The Hindu Business Line : Shortcoming in computing interest on monthly shortfall

IN COMPUTING income from salary an onerous responsibility is cast on the employer to deduct tax at source (TDS) in respect of payments by way of salary to employees. Section 192 of the Income-tax Act, 1961 requires the employer to estimate the income of the assessee under head `salary' and deduct tax on a monthly basis in accordance with the rates in force.

This process of estimation at the beginning of the year is obviously difficult, but by experience most employers resort to reasonable estimate in the first part of the financial year and then effect adjustments in the latter half based on the accuracy of the figures at that point of time.

At times, problems surface on account of the employee not furnishing his investments in time so that the employer can take into account various concessions available under the Act and thereafter effect the TDS. Failure to deduct tax and remit the same to the Government entails interest and penalty which is covered by Section 201 of the Act.

An interesting case came up before the Mumbai Bench of the Tribunal in Vinsons vs Third Income-tax Officer (2004 89 ITD 267). This relates to the shortfall of tax deduction on a month-to-month basis which was later increased before the end of the financial year. The question for consideration was whether interest is leviable on a monthly basis on the shortfall of deduction or whether it will arise only if the shortfall is relatable to the year as a whole.

Facts

The assessee, an employer, filed annual returns of salary under Section 206 of the Act. On scrutiny of the same, the AO found that the assessee, in his capacity as an employer, had deducted negligible sums as income-tax from the salary of his employees in the initial months of the year and deducted very high amounts in the last few months. Therefore, the AO was of the view that the assessee had failed to deduct correct amount of tax from the salary of the employees.

Accordingly, a show-cause notice was issued to the assessee but in the absence of any reply, the AO presumed that the assessee failed to deduct correct tax in each month as required under Section 192(1) of the Act. Accordingly he levied a simple interest at 15 per cent per annum on the amount of such tax from the date on which tax was deductible to the date on which the tax was actually paid, as detailed in the annexure to the assessment order. The CIT (A) confirmed the action of the AO and the matter reached the tribunal.

Tribunal decision

The Tribunal held that the law does not require an accurate deduction of tax on a monthly basis and there is scope for adjustments during the course of the same financial year. The Tribunal reasoned that "Section 192(1) of the Act speaks of deduction of tax at source on the amount payable at the average rate of income-tax on the basis of rates in force for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year.

"The section nowhere mandates that each instalment of TDS recovered should be exactly 1/12 of the total tax deductible at source. A conjoint reading of Sections 192(1) and 192(3) of the Act makes it further clear that TDS instalments of each month need not necessarily be accurate, as otherwise the expression `increase or reduce the amount to be deducted under this section for the purpose of adjusting any excess or deficiency arising out of any previous deduction or failure to deduct during the financial year' will have no meaning."

The Tribunal took the example of a salaried employee, who is supposed to pay annual tax of Rs 30,000 based on the salary income earned in the month of April of the financial year. The employer has to deduct, according to the Revenue, tax at Rs 2,500 a month. If in December the employee gets arrears of salary, bonus, and so on, which doubles the tax liability, the employer would be liable to deduct Rs 5,000 towards tax every month against Rs 2,500 deducted earlier.

It is impossible for the assessee nor the employer to anticipate this position in the month of April itself and, therefore, the section provides for increasing the element of tax from December onwards and on this basis the Tribunal reasoned that the employer cannot be treated as a defaulter. Accordingly, the interest levied under Section 201 was deleted.

Tax deduction at source is virtually outsourcing the job of the Department to the assessee. There is need to simplify and condense the provisions relating to TDS. On the other hand, it has become more and more complicatedcompounding the misery of deductors.

(The author is a Chennai-based chartered accountant.)

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