A deductor would face the following consequences if he fails to deduct TDS or after deducting the same fails to deposit it to the credit of Central Government’s account.
Disallowance of expenditure:
As per section 40(a)(i) of the Income-tax Act, any sum (other than salary) payable outside India or to a non-resident, which is chargeable to tax in India in the hands of the recipient, shall not be allowed to be deducted if it is paid without deduction of tax at source or if tax is deducted but is not deposited with the Central Government till the due date of filing of return.
However, if tax is deducted or deposited in the subsequent year, as the case may be, the expenditure shall be allowed as deduction in that year.
Similarly, as per section 40(a)(ia), any sum payable to a resident, which is subject to deduction of tax at source, would attract 30% disallowance if it is paid without deduction of tax at source or if tax is deducted but is not deposited with the Central Government till the due date of filing of return.
However, where in respect of any such sum, tax is deducted or deposited in subsequent year, as the case may be, the expenditure so disallowed shall be allowed as deduction in that year.
Interest for failure to deduct tax at source/delay in payment of TDS:
As per section 201, if any person who is liable to deduct tax at source does not deduct it or after so deducting fails to pay, the whole or any part of the tax to the credit of the Government, then, such person, shall be liable to pay simple interest as given below:
Interest shall be levied 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 was deducted.
Interest shall be levied at 1.5% 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 was actually remitted to the credit of the Government.
In other words, interest will be levied at 1% for every month or part of a month for delay in deduction and at 1.5% for every month or part of a month for delay in remittance after deduction.
Interest in case deductee pays the tax:
As per section 201, a payer who fails to deduct whole or any part of the tax at source is treated as an assesses-in-default. However, the payer who fails to deduct the whole or any part of the tax on the payment made to a payee (whether resident or non-resident) shall not be deemed to be an assesses-in default in respect of tax not deducted by him, if the following conditions are satisfied:
The recipient has furnished his return of income under section 139.
The recipient has taken into account the above income in its return of income.
The recipient has paid the taxes due on the income declared in such return of income.
The recipient furnishes a certificate to this effect from an accountant in Form No.26A.
In other words, in case of non-deduction of tax at source or short deduction of tax, in case of a payee, if all the discussed conditions are satisfied, then the payer will not be treated as an assesses-in-default
However, in such a case, even if the payer is not treated as an assesses-in-default, he will be liable to pay interest under section 201(1A). In this case, interest shall be payable from the date on which such tax was deductible to the date of furnishing of return of income by such payee. Interest in such a case will be levied at 1% for every month or part of the month.
Relevant Case laws:
Hindustan Coco Cola Beverage P. Ltd. [2007] 293 ITR 226 (SC), Children's Education Society v. DCIT (TDS) [2009] 319 ITR 409 (Karn.); Divisional Forest Officer v. ITO [2015] 44 CCH 0026 (Del. Trib). wherein it was held that the Department cannot recover tax twice. As such where payee has paid full tax, no tax can again be recovered from deductor for failure to deduct tax. However, interest can be recovered from him.
Analysis:
As per combined reading of above provisions, prima-facie we are of the opinion that, in case of non-deduction of tax at source or short deduction of tax, in case of a payee, if all the discussed conditions (as mentioned above) are satisfied, then the payer will not be treated as an assesses-in-default, and he will be liable to pay interest under section 201(1A).
In this case, interest shall be payable from the date on which such tax was deductible to the date of furnishing of return of income by such payee. Interest in such a case will be levied at 1% for every month or part of the month.
We hope the above blog was helpful in enhancing your knowledge on the matter. In case of any queries feel free to get in touch with our team of experts.
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