Raghunath (name assumed), the Managing Director of ABC Company, was sentenced to three months’ rigorous imprisonment and fine of Rs 10,000 for offences under the Income-tax Act, 1961. The offence? Under his management, ABC had deducted tax at source (TDS) on various payments but had not deposited the taxes with the Government within the prescribed timeline.

TDS provisions have been an intrinsic part of the Act and have been used as an effective source of revenue collection by the Government. TDS is a vicarious liability where the payer of income is responsible for payment of tax on behalf of the person earning the income. Over the years, these provisions have expanded in scope to cover more types of payments.

The TDS mechanism places an onerous responsibility on the payer to deduct and promptly deposit prescribed taxes on specified payments and file quarterly TDS returns. Failure to comply is a double-edged sword for the payer as it results in disallowance of expense deduction on the one hand and severe monetary consequences on the other, extending to paying tax, interest and penalty, and even prosecution in certain cases.

Deterrent provisions As an effective deterrent to non-compliance, prosecution proceedings are prescribed under section 276B of the Act. These provisions evolved over time and presently apply, inter-alia , to cases where tax has been deducted by the payer but has not been deposited on time. In case of non-deduction of tax, only monetary consequences apply. The rationale is that using government money as one’s own funds is a more severe offence than non-deduction of tax, which could be based on a bonafide view.

This offence is punishable with rigorous imprisonment for a minimum of three months, which can be extended up to seven years, in addition to fine. According to an internal guideline from the CBDT, the tax authorities were instructed to prosecute only in cases where the delay in deposit of TDS was more than 12 months from the date of deduction.

Various cases of taxes wilfully not being deposited within the prescribed time have come to the notice of the Income-tax department. To curb this practice and shore up tax revenues, the CBDT has directed its TDS wing to increase vigilance and has dispensed with the minimum retention period of 12 months for launch of prosecution proceedings. Consequently, payers may become subject to prosecution proceedings on account of any delay whatsoever in deposit of TDS. These prosecution proceedings are in addition to other monetary implications in the form of interest and penalties.

Following the CBDT directions dated August 6, 2013, there has been a spurt in prosecution proceedings by the I-T department.

Proceeding to prosecute Prosecution, by its very nature, has to be initiated on a ‘person’; in the case of a company, proceedings are initiated against a person responsible. The provisions of the Act are wide enough to cover any person connected with the management of the company.

Once proceedings are initiated, the deductor can plead the bonafide case provided there is ‘reasonable cause’ for failure to deposit the TDS. Reasonable cause depends on the facts of each case and requires the deductor to produce satisfactory evidence to the tax authorities to substantiate the reasons for non-compliance.

If the evidence cannot satisfactorily establish the deductor’s bonafide reasons, the deductor can either approach a civil court to contest the prosecution or seek compounding by paying penalty in lieu of the proceedings.

Compounding for TDS non-compliance is done at the discretion of the Chief Commissioner of Income Tax (CCIT). The chief commissioners have been instructed to allow compounding only in cases where payment of compounding fee acts as a better deterrent in lieu of prosecution. The Government has even reduced the compounding fee to encourage more assessees to opt for compounding of their offences.

With the Government reeling under widening fiscal deficit, there is increasing pressure on the CBDT to plug every possible loophole and step up tax revenues. To augment tax collections, there is renewed focus on prosecution and more such proceedings may come to light in the coming days. The only way to avoid sinking in the marshland of TDS non-compliance is for businesses to set up effective systems and controls and take corrective measures to combat the draconian onslaught of penalty and prosecution.

(Naveen Aggarwal is Partner and Nitika Mehta is Director, Tax, KPMG in India)

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