Relief – Fees u/s 234E for late filing of TDS return

Part – I – case in brief

Entering the subject

Section 234E came on rule book w.e.f. 1-Jul-2012 which levies a fee at the rate of Rs. 200/- per day for delay in filing TDS return. The mechanism provisions were brought into operation w.e.f. 1-Jun-2015. IT dept. has issued numerous notices for earlier year(s) or period(s) i.e. before 1-Jun-2015 for recovery of the fees.

The question was whether it is correct / valid. If so, in which manner can it be done.

Questions answered by ITAT

Chennai ITAT in the case of Smt. G. Indhirani v DCIT has taken a slightly different view in this regard which is covered in this article.

Author’s Personal opinion

The author is of a personal view that, the charge of levy should not/can-not fail. In this regard, the observations of Chennai ITAT are more relevant.

For a moment consider that, the amendment by the finance bill, 2015 is not there.

Whether the courts still would have come to this conclusion that the levy fails because the explicit mechanism of recovering the levy is inadequate?

Can the amendments by Finance Act, 2015 and more importantly the observations in the memorandum to the said bill, 2015 influence the interpretation of legislative amendments made vide the Finance Act, 2012?

The courts have upheld the elimination of penalty on failure to timely file TDS return but have held that mechanism u/s 234E can not be brought into force.

Observations of Chennai ITAT in the case of Smt. G. Indhirani v DCIT regarding other modes of recovery-:

Para 8 contains following observation

When Section 234E clearly says that the assessee is liable to pay fee for the delay in delivery of the statement with regard to tax deducted at source, the assessee shall pay the fee as provided under Section 234E(1) of the Act before delivery of the statement under Section 200(3) of the Act. If the assessee fails to pay the fee for the periods of delay, then the assessing authority has all the powers to levy fee while processing the statement under Section 200A of the Act by making adjustment after 01.06.2015. However, prior to 01.06.2015, the Assessing Officer had every authority to pass an order separately levying fee under Section 234E of the Act. What is not permissible is that levy of fee under Section 234E of the Act while processing the statement of tax deducted at source and making adjustment before 01.06.2015. It does not mean that the Assessing Officer cannot pass a separate order under Section 234E of the Act levying fee for the delay in filing the statement as required under Section 200(3) of the Act.

Part – II – case explained elaborately

Facts of the case

1. The TDS return(s) were filed belatedly. DCIT, CPC (TDS), Ghaziabad issued notices to various assessees u/s 200A for payment of fees u/s 234E for various quarters of A.Y. 2013-14, 2014-15.
2. In some cases, the assessee filed a response u/s 154 which was dis-missed by AO.
3. In remaining cases, an appeal was preferred before CIT(A).
4. In appeal, the CIT(A) held that the appeal of assessee was not maintainable, in view of the ratio laid down by the Hon’ble Bombay High Court in Rashmikant Kundalia Vs. Union of India (2015) 54 Taxman.com 200 (Bom).
5. Further, even on merits, the contention of assessee that the Assessing Officer was not empowered to raise the demand under section 234E of the Act by passing order under section 200A of the Act was held to be not legally tenable.

Legislative Background

The section 234E was inserted by the Finance Act, 2012, w.e.f. 1-7-2012 to levy a fee of Rs. 200/- per day for the period of delay or the quantum of TDS paid / payable vide that TDS return whichever is less.

Second proviso, which was inserted w.e.f. 01.07.2012, wherein it is provided that under clause (k) to section 272A(1) of the Act, no penalty is to be levied.

It is so the provisions of section 234E of the Act were compulsorily applicable.

Section 272A talks about penalty where normal jurisprudence of ‘mens rea’, the use of the word “may” is there giving an option to levy or drop the penalty.

Section 234E talks of fees [and not penalty] which is mandatory and may be compared with interest. The moot point being, there are no qualitative checks like ‘mens rea’.

Clause (k) to Section 272A(2) of the Act came on rulebook w.e.f. 01.04.2005 where the statement was not filed by the deductor, penal provisions were attracted and the same was with respect to timely filing of quarterly returns of TDS.

Sub section (3) of Section 200 of the Act and penalty under section 272A(2)(k) of the Act were simultaneously introduced.

The text of section 200A at the time of insertion of section 234E and after amendment by the Finance Act, 2015 is re-produced below. The clauses to section 200A(1) Clauses (c) to (f) substituted for clauses (c) to (e) by the Finance Act, 2015, w.e.f. 1-6-2015. Memo explaining the Finance Bill clearly says that the amendment was w.e.f. 01.06.2015

Memorandum to Finance Bill, 2015

Finance (No.2) Act, 2009 inserted section 200A in the Act which provides for processing of TDS statements for determining the amount payable or refundable to the deductor. However, as section 243E was inserted after the insertion of section 200A in the Act, the existing provisions of section 200A of the Act does not provide for determination of fee payable under section 234E of the Act at the time of processing of TDS statements. It is, therefore, proposed to amend the provisions of section 200A of the Act so as to enable computation of fee payable under section 234E of the Act at the time of processing of TDS statement under section 200A of the Act.

Judicial pronouncements directly on this matter

The constitutional validity of section 234E was challenged before Bombay HC in the case of Rashmikant Kundalia Vs. Union of India (2015) 54 Taxman.com 200 (Bom). Bombay high court upheld the section being constitutionally valid but apparently, there was no comment about date of enforcement i.e. whether prospective or retrospective / clarificatory etc.

There are two other ITAT judgements have been pronounced on the operational part of section 234E.

Sibia Healthcare Private Limited v DCIT – [referred to as Amritsar ITAT] – I.T.A. No.90/Asr /2015 dated 9-Jun-2015.

Smt. G. Indhirani v DCIT [referred to as Chennai ITAT] ITAT A Bench, Chennai in the case of Smt. G. Indhirani v DCIT, CPC, (TDS),ITA No. 1019 to 1021/MDS/2015, dt 10-July-2015]

Operating portion from Amritsar ITAT order.

In view of the above discussions, in our considered view, the adjustment in respect of levy of fees under section 234E was indeed beyond the scope of permissible adjustments contemplated under section 200A…………The issue is whether such a levy could be effected in the course of intimation under section 200A. The answer is clearly in negative. No other provision enabling a demand in respect of this levy has been pointed out to us and it is thus an admitted position that in the absence of the enabling provision under section 200A, no such levy could be effected. As intimation under section 200A, raising a demand or directing a refund to the tax deductor, can only be passed within one year from the end of the financial year within which the related TDS statement is filed, and as the related TDS statement was filed on 19th February 2014, such a levy could only have been made at best within 31st March 2015. That time has already elapsed and the defect is thus not curable even at this stage. In view of these discussions, bearing in mind entirety of the case, the impugned levy of fees under section 234E is unsustainable in law. We, therefore, uphold the grievance of the assessee and delete the impugned levy of fee under section 234E of the Act.

Operating portion from Chennai ITAT order- In para 7, the Chennai ITAT has come to the same conclusion in following words

Therefore, it is obvious that prior to 01.06.2015, there was no enabling provision in Section 200A of the Act for making adjustment in respect of the statement filed by the assessee with regard to tax deducted at source by levying fee under Section 234E of the Act.

Operating portion from Hon’ble Karnataka High Court in Writ Appeal Nos.2663-2674/2015(T-IT) & Ors in Sri Fatheraj Singhvi & Ors Vs. Union of India & Ors dated 26-Aug-2016

20. In view of the aforesaid observations and discussion, two aspects may transpire one, for Section 234E providing for fee and given privilege to the defaulter if he pays the fee and hence, when a privilege is given for a particular purpose which in the present case is to come out from rigors of penal provision of Section 271H(1)(a), it cannot be said that the provisions of fee since creates a counter benefit or reciprocal benefit in favour of the defaulter in the rigors of the penal provision, the provisions of Section 234E would meet with the test of quid pro quo.

21. However, if Section 234E providing for fee was brought on the state book, keeping in view the aforesaid purpose and the intention then, the other mechanism provided for computation of fee and failure for payment of fee under Section 200A which has been brought about with effect from 1.6.2015 cannot be said as only by way of a regulatory mode or a regulatory mechanism but it can rather be termed as conferring substantive power upon the authority. It is true that, a regulatory mechanism by insertion of any provision made in the statute book, may have a retroactive character but, whether such provision provides for a mere regulatory mechanism or confers substantive power upon the authority would also be a aspect which may be required to be considered before such provisions is held to be retroactive in nature. Further, when any provision is inserted for liability to pay any tax or the fee by way of compensatory in nature or fee independently simultaneously mode and the manner of its enforceability is also required to be considered and examined. Not only that, but, if the mode and the manner is not expressly prescribed, the provisions may also be vulnerable. All such aspects will be required to be considered before one considers regulatory mechanism or provision for regulating the mode and the manner of recovery and its enforceability as retroactive. If at the time when the fee was provided under Section 234E, the Parliament also provided for its utility for giving privilege under Section 271H(3) that too by expressly put bar for penalty under Section 272A by insertion of proviso to Section 272A(2), it can be said that a particular set up for imposition and the payment of fee under Section 234E was provided but, it did not provide for making of demand of such fee under Section 200A payable under Section 234E. Hence, considering the aforesaid peculiar facts and circumstances, we are unable to accept the contention of the learned counsel for respondent-Revenue that insertion of clause (c) to (f) under Section 200A(1) should be treated as retroactive in character and not prospective.

22. It is hardly required to be stated that, as per the well established principles of interpretation of statute, unless it is expressly provided or impliedly demonstrated, any provision of statute is to be read as having prospective effect and not retrospective effect. Under the circumstances, we find that substitution made by clause (c) to (f) of sub-section (1) of Section 200A can be read as having prospective effect and not having retroactive character or effect. Resultantly, the demand under Section 200A for computation and intimation for the payment of fee under Section 234E could not be made in purported exercise of power under Section 200A by the respondent for the period of the respective assessment year prior to 1.6.2015. However, we make it clear that, if any deductor has already paid the fee after intimation received under Section 200A, the aforesaid view will not permit the deductor to reopen the said question unless he has made payment under protest.

23. In view of the aforesaid observation and discussion, since the impugned intimation given by the respondent-Department against all the appellants under Section 200A are so far as they are for the period prior to 1.6.2015 can be said as without any authority under law. Hence, the same can be said as illegal and invalid.

24. If the facts of the present cases are examined in light of the aforesaid observation and discussion, it appears that in all matters, the intimation given in purported exercise of power under Section 200A are in respect of fees under Section 234E for the period prior to 1.6.2015. As such, it is on account of the intimation given making demand of the fees in purported exercise of power under Section 200A, the same has necessitated the appellant-original petitioner to challenge the validity of Section 234E of the Act. In view of the reasons recorded by us hereinabove, when the amendment made under Section 200A of the Act which has come into effect on 1.6.2015 is held to be having prospective effect, no computation of fee for the demand or the intimation for the fee under Section 234E could be made for the TDS deducted for the respective assessment year prior to 1.6.2015. Hence, the demand notices under Section 200A by the respondent-authority for intimation for payment of fee under Section 234E can be said as without any authority of law and the same are quashed and set aside to that extent.

25. As such, as recorded earlier, it is on account of the intimation received under Section 200A for making computation and demand of fees under Section 234E, the same has necessitated the appellant to challenge the constitutional validity of Section 234E. When the intimation of the demand notices under Section 200A is held to be without authority of law so far as it relates to computation and demand of fee under Section 234E, we find that the question of further scrutiny for testing the constitutional validity of Section 234E would be rendered as an academic exercise because there would not be any cause on the part of the petitioners to continue to maintain the challenge to constitutional validity under Section 234E of the Act. At this stage, we may also record that the learned counsels appearing for the appellant had also declared that if the impugned notices under Section 200A are set aside, so far as it relates to computation and intimation for payment of fee under Section 234E, the appellant-petitioners would not press the challenge to the constitutional validity of Section 234E of the Act. But, they submitted that the question of constitutional validity of Section 234E may be kept open to be considered by the Division Bench and the Judgment of the learned Single Judge may not conclude the constitutional validity of Section 234E of the Act.

26. Under these circumstances, we find that no further discussion would be required for examining the constitutional validity of Section 234E of the Act. Save and except to observe that the question of constitutional validity of Section 234E of the Act before the Division Bench of this Court shall remain open and shall not be treated as concluded.

27. In view of the aforesaid observations and discussion, the impugned notices under Section 200A of the Act for computation and intimation for payment of fee under Section 234E as they relate to for the period of the tax deducted prior to 1.6.2015 are set aside. It is clarified that the present judgment would not be interpreted to mean that even if the payment of the fees under Section 234E already made as per demand/intimation under Section 200A of the Act for the TDS for the period prior to 01.04.2015 is permitted to be reopened for claiming refund. The judgment will have prospective effect accordingly. It is further observed that the question of constitutional validity of Section 234E shall remain open to be considered by the Division Bench and shall not get concluded by the order of the learned Single Judge.

Contention of revenue

Compare the provisions of the Finance Act, 2012 whereby following changes were introduced w.e.f. 01-Jul-2012 in the matter of “delay in filing TDS return”

• Section 234E was introduced to levy A FEE of Rs. 200/- per day.
• Second proviso to Clause (k) of section 272A(1) was inserted for deletion of penalty.

Bombay high Court has in the case of Rashmikant Kundalia has upheld the validity of section 234E and the character of the charge being a “fee” for services rendered by the IT dept. Following are the relevant paragraphs to decide the character of the levy

14. We find that the Legislature took note of the fact that a substantial number of deductors were not furnishing their TDS return/statements within the prescribed time frame which was absolutely essential. This led to an additional work burden upon the Department due to the fault of the deductor by not furnishing the information in time and which he was statutorily bound to furnish. 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.

15. As stated earlier, due to late submission of TDS statements means the Department is burdened with extra work which is otherwise not required if the TDS statements were furnished within the prescribed time. This fee is for the payment of the additional burden forced upon the Department. A person deducting the tax (the deductor), is allowed to file his TDS statement beyond the prescribed time provided he pays the fee as prescribed under section 234E of the Act. In other words, the late filing of the TDS return/statements is regularised 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.

Being a fee, it does not require an adjudication like in case of interest on tax payable. Interest charge is mandatory and consequential.

Revenue stressed that the provisions of section 234E of the Act was charging section wherein the liability was upon the assessee that he shall pay and when the same is to be paid is also specified therein. The Legislature in this regard was clear that defaulter itself would make the compliance.

Revenue further contended that by way of an amendment in 2015, the Act has not provided any new levy; the provisions of section 234E of the Act were already there and amendment is only clarificatory.

Contention of assesse

The assessee’s contention was re-produced in para of the order as follows. Paragraph para phrased.

14. The learned Authorized Representative for the assessee in rejoinder pointed out that Memo explaining the Finance Bill clearly says that the amendment was w.e.f. 01.06.2015 and it was proposed to amend the provisions of section 200A of the Act.

He further stated that under the provisions of section 45 of the Act, where the cost of acquisition was Nil, no capital gains was leviable but after the amendment, it is so provided that capital gains would be chargeable in some cases where the cost of acquisition was Nil and hence, it is the statute which empowers the authorities to levy fees, charges or taxes.

In the absence of such power, there is no merit in levy of fees under section 234E of the Act.

Though I am not sure about the context of above submission of the assessee, following is something I have inferred from the observation.

There was an amendment to section 55(2)(a) w.e.f. 1-Apr-2002 which legislated that the cost of acquisition of self generated assets will be treated as NIL. The contention was that, in view thereof it was not possible to compute the capital gains under

Section 48 of the said Act resulting in the charge of tax also failing as held by the Apex Court in the matter of B. C. Srinivasa Shetty 128 ITR Page 294.

In this regard, Bombay High court in the case of CIT-12 v Fernhill Laboratories and Industrial Establishment ITA NO.5615 OF 2010 dated 12-Jun-2012

8. We have considered the rival submissions. Section 45 of the Act is a charging section for the purpose of levying capital gains. However to impose the charge, parliament has enacted provision to compute profits or gains under that head. Section 48 of the said Act provides the manner in which the income chargeable under the head capital gains is to be computed i.e. by deducting costs of acquisition of the capital asset from the full consideration received on the transfer of the capital asset. The Supreme Court in the matter of B. C. Srinivasa Shetty (supra) was dealing with the issue whether the transfer of the goodwill by partnership firm can give rise to a capital gain tax under Section 45 of the said Act. The Apex Court held that where the cost of acquisition of the capital asset is nil then the computation provision fails and the transfer of goodwill not give rise to capital gains tax. Prior to the amendment made to Section 55(2) by the Finance Act, 2001 effective from 1/4/2002 by adding the words “trade mark or brand name associated with the business” self generated assets such as trademark did not have any cost of acquisition. Therefore for the period under consideration the computation provision under Section 48 of the said Act fails resulting in such transfer of trade marks not being chargeable to capital gains tax. Consequent to amendment made to Section 55(2) with effect from 1/4/2002 by which the words trade mark or brand name associated with the business was introduced into it, the computation provision becomes workable and the consideration received for the sale of trade mark would be subject to capital gains tax. However, for the period prior to 1/4/2002 the sale of self generated trademark is not liable to capital gains tax. In fact, when the amendment was made to Section 55 by Finance Act, 2001 the Central Board of Excise and Customs had issued a circular bearing No.14/2001 explaining the provision of the Finance Act, 2011 relating to direct taxes provided as under:

“42- Providing for cost of acquisition of certain intangible capital asserts under section 55 42.1 Under the existing provisions of sub- section (2) of section 55 of the Income tax Act, the cost of acquisition of an intangible capital asset, being goodwill of a business or a right to manufacture, produce or process any article or thing, tenancy rights, stage carriage permits or loom hours, is the purchase price in case the asset is purchased by the assessee from a previous owner, and nil in any other case. It was pointed out that certain similar self generated intangible assets like brand name or a trademark may not be considered to form part of the goodwill of a business and consequently it may not be possible to compute capital gains arising from the transfer of such assets.

42.2- The Act has therefore amended clause (a) of sub-section (2) to provide that the cost of acquisition in relation to trademark or brand name associated with a business shall also be taken to be the purchase price in case the asset is purchased from a previous owner and nil in any other case.

42.3- This amendment will take effect from 1st April, 2002, and will, accordingly, apply in relation to the assessment year 2002-2003 and subsequent years.”

9. From the above circular, it would be clear that the amendment bringing self generated intangible assets such as trademark to capital gains tax only with effect from Assessments Year 2002-03 onwards. In this case, we are concerned with Assessment Year 1999-2000 and therefore, the amendment would not have any effect. Further as held by the Supreme Court in the matter of Dy. CIT v/s. Core Health Care ltd. reported in 298 ITR 194 that a provision introduced with effect from a particular date would not have retrospective effect unless it is expressly stated to be so. Consequently, the sale of self generated, trade marks during the Assessment year 1999-2000 are not chargeable to capital gains tax. So far as the sale of self generated designs (i.e. not acquired) the same is also not chargeable to capital gains tax not only for the reasons applicable to trade marks but for the fact that even till this date, no amendment has been made to Section 55(2) of the said Act defining cost of acquisition of design as in the case of trademark goodwill etc.

Relevant Paragraphs of the order

24. In respect of the issue raised before us, it is clear that the prescribed authority has been vested with the power to charge fees under section 234E of the Act only with regard to levy of fees by the substitution made by Finance (No.2) Act, 2015 w.e.f. 01.06.2015. Once the power has been given, under which any levy has to be imposed upon tax payer, then such power comes into effect from the date of substitution and cannot be applied retrospectively. The said exercise of power has been provided by the statute to be from 01.06.2015 and hence, is to be applied prospectively. There is no merit in the claim of Revenue that even without insertion of clause (c) under section 200A(1) of the Act, it was incumbent upon the assessee to pay fees, in case there is default in furnishing the statement of tax deducted at source. Admittedly, the onus was upon the assessee to prepare statements and deliver the same within prescribed time before the prescribed authority, but the power to collect the fees by the prescribed authority vested in such authority only by way of substitution of clause (c) to section 200A(1) of the Act by the Finance Act, 2015 w.e.f. 01.06.2015. Prior to said substation, the Assessing Officer had no authority to charge the fees under section 234E of the Act while issuing intimation under section 200A of the Act. Before exercising the authority of charging any sum from any deductor or the assessee, the prescribed authority should have necessary power vested in it and before vesting of such power, no order can be passed by the prescribed authority in charging of such fees under section 234E of the Act, while exercising jurisdiction under section 200A of the Act. Thus, in the absence of enabling provisions, under which the prescribed authority is empowered to charge the fees, the Assessing Officer while processing the returns filed by the deductor in respect of tax deducted at source can raise the demand on account of taxes, if any, not deposited and charge interest. However, prior to 01.06.2015, the Assessing Officer does not have the power to charge fees under section 234E of the Act while processing TDS returns. In the absence of enabling provisions, levy of fees could not be effected in the course of intimation issued under section 200A of the Act prior to 01.06.2015.

28. The perusal of Memo explaining the provision relating to insertion of clause (c) to section 200A of the Act clarifies the intention of Legislature in inserting the said provision. The provisions of section 234E of the Act were inserted by the Finance Act, 2012, under which the provision was made for levy of fees for late furnishing TDS / TCS statements. Before insertion of section 234E of the Act, the Finance (No.2) Act, 2009 had inserted section 200A in the Act, under the said section, mechanism was provided for processing of TDS statements for determining the amount payable or refundable to the deductor, under which the provision was also made for charging of interest. However, since the provisions of section 234E of the Act were not on statute when the Finance (No.2) Act, 2009 was passed, no provision was made for determining the fees payable under section 234E of the Act at the time of processing the TDS statements. So, when section 234E of the Act was introduced, it provided that the person was responsible for furnishing the TDS returns / statements within stipulated period and in default, fees would be charged on such person. The said section itself provided that fees shall not exceed the amount of tax deducted at source or collected at source. It was further provided that the person responsible for furnishing the statements shall pay the said amount while furnishing the statements under section 200(3) of the Act. However, power enabling the Assessing Officer to charge / levy the fee under section 234E of the Act while processing the TDS returns / statements filed by a person did not exist when section 234E of the Act was inserted by the Finance Act, 2012. The power to charge fees under the provisions of section 234E of the Act while processing the TDS statements, was dwelled upon by the Legislature by way of insertion of clause (c) to section 200A(1) of the Act by the Finance Act, 2015 w.e.f. 01.06.2015. Accordingly, we hold that where the Assessing Officer has processed the TDS statements filed by the deductor, which admittedly, were filed belatedly but before insertion of clause (c) to section 200A(1) of the Act w.e.f. 01.06.2015, then in such cases, the Assessing Officer is not empowered to charge fees under section 234E of the Act while processing the TDS returns filed by the deductor.

32. We further find that in recent judgment dated 26.08.2016, the Hon’ble Karnataka High Court in Writ Appeal Nos.2663-2674/2015(T-IT) & Ors in Sri Fatheraj Singhvi & Ors Vs. Union of India & Ors has quashed the intimation issued under section 200A of the Act levying the fees for delayed filing the TDS statements under section 234E of the Act. The Hon’ble High Court notes that the Finance Act, 2015 had made amendments to section 200A of the Act enabling the Assessing Officer to make adjustments while levying fees under section 234E of the Act was applicable w.e.f. 01.06.2015 and has held that it has prospective effect. Accordingly, the Hon’ble High Court held that “intimation raising demand prior to 01.06.2015 under section 200A of the Act levying section 234E of the Act late fees is not valid”. However, the Hon’ble High Court kept open the issue on constitutional validity of section 234E of the Act. We have already referred to the decision of Hon’ble Bombay High Court in Rashmikant Kundalia Vs. Union of India (supra) in this regard, wherein the constitutional validity of section 234E of the Act has been upheld.