February 20, 2014 CONSEQUENCES ON FAILURE TO COMPLY WITH TDS / TCS PROVISIONS UNDER THE INCOME TAX ACT, 1961 Balkrishna V. Jhaveri Advocate, High Court. CONSEQUENCES • • • • • Consequences on failure to comply with TDS/TCS provisions under the Income-tax Act, 1961 are five fold namely: (i) Charging of interest for delayed deduction and/or payment of TDS and delayed collection and /or payment of TCS. (ii) Levy of penalty for committing default in complying with the provisions of TDS and TCS which is independent and in addition to charging of interest. (iii)Liable for being prosecuted for committing default in complying with the provisions of TDS and TCS which is independent and in addition to charging of interest and levy of penalty. (iv) Liable to pay late filing fees for delayed furnishing of statements u/s.200(3) or u/s.206C(3). (v) Disallowance of expenditure u/s. 40(a)(i) & (ia) while computing income under the head ‘Profits & gains of business profession’ if the tax is not deducted and/or paid under Chapter XVII-B of the Act. CHARGING OF INTEREST U/S. 201(1A) FOR TDS AND U/S. 206C(7) FOR TCS Section 201(1A) provides that if any person including the principal officer of a company does not deduct the whole or any part of the tax or after deducting fails to pay the tax as required under the Act, it shall be liable to pay simple interest,– (i) 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 (ii) at 1.50% 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. Section 206C(7) provides that if a person responsible for collecting tax does not collect or after collecting the tax fails to pay it, he shall be liable to pay simple interest @ 1% per month or part thereof on the amount of such tax from the date on which such tax was collectible to the date on which the tax was actually paid. The Finance Act 2012 w.e.f. 1st July 2012 has inserted proviso to section 201(1A) and to section 206C(7) of the Act to clarify that if the recipient resident or payer has furnished his return of income u/s.139 and 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 circumstances interest for non deduction or collection of tax at source shall be payable from the date on which the tax was deductible or collectible to the date of furnishing of return of income by such resident recipient or payer. The proviso to section 206C(7) is not applicable in respect of collection of tax on sale of bullion or jewellery exceeding a particular amount. The payment of interest is mandatory. [Pentagon Engg. Pvt. Ltd. v. CIT [212 ITR 92 (Bom)] There is no question of the waiver of payment of interest on the basis that the default was not intentional or on any other basis such as payment of tax subsequently. CIT v. Rathi Gum Industries [213 ITR 98, Raj.] Interest paid u/s. 201(1A) is not deductible as business expenditure. CIT vs. Chennai Properties and Investment Ltd. (239 ITR 435, Mad.) Ferro Alloys Corporation Ltd. vs. CIT (196 ITR 406, Bom.) SECTIONS UNDER WHICH PENALTY IS LEVIABLE FOR FAILURE TO COMPLY WITH TDS PROVISIONS Section Nature of default Amount of penalty 271C Failure to deduct the whole or any part of tax as The amount of tax such required under sections 192 to 195 or failure to person has failed to deduct pay the whole or any part of tax as required or pay. under section 115-O (2) or second proviso to Sec.194B. 271CA Failure to collect tax at source. 271H Failure to submit or to furnish incorrect Not less than Rs.10,000/information in quarterly TDS / TCS returns and may extend to (applicable from 1st July 2012) . Rs.1,00,000/- . 100% of tax which a person has failed to collect. 272A(2)(c) Fails to furnish within the prescribed time a Rs.100 for everyday during return/statement under section 206 (TDS) or which default continues but section 206C (TCS). cannot exceed the amount of tax deductible or collectible. Section Nature of default Amount of penalty 272(A)(2) (g) Fails to furnish a certificate as required by sec. 203 or sec. 206C Rs.100 for everyday during which default continues but cannot exceed the amount of tax deductible or collectible. 272(A)(2) (j) Fails to deliver or cause to be delivered within Rs.100 for everyday the prescribed time a copy of a declaration during which default referred to in Sec. 206C(1A) continues but cannot exceed the amount of tax collectible. 272(A)(2)(l) Fails to deliver or cause to be delivered the Rs.100 for everyday statement within the time specified in Sec. during which default 206A(1). continues but cannot exceed the amount of tax deductible. SECTION 271C If any person fails to – (a) deduct the whole or any part of the tax as required by or under the provisions of Chapter XVII-B; or (b) pay the whole or any part of the tax as required by or under – (i) sub-section (2) of section 115-O (tax on dividend distribution by domestic companies); or (ii) the second proviso to section 194B (winnings from lottery or crossword puzzle in cash or kind or both), then, such person shall be liable to pay, by way of penalty, a sum equal to the amount of tax which such person failed to deduct or pay as aforesaid. PENALTY FOR FAILURE TO COLLECT TAX AT SOURCE U/S.271CA Section 271CA provides that if any person fails to collect the whole or any part of the tax as required u/s.206C i.e. to collect tax on sale of alcoholic liquor for human consumption, tendu leaves, timber obtained under a forest lease or timber obtained by any mode other than under a forest lease, etc. such person shall be liable to pay by way of penalty a sum equal to the amount of tax which such person failed to collect. Section 206C(1) provides that every person, being a seller shall collect from the buyer of any goods of the nature specified herein below, a sum equal to the percentage specified against each entry at the time of debiting the account of the buyer or receiving the payment in cash or cheque or draft or by any other mode, whichever is earlier. Sr. No. Nature of Goods Percentage of TCS Alcoholic liquor for human consumption (other than Indian made foreign liquor) 1 2. Indian made foreign liquor 1 3. Tendu leaves 5 4. Timber obtained under a forest lease 2.50 5. Timber obtained by any mode other than under a forest lease 2.50 6. Any other forest produce not being timber or tendu leaves 2.50 7. Scrap 1. 1 Sec. 206C (1C) provides that every person, who grants a lease or a licence or enter into a contract or otherwise transfers any right or interest either in whole or in part in any parking lot or a toll plaza or mine or quarry, to another person, other than a public sector company for the purpose of business shall, at the time of debiting the amount payable by the licensee or lessee or at the time of receipt of such amount from the licensee or lessee in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, collect from the licensee or lessee of any such licence, contract or lease of the nature specified in column 2 of the table below, a sum equal to the percentage, specified in the corresponding entry in column 3 of the said table, of such amount as Income Tax: Sr. No. Nature of Contract or Licence or Lease, etc. Percentage of TCS 1. Parking lot 2 2. Toll plaza 2 3. Mining or quarrying 2 Section 206C(1D) every person, being seller, who receives any amount in cash as consideration for a sale of bullion or jewellery, shall, at the time of receipt of such amount in cash, collect from the buyer, a sum equal to 1% of sales consideration as Income-tax, if such consideration, – (i) for bullion, exceeds two lakhs rupees; or (ii) for jewellery, exceeds five lakhs rupees. PENALTY FOR FAILURE TO SUBMIT OR FURNISHING INCORRECT STATEMENT IN QUARTERLY TDS/TCS RETURNS U/S. 271H If a person fails to deliver quarterly statements of TDS/TCS within the time prescribed u/s.200(3) or proviso to Sec. 206C(3) or furnishes incorrect information in the said quarterly returns, he will be liable to pay penalty which shall not be less than Rs.10,000/- but which may extend to Rs.1,00,000/-. Sub-section (3) of Sec.271H provides that if the person proves that after paying tax deducted or collected along with the fee and interest to the credit of Central Government, he had delivered the quarterly statements before the expiry of a period of one year from the time prescribed for delivering such statement, he will not be liable for penalty u/s. 271H(1). The provisions of Sec.271H are applicable in respect of the quarterly returns filed on or after 1st day of July 2012. PENALTY FOR FAILURE TO FILE QUARTERLY TDS / TCS RETURN, STATEMENTS, CERTIFICATE AND DECLARATION U/S. 272A(2) 272A (2). If any person fails – • (c) to furnish in due time any returns/statements u/s.206 or section 206C, • (g) to furnish a certificate as required by section 203 or 206C, • (j) to deliver or cause to be delivered in due time a copy of a declaration referred to in section 206C(1A), • (k) to deliver or cause to be delivered a copy of the statement within the time prescribed in sec. 200(3) or proviso to sec. 206C(3), • (l) to deliver or cause to be delivered the statements within the time specified in section 206A(1). • he shall pay by way of penalty, a sum of Rs.100 for everyday during which the failure continues. • The amount of penalty for the aforesaid failure shall not exceed the amount of tax deductible or collectible, as the case may be. REPLACEMENT OF SEC. 272A (2)(k) BY SEC. 271H W.E.F. 1ST JULY 2012 Sec. 272A(2)(k) prior to its omission provided that if any person fails to deliver after 1st April, 2005, a copy of the quarterly TDS statements u/s.200(3) or quarterly statements for TCS under proviso to sec. 206C(3) of the Act, is liable to pay penalty of Rs.100/for everyday during which the failure continues. However the penalty shall not exceed the amount of tax deductible or collectible, as the case may be. Sec.271H provides for levy of penalty for default committed u/s.272A(2)(k) and also provides for levy of penalty for furnishing incorrect information in the TDS / TCS returns filed u/s.200(3) or under proviso to sec. 206C(3) of the Act. In other words, w.e.f. 1st July 2012 the assessee will be liable to pay penalty for furnishing incorrect information in the TDS / TCS statement filed by it. Thus the modus operandi of filing TDS/TCS returns with incomplete information and subsequently revising the same many times will attract penalty. Sec.271H(3) provides that no penalty shall be levied for delay in furnishing of TDS/TCS quarterly statement if such statement is submitted within one year of the due date after payment of tax deducted/collected along with applicable interest and fee. In other words, the aforesaid concession cannot be availed of for furnishing incorrect information in the TDS/TCS statements. PENALTY NOT TO BE IMPOSED IN CERTAIN CASES Section 273B provides that notwithstanding anything contained in the provisions of section 271C, section 271CA, section 271H and section 272A, no penalty shall be imposable on the person for any failure referred to in the said provisions if he proves that there was a reasonable cause for the said failure. PENALTY LEVIABLE i. Asahi Glass Co. Ltd. V/s. ACIT [(2003) 129 Taxman 76 (Delhi) (Mag.)] Penalties u/s.271C can be attracted in a case where there is material on record to show a complete connivance and nexus between Indian company and foreign company whereby there emerges a deliberate attempt to mislead the tax authorities in India by making nominal payments in India and paying substantial amount abroad (may be to the families of the expatriate employees). ii. Marg Constructions Ltd. V/s. ACIT [(2003) 81 TTJ 440 (Chennai)] Plea that crediting of interest is reversed in later year cannot be accepted as an explanation for not deducting tax at time of credit of interest. iii. Wipro Finance Ltd. V/s. ITO [(2003) 81 TTJ 887, (Bangalore)] There is no merit in plea that where the Department has not treated the assessee-indefault u/s.201(1) for good and sufficient reasons, the same test should also hold good as being a reasonable cause vis-a-vis levy of penalty u/s.271C. iv. Hindustan Coca Cola Beverages Pvt. Ltd. V/s. ACIT [(2004) 90 ITD 72 (Del.)] No where it has been stated or clarified either in the Act or by the CBDT that once short deducted tax has been paid by the deductor-assessee, no penalty u/s. 271C can be levied. v. Great Value Foods V/s. ACIT [(2009) 178 Taxman 114 (Asr.) (Mag). Penalty is leviable for default in payment of tax and not for default in payment of interest. PENALTY NOT LEVIABLE – REASONABLE CAUSE 1. ACIT v. Cadbury India Ltd.  11 taxmann.com 66 (Delhi). No penalty can be levied u/s.271C where assessee deducts TDS u/s.194C instead of Section 194I and 194J under misconceived professional advise 2. ACIT v. SMS India Ltd. [(2006) 7 SOT 424 Mumbai.] Bona fide belief leading to short deduction of tax coupled with voluntary compliance in terms of depositing the same immediately on coming to know of the same, would constitute a reasonable cause. 3. Indo Nissin Foods Ltd. v. ACIT [(2004) 3 SOT 495 (Bang.) where taxes were paid voluntarily before any deduction by the Department, that would constitute reasonable cause. Not passing order under section 201(1) before initiation of proceedings under section 271C, would make imposition of penalty invalid. 4. CIT v. Mitsui & Co. Ltd..  140 Taxman 430 (Delhi) The assessee has escaped from penalty for the failure to deduct tax on payments to non resident employees. Before the Tribunal the assessee pleads that he did not deduct tax on the basis of an opinion received from its international legal cell. The Tribunal held that the opinion with the assessee constitute a reasonable cause for such failure hence, it deletes the penalty. The Delhi High Court affirmed the order of the Tribunal. 5. CIT v. Dex Travel (P). Ltd.  172 Taxman 142, Delhi Whether an assessee is required to deduct tax on the discount/special commission paid to agents is debatable and thus no penalty is exigible on such failure. In this case, the assessee carried with him opinion from a former Chairman of CBDT, a senior Advocate and a Chartered Accountant. 6. ITO v. ABN Amro Bank [(2008) 23 SOT 52 Delhi] The Tribunal held that penalty u/s.271C cannot be levied in doubtful cases where the assessee had acted in a bona fide manner on the basis of opinion of its counsel 7. Savani Financials Ltd. v. ITO [(2005) 1 SOT 112 (Mumbai)] Lintas India Ltd. v. ACIT [(2006) 5 SOT 311 (Mumbai)] If an employer has made a fair and honest estimate of the taxable salary and deducted and paid tax thereon, he cannot be treated as an assessee in default u/s.201(1) even if the Assessing Officer ultimately assessed the salary at a higher figure. 8. Ind Telesoft (P.) Ltd., In re  140 Taxman 463 (AAR – New Delhi) Tax is not deductable at source u/s.195 in respect of transactions relating to commission and retainer fees payable to non resident having no office or business operation in India, on export earnings. 9. CIT v. HCL Info Systems Ltd. [(2005) 146 Taxman 227, Delhi] The exemption provided by the employer in regard to conveyance allowance and LTA amounts on the basis of employees’ declarations’ is not to be adversely looked upon as far as short deduction of tax is concerned. It was held that employer only makes a bona fide estimation of income and it is for the Assessing Officer to demand evidence of actual expenses incurred by each employee. 10. Wipro GE Medical Systems Ltd. v. ITO [(2005) 3 SOT 627 Bangalore] Where tax has already been paid by the payee, no penalty can be levied on the assessee-payer for the failure to deduct tax at source. 11. DCIT v. Satellite Television Asia Region Ltd. [(2012) 56 SOT 22, Mumbai] Due to prevalent judicial pronouncement tax is not deducted would not attract penalty. 12. Muthoot Bankers v. JCIT [(2012) 18 taxmann.com 203 Kochin Since recipient paid tax within time and non deduction of tax was bona fide omission and was not deliberate, penalty u/s.271C not leviable. OFFENCES AND PROSECUTIONS Section Nature of offence Rigorous Imprisonment Minimum period (1) (2) (3) Maximum period (4) 276B Failure to pay tax to the 3 Months (and 7 years (and fine). Governments Treasury or failure to fine) pay to the Government tax payable by him as required by Sec.115-O(2) or second proviso to Sec.194B. 276BB Failure to pay to the credit of 3 Months (and 7 years (and fine). Central Government tax collected fine) under section 206C. 278A Punishment for second and 6 Months for 7 years for every subsequent offences under section every offence offence. 276B, 276C(1), 276CC, 277 and 278. Section 234E – Fee for default in furnishing statements • The Finance Act, 2012 has inserted section 234E w.e.f 1st July, 2012, which provides that without prejudice to the provisions of the Act, where a person fails to deliver a statement of TDS within the time prescribed in section 200(3) or a statement of TCS within the time prescribed in proviso to section 206C(3), he shall be liable to pay by way of fee, a sum of Rs.200/- for every day during which the failure continues. • Constitutional validity of the provisions of section 234E of the Act are challenged before the High Court of Kerala in the case of Narath Mapila LP School wherein the Court has granted ad-interim stay for a period of two months which has expired on 18th February, 2014. [[ • I thank Indian Merchants’ Chamber and all the persons who devoted time and energy in organising this seminar and all of you for making me revise my knowledge on the subject and for patient hearing.