For a huge population, India has a well-structured hierarchical taxation system. The Indian taxation system has seen several changes over time. Clearly, taxes are our government’s main source of revenue, making the taxpayer the government’s customer. Income tax rates have been standardised, with simpler governing regulations that are easy enough for a layperson to understand and apply. This has resulted in increased compliance, convenience of payment of taxes, and better as well as efficient law enforcement. Along with these beneficial modernizations, there has recently been a significant increase in the number of prosecution procedures started by the Department of Income Tax. The main reasons for these charges have been wilful attempts to evade or pay any such tax, failing to deposit the tax deducted/collected at source or any delay in doing so, and wilful refusal to file income tax returns.
UNDERSTANDING TAX DEDUCTED AT SOURCE
Among all the penalised offences under tax legislation, the litigation in cases of tax deducted at source defaulters has reached an all-time high. TDS is the income tax that is deducted from money paid at the time of making certain payments such as commission, professional fees, rent, salary, interest, and so on by the person who is meant to be making the payment. Any individual paying any of the payments listed in the Income Tax Act is required to have them deducted at the time of payment.
According to the proviso to Section 201 of the Income Tax Act, if the individual responsible to deduct TDS fails to do so in whole or in part of the TDS on a payment made to an individual, the defaulter is not merely deemed to be a ‘assessee-in-default’ for non-deduction. The barrier for granting the title of ‘assesse-in-default’ is significantly higher, and the standards outlined in the section must be met. Some of these criteria include: the recipient having supplied his income tax return under Section 139; the receipt having paid any relevant taxes payable on the income stated in their income tax return; and so on.
According to Section 271C of the Income Tax Act, the penalty for failing to deduct or pay TDS is equivalent to the amount of tax that was not deducted or paid. According to existing tax legislation, defaulters who do not exceed the maximum of Rs.25,00,000 in non-payment of TDS coupled with a delay in deposit of no more than 60 days will not be punished by default, provided that these two requirements are met. For defaulters who do not meet the requirements, a member team of senior officials will evaluate the cases and, after deliberation, determine the best option to be against them. These tax defaulters would have faced prosecution in a court of law prior to the implementation of CBDT.
The Ministry of Finance (MoF) and the Revenue Secretary drafted steps to ensure that honest taxpayers do not suffer exorbitant penalties for minor violations. Retention of amount payable to the government after the due date is an offence punishable by imprisonment under Section 276B of the Income Tax Act. According to Section 276B of the earlier legislation, the punishment for non-payment of TDS deposit was harsh imprisonment for three months to six years and a fine, which has been amended to a different category depending on the amount in time and duration of delay as mentioned. There have been many reports of citizens being severely punished for failing to submit TDS for modest sums on time. According to the amended law, the authority to impose heavy penalties on defaulters who fail to file their income tax returns or TDS no longer lies with Magistrate Courts.
The requirement of a minimum retention term of 12 months has been removed from the CBDT’s updated recommendations. It has been made very plain that TDS defaulters who fail to deposit the same by the due date would face prosecution, regardless of the term of detention. The Tax Department’s TDS department has been extremely active with criminal procedures in appropriate cases. The multiplication of prosecution cases suggests that prosecution is being viewed as a strategic instrument for enforcing taxpayer compliance. There have been numerous cases of severe penalty for minor offences. In Bengaluru, the MD of a firm involved in infrastructure projects was found guilty of failing to deposit TDS of more than Rs. 60 lakh (before the stipulated period) and was sentenced to three months in prison and a fine. Similarly, a Mohali resident was found guilty of failing to deposit TDS within the required time frame and sentenced to one year in jail as well as a fine.
According to Section 278AA of the IT Act, no person shall be responsible for any failure referred to in Section 276B provided he can demonstrate reasonable grounds for such failure. The controlling statute does not define reasonable cause objectively. The concept was created by the courts on their own by determining what is fair, not absurd, not illogical, and not ludicrous. Other reasons regulating the reasonable cause exemption include a lack of financial ability, among others.
In the matter of Firoz Nadiawala, the Mumbai District Court, dealt with the problem of the commencement of prosecution proceedings for an offence under Section 276B of the IT Act due to failing to pay the Tax Deducted at Source (TDS) amount within the time limit. In this case, the court used the Supreme Court case of Madhumilan Syntax Ltd As a precedent, if payment is not made within the specified time frame, it is considered a default in the eyes of the law, and the Court is authorized to take necessary action under the governing Act. It was also discovered that the major goals of the prosecution provisions contained in Chapter XXII of the IT Act are to punish criminals found guilty of tax-related offences and tax evasion, as well as to instill fear of the law in those who may even consider avoiding payment of lawful taxes.
According to the Law Commission Report of 1972, It was discovered that the legislation and judicial attitude to such offences were taken lightly, and the sanctions were insufficient in consideration of the crimes committed. A report by the Working Group on Central Direct Taxes Administration was also taken into account, in which it was discovered that, despite the fact that direct tax legislation provides a provision for prosecution in situations of default, not a single case had been prosecuted. However, the situation has completely flipped in terms of the court’s prosecuting practices in terms of default. The Income Tax Department is issuing show-cause notifications to TDS defaulters in order to initiate prosecution under Section 276B. There has been conviction in cases where amount of default is comparatively less and period of default is negligible. The current trend is to use the window of prosecution to put undue pressure on tax collection in order to fulfil the revenue department’s budgeted objectives for improving service records. Clearly, this was not the purpose of the legislators who enacted such measures in the IT Act. The transition of Section 276B over the previous five decades has certainly not been in favor of the assesses since it has never been taxpayer friendly. There is no idea of categorization in the current framework of taxes legislation.
The Income Tax Department has issued over 859 prosecutions show cause notices in Karnataka and Goa to businesses in both the private and public sectors for failing to submit tax deducted at source to the exchequer on time. Out of these 859 cases, in 48 cases, prosecution has already been sanctioned and complaints have been filed in special Economic Offences Court. The dedicators have submitted petitions for compounding of offences in 223 cases by paying taxes in addition to interest and penalty. Such measures, it is alleged, have also been begun in other regions of the nation. Consider a case in which an Assessee, X, fails to deposit TDS in the sum of 50 lacks. Assume he deposits the principal TDS amount as well as the punitive interest at 1.5 percent per month after a 6-month wait.
However, his typical income tax refund of more than Rs. 50 lacks are also outstanding with the Exchequer and would remain pending during his term of TDS failure and beyond. The question here is whether it is reasonable to regard assessee X to be an assessee-in-default under Section 201 of Income Tax Act. Second, is it legal to initiate criminal procedures under Section 276B? The questions will be answered in the negative based on the dictum of natural justice and the purpose of the legislature. It is extremely simple to calculate that the TDS demand of Y may be offset against his pending normal income-tax refund, and so Y should not be regarded an assessee-in-default under the concept of natural fairness. The possibility of prosecution should also be avoided. This hypothetical clearly illustrates the assessee’s lack of a fair playing field. In contrast, if the Exchequer delays in issuing income tax refunds, he is not given with a plan of action and may only hope for compensatory interest at 0.5 percent per month, following a lengthy follow-up and litigation. This is just another instance of fundamental loophole in the system.
To restore some balance, in cases where there is a default in TDS payment but a regular income-tax refund is also being sent in the name of the assessee, the assessee must be given the option to have its outstanding TDS demand adjusted against its pending income tax refund, allowing the recipient of income to obtain his TDS credit on time. A better coordination between the TDS wing and the Assessment Wing of the Exchequer is necessary, as well as the elimination of procedural restrictions and simplification of the Exchequer’s functional capacity.
The fundamental question of the application of prosecution procedures has long been a source of contention in the courts. In cases including Kingfisher Airlines Ltd., Rayala Corporation Ltd., and Lakshmandas Pranchad, several courts have ruled those actions under the section in question might be commenced for failing to pay TDS amount. However, in a few cases, such as Sequoia Construction and Detecon Indian Project Office, courts have ruled in favour of dismissing the prosecution for an offence under the same.
The first phase in judicious, equitable, and effective execution of prosecution procedures under section 276B should be categorizing defaulters into distinct groups depending on the type and severity of the default in various terms. These determining factors can be based on the quantum, duration, and purpose parameters, and the punitive consequences must follow depending on the severity of the default. When categorizing, the element of subjectivity must be eliminated, and standardization should be supplied, like in Computer Assisted Scrutiny Selection (CASS). While it appears that the Tax Administration is using the weapon of prosecution to induce compliance as well as generate additional income in the form of compounding fines and penalties, it must be ensured that this does not lead to tax terrorism and harassment of tax payers in general. The taxpayer is the government’s client, and a customer should not be terrorized into following the rules of the game. Every contract contains the notion of permission and voluntariness; a social contract between the government and taxpayers should be no different.
The punitive penalties for late and default in depositing TDS are harsh, as evidenced by the fact that there is no mitigating advantage for a person who has willingly paid the TDS together with interest for the delayed time without any notice or demand. As a result, it is strongly suggested to comply with the requirements relating to TDS deduction and deposit without fail, as failure to do so may result in assesses facing rigors jail or massive penalties and fines.
 Income Tax Prosecution – Need for Balancing Act, by Sanjay Sanghvi & Ashish Mehta.
 Madhumilan Syntex Ltd. & Ors v. Union of India & Ors. (2007) 208 CTR (SC) 417: (2007) 290 ITR 199 (SC).
 Supra 4
 Kingfisher Airlines Ltd. v. ITO  265 CTR 0240 (Kar)
 ITO v. Rayala Corpn. (P) Ltd.  206 ITR 381 (Mad)
 Lakshmandas Pranchand v. Union of India  98 Taxman 203 (MP)
 Sequoia Construction Co. (P) Ltd. v. ITO  158 ITR 496 (Del)
 Detecon Indian Project Office v. ITO  83 Taxman 279 (Del)