatory processing for prosecution or cases identified otherwise and to report the progress to the CIT (TDS) in the monthly DO.

IV.Role of AO(TDS)

(i)  Downloading list of cases identified by CPC-TDS for mandatory proceeding of cases (list-A).

(ii)  Downloading list-B of cases for identification of cases based on facts and circumstances of the cases and also to examine cases on the basis of information gathered from external sources such as spot verification / surveys and shortlist cases fit for prosecution amongst these cases after discussion with Range Head and CIT(TDS).

(iii)  Initiating action and collecting information in accordance with the procedures laid down above.

(iv)  Issuing show cause notice to all the accused(s) identified by him giving due opportunity to the accused within 45 days of receipt of the list of prosecutable cases from CPC-TDS.

(v) Sending the proposal prepared in Form ‘F’ alongwith other information /documents to the CIT(TDS) through proper channel.

(vi) Making an entry for the following events in the manual register or as and when in the utility made available in TRACES:

1. Initiation of proceedings for prosecution.

2. Sending the proposal to the CIT(TDS) for necessary action.

3. Date of receipt of sanction u/s 279(1) of CIT(TDS).

4. Filing of complaint / launching of prosecution in the competent court on receiving order u/s 279(1).

5. In case report on the compounding application is to be sent on filing of compounding application by the deductor, date of the report as well as when order on such application is received from the competent authority.

6. On receiving orders of the competent Court in the case, date of filing of appeal, if any filed.

Role of CIT(CPC-TDS), Ghaziabad:

(i) Generating list-A of defaulters along with their statement of defaults for mandatory processing of cases for prosecution involving delayed payment of Rs. 1 lakhs or more as prescribed in the present Instruction and make it available to AO(TDS) as well as the CIT(TDS) within one month of the filing of the quarterly TDS statement.

(ii)  Generating list-B of cases involving defaults of delay in payment of Rs. 25,000/- to 1,00,000/- alongwith default sheets for the year as well as proceeding year and subsequent year (if dates are available), to help CIT(TDS) AO(TDS) to identify cases fit for prosecution based on facts & circumstances of the cases within one month of the filing of the quarterly TDS statement.

(iii) Generating a list of non-filers of TDS statement within one month of the due date and communicating to the AO(TDS) with a copy to the CIT(TDS).

(iv) Developing and maintaining a specific module/utility in TRACES for identification and control over prosecution proceedings where all the details of each case of prosecution can be maintained online.

Now the question is if you do not pay the Tds within define timelines, is Prosecution or Compounding is applicable on you.

If you ask from the law point of view and interpretation of department then the answer is yes , but there are some circumstances in which cases assessee may seek an relief.

In Today Corporate world due to define accounting modern methods , company is statutorily required to maintain books of accounts on mercantile basis which mandate booking of expenses on accrual basis and accrual of liability fasten liability to deduct tax at source and deposit the same which ultimately result in creation of liability of payment of TDS without liability of making payment to vendor / service provider. Further, Non accounting of accrual liability disentitle the assessee to claim such expenses. There may be delay in receiving payments and delay in completion of works at sites because of the circumstances beyond control.  Therefore, as elucidated herein delay in deposit of TDS by the company was purely non-intentional and due to the circumstances beyond the control and management of the company.

In Decided case :

Sonali Autos Private Limited vs The State Of Bihar & Ors on 2 August, 2017

      IN THE HIGH COURT OF JUDICATURE AT PATNA                     Criminal Miscellaneous No.16498 of 2014         Arising Out of PS.Case No. -52 Year- 2013 Thana -ECONOMIC OFFENCES, BIHAR District-                                                  PATNA===========================================================

  1. Sonali Autos Private Limited, Dangi Complex, National Highway-30, New By Pass, Anisabad, through one of its Director Sri Abhishek Kumar, S/O Sri Bidhan Chandra Roy, aged about 33 Years, resident of Mahavir Nagar Colony, Beur Jail Road, Beur, Anisabad, Post Office- Anisabad, Police Station- Gardanibagh, District- Patna.

…. …. Petitioner/s Versus

  1. The State of Bihar.
  2. The Commissioner of Income Tax, TDS Circle, Patna.
  3. The Deputy Commissioner of Income Tax, TDS Circle, Patna.

…. …. Opposite Party/s =========================================================== Appearance:

For the Petitioner : Mr. Ajay Kumar Rastogi, Advocate For the Opposite Party No.1 : Mr. Nawal Kishore Prasad, APP For the Opposite Party Nos.2 & 3: Mrs. Archana Sinha, Advocate =========================================================== CORAM: HONOURABLE MR. JUSTICE SANJAY PRIYA CAV JUDGMENT Date: 02-08-2017

1. This application under Section 482of the Code of Criminal Procedure has been filed for quashing the order dated 15.05.2013 passed by the Special Judge, Economic Offences, Patna, in Complaint Case No.52-C of 2013 by which the learned Special Judge has taken cognizance of the offence under Section 276B of the Income Tax Act, 1961 (hereinafter to be referred as “Act”).

2. Prosecution has been launched against the petitioner on the basis of complaint filed by Sri Ajay Jadeja, Deputy Commissioner of Income Tax, TDS Circle, Patna, alleging therein that Accused No.1 Sonali Auto Pvt. Ltd. with its registered office at Dangi Complex, NH 30, New Bye Pass, Anisabad, Patna, filed its Patna High Court Cr.Misc. No.16498 of 2014 dt.02-08-2017 TDS return in respect of Tax deducted at source on different nature of payment from its Patna Office at Patna having TAN- PTNS00778S. As per scheme of Section 276-Bof the Act and the details available on the ITD system, the list of cases/deductors, who have failed to pay to the credit of Central Govt. the tax deducted by them has been obtained by the complainant.

3. From perusal of TDS return filed by the accused, it has been gathered by the complainant that TDS amounting to `1,43,029/- had not been deposited in time to the credit of Central Govt. for financial year 2009-2010. Thus, there was delay of 481 days without any reasonable cause.

4. The delay in filing e-TDS is covered by prosecution under Section 276 B of the Act for the failure on the part of deductors to deposit the TDS to the credit of Central Govt.

5. Accused Nos.2, 3 and 4 are the day to day in charge of the conduct of business of Accused No.1. Accused Nos. 2, 3 and 4 had full knowledge regarding non payment of TDS for the financial year 2009-10 and have committed offence under Section 276B read with 278 B of the Act and the accused have rendered themselves liable for punishment under Section 276 B of the Act.

6. The Commissioner of the Income Tax (TDS), Patna, considering the facts involved in the case, accorded sanction Patna High Court Cr.Misc. No.16498 of 2014 dt.02-08-2017 under Section 279(1)of the Act for launching prosecution for the offence committed by the accused under Section 276 B of the Act. An original copy of the order under Section 279(1) of the Act has been attached with the complaint filed by the complainant.

7. The learned Special Judge, Economic Offences, Patna, on the basis of the aforesaid complaint filed by the complainant took cognizance against the petitioner-Company and its three Directors for the offence under Section 276 B of the Act.

8. It has been submitted on behalf of the petitioner that sanction accorded by the Opposite Party No.2 on 31.03.2013 under Section 279of the Act for launching prosecution against the petitioner under Section 276 B of the Act is mechanical and contrary to the instructions issued by the Central Board of Direct Taxes (hereinafter to be referred as “CBDT”),

9. The petitioner-company is involved in business of motor vehicle under the name and style of Sonali Autos and derives its income from the same. The petitioner has been filing its return of income for the purpose of the Act and paying requisites taxes thereupon at all material times. The Actprovides for three modes of collection of taxes; (i) direct levy, (ii), levy by deduction at source and (iii) by collection at source. The ordinary method of collection is direct collection of the tax from an assessee. Deduction of tax at Patna High Court Cr.Misc. No.16498 of 2014 dt.02-08-2017 source is provided for in certain specified cases. Section 192to 195 of the Act and Section 196 A to 196 D of the Act provide for levy by deduction of tax at source. The person, who is bound to deduct and has failed to deduct the tax may be treated as „assessee‟ in default under Section 201 of the Act and will be liable to penalty under Section 221 or 271 C read with section 273 B of the Act. As soon as the tax is deducted at source by the person responsible to make payment, the liability of an assessee to pay that tax gets discharged and it is responsibility of the person, who has deducted tax at source, to deposit the same with the government. The tax has to be deposited at the time of crediting payment and the amount so deducted has to be paid over to the Central Government before the 7th day of the month following the month in which the said deduction was made.

10. The petitioner in the financial year 2009-2010 made certain payments on various dates, totaling to `12,25,144/- towards interest (other than „interest on securities‟) and commission and while crediting the said sums, duly deducted tax at source to the tune of `1,43,029/- under Section 194 A and 194 H of the Act respectively.

11. Due to oversight on the part of the Accountant, who was appointed to deal with the Accounts and Income Tax matters, the petitioner could not deposit the aforesaid sum of Patna High Court Cr.Misc. No.16498 of 2014 dt.02-08-2017 `1,43,029/- with the Central Government within the specified time limit. Subsequently, at the time of audit of Books of Accounts in August, 2010, this mistake was noticed by the Statutory Auditors of the petitioner-company. The petitioner out of total amount of `1,43,029/- so deducted under Section 194 A and 194 H of the Act, paid a sum of `41,029/- on 07.09.2010 and thereafter paid Rs.1,02,000/- on 20.09.2010. Owing to the delay in payment, the petitioner while paying the said sum also deposited interest amounting to `23,595/- as required under Section 201(1A) of the Act.

12. Provisions of Section 201(1A) of the Actprovides for payment of tax deducted along with interest at the rate of 1.5% for every month or part of the month on the deducted amount from the date on which Tax was deducted to the date on which tax was actually paid. The petitioner, accordingly, has deposited interest of `23,595/- on the delayed payment of TDS.

13. All of a sudden, at a very belated stage, Opposite Party No.2 granted sanction to Opposite Party No.3 under Section 279(1)of the Act on 31.03.2013 for launching prosecution under Section 276 B of the Act against the petitioner and its Directors. After a lapse of three years from the date of payment of dues (tax + interest), a Complaint Petition (Annexure-1) was filed by the Patna High Court Cr.Misc. No.16498 of 2014 dt.02-08-2017 complainant before the Special Judge, Economic Offences, Patna, on 14.05.2013, inter alia, alleging the default pertaining to financial year 2009-10 under Section 276 B of the Act and in respect of which cognizance has been taken by the impugned order.

14. Section 278 AA of the Act postulates an express bar on punishment under Sections 276 A, 276 AB or 276B of the Act if an assesee proves that there was reasonable cause for such failure. The main objective of prosecution provisions contained in Chapter XXII of the Act is to punish the offenders found guilty of tax evasion and other tax related offences and to install fear of law in the minds of those, who may even contemplate evading payment of legitimate taxes. Instant prosecution has been launched against the petitioner with a view to spite the petitioner considering that amount of `1,43,029/- and the period of default are not substantial after lapse of period of three years from the date of payment of due taxes along with interest thereon under Section 201(1A) of the Act.

15. Counsel for the petitioner has further submitted in para 6 to the reply to the Counter Affidavit that launch of the prosecution against the petitioner under Section 276 B of the Act is mechanical and contrary to the instructions bearing F. No.255/339/79-IT (Inv.) dated 28.05.1980 issued in this regard by CBDT, wherein, it is mentioned that prosecution under Section 276 Patna High Court Cr.Misc. No.16498 of 2014 dt.02-08-2017 B of the Act should not normally be proposed when the amount involved and/or the period of default is not substantial and the amount in default has also been deposited in the meantime to the credit of the government. No such consideration will, of course, apply to levy of interest under Section 201(1A) of the Act. Copy of the aforesaid instruction has been annexed as Annexure-1 to the reply to Counter Affidavit.

16. Counsel for the petitioner has finally submitted that the instant prosecution is mechanical and contrary to the instructions issued by the CBDT and is wholly unsustainable in law. Reasonable cause would mean a cause which prevents a reasonable man of ordinary prudence acting under normal circumstances, without negligence or inaction or want of bonafides. Oversight on the part of the Accountant, who was appointed to deal with the Accounts and Income Tax matters, cannot be termed as anything but a reasonable cause and such defaults are often committed in due course of business.

17. Counsel for the petitioner has relied on the decision of this Court dated 30.12.2009 passed in Cr. Misc. No.36697 of 2007, wherein, this Court was pleased to quash the order taking cognizance on the ground that due tax along with interest had been paid.

Patna High Court Cr.Misc. No.16498 of 2014 dt.02-08-2017

18. Counsel for the petitioner has further submitted that in similar situation in the case of Bee Gee Motors & Tractors Vs. ITO (P & H) reported in [1996] 218 ITR 155 (P & H), Hon‟ble Punjab & Haryana High Court was pleased to quash the criminal complaint when the amount and/or period of default was not substantial and when the prosecution came to be launched after a number of years from when the default was committed.

19. Counsel for the petitioner has further relied on the decision of Madya Pradesh High Court {Indore Bench} in the case of Vijay Singh Vs. UOI reported in [2005] 278 ITR 467 (MP).

20. Counsel for the Income Tax Department has appeared. She has submitted that by making payment of TDS amount along with interest will not exonerate the petitioner from the liability of Section 276 B of the Act. She has further submitted that petitioner had deducted tax at source to the tune of `1,43,029/- under Section 194 A and 194 H of the Act respectively for the financial year 2009-10, but did not deposit the aforesaid sum with the Central Government within the specified time limit.

21. Having heard argument of both sides and on perusal of the materials on record, it appears that it is admitted position that the petitioner deducted tax at source at the rate of `1,43,029/- for the financial year 2009-10, but did not deposit the Patna High Court Cr.Misc. No.16498 of 2014 dt.02-08-2017same with the Central Government within the specified time limit. It is also admitted position that subsequently out of total amount of `1,43,029/- so deducted under Section(s) 194A and 194 H of the Act, the petitioner paid a sum of `41,029/- on 07.09.2010 and thereafter paid a sum of `1,02,000/- on 20.09.2010. The petitioner also deposited interest of `23,595/- as required under Section 201(1A) of the Actowing to the delay in payment of the aforesaid amount.

22. Copy of the instructions bearing F. No.255/339/79- IT (Inv.) dated 28.05.1980 issued by the CBDT has been annexed by the petitioner as Annexure-1 to the reply to the Counter Affidavit, wherein, it is mentioned in clause (g) that prosecution under Section 276 B of the Act should not normally be proposed when the amount involved and/or the period of default is not substantial and the amount in default has also been deposited in the meantime to the credit of the government. No such consideration will, of course, apply to levy of interest under Section 201(1A) of the Act.

23. In the instant case, admittedly, the petitioner has deposited the amount of `1,43,029/- along with interest of `23,595/- on various dates in the year 2010. Allegation against the petitioner is that the petitioner did not deposit amount of `1,43,029/- duly deducted at source for the financial year 2009-10 within specified Patna High Court Cr.Misc. No.16498 of 2014 dt.02-08-2017 time with the Central Government, but the aforesaid amount has been deposited by the petitioner along with interest on various dates in the year 2010 when the mistake was noticed by the petitioner at the time of audit of Books of Accounts in 2010. Prosecution has been launched against the petitioner after the lapse of three years on 14.05.2013 as a consequence of sanction order passed under Section 279(1) of the Act (Annexure-3) on 31.03.2013, in contravention of the instructions bearing F. No.255/339/79-IT (Inv.) dated 28.05.1980 issued by the CBDT in this regard.

24. Section 278 AA postulates an express bar on punishment under Section(s) 276 A, 276 AB or 276 B of the Act, if an assesasee proves that there was a reasonable cause for such failure.

25. Section 278 AA of the Act is reproduced herein below:

“278AA. Punishment not to be imposed in certain cases.— Notwithstanding anything contained in the provisions of section 276 A, section 276 AB, [or section 276 B], no person shall be punishable for any failure referred to in the said provisions if he proves that there was reasonable cause for such failure.”

26. The petitioners have stated in the petition that the aforesaid tax could not be deposited within time due to oversight on the part of the Accountant, who was appointed to deal with the Patna High Court Cr.Misc. No.16498 of 2014 dt.02-08-2017 Accounts and Income Tax matters. This mistake was detected at the time of audit of Books of Accounts by the Statutory Auditors of the petitioner-company in August, 2010. Thereafter, the petitioner immediately deposited the amount of tax along with interest in the year 2010 itself. Section 278 AA of the Act specifically says that no person shall be punished for any failure referred to under the said provisions if the assessee proves that there was reasonable cause for such failure. Reasonable cause would mean a cause which prevents a reasonable man of ordinary prudence acting under normal circumstances, without negligence or inaction or want of bonafides.

27. Oversight on the part of the Accountant, who was appointed to deal with Accounts and Income Tax matters, can be presumed to be a reasonable cause for not depositing the tax within time. The petitioner immediately after noticing the aforesaid defects by the Statutory Auditors of the petitioner-company deposited the amount of `1,43,029/- along with interest amounting to `23,595/- as required under Section 201(1A)of the Act in the year 2010 itself. Instant prosecution has been launched against the petitioner on 14.05.2013 after lapse of about three years from the date of deposit of due tax along with interest by the petitioner under Section 201(1A)of the Act, which is contrary to the instructions bearing F. No.255/339/79-IT (Inv.) dated 28.05.1980 (Annexure-1 to the Patna High Court Cr.Misc. No.16498 of 2014 dt.02-08-2017 Counter Affidavit) issued by the CBDT in this regard.

28. Moreover, Section 278 AA of the Act clearly states that no person for any failure referred to under Section 276 B of the Act shall be punished under the said provisions if he proves that there was reasonable cause for such failure.

29. This Court on the basis of explanation submitted by the petitioner, as mentioned above, is of the view that the petitioner has been able to prove the reasonable cause for not depositing the aforesaid tax amount within the specified time limit.

30. In view of such, this Court is of view that continuance of the criminal proceeding against the petitioner is mere harassment to him and abuse of process of the Court.

31. Accordingly, the order dated 15.05.2013 passed by the Special Judge, Economic Offences, Patna, in Complaint Case No.52-C of 2013 taking cognizance of the offence under Section 276B of the Income Tax Act, 1961, along with entire criminal proceeding against the petitioner is hereby quashed.

32. This application is, accordingly, allowed.

Thus, in Short if due to Shortage of payment Company unable to deposit the Tds within define timelines , then at the time of filing the Tds returns the assessee Company should submit Complete tds whatever they deducted along with Late Payment Interest along with Late Filing Fees. Then      90 % of the Chance that your case will not fall under Prosecution.

After in detail discussion to avoid the Statutory payment is serious offence , Every Company should give Priority to all the Statutory Payments , otherwise heavy interest and Penalties will cause serious hurt to their Business.

Our idea in this article is to brief about the Tds and current Prosecution cases and its effects on the Industry, if any Company / assessee suffer from this Problem or you still have any doubt in this regard, you can write us on vivekmalhotra492@gmail.com or give a call at 9780754114.

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3 responses to “TDS Prosecution- All you want to know”

  1. CA Raman Bajaj says:

    A very nice Article with detailed analysis of law and procedures.
    I Want to know that what a company should do in the case of default as notices for persecution are issued in the name of the company as well as all the directors. The word co-accused is also to be clarified in this regard.

  2. A Senthil,Tax Consultant says:

    Very nice. A full detail article. TDS is very tedious to approach by Tax Cosnultants. Every Quarter every case has demand in some heads. To resolve them by filing correction returns are a headache works. Huge demands of 234E is big issue. So as a filer I very discouraged on ETDS preparing and filing works. There may be so many persons like me. Its very crucial to practice. Excuse me if anything told inadvertently.

  3. Himanshu Vadher says:

    Best all news of income Tax and G.S.T. Law,Goo
    d Luck Tax Guru

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