Assessments relating to TDS

by Deepak Jain, LL.M.

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Introduction: The TDS Returns or TDS Statements as they are called, are required to be filed by the deductors u/s 200(3). Such deductors are also required to pay TDS u/s 200(1) to the credit of the Central Government within the prescribed due dates. The Returns are to be filled up electronically by either using the softwares provided by the TIN-NSDL website or by purchasing TDS softwares. Such returns require filling up of requisite details viz. Challan details, PAN of deductee, Date and Amount credited in the name of the deductees. The said TDS statements are validated by FVU files and standards provided by the TIN-NSDL site. The Act u/s 200A provides for processing the statements filed through Centralised Processing Centres. Prior to the amendment of section 201 by the Finance (No.2) Act, 2009 w.e.f. 1.4.2010, there was no time limit prescribed for passing an order holding the assessee to be in default for failure to deduct tax at source, which have now been provided. The said provisions relating to processing and assessments of TDS statements are discussed in this Article:

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System of processing TDS and TCS statements filed by the assessee: W.e.f. 1.4.2010 , as provided in section 200A, processing of statements of TDS/ TCS shall be done to make the following adjustments : (a) Arithmetical errors in the statements, or (b) incorrect claims apparent from information in the statement of taxes deducted/collected at source; Based on the above, an Intimation will be issued to the deductor granting the deductor a refund or advising him of the amount of tax and interest payable. The time limit for issue of intimation will be one year from the end of the financial year in which the statement of TDS/ TCS is filed. The scheme for centralised processing of Statements of taxes deducted/ collected at source has been introduced.
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As per Explanation to section 200A an incorrect claim apparent from any information in the statement shall mean a claim, on the basis of an entry, in the statement (i ) of an item, which is inconsistent with another entry of the same or some other item in such statement; (ii) in respect of rate of deduction of tax at source, where such rate is not in accordance with the provisions of this Act. 3.0 Time limit prescribed u/s 201(3) for passing order for treating an assessee to be in default for failure to deduct TDS: W.e.f. 1.4.2010 , as provided in section 201(3), the following time limit have been prescribed for passing an order where the deductee is a resident taxpayer: (a) Within 2 years from the end of the financial year in which the statement of taxes withheld is filed u/s 200(3) by the deductor (b) Within 4 years from the end of the financial year in which payment is made or credit is given, where no such statement is filed. The order for the above TDS proceeding for the financial year beginning 1.4.2007 and earlier years can be completed by 31.3.2011. The above time limit shall be subject to the time limit prescribed for the order giving effect to the orders of the various appellate authorities, to the extent applicable. Prior to the above amendment, there was no time limit prescribed for passing an order holding the assessee to be in default for failure to deduct tax at source. 4.0 Unbridled use of section 201 as a tool to bolster revenues: When, at the asking of the Finance Minister, the Income-tax Department is stirred up from time to time to bolster sagging revenues, the provisions of section 201 of the Income-tax Act, 1961 come in nulli secundus in raking up the target quota of revenue - at least, that is the way the income-tax mandarins are used to think. The modus operandi is simple : get hold of a corporate house, demand to see some old salary records, find out short deduction or improper deduction of tax at source under section 192 of the Act, apply section 201 and brand the corporate house an assessee in default, extract the shortfall along with interest and penalty and the revenue target is met.
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This being the trendy and one of the most popular ways to raise the revenues adopted by the Income-tax Department, it may be worthwhile to delve deep and attempt to find whether section 201 really gives such unbridled power to the department to use the section in the manner it does. In other words, one may check out if the section when subjected to the canon of "strict interpretation", will be able to hold its grounds? 5.0 Scope of provisions of section 201 - Questions required to be considered : Let us start by a plain reading of what the section has to say: " Consequences of failure to deduct or pay. (1) If any such person and in the cases referred to in section 194, the principal officer and the company of which he is the principal officer does not deduct or after deducting fails to pay the tax as required by or under this Act, he or it shall, without prejudice to any other consequences which he or it may incur, be deemed to be an assessee in default in respect of the tax: Provided that no penalty shall be charged under section 221 from such person, principal officer or company unless the Assessing Officer is satisfied that such person or principal officer or company, as the case may be, has without good and sufficient reasons failed to deduct and pay the tax. (1A) Without prejudice to the provisions of sub-section (1), if any such person, principal officer or company as referred to in that sub-section does not deduct 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 at eighteen per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid. (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 subsection (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)."

Section 201, thus, provides for a three-tier punishment structure for a payer who fails to deduct tax at source or after deducting fails to pay the same to the Central Government or to whoever the CBDT directs. 1) Firstly, the payer is deemed to be an assessee in default. The section itself does not elaborate on what befalls an assessee if he is deemed to be in default. One has to refer to sections 221 and 222 to find that out. Section 221 states, inter alia, that an assessee who is deemed to be in default is liable to a penalty. 2) Secondly, such person failing to deduct tax at source while being liable to deduct, or failing to deposit the tax so deducted with the Government, is liable to pay interest at the rate of 18 per cent per annum under section 201(1A) on the amount of such tax from the date on which such tax was deductible to the date when such tax is actually paid. 3) Thirdly, if such person deducts tax at source but fails to make payment of the deducted amount, then the amount of tax deducted but not paid and interest leviable under section 201(1A) form a charge on all the assets of the defaulting payer. 6.0 Short payment not covered within section 201: Sub-section (1) starts with these very clear wording : If such person. . . does not deduct or after deducting fails to pay . . . . It follows therefrom that an assessee can be deemed to be in default only under two circumstances - first, he fails to deduct tax at source, that is, anything at all, and second, having deducted tax at source, as he is required to deduct, fails to pay the same to the Government. The point to be noted is, there is no situation in between. The question of short deduction is left out altogether. Therefore, if an employer, instead of deducting tax of Rs. 100 being the correct amount under the Act, on the basis of estimate provided by the employee and based upon his (employers) own interpretation of the law, deducts only Rs. 90 from the salary of his employee, is he an assessee-in-default under section 201?

It will important to quote TNC Rangarajan, J. in the case of P.V. Rajgopal v. Union of India [1998] 99 Taxman 475/233 ITR 678 (AP) and let the same be, therefore, repeated verbatim: "This section has two limbs, one is where the employer does not deduct tax and the second where after deducting tax, the employer fails to remit it to the Government. There is nothing in this section to treat the employer as the defaulter where there is a shortfall in the deduction. The department assumes that where the deduction is not as required by or under the Act, there is default. But the fact is that this expression as required by or under this Act grammatically refers only to the duty to pay the tax that is deducted and cannot refer to the duty to deduct the tax. Since this is a penal section, it has to be strictly construed and it cannot be assumed that there is a duty to deduct the tax strictly in accordance with the computation under the Act and if there is any shortfall due to any difference of opinion as to the taxability of any item, the employer can be declared to be an assessee-in-default." (p. 694) Section 192(1) reads as follows: " Salary .Any person responsible for paying any income chargeable under the head Salaries shall, at the time of payment, deduct income-tax on the amount payable at the average rate of income-tax computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year. . . ." In this case, it is clearly an estimation error which had led to deduction of a tax amount which was lower than the appropriate. The emphasis here is on the words estimated income occurring in section 192(1). In CIT v. Nestle India Ltd. [2000] 109 Taxman 403 (Delhi), the facts were as follows - on scrutiny of the annual return filed by Nestle u/s 206, the department noticed that the company had not included conveyance allowance/reimbursement granted to its employees in their incomes chargeable under the head "Salaries" and to that extent had
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made short deduction of tax at source. The A.O. observed that the company was paying salary to its employees under the garb of conveyance allowance and held the company to be in default for not deducting tax, therefrom. Accordingly, he calculated short deduction for several financial years and directed the company to pay the same along with interest u/s 201(1A). The Tribunal deleted the short deduction and interest, holding that the assessee being under a bona fide belief that conveyance allowance was not taxable, it had good and sufficient reasons for not deducting tax thereon. On a petition of the department u/s 256(2), the Delhi High Court upheld the order of the Tribunal and held that deduction of tax at source by an employer is always a tentative deduction of income-tax subject to regular assessment in the hands of payee/recipient. The only inference that can clearly be drawn from the decisions above is that shortfall in deduction of tax at source from payments is not covered by section 201. The same logic can be extended to the case of deduction of tax at source from salary payments based on estimated income of the payee and leads to the same conclusion that an employer is not an assessee-in-default if the tax deducted by it on estimated salary income falls short of the amount of tax on income arrived at by liberally construing all the taxing provisions of the Act. 7.0 Nature of amount an assessee-in-default may be called upon to pay pursuant to order u/s 201: To the extent the section requires such an assessee to pay interest or penalty, there is, of course, not much scope for confusion but what about the principal amount - the tax, the alleged non-deduction of which is the cause of action? If the payer assessee is now called upon to pay the sum, how does he show it in his books of account and what is the tax treatment of such a payment in the payers own assessment? Consider a real-life situation where there is a survey u/s 133A. The employer-company is asked to produce vouchers evidencing payment of a certain allowance to the employees. A random check of the vouchers shows that the supporting documents provided by some of the employees for claiming tax exemption from the allowance do not provide specific information. The Income-tax Department concludes that the employees concerned were
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unduly given the advantage of exemption. Short deduction of tax u/s 192 is alleged and the employer is called upon to make good the shortfall in deduction along with interest and penalty. Treatment by payer in his book of accounts: There are some following issues: (a) Perquisites of the employees concerned - One can take a view that in making good the shortfall in deduction of tax at source, the employer in effect discharges the income-tax liabilities of its employees. The word perquisite is defined in section 17(2) to include, inter alia , any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee. The shortfall in TDS made good by the employer is, therefore, a perquisite in the hands of the employee. So should the employer treat such payment as Salary & wages? A note of caution may be in order at this juncture if such payment is considered as salary, the department may take the view that such salary also needs to be taxed and, therefore, may call upon the employer to pay tax on such salary as well. Thus, the employer stands to pay twice under this scheme. (b) Tax u/s 40(a)(ii) - Section 40 denies deduction of certain payments while computing Profits and gains of business or profession. These include, in subclause (ii) of clause (a), any sum paid on account of any rate or tax levied on the profits or gains of any business or profession assessed at a proportion of, or otherwise on the basis of, any such profits or gains. The TDS shortfall that the employer makes good is definitely not linked to the profit of his business. Therefore, it cannot be denied exemption under section 40(a)(ii). (c ) General charge - The only option left is to treat such payment as General Charge and claim deduction therefor u/s 37 in the payers own assessment.

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Does short deduction of tax at source make a corporate assessee guilty of violating section 200 of the Companies Act? Section 200 prohibits a company from making any tax-free payment. Only in few exceptional cases, as u/s 10( 5B) of the Act, can a company discharge the income-tax liability of another, that section having an overriding power over section 200. Therefore, if a corporate assessee is indicted u/s 201 for not having deducted the proper amounts of tax from the salaries of its employees, does it mean that the corporate assessee had violated section 200 as well? Section 200 states "200. Prohibition of tax-free payments. (1) No company shall pay to any officer or employee thereof, whether in his capacity as such or otherwise, remuneration free of any tax, or otherwise calculated by reference to, or varying with, any tax payable by him, or the rate or the standard rate of any such tax, or the amount thereof. Explanation .In this sub-section, the expression tax comprises any kind of income-tax including super-tax." No specific penalty is provided for contravention of this section. However, section 629A of the Companies Act prescribes penalty of Rs. 500 for each case of contravention under any section where specific penalties are not provided for. Accordingly, each case of contravention under this section can lead to penalty of Rs. 500. Moreover, in the draft Companies Bill, it is proposed to increase every penalty ten fold. If shortfall in deduction u/s 201 of the Income-tax Act for every employee is considered as a contravention of section 200 of the Companies Act as well, total penalties at the rate of Rs. 500 will be huge burden on the assessees.

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Double recovery of tax short deducted at source: Generally there are situations where the Income-tax Department recovers taxes not deducted at source from an assessee-indefault and parallely, the payee from whose payment the non-deduction was alleged has his assessment completed and the balance tax found payable by him in assessment is also recovered by the department. Here, do we not have a case of the department unjustly enriching itself by extracting tax twice from the same income? While the statute law is
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silent on the point, from the point of view of the reasonable man it may apparently be concluded that where regular assessment of an employee has been completed and the amount of his tax liability has been fully paid by him, the A.O. has no jurisdiction u/s 201 to demand further tax from the employer for the tax allegedly short deducted from such employees salary. The Madhya Pradesh High Court in the following cases adopted this view : CIT v. Manager, Madhya Pradesh State Co-operative Development Bank Ltd. [1982] 137 ITR 230/11 Taxman 226; CIT v. Divisional Manager, New India Assurance Co. Ltd. [1983] 140 ITR 818; CIT v. Shri Synthetics Ltd. [1984] 16 Taxman 150/[1985] 151 ITR 634; Gwalior Rayon Silk Co. Ltd. v. CIT [1983] 140 ITR 832/ 14 Taxman 99 ; CIT v. Hindustan Steel Ltd. [1984] Taxation 73(3) - 153; CIT v. M.P. Agro Morarji Fertilisers Ltd. [1989] 176 ITR 282/ 41 Taxman 115 and CIT v. Life Insurance Corporation [1987] 166 ITR 191/[1986] 25 Taxman 6. As a natural corollary, it has also been held that where an amount has been held to be not includible in the total income of the employee as per the assessment made in the hands of the employee concerned, the employer cannot be deemed to be an assessee in default for not deducting tax at source from the impugned amount - CIT v. Kannan Devan Hill Produce Co. Ltd. [1986] 161 ITR 477 (Ker.) and Kanan Devan Hill Produce Co. Ltd. v. CIT [1986] 161 ITR 489 (Ker.). 10.0 Conclusion: As can be gathered from above, TDS related assessments is more procedure related. The grey areas are where the TDS has been deducted under a wrong section or head or with a lower rate of tax. As a remedy, if the mistakes are detected before assessments, the assessee has the option to file correction statements. The head or section under which TDS is to be deducted can also be an issue where two views are possible and are disputed. In such a case, apart from Interest on such additional tax computed will be payable by the assessee, there are also chances of disallowance of corresponding expenditure related to lower deduction of TDS. The tax consultants and practitioners should be careful in diligently filing TDS returns of their clients in time and see that the procedure is strictly followed as per law to avoid severe consequences and hardships.

As per the instances and examples highlighted in this article, it can be seen that section 201 can also be misused by the Department. Based upon the principle of strict interpretation and armed with court judgments, a discerning payer-assessee faced with the charge of short deducting TDS and thereby being branded an assessee-deemed-to-be-in-default, can challenge the departments capacity and legality to so charge. Law on this point has to be made clearer and more certain. Higher authorities like the CBDT have to step in with clarifications for the guidance of general assessees and instruction for their subordinate field authorities in matters of interpretation of law on the various other practical issues.

Mr. Deepak Jain is co-author of Ready Reckoner of Business expenditure and Tax Treatment of Cash Credits, Gifts and Unexplained Investments . He is also an assisting author of books including How to Handle Income Tax Problems and Income Tax Pleading & Practice. E mail: djainadv@vsnl.com

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