Chief Commissioner (Retd.)
V.K. Pandey completed his M.Sc. in Physics from Allahabad University. He was a probationary officer in State Bank before joining the Indian Revenue Service (IRS) in 1984. He worked in various capacities in Allahabad, Nagpur (NADT), Mumbai, Delhi, Chennai, Kolhapur, Ahmedabad and Rajkot. He retired in June 2018 as CCIT Rajkot. He has special interest in fields of Training, Investigation and TDS. As CIT(TDS) Mumbai he handled many prosecution cases. In the present article he deals with the history of provisions of TDS prosecutions to bring in focus the role played by the technology which, according to him, is leading to better compliance of TDS provisions of Income Tax Act, 1961.
Though the statute,for a very long time,had provided for prosecution in cases of violation of certain TDS provisions, yet the conviction rate has remarkably increased only after the Income Tax department entered a digital era. The article highlights how technology has helped courts in arriving at decisions more expeditiously in TDS violation cases. It also brings in focus the fact that by improving the efficiency in the system, the technology can lead to better financial discipline in as much as compliance with TDS provisions is concerned.
There have been, of late, many news items about conviction under Income Tax Act (the Act) for violation of TDS (Tax Deducted at Source) provisions. A recent study shows that more than 40 per cent of all convictions under the Act relate to violation of TDS provisions.
Violation of TDS provisions has been a punishable offence for more than a century. However, the number of cases reported in the media where TDS cases have resulted in conviction and the persons responsible for such violation of law have been sent to jail are coming out in good numbers and at an increased frequency only recently. Has it got anything to do with the increased use of technology by the Income Tax department? In my opinion, answer to this question is a firm ‘yes’!
As per law, while making payments of certain specified natures a person (deductor) shall deduct tax (TDS). The law further requires that such person shall deposit this TDS with the Central Government within a specified time period. Any violation of this legal requirement, that is to say not depositing the TDS with the Central Government within statutory time frame is a punishable offence under the Act. Initially the ‘punishment’ for such offence was only a fine of Rs. 10 per day of default. There was no imprisonment prescribed for the convict. Convictions were rare, even though violations of TDS provisions were not. This position continued till 1968.
Apparently ‘only’ the fine was not found to be a strong deterrent. So rigorous imprisonment for a term of up to six months, in addition to the fine, was introduced from 1968. The ‘fine’ was also linked to the amount of tax involved – 15 per cent per annum of the TDS for the period of default. However, not much improvement in compliance with TDS provisions was witnessed. TDS defaults continued, rather kept on increasing. The litigation also increased keeping with the trend of TDS defaults. So a need for much stronger ‘deterrent’ was felt.
Accordingly, in 1976 the term of rigorous imprisonment was extended: minimum being six months and maximum being seven years, if the tax involved was more than one lakh rupees. For tax default amounts of less than one lakh rupees, the minimum and maximum terms of rigorous imprisonments were three months and three years respectively. The ‘fine’, in addition to the imprisonment continued, but now it was delinked from the amount of tax in default.
From 1989 the punishment was delinked from the amount of tax in default and a uniform term of a minimum of three months and a maximum of seven years was prescribed, in addition to the fine which remained unspecified. These statutory provisions are still in vogue.
The experience of the tax administration, however, did not change much over the period of about a century as not many convictions were ordered by the courts. The usual procedural lapses by the departmental officers, lack of evidences on record etc. rather ensured the failure of prosecution in most of the TDS cases. Emboldened by such prosecution failures, the defaulters started looking at the TDS amounts as an alternative source of ‘funds’ for conducting their business activities. Over the periods, more and more transactions were brought under the TDS ambit. As a result, such ‘funds’ with the business entities swelled-in some cases a few hundred crores of rupees every year! As per law, the TDS amount is public (government) money and the deductor is mere a ‘custodian’. By not depositing the TDS amount with the central government within prescribed time limit makes such deductor an offender. Such act of deductor not only deprives the government of its rightful funds (which it can use for various developmental/welfare activities), but also results in harassment of many other assessees who do not get credit of the TDS deducted from their salaries, contract or other payments. If an employer, having, say five thousand employees, deducts tax from their salaries and does not deposit it with the government as required by law, all those five thousand employees will not get credit for such TDS amount. On the contrary they may get notices from the income tax department for ‘not paying tax due on their income’! Obviously it also leads the department to engage in huge infructuous and unproductive, rather counter productive work. This example is given here only to highlight the enormity of grave consequences (for all stakeholders) of one ‘simple’ failure of the deductor. A heavy punishment of rigorous imprisonment was, therefore, considered justified for such a serious offence. But in practice the prosecutions failed due to above mentioned reasons of procedural lapses and lack of evidences etc.
Things, however, changed from the year 2008, when technology stepped in. The electronic filing of TDS returns became compulsory for almost all the deductors. Now the electronic data was made available online. The deductor, the deductee (person from whose payment TDS was deducted by the deductor) are identified by TAN (Tax Deduction Account Number), PAN (Permanent Account Number). The date and amount of payment as also its nature is known. The date and amount of tax deducted as well as its credit to the central government is also known. Thus it became very easy to establish the delay/default in amount of TDS deposited by the deductor. Thus the technology eliminated the defects in record keeping and the ‘facts’ could no longer be disputed by the deductor in courts. The transparency of the system ensures that all the datais available to the deductor. Any mistake found can also be rectified easily. This has definitely helped the courts to expedite the disposal of TDS prosecution cases.
The TDS default is a technical offence. Unlike in a case of concealment of income, mens rea (guilty mind or criminal intent) is not required to establish the TDS offence. It can be compounded. In fact a large number of deductors, realizing that they may go to jail, have opted for compounding of their offences. This has also been possible largely due to technology – the electronic data maintenance. The number of TDS offences compounded are many times the number of TDS convictions ordered by courts. As these are administrative orders confined to departmental files, these do not find place in media. Nevertheless these are also convictions as the defaulters have admitted to having committed the offence. This is mainly due to technology. The fact that there is no limitation of time in initiating prosecution has also forced many TDS defaulters to come forward for compounding as they fear that due to easy accessibility to the digital records, the department may initiate prosecution at any time. A recent survey also confirmed that most of the taxpayers prefer compounding of TDS offences to litigation.
It may be argued that the large number of convictions are a result of filing of more prosecution cases. It is correct that the number of prosecution complaints filed by the department have seen a steep rise in last 7-8 years. But technology has actually helped the department in filing more prosecution complaints. Earlier when an officer had to find a case fit for launching prosecution, he was required to see a number of files manually before zeroing in on a single case for processing. This obviously took a lot of time and hence number of prosecution complaints filed were less in number. Now with digital data being easily accessible, hundreds of cases can be filtered just at one click of the mouse! This is much easier in TDS default cases. Hence a large number of TDS prosecutions are being launched.
Technically the TDS offence is complete if there is a delay of even one day in depositing the tax deducted for any amount howsoever small. But this may lead to a huge and unmanageable numbers of court complaints! Therefore, the department has issued administrative guidelines for initiating prosecution in TDS default cases keeping in mind the amount of default as well as period of delay in depositing the tax to the credit of central government.
With the help of technology the defaults of TDS offenders are established easily, saving lot of time for the courts. However, as per principles of natural justice, the TDS defaulter can still escape punishment if he can show to the court that he had ‘reasonable cause’ for such failure (to deposit the TDS amount with the central government within time). However, due to the fact that most financial transactions are digitally available and hence are verifiable, there is hardly any scope for the so called benefit of doubt. Thus the courts have been averse to accept any excuse as reasonable cause. This has led to higher rate of TDS convictions in recent times. An analysis of these convictions show that most of such cases relate to financial year 2008-09 or thereafter!