Companies even after depositing TDS with penal interest are getting show-cause notice from Income Tax Department for initiation of prosecution. Also, directors have been made co-accused in such matter.

While department sources counter by saying this is not a general trend and prosecution is initiated only when the amount is “really big”, tax experts feel such a move will put additional burden on companies as they may require to pay over and above TDS plus penal interest as compounding fee.

Section 276B/276BB of the Income Tax Act deals with those instances where company has deducted the withholding taxes but failed to deposit with government within prescribed time limit and it contains criminal prosecution penalty including imprisonment for officials of company.

However, show-cause notice are being issued by the Income Tax Department in those cases as well where company has inadvertently failed to deposit withholding tax within the time limit and later suo moto deposited tax along with interest. Generally, the department serves a notice under Section 2(35) of the IT Act to the officials of a Company before making such officer an accused along with the company in a criminal prosecution.

According to Saurrav Sood, Practice Leader — International Tax and Transfer Pricing at SW India, off late, many directors of the company have received show-cause notice where the prosecution has been initiated against the company and its directors for such default. “These notices are the tip of the iceberg and the real problem lies in the whole process of undergoing compounding which is a way to diffuse the prosecution proceedings, which otherwise are criminal proceedings in nature,” he said.

‘Reasonable cause’

Amit Maheshwari, Tax Partner with AKM Global, says there are two options before the person named in notices. First, one needs to contest the trial on merits before the Magistrate and demonstrate before the Magistrate that there was a reasonable cause for failure to deposit the TDS within the stipulated time. The onus to prove that there was a reasonable cause for delay is on accused and hence, there is no straight jacket formula to determine what constitutes reasonable cause under Section 278AA of the IT Act and the same will vary from case to case. Therefore, proving reasonable cause before the court may be a long legal battle.

Secondly, one can apply for compounding as per the compounding guidelines issued by the Income Tax Department.

Sood said that to date, there have been multiple notices issued to taxpayers and most of the matters never actually conclude in prosecution but often result in taxpayers paying compounding fees which is as a percentage of the amount withholding tax deposited with delay.  Does this mean, that the real intent of the income tax authorities is to make the taxpayer pay more through the tool of prosecution which also involved the time of a district court magistrate since it is before such a person that prosecution matters are listed, he asked.

Maheshwari said all the conditions as stipulated under the compounding guidelines need to be fulfilled and only then the offence can be compounded. “There is a certain time limit within which application for compounding has to be filed and there are certain compounding fees involved. However, courts have passed various judgements in which time lines for compounding application have been held as not compulsory,” he said.