Consequences of TDS defaults under Income Tax Act 1961

Introduction: TDS/TCS compliances is one of the major compliance under Income Tax Act, 1961 and has a wide scope of its applicability to the business organizations. Small businesses are not much aware of the overall implications of non compliances of the TDS/ TCS provisions and ends up in paying the higher penal charges due to not following the deadlines. My article is focused on the consequences of failure to comply with these provisions in time bound manner. The following points I am putting forward for your consideration which I feel to be significant.

1. Late deduction and / or deposit of TDS.
2. Late return filing.
3. Furnishing incorrect information.
4. Late download of TDS certificate from TRACES website.

The detailed discussion follows:

Consequences of Failure to Deduct or Pay: Section 201

Section 201(1) of Income Tax Act expressly states that any person liable to deduct TDS on the income distributed, makes default in the deduction and/or payment of TDS, shall be treated “assessee in default” and penalty U/s 221 of Income Tax Act shall be payable by such assessee. The only rescue given to assessee is that the TDS deductible in respect of a resident, who has furnished his return of income under sub sections of section 139 (not under any other section) and has taken into account such sum for computing the income and the due taxes are paid on such income, shall not be considered for the purpose of section 221 of the Act on furnishing a certificate from an Accountant. Point to be noted that here the deductee should be a Resident and this do not apply to non-resident deductee. Practically, this section ignores hardship on the part of the assessee to establish such facts.

Further the section 201(1A) reads as follows:

“(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 interest,—

(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 deductible 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:”

Lets read the above section in a tabular presentation:

The above table explains how small delay in deduction and/ or payment costs huge.

Late Fees For Default In Furnishing Statements of TDS/TCS: Section 234E    

The Act reads as follows:

Fee for default in furnishing statements.

234E. (1) Without prejudice to the provisions of the Act, where a person fails to deliver or cause to be delivered a statement within the time prescribed in sub-section (3) of section 200 or the proviso to sub-section (3) of section 206C, he shall be liable to pay, by way of fee, a sum of two hundred rupees for every day during which the failure continues.

(2) The amount of fee referred to in sub-section (1) shall not exceed the amount of tax deductible or collectible, as the case may be.

(3) The amount of fee referred to in sub-section (1) shall be paid before delivering or causing to be delivered a statement in accordance with sub-section (3) of section 200 or the proviso to sub-section (3) of section 206C.

(4) The provisions of this section shall apply to a statement referred to in sub-section (3) of section 200 or the proviso to sub-section (3) of section 206C which is to be delivered or caused to be delivered for tax deducted at source or tax collected at source, as the case may be, on or after the 1st day of July, 2012.”

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 U/s 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.

Bombay High court dismissed the writ petition filed against levy of late fees U/s 234E of Income Tax Act 1961 for late filing of TDS return. In WRIT PETITION NO.771 OF 2014 Mr Rashmikant Kundalia and Another v/s Union of India and others High Court rejected the petitioner argument that a “fee” is known in the commercial and legal world to be a recompense of some service or some special service performed, and it cannot be collected for any dis-service or default.

As Held by High Court:

“as per the existing provisions, a person responsible for deduction of tax (the deductor) is required to furnish periodical quarterly statements containing the details of deduction of tax made during the quarter, by the prescribed due date. Undoubtedly, delay in furnishing of TDS return/statements has a cascading effect. Under the Income Tax Act, there is an obligation on the Income Tax Department to process the income tax returns within the specified period from the date of filing. The Department cannot accurately process the return on whose behalf tax has been deducted (the deductee) until information of such deductions is furnished by the deductor within the prescribed time. The timely processing of returns is the bedrock of an efficient tax administration system. If the income tax returns, especially having refund claims, are not processed in a timely manner, then (i) a delay occurs in the granting of credit of TDS to the person on whose behalf tax is deducted (the deductee) and consequently leads to delay in issuing refunds to the deductee, or raising of infructuous demands against the deductee; (ii) the confidence of a general taxpayer on the tax administration is eroded; (iii) the late payment of refund affects the Government financially as the Government has to pay interest for delay in granting the refunds; and (iv) the delay in receipt of refunds results into a cash flow crunch, especially for business entities.”          

It is in this light, and to compensate for the additional work burden forced upon the Department, that a fee was sought to be levied under section 234E of the Act. Looking at this from this perspective, we are clearly of the view that section 234E of the Act is not punitive in nature but a fee which is a fixed charge for the extra service which the Department has to provide due to the late filing of the TDS statements.

In other words, the late filing of the TDS return/statements is regularized upon payment of the fee as set out in section 234E. This is nothing but a privilege and a special service to the deductor allowing him to file the TDS return/statements beyond the time prescribed by the Act and/or the Rules. We therefore cannot agree with the argument of the Petitioners that the fee that is sought to be collected under section 234E of the Act is really nothing but a collection in the guise of a tax.

It must be noted that a right of appeal is not a matter of right but is a creature of the statute, and if the Legislature deems it fit not to provide a remedy of appeal, so be it. Even in such a scenario it is not as if the aggrieved party is left remediless. Such aggrieved person can always approach this Court in its extra ordinary equitable jurisdiction under Article 226 / 227 of the Constitution of India”

Penalty for Failure to Furnish Statements, Etc.: Section 271H 

The act reads as follows

“Penalty for failure to furnish statements, etc.

271H. (1) Without prejudice to the provisions of the Act, the Assessing Officer may direct that a person shall pay by way of penalty, if, he—

(a) fails to deliver or cause to be delivered a statement within the time prescribed in sub-section (3) of section 200 or the proviso to sub-section (3) of section 206C; or

(b) furnishes incorrect information in the statement which is required to be delivered or caused to be delivered under sub-section (3) of section 200 or the proviso to sub-section (3) of section 206C.

(2) The penalty referred to in sub-section (1) shall be a sum which shall not be less than ten thousand rupees but which may extend to one lakh rupees.

(3) Notwithstanding anything contained in the foregoing provisions of this section, no penalty shall be levied for the failure referred to in clause (a) of sub-section (1), if the person proves that after paying tax deducted or collected along with the fee and interest, if any, to the credit of the Central Government, he had delivered or cause to be delivered the statement referred to in sub-section (3) of section 200 or the proviso to sub-section (3) of section 206C before the expiry of a period of one year from the time prescribed for delivering or causing to be delivered such statement.

(4) The provisions of this section shall apply to a statement referred to in sub-section (3) of section 200 or the proviso to sub-section (3) of section 206C which is to be delivered or caused to be delivered for tax deducted at source or tax collected at source, as the case may be, on or after the 1st day of July, 2012.”

Illustration:

Suppose the quarterly statement of tax deducted at source i.e. TDS return for the first quarter of the year 2019-20 is filed by Mr. Suresh on 20-07-2019 The particulars of the tax deducted at source as mentioned in TDS return are incorrect. Will he be liable to pay penalty under section 271H for delay in filing the TDS return and for furnishing the inaccurate particulars in the return?

Penalty under section 271H can be levied for following defaults:

(1) Delay in filing the TDS/TCS quarterly statement i.e. TDS/TCS quarterly return.

(2) Furnishing incorrect TDS/TCS quarterly statement i.e. TDS/TCS quarterly return.

In the present case Mr. Sharma has filed an incorrect TDS return and hence he shall be held liable to pay penalty under section 271H. Minimum penalty of Rs. 10,000 and maximum penalty of up to Rs. 1, 00,000 may be levied. Mr. Sharma will have no remedy under Section 271H (3) to claim relief from penalty for furnishing of inaccurate particulars in the return. However, the taxpayer can seek relief in the following way:

1) He can apply to Principal Commissioner of Income-tax or Commissioner of income-tax under section 273A (4) to grant relief from penalty.

2) He can seek relief under section 273B by proving that there was a reasonable cause for failure.

TDS Certificate: Penalty for non-compliance: Section 272A                    

“Please be advised that under the provisions of section 203 of the Income Tax Act, 1961 read with rule 31A, Certificate of tax deducted at source is to be furnished within fifteen (15) days from the due date for furnishing the statement of tax deducted at source. Failure to comply with the provisions of the Act will attract penalty under the provisions of section 272A of the Act, a sum of one hundred rupees for every day during which the failure continues.”

It is mandatory to issue certificate for deduction of tax by the deductor to the deductee within 15 days of due date of furnishing of TDS return. Non Compliance of this results in penalty of Rs. 100 per day per certificate till the date of default. Language of the section suggest the calculation of 15 days period from the date of “due date” of furnishing of return and thus multiplies to the penal burden on deductor who has furished a late return. Since the system is now online it is very easy for department to issue notices and to trace and force the compliance. TDS department has already started sending notice on emails.

Further note that, section 200A of the Income-tax Act relating to processing of statements of tax deducted at source w.e.f. 1^st June, 2015.

It is proposed to amend sub-section (1) of the said section to provide that statement of tax deduction at source or correction statement made under section 200 shall be processed and sum deductible under Chapter XVII shall be computed after taking into account the fee, if any, payable in accordance with the provisions of section 234E. The sum payable or refundable shall be determined after adjusting the aforesaid computed sum against any amount paid under section 200 or section 201 or section 234E and any amount paid otherwise by way of tax or interest or fee.

Author- Mukesh Katara | B.Com, MBA in Finance | Email:- [email protected] | Mobile No. 9979743486.

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(Republished with Amendments by Team Taxguru)