INCOME TAX REVIEW

1. The consequences of the failure to comply with the provisions relating to TDS are contained in section 201. The heading of the section is "Consequences of failure to deduct or pay". Hence, two possibilities are contemplated here: failure to deduct the tax and failure to pay the tax so deducted.

   Sub-section (1) of section 201 states that if the person responsible for deducting the tax at source does not deduct the tax, either wholly or partly, or after having deducted fails to pay the tax, he shall be deemed to be an assessee in default in respect of the tax. However, the proviso to the section adds that no penalty shall be levied under section 221 unless the Assessing Officer (AO) is satisfied that the default was committed without good or sufficient reasons. The burden to be discharged is squarely upon the assessee. It was held in Jubilee Industries and Investments Ltd 238 ITR 648 (Cal)

   Once assessee has failed to deposit TDS amount in time he is liable to pay penalty under s. 221 whether it has paid the interest or not; profit or loss in business of assessee has nothing to do with deposit of TDS amount and cannot be a valid ground for not making deposit in time.

   The AO has to pass a written order to enable the assessee in default to file an appeal, as was held in Mettur Chemical and Industrial Corporation Ltd 150 ITR 341 (Mad). No penalty is leviable without giving the defaulter an opportunity of being heard. Once he is declared a defaulter the AO and the TRO have recourse to the provisions of section 222 and 226 to effect recovery.

   The defaulter is also liable to pay interest. Sub-section (1A) lays down that for the failure so committed the person responsible for deducting the tax shall be liable to pay simple interest at 12% per annum on the amount of such tax from the date of deductibility to the date of actual payment. The provisions of charging interest are mandatory, and the payment of tax by the recipient of the amount will not absolve the person responsible for deducting the tax of his liability to pay interest. It was held in CIT vs. Dhanalakshmy Weaving Works 245 ITR 13 (Ker).

   Levy of interest is of a compensatory measure for withholding tax which ought to have been gone to exchequer. Provision makes it clear that levy is mandatory. It is true that use of expenditure ‘shall’ is not always determinative of the facts whether a provision is directory of mandatory in nature. But the context in which expression ‘shall’ is used in s. 201(1A) makes it unambiguously clear that levy is mandatory. Purpose of levy is to claim compensation on the amount which ought to have been deducted and deposited and has not been done.

   However, where the assessment of the employee was completed and tax was found to have been paid the employer could not be deemed to be assessee in default, as was held in M.P. Agro Morarji Fertilizers 176 ITR 282 (MP). In a similar vein, where a co-operative housing society had failed to deduct tax at source on payments made to a contractor, but the contractor had already paid the appropriate amount of advance tax, the Gujarat High Court held in Rishikesh Apartments Co.op Housing Society Ltd. 253 ITR 310

   If assessment in relation to income of R i.e., the contractor had become final and no further tax was found due from R that would put the end to the liability of the assessee-society and as the assessee-society was not liable to make any payment of tax on behalf of the contractor, no amount of interest could be leviable under the provisions of s. 201(1A). As the amount of tax payable by the contractor had already been paid by it and that too in excess of the amount which was payable by way of advance tax, the Tribunal was absolutely right in holding that the tax paid by the contractor in its own case, by way of advance tax and self-assessment tax, should be deducted from the gross tax that the assessee should have deducted under s. 194C while computing interest chargeable under s. 201(1A). If the Revenue is permitted to levy interest under the provisions of s. 201(1A), even in the case where the person liable to pay the tax has paid the tax on the date due for the payment of the tax, the Revenue would derive undue benefit or advantage by getting interest on the amount of tax which had already been paid on the due date. Such a position cannot be permitted.

   Sub-section (2) states that the unpaid tax and interest shall be a charge upon the assets of the person or the company. This means that the recovery can be made from the assets of the person responsible for deducting the tax.
    

2. Certain amendments were introduced to section 40 w.r.e.f. 1-4-2004. Broadly, these sections state that no deduction shall be allowed in computing the income chargeable under the head "Profits and gains of business and profession" if the tax deductible on the item specified was not deducted and paid during the year.

   Section 40(a)(i) states that no deduction would be given under the head "Profits and gains from business or profession" in relation to the following:

   1. interest (not being interest on a loan issued for public subscription before 1-4-1938),

   2. royalty,

   3. fees for technical services or

   4. other sum chargeable,

   if payable outside India or, in India to a non-resident not being a company or to a foreign company. However, the proviso states that the deduction would be given in the year in which the TDS was paid.

   Section 40(a)(ia) brings within its scope the following if payable to a resident:

   1. interest

   2. commission or brokerage

   3. fees for professional services

   4. fees for technical services

   5. contractor

   6. sub-contractor

   However, the proviso states that the deduction would be given in the year in which the TDS was paid.

   Section 40(a)(ib) brings within its purview any sum paid on account of securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004.

   Section 40(a)(iii) brings within its scope "Salaries" if payable outside India or to a non-resident.

   Section 271C lays down the penalty for failure to deduct tax at source or to pay the sum so deducted at the rate that is equal to the amount of tax. This penalty shall be imposed by the Joint Commissioner of Income Tax. Although the section is silent on the issue of natural justice, section 273B states that no penalty can be levied in the sections mentioned therein if the assessee proves that there was reasonable cause for the failure. As held in Woodward Governors (India) P. Ltd 253 ITR 745 (Del) levy of penalty under section 271C is not automatic. Before levying penalty, the AO is required to find out whether even if there was any failure the same was without a reasonable cause. The initial burden is on the assessee to show that there existed reasonable cause which was the reason for the failure referred to in the concerned provision. Thereafter the officer dealing with the matter has to consider whether the explanation offered by the assessee as regards the reason for failure, was on account of reasonable cause.

   Prosecution is the most serious consequence of failure to deduct tax at source or pay the tax so deducted. A substantial number of prosecutions launched by Revenue comprise TDS defaults due to the relative ease with which the evidence of such defaults can be presented. The following sections govern prosecutions.

   Sections 276B and 276BB lay down that if a person fails to pay to the credit of the Central Government the tax deducted at source by him, or fails to comply with the provisions of section 206C, he shall be punishable with rigorous imprisonment ranging from 3 months to 7 years, with fine. However, these sections make no mention of the assessee’s failure to deduct tax in the first place. It was held as follows in Kaushal Kishore Biyani 256 ITR 679 (MP) that only if a person deducts tax but does not pay the same is there an offence committed to attract section 276B.

   Complaint for alleged offence under s. 276B filed after 1st April, 1989, for failure to deduct tax at source would be governed by the amended provisions of s. 276B which had come into force on that date, and since the amended provision does not contemplate prosecution for failure to deduct tax at source, the complaint was not sustainable.

   However, as held in Rishikesh Balkishandas 167 ITR 49 (Del), the mere fact that the tax was deposited before the filing of the complaint will not absolve the assessee of the offence under section 276B.

   Sub-section (2) of section 276C states that if a person wilfully attempts in any manner to evade the payment of any tax, penalty or interest he shall be punishable with rigorous imprisonment ranging from 3 months to 3 years, with fine. Although the word ‘wilfully’ suggests that the onus is upon the Revenue, the Explanation to section 276C states that "a wilful attempt to evade any tax, penalty or interest" would include a case where any person, amongst other situations, causes circumstances to exist which can enable the evasion of tax, penalty or interest. The element of ‘guilty mind’ forms an adequate protection for the assessee. As held in Gangaram Chapolia 103 ITR 613 (Ori)(FB), the word ‘wilful’ imparts the concept of mens rea, and if mens rea is absent, no offence under the section is made out. However, the fact that prosecution is a very potent weapon in the Revenue’s armoury was highlighted in the Supreme Court judgment in P. Jayappan vs. S.K. Perumal, 1st ITO 149 ITR 696 where it was held

   There is no provision in law which provides that a prosecution for the offences in question cannot be launched until reassessment proceedings initiated against the assessee are completed. No legal bar for the institution of the proceedings is urged except stating that in the event of the petitioner being exonerated in the reassessment proceedings, the prosecutions may have to be dropped. A mere expectation of success in some proceeding in appeal or reference under the Act cannot come in the way of the institution of the criminal proceedings under ss. 276C and 277.

   Section 278B refers to offences by companies. The section states that where an offence has been committed by a company then, not only the company but the person responsible for the conduct of the business shall also be held liable. However, the proviso protects the person responsible for the conduct of the business if he had exercised due diligence or that the offence was committed without his knowledge.

   But can a company be prosecuted? No, said the Supreme Court in Velliappa Textiles Ltd 263 ITR 550. A company cannot be prosecuted for offences under sections 276 C, 277 and 278, since each one of these sections requires imposition of a mandatory term of imprisonment coupled with a fine and leaves no choice to Court to impose only a fine.

   Under section 279 prosecution is always initiated by the Chief Commissioner or the Commissioner. Sub-section (2) allows for compounding of the offence by the Chief Commissioner or the Director General. Compounding the offence is a means to buy peace, given the delays in the judicial system and the accompanying futile efforts. In such cases the initiative should always be taken by the assessee. Indeed, it is advisable to do so. Given below are some extracts from relevant Board’s circulars.

   BOARD’S F. No. 4/7/69-IT (INV)

   Prosecution under the IT Act
   Compounding of—Instructions regarding

   21-3-1969

   It was emphasised that a prosecution should not ordinarily be compounded if the prospects of success were good. The Board desires that in such cases the request of the assessee for having the offence compounded should not ordinarily be recommended to the Board.

   2. The provisions of s. 279(2) give a discretion to the CIT to compound any offence under the IT Act and this discretion is an unfettered one. Even so it has to be exercised in a judicial manner. Although it is neither possible to precisely lay down all the circumstances in which an offence may be compounded nor it is intended to fetter the CIT’s discretion in this matter, it is nevertheless necessary to have a uniform policy for exercising the discretion in a judicial manner.

   3. Some of the points which have to be considered before deciding to compound an offence are indicated below:

      1. compounding of an offence may be considered only in those cases in which the assessee comes forward with a written request for compounding offence;

      2. cases in which the prospects of a successful prosecution are good, should not ordinarily be compounded;

      3. bearing in mind the deterrent effect of a prosecution, it should be considered whether the purpose will be more effectively served by making the assessee pay a deterrent composition fee or by obtaining a conviction; and

      4. in cases where subsequent to the launching of prosecution fresh evidence becomes available which may show that the case for the prosecution is weak and the assessee is agreeable to have the offence compounded it may be advisable to compound the offence and not to proceed with the prosecution.

   4. Ultimately the answer to the question whether the prosecution should be compounded or not will depend on the facts of each case. The above aspects are only intended to provide broad guidelines. The previous approval of the Board should always be obtained before deciding to compound an offence. No assurance of any kind should be given to the assessee before obtaining the Board’s approval.

      BOARD’S INSTRUCTIONS NO. 1317 (RELEVANT EXTRACT)

      Compounding of offences under s. 279(2)

      11-3-1980

      2. Cases which should not be compounded

         1. No compounding will be done if the assessee belongs to a monopoly or large industrial house or is a director of a company belonging to or controlled by such house.

         2. Cases in which the prospects of a successful prosecution are good should not ordinarily be compounded.

         3. Compounding will not be done in cases of second and subsequent offences.

      3. Cases which may be compounded

         1. Except in cases falling within categories (1) and (3) of B above, compounding of an offence can be done with the consent of the Board if the amount involved in the offence/default is less than rupees one lakh.

         2. Except in cases falling under categories (1) and (3) of B above, and category (1) of C, compounding may be done with the approval of the Minister if, in view of the developments taking place subsequent to the launching of the prosecution, it is found, after consultation with the Ministry of Law, that the chances of conviction are not good.

      4. Notwithstanding anything stated in B, the Board may approve compounding in deserving and suitable cases involving hardship with the approval of the Minister.

   5. While the above are only intended to provide broad guidelines to be followed before sending a proposal for compounding, the previous approval of the Board should always be obtained before deciding about the compounding of an offence. No assurance of any kind should be given to the assessee before obtaining the Board’s approval.
      SOURCE : [Reported in Y.P. Chawla & Ors. vs. M.P. Tiwari & Anr. 195 ITR 607 (SC]