Case of default in deposit of TDS
In a hard hitting judgment of the Bombay High Court in Reliance Industries Limited vs. CIT in ITA No. 1021 of 2000 dated 20th July 2015 the Deputy Commissioner of Income tax is found to have issued a show cause notice for Assessment Year 198788 to the assessee calling upon it to show cause why penalty under Section 221 of the Act should not be imposed. The basis of the notice was that though tax at source had been deducted on payment of salaries, dividend, interest, etc. the same was not deposited with the revenue in the prescribed time. Consequently the assessee was liable for penalty under Section 221 of the Act. The assessee pointed out that the delay in depositing the tax was essentially on account of financial difficulties and also in view of the sheer volume, size and spread of its operations. This was as the requisite information from offices situated all over India had to be collected before depositing the amounts deducted as tax at source. In their defense the assessee submitted that no penalty can be imposed under Section 221 of the Act, when failure to deduct and deposit is for good and sufficient reasons. A penalty Rs.76.79 Lacs which was about 10% of the quantum of delayed deposit of tax deducted at source got imposed in this case. The Commissioner of Income tax (Appeals) following orders in preceding years held that no penalty is imposable on the pretext that for imposition of penalty, it is necessary that an assessee should be continuously in default i.e. even on the date the proceedings for imposition of penalty is commenced/initiated. The CIT(A) in his order held that though the Explanation to Section 221(1) of the Act does attempt to cover even such cases, yet on consideration of the entire scheme of the Act, the imposition of penalty can only be justified when an assessee is in default at the commencement of penalty proceedings. As in this case the assessee had deposited the tax along with interest before initiation of the penalty proceedings u/s 221 it claimed exemption from such impose.
Being a case of repeat breach of the law the tribunal allowed the revenue’s appeal and also further held that once an assessee becomes a defaulter, penalty is imposable by placing reliance upon the decision of the Patna High Court in CIT Vs. Sriram Agarwal (1976) 161ITR302. It however reduced by half penalty to 5% i.e. to Rs.38.38 lacs.
Several technical pleas defeated
In further appeal the assessee took the following technical pleas on lack of jurisdiction:-
- That to be in default or being deemed to be in default can only arise when an appealable order is passed under Section 201(1) of the Act prior to initiation of penalty proceedings u/s 221;
- That such an order under Section 201 of the Act has to be speaking order preceded by notice, determining the question of tax to which the assessee is a defaulter before proceedings under Section 221 of the Act can commence;
- That passing a consolidated order under Sections 201 and 221 of the Act as is in this case is bad in law;
- That Section 221 of the Act is invokable only when there were arrears of tax deducted at source to be paid after a notice of demand is raised. As in this case, the assessee has deposited tax deducted at source alongwith interest with the revenue much before any notice of demand is issued hence there being no “amount in arrears” reason to impose any penalty cannot arise;
- That the proviso to Section 201(1) of the Act which provides for invocation of Section 221 of the Act only where the assessee has failed to deduct and pay tax to the revenue without being qualified by the words “in accordance with the Act” as found in Section 201(1) and (1A) of the Act is with a purpose so that once tax is paid even beyond the prescribed time provided under the Act, no penalty under Section 221 of the Act is imposable;
- That the explanation below Section 221(1) of the Act which clarifies that a person will not cease to be liable to pay penalty merely because he has paid the tax before imposition of penalty will serve no purpose as vide proviso under Section 201(1) of the Act, the Assessing Officer has no authority to initiate proceedings under Section 221 of the Act where the amount of tax deducted has already been paid to the revenue. The assessee therefore went on to place emphasis on the words “failed to deduct and pay tax” of the proviso as contrasted with the words “fails to pay the tax as required by or under this Act” found in Section 201(1) as well as 201(1A) of the Act.
In the last but not the least knowing well that all other technical please might fail that the assessee took the plea that in any case, no penalty ought to have been levied upon the assessee in view of proviso to Section 221 of the Act which provides in case of default for good and sufficient reasons, no penalty can be imposed. There it claimed that delay in payment of the tax deducted at source into the revenue was due to its diverse locations, lack of computerization and financial stringency all of which constitute good and sufficient reasons for dropping of penalty.
Brushing aside all technical pleas the High Court went on to hold that the saving proviso applies only in case of a person who has failed to satisfy both the conditions therein i.e. altogether fails to deduct as well as also fails to pay the tax. In other words all other pleas taken could make sense when the assessee admittedly omits to deduct tax as well as omits to pay TDS. The following observations by the High Court bring to light the purpose and scope of the penalty under the Act:
“ 22. It was next contended that in view of the proviso to Section 201(1) of the Act, invocation of Section 221 of the Act is barred where the Assessing Officer is satisfied that failure to deduct and pay tax was without good and sufficient reasons. The words “failed to deduct and pay tax” of the proviso is contrasted with the words “fails to pay the tax as required by or under this Act” found in Section 201(1) as well as 201(1A) of the Act. In view of this difference in language, it is submitted that the proviso would have no application where an assessee has paid the tax even if the same is paid beyond the period provided under the Act. This is contested by the revenue on the ground that the proviso applies only in case of a person who has failed to satisfy both the condition therein i.e. fails to deduct and also fails to pay the tax. This interpretation is also supported by the words found in subsection (1) of Section 201 of the Act which provides “…. principal officer of the company does not deduct or after deducting fails to pay the tax as required by or under this Act”. In this case, the tax has been deducted but there is a failure in depositing the tax with the revenue. The Parliament treats a person who has deducted the tax and fails to pay it to revenue as a class different from a person who has not deducted the tax and also not deposited the tax with revenue. This is for the reason that in the first class of cases the assessee concerned after deducting the tax, keep the money so deducted which belongs to another person for its own use. In the second class of cases, the assessee concerned does not take any advantage as he pays the entire amount to the payee without deducting any tax and does not enrich itself at the cost of the government. Therefore, although penalty is also imposable in the second class of cases, yet in view of the proviso to Section 201(1) of the Act, it is open to such assessee to satisfy the Assessing Officer that as they have good and sufficient reasons no penalty is imposable. It is in the above view that in the first class of assessees the Parliament has provided for prosecution under Section 276B of the Act for failing the pay the tax deducted at source. Therefore the first class of assessee to which the assessee belongs would be liable for prosecution. Thus the proviso would only apply in respect of the second class of assessee i.e. such class of assessee who have not deducted the tax and consequently failed to pay the tax.
- Therefore in our view, the proviso under Section 201 would have no application to the facts of the present case. The legislature did not provide for the words “by or under this Act” in the proviso as in the absence of deducting tax, the occasion to deposit it within time as provided in the Rules would not apply. This is so as the time begins to run from the date of the deducting of tax as is evident also from Section 200 of the Act which provides that any person deducting any sum shall pay it within the prescribed time, the sum so deducted to the Central Government.”
High Court advisory to deductors
The High Court finally went on to hold that the obligation to deduct and
pay tax upon the assessee is unconditional under the Act. The High Court further left the following advisory for all deductors::
“ It is the responsibility of the assessee to deduct taxes and to pay to the revenue within the period provided under the Act. Financial stringency would not justify deducting tax from the amount paid to the payee and not paying it to the revenue. Otherwise it would amount to using somebody else’s money for the purposes of one’s business. In such circumstances, the question of financial stringency, to our mind, hardly gives rise to a good and sufficient reason for not depositing tax which was an amount otherwise payable to the payee or on behalf of the payee to the revenue. Moreover, the impugned order dated 16 March 2000 records the fact that the assessee has not produced any evidence to show that it was in financial difficulty. Similarly diverse locations and lack of computerization are hardly any reasons to justify the failure to pay under the Act. The assessee is entitled to do business in as many locations as it desires but that would not by itself justify not paying taxes which are due to the revenue. The obligation to pay taxes is absolute.”
Also under the current Indian Income tax law the obligation to deduct tax arises at the time of payment or credit, whichever is earlier. In case the payment precede the tax is deductible at that point in time so that any later deduction would not be proper. Subsequent deduction and deposit would not mitigate for the mandatory interest payable u/s 201 (1A) and even penalty u/s 221 in view of the High Court ruling. The provisions for payment of interest are mandatory and automatic and interest has to be paid from the date on which the tax was deductible till the date on which the tax is actually deducted and paid. Also going forward it may invite penalty u/s 271C of the Act.
The Gujarat High Court in CIT v. Ranoli Investment Private LImited and others (1999) 235ITR433 held that deduction made at belated stage of payment, would not be “tax deducted at source” properly so-called and such subsequent deduction even when deposited with the Government, cannot be treated as tax deducted at source. In this case where the assessee did not deduct tax at the time of credit but deducted later at the point in time of actual payment the Court went on to hold that when credit of income is given to the account of the payee, earlier than the time of actual payment by any of the modes indicated, the income- tax would be deductible at the earlier point of time of giving of such credit. In other words, the tax in such a case would be deductible at source at the time when credit was given to the account of the payee and not thereafter at any subsequent stage including that of actual payment.
After the High Court ruling the assessee even lost on the 50% relief that it received from the Tribunal. Thus in the matter of TDS non-compliance there is a need to exercise ample caution and vigil so that any prescribed transaction entered in the books must be subject to TDS at its outcome as otherwise it may have adverse effects under the present law. Deposit later will not serve much purpose and rather could worsen the position.