TDS not Deducted ? -Consequences

By | October 16, 2016
(Last Updated On: October 16, 2016)

TDS not Deducted

1.1 A person deemed as an assessee in default in case TDS not deducted

A payer is treated as Assessee in Default if TDS not deducted.

A ‘payer’, whether he is an employer, or a person responsible for paying any amount under the head ‘Salaries’ (like the principal officer of a company) who is liable to deduct tax at source in terms of section 192 of the Act, or the person making payments of the type covered under sections 193 to 196D of the Act, will be treated as an assessee in default for any of the following default

♦             Failure to deduct tax at source, either in full or in part.

♦             Failure to pay such tax, either in full or in part, without deducting it at source.

♦             Failure to pay such tax, either in full or in part, after deducting it at source.

The only situation where the payer will not be treated as an assessee in default is in cases where the payee (i.e., the employee in case of ‘salary’ or the person who receives or is credited with the amount in the other cases) has directly paid the tax due to the Government.The impact of treating a person as an assessee in default is that recovery proceedings under the Act will be initiated against such person for realizing the tax due. In addition, the person will also face the following consequences:

For failure to deduct tax at source as per the provisions

♦             Interest under section 201 (see para 1.3)

♦             Penalty under section 221 (see para 1.4)

♦             Penalty under section 271C (see para 1.5)

For failure to pay/deposit tax deducted within prescribed time

♦             Interest under section 201 (see para 1.3 )

♦             Penalty under section 221 (see para 1.4)

♦             Prosecution under section 276B (see para 1.6).

1.2 When is a person not deemed as assessee in default

With effect from 1-7-2012, the first proviso to section 201(1) provides 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 the Act 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—

(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.

As proof to substantiate that the aforesaid requirements are fulfilled, the person who has failed to deduct tax must furnish a certificate from a chartered accountant to the effect that the aforesaid requirements have been fulfilled. The certificate must be in Form No. 26A and shall be furnished to the Director General of Income-tax (Systems) or the person authorised by the Director General of Income-tax (Systems). It may be noted that this concession applies only if the payee (recipient) is a resident.

1.3  Interest under section 201

If the person responsible for deducting tax at source has :

either failed to deduct, the whole or part of, tax at source, or

after deducting tax at source, has failed to pay, the whole or part of, tax to credit of Central Government within prescribed time,

he shall be liable to pay simple interest at the following rates, on the amount of tax from the date on which such tax was deductible to the date on which such tax is actually paid to credit of Central Government. In computing such period, the period prescribed for making the payment to credit of Central Government is not to be excluded :

(a) In respect of interest chargeable or payable for the period prior to 1-4-2008

– 12 per cent per annum

(b) In respect of interest chargeable or payable for the period commencing on or after 1-4-2008 till 30-6-2010

– 1 per cent for every month or part of a month

(c) In respect of interest chargeable or payable for the period commencing on or after 1-7-2010

(i) From the date on which tax is deductible to the date on which such tax is actually deducted

One per cent for every month or part of a month

(ii) From the date on which tax is deducted to the date on which such tax is actually paid

One and one-half per cent for every month or part of a month

With effect from 1-6-2006, this interest must be paid on self-assessment basis by the person every quarter before furnishing the quarterly statements.

With effect from 1-7-2012, in the case of payers who are not deemed to be an assessee in default in the circumstances explained in para 1.2 above, and the payers have furnished the certificate from the chartered accountant as stated in that paragraph, the payers are liable to pay interest only from the date on which tax was deductible to the date of furnishing of return of income by the resident-payee.

In calculating interest payable the amount of tax in respect of which interest is to be calculated will be rounded off to the nearest multiple of Rs. 100 ignoring any fraction of Rs. 100.

1.4 Penalty under section 221

Where any person responsible to deduct tax at source has,

♦             either failed to deduct tax at source, or

♦             after deducting tax at source, has failed to deposit tax to the credit of the Central Government within time prescribed,

he shall be liable to penalty under section 221.

The amount of penalty under section 221 is such amount as the Assessing Officer, may direct, and, in the case of continuing default, such further amount or amounts as the Assessing Officer may, from time to time, direct. However, the total amount of penalty cannot exceed the amount of tax in arrears.

REASONABLE CAUSE – Penalty under section 221 is not leviable if the payer can show that non-deduction of tax at source or delayed deposit of tax to credit of Central Government is due to a reasonable cause.

1.5 Penalty under section 271C

If any person who is responsible to deduct tax at source, has failed to deduct either whole or any part of tax so deductible, he will be liable to penalty. The quantum of penalty will be a sum equal to amount of tax which he has failed to deduct. Penalty is to be levied only by Joint Commissioner. It may be noted that penalty is leviable only for failure to deduct tax at source and not for failure to deposit the tax so deducted.

Failure to pay the whole or any part of tax as required under proviso to section 194B  is also punishable under section 271C. The quantum of penalty will be a sum equal to amount of tax which he has failed to deduct. Penalty is to be levied only by Joint Commissioner.

REASONABLE CAUSE – If the person responsible to deduct tax at source can show a reasonable cause for non-deduction or short deduction of tax at source, no penalty will be levied.

1.6 Prosecution of employer under section 276B

Failure to deposit, either the whole or portion of the tax deducted at source to credit of Central Government, makes the payer liable to prosecution and punishment will be rigorous imprisonment for a term, which shall not be less than 3 months but which may extend to seven years and with fine. For second and subsequent offence the person shall be punishable with rigorous imprisonment for a term which shall not be less than six months but which may extend to seven years with fine.

Similarly failure to pay to the credit of Central Government tax payable under proviso to section 194B  is also punishable.

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