The Hindu Business Line : The muddle over TDS interest

Section 191 mandates tax authorities to recover tax which has not been deducted, only from the assessee (that is, the payee from whose income the deduction is made) and not from the payer of the income.

The entire chapter of "Collection and recovery of taxes" contains machinery provisions and is not a substantive law which creates an original charge. Section 4(1) is the original charging section which charges the income of the assessee (that is, payee) and this is expressly confirmed in Section 190(2) too.

Thus, nothing contained in Section 191 transfers the assessee's primary tax obligation to the payer, in the event of the latter's failure to deduct tax.

There is a deeming fiction created under Section 201(1), whereby the payer in failure to deduct tax and/or remit the same becomes an `assessee in default'. But that fiction does not extend beyond the mere deeming. The deeming does not by itself authorise the authorities to collect the un-deducted tax from the payer.

Had this been the intention of the legislature, the provision should have been worded similar to that of Section 179 (obligation of a director of a private limited company) or Section 161(1) (the obligation of a representative assessee).

In those two cases, we find clear legislation to the effect that, the director of a private company shall, subject to conditions, be liable jointly and severally for the payment of tax.

In the case of representative assessee, he shall be liable to tax in the like manner and to the same extent as would be leviable upon the represented person (Section 161(1)).

But such an intention is conspicuously absent in Section 201. It only deems the defaulting payer as an assessee in default.

The deeming fiction cannot authorise the tax authorities to collect the tax from the payer, who is though deemed now as an assessee in default.

Section 205 also further strengthens this view, according to which, the assessee cannot be called upon to pay the tax to the extent tax has already been deducted by the payer.

This provision clearly implies that, to the extent tax has not been deducted, it is the assessee, not the payer, who is under an obligation to pay the tax direct (Section 191). The primary charge of tax is always on the assessee and this has not been shifted to the payer.

Thus, the payer, though deemed as `assessee in default', is not cast with any charge under any provision, by which tax has to be recovered from him.

The obligation of the deductor is only one of the modes of collecting TDS, and still the prime charge is always on the assessee alone. As the provision contained in Section 201 is simply a deeming fiction towards the defaulted payer as `an assessee in default', he is not liable to pay tax for his failure to deduct tax.

Section 201 is unlike Section 179 or 161(1) and, hence, the fiction stops over there and does not authorise recovery from the payer.

The explanation introduced by the Finance Act, 2003 w.e.f. June 1, 2003, deems the payer as an `assessee in default' in case tax has not been paid by the assessee direct.

However, a careful perusal of the arguments makes it clear that the said explanation has not altered the fundamental framework of Chapter XVII.

Nor does it help beyond "deeming" the payer as an `assessee in default'. As seen, even if the payer is deemed as an `assessee in default,' tax cannot be recovered from him; as it is always the assessee's obligation, vide Sections 4(1) and 190(2) and the implied meaning of Section 205.

Once tax itself cannot be recovered from the payer in spite of the deeming fiction, how can interest be? If interest is considered necessarily as a levy that can be calculated on the tax, then, when the tax recoverable is nil the interest should also be nil.

This may lead one to the position that for non-deduction of TDS, there cannot be interest levy on the payer. During the time tax has not been deducted by the payer, nor has the payee paid direct, the exchequer loses interest and should be compensated for the same. As the payer has not discharged his responsibility, the interest compensation has been put on his shoulders. Though, on the face of it, one can accept this contention, can interest be levied on the payer in spite of no tax being recoverable from him?

If the answer is `no', then the entire Chapter XVII-A becomes redundant. Perhaps, among other things, a suitable amendment to the provisions themselves may not be an impossible task.

Recently, the Kolkata High Court, in the Kanoi Industries P Ltd (2003 261 ITR 488) case, held that unlike Section 201(1), Section 201(1A) does not contain any restriction, such as reasonable cause for non-deduction or non-payment. Therefore, interest under Section 201(1A) is automatic and mandatory. The outer limit for payment of interest which is "actually paid" is continuous. This means, it continues until tax is either paid or recovered through any other mode.

This ruling has set aside the Tribunal's ruling in the Munak Investment case. However, the High Court did not go into the fundamental arguments in the ACC case. The issue deserves an in-depth study by experts.

(Concluded)

The first part of this article appeared on December 20, 2003.)