Section 201 Consequences of Non-Compliance to TDS

 Consequences of Non-Compliance to TDS under Section 201 of Income Tax Act, 1961

Where any person, including the principal officer of a company, who is required to deduct any sum in accordance with the provisions of this Act; or referred to in sub-section (1A) of section 192, being an employer, does not deduct, or does not pay, or after so deducting fails to pay, the whole or any part of the tax, as required by or under this Act, then, such person, shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default in respect of such tax. A deductor would broadly face the following consequences:

The same is divided into following parts:

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

A. Provisions applicable to person deemed to be an “assessee in default”

Levy of interest:-

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

iii. at 1%for every month or part of a month on the amount of such tax from the date on which such tax was deductible to the date on which such tax is deducted; and

iv. at 5%for every month or part of a month on the amount of such tax from the date on which such tax was deducted to the date on which such tax is actually paid.

• Levy of interest is mandatory in nature: Levy of interest u/s. 201(1A) is mandatory and that the interest is to be paid whether the Assessee is an assessee in default or not.
• Interest – deduction as business expenditure: Whether the interest paid u/s 201(1A) can be claimed as deductible expenditure – Relying on the various judgments, it has been held that the interest paid u/s 201(1A) takes colour from its principal amount i.e., income tax and hence such interest cannot assume the character of business expenditure and hence is not allowable.

Levy of Penalty: 

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

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

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

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

Disallowance of expenditure:

• As per section 40(a)(i) of the Income-tax Act, any sum (other than salary) payable outside India or to a non-resident, which is chargeable to tax in India in the hands of the recipient, shall not be allowed to be deducted if it is paid without deduction of tax at source or if tax is deducted but is not deposited with the Central Government till the due date of filing of return. However, if tax is deducted or deposited in subsequent year, as the case may be, the expenditure shall be allowed as deduction in that year.
• TDS is to be deducted and deposited before 7^thof next month (or 30^th April in case of payment in March) on sum payable as salary to any non-resident. Otherwise 100% of expense will be disallowed and shall not be allowed even if deposited after the due date.
• Similarly, as per section 40(a)(ia), any sum payable to a resident, which is subject to deduction of tax at source, would attract 30% disallowance if it is paid without deduction of tax at source or if tax is deducted but is not deposited with the Central Government till the due date of filing of return. However, where in respect of any such sum, tax is deducted or deposited in subsequent year, as the case may be, the expenditure so disallowed shall be allowed as deduction in that year.
• Note: If the Assessee after deduction of TDS does not pay the same, then as per sub-section (2) of section 201, for the amount of tax not paid together with the simple interest – a charge is created on the assets of the person.

B. Provision applicable to a person not to be treated as “assessee in default”

A deductor who fails to deduct the whole or any part of the tax on the sum paid to a resident or on the sum credited to the account of a resident shall not be deemed to be an assessee-in-default in respect of such tax if such resident:

• has furnished his return of income under section 139 ;
• has taken into account such sum for computing income in such return of income; and
• has paid the tax due on the income declared by him in such return of income, and the deductor furnishes a certificate to this effect in Form No.26A from a chartered accountant.

Levy of interest: Levy of interest u/s. 201(1A) is mandatory in nature and that the interest (as discussed earlier) is to be paid whether the Assessee is an assessee in default or not.

Levy of Penalty: Penalty u/s. 221 is not payable where a person is not deemed to be an Assessee in default.

Disallowance of expenditure: Finance Act, 2012 w.e.f. 1.7.2012 has inserted second proviso to section 40(a)(ia), where it is provided that if a person is not an assessee in default as per section 201(1) then for the purpose of section 40(a)(ia) it will be deemed that the Assessee has deducted and paid the TDS on such amount and consequently no disallowance ought to be carried out. Hence if a person is not deemed to be an assessee in default then there will be no disallowance u/s. 40(a)(ia).

Note: The proviso is inserted only with context to section 40(a)(ia) and there is no such amendment to section 40(a)(i). Therefore the provision of disallowance specified u/s 40(a)(i) would be applicable.

As per section 40(a)(i) of the Income-tax Act, any sum (other than salary) payable outside India or to a non-resident, which is chargeable to tax in India in the hands of the recipient, shall not be allowed to be deducted if it is paid without deduction of tax at source or if tax is deducted but is not deposited with the Central Government till the due date of filing of return. However, if tax is deducted or deposited in subsequent year, as the case may be, the expenditure shall be allowed as deduction in that year.

C. Penalties, whether the Assessee is in default or not

Section 271C Specific Penalty: It is a specific provision dealing with levy of penalty on failure to deduct the tax at source. Penalty u/s 271C is payable only where a person fails to deduct the tax as required to be deducted. The amount of penalty payable u/s. 271C is equal to the amount of the tax which the person has failed to deduct. Penalty u/s. 271C is not imposable if the Assessee proves the reasonable cause u/s  273B for the failure of the person to deduct TDS.

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

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

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

Note: No Prosecution where Penalty dropped.

D. Consequences for failure to furnish statements and other penalties

Section 271H [Penalty]: 

• The provisions of section 271H levying the penalty are applicable in case of failure to deliver a quarterly statements being TDS/TCS Returns u/s. 200(3) / 206C(3) respectively, before the due of date of filing said returns; or submitting incorrect information in the statement. The penalty will be imposed minimum of ₹ 10,000/- to maximum ₹ 1,00,000/-.
• Note:No Penalty u/s 271H if there is Reasonable Cause for failure.
• Exception– No penalty shall be levied for the failure to submit the statement if it is proved that the statement has been delivered / submitted before the expiry of one year from the due date of filing the said return u/s. 200(3)/206C(3).

Section 234E [Fees]: 

• The provision of section 234E of the Act provides for levy of a fee of ₹ 200/- for each day’s delay in filing the statement of TDS. It is to be paid before the furnishing of the return of TDS. However, the amount of fee liable to be paid shall not exceed the amount of TDS.
• Note:The levy of the fee u/s. 234E mandatory in nature irrespective of the fact that there exists a reasonable cause of failure.

Section 272BB:

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

• obtain the tax deduction account number or tax collection account number;

or

• fails to quote such number as required

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

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

Extract of Section 201 of Income Tax Act, 1961

Consequences of failure to deduct or pay.

201. (1) Where any person, including the principal officer of a company,—

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

(b) referred to in sub-section (1A) of section 192, being an employer,

does not deduct, or does not pay, or after so deducting fails to pay, the whole or any part of the tax, as required by or under this Act, then, such person, shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default in respect of such tax:

Provided that any person, including the principal officer of a company, who fails to deduct the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid to a [payee] or on the sum credited to the account of a [payee] shall not be deemed to be an assessee in default in respect of such tax if such [payee]—

(i) has furnished his return of income under section 139;

(ii) has taken into account such sum for computing income in such return of income; and

(iii) has paid the tax due on the income declared by him in such return of income,

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

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

(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:

Provided that in case any person, including the principal officer of a company fails to deduct the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid to a [payee] or on the sum credited to the account of a [payee] but is not deemed to be an assessee in default under the first proviso to sub-section (1), the interest under clause (i) shall be payable from the date on which such tax was deductible to the date of furnishing of return of income by such [payee].

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

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

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

Explanation.—For the purposes of this section, the expression “accountant” shall have the meaning assigned to it in the Explanation to sub-section (2) of section 288.

(Republished with amendments)

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