Employer not liable to deduct TDS @ 20% for non furnishing of PAN by Employees

G.V.N. Hari for the Appellant. I. Sarish Kumar for the Respondent.

ORDER

G. Manjunatha, Accountant Member – These appeals filed by the assessee are directed against the order of Commissioner of Income-tax (Appeals)-2, Visakhapatnam dated 28-1-2015 and pertains to the Asst. Years 2011-12, 2012-13 and 2013-14. Since, the issues involved in these appeals are common, they are heard together and disposed off by way of common order for the sake of convenience.

2. The brief facts of the case are that the assessee is a public sector undertaking which is engaged in the business of manufacture and sale of Iron and Steel products, has filed its eTDS returns in form No. 24Q. The CPC-TDS, Ghaziabad has processed the eTDS return for the 4th quarter of FY 2010-11 and intimation under sec. 200A was served on the assessee on 26-11-2013 with a demand of tax and interest of Rs. 2,53,27,830/-. On receipt of intimation under sec. 200A, the assessee has downloaded justification report from the TRACES and found that the demand was raised on account of levy of normal rate of tax for furnishing invalid PAN, non furnishing of PAN, wrong classification of category of employee’s in respect of female and senior citizens and also for rounding off tax and interest to nearest ten rupees.

3. Being aggrieved by the intimation under sec. 200A, the assessee preferred an appeal before CIT(A). Before CIT(A), the assessee categorised the defaults into 7 categories and made his submission with regard to each of the seven categories. The assessee submitted that basically the short deduction was computed for the following defaults.

(i)Invalid PAN then and not yet corrected.

(ii) Invalid PAN then but valid PAN obtained later.

(iii) Invalid PAN then but valid PAN was available then.

(iv) PAN not available then and now too.

(v) PAN not available then but PAN obtained later.

(vi) Rounding off of TDS to nearest ten rupees.

(vii) Error in employee categorisation into female and senior citizen.

The assessee has explained the reasons for each of the seven categories of defaults. The assessee further submitted that it is a public sector undertaking having large work force of more than 17000 employees. The assessee has taken all out efforts to collect PAN numbers from each employee. However, there were certain discrepancies in the PAN quoted in TDS returns which resulted in mismatch of PAN numbers while processing the TDS returns. The assessee has filed rectification request and corrected most of the defaults by obtaining correct PAN from the employees. Although, it has corrected most of the defaults, the defaults mentioned in category (i) and (iv) was not rectified, because even now few employees have not furnished correct PAN. The assessee further submitted that for such discrepancies, the tax was calculated at 20% without even allowing basic exemption limit, which has an adverse impact in the case of employees, whose income is subject to tax at progressive rate of taxation. The assessee further submitted that demand can be made against the assessee, only when there was a failure on the part of employees in the payment of tax. To this effect placed its reliance on the following two decisions.

(i) Jagran Prakashan Ltdv. DCIT [2012] 345 ITR 288 (All)

(ii) Allahabad Bank v. ITO(TDS), Algarh in ITA No. 448 to 454/Agra/2011.

The CIT(A), after considering the explanation of assessee, set aside the issue to the file of AO/TDS officer, in respect of defaults referred in clause (ii), (iii) and (v) and directed the AO/TDS officer to verify the revised TDS returns and wherever correct PAN and status of employee is quoted by the assessee, then credit should be given against the short deduction determined. In respect of cases falling under category (i) and (iv), upheld the action of AO/TDS officer. With these observations, the CIT(A) allowed the appeal for statistical purpose. Aggrieved by the CIT(A) order, the assessee is in appeal before us.

4. The learned authorised representative of the assessee submitted that the CIT(A) was erred in confirming the defaults referred in category (i) and (iv), i.e. Invalid PAN then and not yet corrected and PAN not available then and now too. The A.R. submitted that assessee is a public sector undertaking having large work force of more than 17000 employees. The assessee has taken all out efforts to collect PAN numbers from each employee. In spite of repeated reminders, few employees did not furnished PAN for various reasons. However, the assessee has filed rectification statements and corrected most of the defaults by obtaining correct PAN from the employees. Although, it has corrected most of the defaults, the defaults mentioned in category (i) and (iv) was not rectified, because even now few employees have not furnished correct PAN. The assessee further submitted that for such discrepancies, the tax was calculated at 20% without even allowing basic exemption limit, which has an adverse impact in the case of employees, whose income is subject to tax at progressive rate of taxation. The assessee further submitted that demand can be made against the assessee, only when there was a failure on the part of employees in the payment of tax. To this effect placed its reliance on the following two decisions. (i) Jagran Prakashan Ltd v. DCIT [2012] 345 ITR 288 (All)(ii) Allahabad Bank v. ITO(TDS), Algarh in ITA No. 448 to 454/Agra/2011. Therefore, requested to set aside the order of CIT(A).

5. On the other hand, the D.R. strongly supported the order of CIT(A). The ld. D.R. submitted that the CIT(A) has considered the assessee request and set aside the issue to the file of A.O., wherever, the assessee has obtained correct PAN and filed revised TDS return. In respect invalid PAN then and now and PAN not available then and now too, even now the assessee could not rectified the defaults. Therefore, the A.O./TDS officer was correct in computing the short deduction and his order should be upheld.

6. We have heard both the parties, perused the materials and gone through the orders of authorities below. The CPC-TDS has processed eTDS returns and issued intimation under sec. 200A of the Act. The AO/TDS officer has computed short deduction of tax and interest for defaults in furnishing invalid PAN, non furnishing of PAN and error in categorisation of employees. It was the contention of the assessee that it has filed revised return and corrected most of the defaults for which short deduction was determined by the CPC-TDS. The CIT(A) has allowed the claim of the assessee and set aside the issue to the file of the A.O. with a direction to allow credit for TDS wherever PAN is corrected in the revised returns. In respect of invalid PAN then and now too, the CIT(A) upheld the action of A.O./TDS officer in computing the short deduction.

7. The contention of the assessee was that both the authorities have failed to take note of the fact that the assessee has complied with the provisions of TDS by deducting appropriate TDS as per law. However, there were certain discrepancies in the PAN numbers and errors in keying the Data of the employees at the time of filing the eTDS returns. In the rectification statements, most of the defaults referred to in TRACES have been rectified with correct PAN numbers. But, in few cases, it was unable to rectify the defaults with correct PAN, as there was mismatch in PAN furnished by the employees. The assessee has taken all out efforts to collect PAN numbers from each employee. In spite of repeated reminders, few employees did not furnished PAN for various reasons. However, the correct amount of TDS recoverable from the payments have been deducted and paid to the Govt. Account. There is no short fall in recovery of TDS as per law. The short deduction was determined by applying higher rate of TDS without even deducting basic exemption limit allowable under the Act, which has an adverse impact in the case of employees, whose income is subject to tax at progressive rate of taxation.

8. Section 206AA of the Act, provides for deduction of tax at higher rates, in case the deductee fails to furnish the correct PAN to the person responsible for deducting tax at source. In the event, the deductee fails to furnish PAN, then the deductor shall deduct tax at the rates which is higher of

(i) at the rates specified in the relevant provisions of the Act, or

(ii) at the rate or rates in force, or

(iii) at the rate of twenty percent.

A careful study of the provisions of section 206AA made it clear that it is not automatic that a flat rate of 20% shall be deducted wherever PAN is not furnished. The deductor shall compute the tax in the manner specified under section 206AA of the Act, by applying the rate specified under the relevant provision of this act, or at the rate or rates in force and then, compared to flat rate of 20% to decide whichever is higher. In the instant case, the assessee deducted TDS on salary payments to employees under sec. 192 of the Act. Sec. 192 of the act provides for computation of tax under normal rates in force for the financial year in which payment is made, on the estimated income of the assessee. The assessee contended that it has deducted tax at source as per the applicable rates in force in the manner specified under sec. 192 after allowing basic exemption limit. We find force in the arguments of the assessee, for the reason that the payment covered under dispute is salary to employees. TDS on salary shall be deducted in the manner specified under sec. 192 of the Act, after allowing basic exemption limit and deductions towards investments in savings scheme etc. Unlike other provisions of TDS, TDS on salary cannot be deducted by applying flat rate of tax on gross payment. Therefore, sec. 206AA provides for higher of the three, i.e. at the rates specified in the relevant provisions of the Act, or at the rate or rates in force or at the rate of twenty percent. It is not necessarily that all payments are comes under 20% flat rate, in some cases the rate of tax may be at 10% and in some cases it may be at 30%. Unless, this was done, the A.O. cannot apply flat rate of 20% and compute the short deduction of tax. Thus, it is clear that the onus is on the revenue to demonstrate that the correct tax has not been recovered from the person who had the primary liability to pay tax. Without doing so, the A.O. cannot simply compute the short deduction by applying flat rate of 20% tax on gross payment.

9. In the present case on hand, the assessee being a public sector undertaking has deducted TDS at the rates prescribed under the Act and filed the necessary eTDS returns. The CPC -TDS, processed the return and computed the short deduction of tax by applying the 20% flat rate specified under sec. 206AA, merely based on the statements filed by the assessee, without being applying the higher of the three rates prescribed under sec. 206AA. It is settled position of law that a short deduction of tax at source, by itself does not result in a legally sustainable demand under sec. 201(1) and 201(1A). The taxes cannot be recovered once again from the assessee in a situation where the recipient of income has already paid the due taxes on such income. Unless, the A.O. verified himself that the recipient of income has not paid the tax on such income and also demonstrate that the rate applied by him was in accordance with the provisions of sec. 206AA, the assessee cannot be hold as assessee in default under sec. 201(1) and 201(1A). Therefore, we are of the opinion that the A.O./TDS officer was not correct in computing the short deduction of tax and interest, by applying flat rate of 20% tax. The CIT(A), without appreciating the facts, simply upheld the action of A.O./TDS officer. Therefore, we deem it appropriate to remit the issue back to the file of the A.O./TDS officer and direct the A.O. to examine the issue in the light of the discussions above, after affording an opportunity of hearing to the assessee. Needless to say, the assessee is directed to furnish all the details before the A.O./TDS officer, for early disposal of the case.

10. In the result, the appeals filed by the assessee in ITA. Nos. 115/V/2015 to 117/V/2015 are allowed for statistical purpose.