TDS: consequences of non-deposit of tax deducted by the deductee
QUESTION: I own a commercial building giving me a rent of Rs. 4 lakhs a month. The tenant is deducting 20 per cent as TDS and informing me, that this amount is deducted and the balance amount is being remitted. For the past one year, this process is going on. He has not paid this amount to the Income-tax Department. He has not issued TDS Certificate in Form 16A to me. The department is being reminded by me every month with a copy to the Central Board of Direct Taxes (CBDT). Sec. 205 of Income-tax Act protects me from the department making a demand on me. I am showing in my returns this amount as Form 16A receivable, but the assessing officer does not give credit for the TDS amount to be adjusted against the other demands on me from the department. This matter may drag on for some time. Meanwhile if my tenant declares himself as insolvent, what is my position as against the Income-tax Department? The department could have applied Sec. 276BB and collected the TDS. It has not done so.
In the long run, do I have any method to make the department permit me to adjust this TDS amount from the demands pending against me? In the Income-tax Act, 1961 nothing is specifically mentioned. Justice and equity demands that some provision in the Act should have been there to enable me to adjust the deducted amount against my dues to the department. Are there any directions or circulars from CBDT on this subject?
ANSWER: The plight of the reader is not unusual nor is it confined only for those receiving rent from tenants. Even in respect of payment of interest or salary, the amount deducted at source does not always get deposited, so that the deductee entitled to the benefit of tax deduction is put to hardship because of the departmental misunderstanding of the provisions of law in this regard. Sec. 190 provides for payment of tax either directly or by way of deduction or collection at source. Hence, the charge of the tax on the taxpayer under section 4 of the Act does not cease to exist, because of TDS provisions. But, where tax is deducted, deduction itself is understood by the section as payment.
Sec. 191 provides for direct payment only in following circumstances as clearly stated in the section which reads as under: "191. Direct Payment. In the case of income in respect of which provision is not made under this Chapter for deducting income-tax at the time of payment, and in any case where income-tax has not been deducted in accordance with the provisions of this Chapter, income-tax shall be payable by the assessee direct". (emphasis supplied)
From the above, it is clear that only where the income-tax has not been deducted at all as required under the provision, income tax shall be payable by the assessee directly. The question of direct payment should not arise, where tax has been deducted at source. But the officers do not carry out this mandate of law merely because the assessee is unable to produce a certificate of tax deduction at source.
Where tax has been deducted but certificate is not issued, it is not the fault of the person who suffers tax deduction. A reasonable construction of law in such cases is that where a taxpayer asserts that tax has been deducted at source and is also able to show by some evidence that he had received payment less tax, the Income-tax Department after verification of the claim should grant credit and take appropriate action for recovery against the defaulter, who had failed to deposit the tax deducted.
Law provides for prosecution under Sec. 276B with rigorous imprisonment for the offence for a term not less than three months but which may extend to seven years with fine. Penalty is exigible for non-compliance with Sec. 206 requiring such persons to furnish prescribed return with the consequence of penalty of Rs. 100 per day for each day of default starting from the day on which such return was due. Where tax has been deducted and deposited, but tax deduction certificate is not issued, prosecution is spared, but penalty would be leviable.
What now happens is that the Department is content to deny tax credit to the sufferer, who is the victim of the offence, while taking either no action or only nominal action of notice without pursuing either collection or otherwise enforcing the law against the offender. In doing so, the Department itself commits two defaults, one by denying a person a legitimate credit and the other by being negligent in enforcing tax collection from the person from whom it has to be collected. TDS certificate in Form 16A is only an evidence of tax deduction, so that if there is other proof available, tax credit is bound to be given. Lack of information about date of payment in Form 16A, even where it is issued, need not lose the right to credit, since
such information has to be construed only as an aid for department to enforce recovery for non-payment, since deposit of tax deduction is not a pre-condition for credit under the statute. Deductors are obliged to issue TDS certificates wherever tax has been deducted, whether such tax has been deposited or not.
Sec. 219 prescribing the manner of determination of advance tax would permit that credit can be taken for tax deductible at source. Sec. 140A(1A) providing for self-assessment also enables the assessee to take credit for not only any tax paid by way of advance tax, but also any tax deducted or collected at source. It is sufficient that if the assessee establishes tax has been deducted at source, since even Sec. 140A does not expect the assessee to ensure that the deducted tax had been deposited.
The answer from the Income-tax Department for the complaint as that of the reader in this regard is an amendment made by the Finance Act, 2002 with effect from June 1, 2002 by insertion of a proviso to Explanation (c)(i) to sub-section (9) of Sec. 139 enabling filing of TDS certificate even two years after the end of assessment year. If the taxpayer is unable to get the tax deduction certificate till the date of filing the return, which is almost a year after the default, his prospect of getting it later cannot be much brighter. In such cases, the Income-tax Department should suo motu take such action against defaulter as is warranted by law, not only in fairness to the assessee, but also because of the responsibility placed by the statute on the authorities to collect the tax from persons, who are obliged to pay under the law. As otherwise, the elaborate provisions and the powers relating to tax deduction at source makes no sense at all. This position of law has been pointed out in ACIT v Om Prakash Gattani (2000) 242 ITR 638 (Gauh). Revenue audit which is expected to carry out a systems audit, is also apparently not geared for pointing out the neglect of this aspect of work causing ultimately considerable loss of revenue.
The mandate of Sec. 205 barring direct demand is in clearest of the terms, when it provides "the assessee shall not be called upon to pay the tax himself to the extent to which tax has been deducted from that income". It follows that, notwithstanding the present misunderstanding of the law on the part of the authorities, the reader should be spared liability in the event of default to deposit tax deducted by the tenants even belatedly. The best the reader could do now is to inform his assessing officer as well as TDS Cell, preferably the respective Commissioners giving details of the default and declaring that he will not be responsible for any loss of revenue on account of any lapse on the part of the authorities to enforce the law. At any rate, the reader will not be liable for the tax deducted, whether authorities wake up from their slumber and take steps for recovery from the defaulter or allow the chances of recovery to be lost because of their indifference to their duties.
Duties of tax deduction can be overlapping
Q: We are a private limited company registered under the Companies Act, 1956 and licensed by the Insurance Regulatory and Development Authority (Government of India) under the IRDA (Insurance Brokers) Regulations, 2002. Sec. 19 of this Act stipulates payment of remuneration to insurance brokers (whether individual or otherwise) by Insurance Companies for various services rendered by them as defined in Sec. 3 of this Act.
Now some insurance companies while deducting TDS on our brokerage follow Sec. 194D of Income-tax Act, 1961 and deduct 20 per cent tax and 2.5 per cent surcharge (total 20.5 per cent) while others relying on Sec. 194H of Income-tax Act, 1961 deduct 5 per cent tax and 2.5 per cent surcharge (total 5.125 per cent). A copy of circular dated October 17, 2003 issued by the New India Assurance Company Ltd. to their operating offices is enclosed. Since our functions as defined in Sec. 3 of IRDS (Insurance Brokers) Regulation, 2002 are much wider compared to an insurance agent (individual or companies), it is not correct to equate us with such agents for the purpose of deduction of TDS. We feel Sec. 194H of the Income-tax Act, 1961 should apply to us and not 194D. Advise.
A: There are many provisions which require tax deduction at source from different payments. Sec. 194D, which was brought into the statute with effect from April 1, 1973 requires tax deduction from insurance commission for soliciting or procuring insurance business including business relating to continuance, renewal or revival of policy of insurance. This provides for tax deduction at rates in force where the payment exceeds Rs. 50,000. The rate in force is 10 per cent for residents in India other than a company and 20 per cent for a resident company.
(To be continued)
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