The Hindu Business Line : Multiple penalties for TDS failure

For failure to deduct tax at source where one should have as well as for failure to deposit the tax deducted at source with the treasury within the prescribed time, interest at 1 per cent per month or part thereof is payable in terms of Section 201(1A).

In addition, such failure also gives rise to presumption of assessee being in default attracting a discretionary penalty not exceeding the tax in arrears in terms of Section 221 read with Section 201(1). To be sure, for good and sufficient reasons, the failure shall be condoned and interest as well as penalty as above shall not be imposed.

Section 271C duplicates the penalty by once again slapping a penalty not exceeding the amount of tax not deducted at source. While compensatory interest and penalty may be distinguished from each other, one is at a loss to find penalty being imposed twice over for the same offence. The assessee thus in default may in addition also have to cool his heels behind the bars for a term ranging from three months to seven years in terms of Section 276B.

His cup of woes is not full. Not as yet. Section 40(a)(ia) targets select expenditures for disallowance while computing business income where tax has not been deducted at source. Interest, commission or brokerage, rent, royalty, fees for professional services, etc., are not deductible until and unless tax thereon deductible under the Income-tax Act has not only been deducted but also deposited with the treasury.

In other words, these select items of expenditure are allowable as expenditure not in the previous year they have accrued or have been paid, according as one follows the accrual or cash system of accounting, but in the previous year in which they have been deposited with the treasury. Now this smacks of undue enrichment of the exchequer.

Consider this. Penalty equal to the tax not deducted might have already been imposed. This together with the compensatory interest of 1 per cent takes care of the Revenue’s interest fully.

One can even understand the disallowance under Section 40(a)(ia) of the related expenditure till such time the tax deducted thereon is actually deposited because one should not be allowed to take advantage of his own delinquency. But Section 40(a)(ia) goes beyond.

Tax paid by the beneficiary

To insist that tax should be deducted, albeit belatedly, and then deposited betrays ignorance of business and tax realities. First, there are a number of one-off transactions with there being no repeat supply of goods or services from the same party. Where is the scope for deducting tax at source in such circumstances? Doesn’t the penalty equal to the tax not deducted take full care of the Revenue’s interest in such cases?

Second, TDS is just one source of tax recovery, the other sources being advance tax and self-assessment tax. To the extent tax has not been deducted at source, tax has to be paid by the beneficiary of the expenditure himself.

This being so, the peremptory requirement to deduct tax albeit belatedly may have the unintended effect of harassing both the parties to the transaction.

The plight of the payer has already been explained. Now it is the turn of the receiver to suffer some avoidable injustice. He might have paid the tax through the other mode — advance or self-assessment tax.

If the payer insists on deducting tax nevertheless, come what may, from future payments, he might suffer TDS in excess not warranted by the income of such future year.

In all fairness therefore, as an alternative, Section 40(a)(ia) should allow the payer to obtain a certificate from the assessing officer of the beneficiary of the related expenditure recording his satisfaction as to payment of tax in full by the latter.

In short, after having received the tax in full on income from its earner, the Government should not insist on receiving the tax again fully or partially from the payer of such income.

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