CONSEQUENCES OF FAILURE TO DEDUCT TAX AT SOURCE

[Mr. M. GOVINDARAJAN]

LIABILITY TO DEDUCT TAX:

Section 190(1) of the Act provides that notwithstanding the fact that the regular assessment in respect of any income is to be made in a later assessment year, the tax on such income shall be payable by deduction at source or by advance payment in accordance with the provisions of this Chapter.   Section 191 of the Act provides that in the case of income in respect of which a provision is not made under Chapter XVII 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 Chapter XVII, income tax shall be payable by the assessee directly.

TAX DEDUCTOR WHEN DEEMED TO BE AN ASSESSEE IN DEFAULT?

Section 201(1) of the Income Tax Act, 1961 (‘Act’ for short) provides that where any person who is required to deduct tax at source does not deduct, or does not pay, or after so deducting fails to pay, the whole or any part of the tax, then such person, shall without prejudice to any consequences which he may incur, be deemed to be an assessee in default in respect of such tax.

INTEREST AND PENALTY:

Section 201(1A) of the Act contains a specific provision for payment of simple interest by any such person who does not deduct whole or any part of the tax or after deducting fails to pay the tax.   Section 201(2) provides that where tax has not been paid after it is deducted the amount of tax together with simple interest shall be a charge upon all the assets of the person or the company as may be referred to Section 201(1). Penalty may not be charged from such person if the Income Tax Officer is satisfied that the failure to deduct and pay the tax had occurred due to good and sufficient reasons.

The Circular No. 275/201/95-IT(B), dated 29.01.1997 issued by the Central Board of Direct Taxes declares that no demand visualized under Section 201(1) of the Income Tax Act should be enforced after the tax deductor has satisfied the Officer-in-charge of TDS, that the taxes due have been paid by the deductee-assessee. However this will not alter the liability to charge interest under Section 201(1A) of the Act till the date of payment of taxes by the deductee-assessee or the liability for penalty under Section 271C of the Income tax Act.

CASE LAWS:

In ‘Commissioner of Income Tax V. Ranoli Investment P Limited’ [1998 (3) TMI 96 - GUJARAT High Court] it was held that when the tax is not deducted at source, it is required to be paid by the assessee directly but in such a case the liability to pay interest consequent upon failure to deduct tax at source will none the less remain with such person who was duty bound to deduct, till the date when the tax is actually paid by the assessee or on his behalf.   It is only when the tax has not been paid after it is deducted, that the amount of tax together with the amount of simple interest thereon referred to in Section 201(1A) shall be a charge upon all the assets of the person who has failed in his duty to pay the tax deducted, as provided in Section 201(2).   The power to levy tax by deduction at source is without prejudice to any other mode of recovery, as stated in section 202 of the Act.   It will thus, be seen that where the tax is not deducted, the liability to pay the tax directly will be on the assessee, but so far as the interest is concerned, the liability has been fastened on the person who had failed to deduct the tax while crediting the interest income to the assessee.

The Supreme Court had occasion to consider the provisions of Sec. 201 in ‘Hindustan Coca Cola Beverage Private Limited V. Commissioner of Income Tax’ [2007 (8) TMI 12 - SUPREME COURT OF INDIA]In this case the appellant entered into an agreement with M/s Pradeep Oil Corporation for use of their premises for receipt, storage and dispatch of goods belonging to the appellant-company.   Tax was deducted under Section 194C at 2% in respect of ware housing charges.   The Assessing Officer took the view that warehousing charges were in the nature of rent and tad was to be deducted at the rate of 20% under Section 194-I. The Assessing Officer determined the amount of short deduction of tax and also levied interest payable thereon under Section 201(1A) of the Act.   The Tribunal held that there can be no recovery of tax alleged to be in default from the appellant considering the fact that Pradeep Oil Corporation had already paid taxes on the amount received from the appellant.   The High Court interfered with the order of the Tribunal.   The view of the Tribunal was affirmed by the Supreme Court reversing the order of the High Court.

In ‘DIT V. Maersk Co. Ltd.’ [2011 (4) TMI 886 - Uttarkhand High Court]the question taken for decision by the Court was as to when no deduction for payment of advance tax has been made by the employer, whether the assessee is liable to pay interest under Section 234B of the Act. The Court held that from a combined reading of Sections 190, 191, 192, 198, 200, 201, 203 and 204 of the Act, it is clear that as soon as the tax is deducted at source by the person responsible to make the payment, the liability of the assessee to pay the tax gets discharged.   If the tax is not deducted, it remains payable by the assessee direct as provided under Section 191 of the Act.   Further the liability, to pay interest under Section 201(1A) is on the person who fails to deduct the tax at source is absolute and is upon the person responsible for deducting tax at source till the date it was actually paid.

The Court further held that when the tax is not deducted, the assessee is required to pay the tax directly which would be at the stage of self-assessment and not by way of advance tax.   The liability to pay the interest will, however, remain upon the person responsible to deduct the tax at source.   The statute has taken care of the liability for the assessee under Section 191 of the Act to pay the tax deductible at source directly if it has not been deducted by the person responsible for making such deduction.   The loss of interest on the amount of tax suffered by the Revenue would be compensated by the person responsible for making such deduction, namely, in the present case, by the employer as provided under Section 201(1A) of the Act.

In ‘Jagan Prakashan Limited V. Deputy Commissioner of Income Tax (TDS), [2012 (5) TMI 488 - ALLAHABAD HIGH COURT] the petitioner is engaged in the business of printing and publishing Dainik Jagaran and I-next from different canters across the country. The major source of the revenue is generated from the advertisements published in the said newspapers. The Department made a survey in the office of the petitioner and thereafter issued a notice stating that during the course of survey on 15.03.2012, it has been gathered that the petitioner has failed to deduct tax at source under Section 194H of the Act on the payment received from advertising agencies after allowing 15% trade discount, which is as well as a deemed commission. The petitioner was asked to show cause as to why order under Section 201(1) and 201(1A) of the Act be not passed declaring the petitioner as an assessee in default in respect of such taxes and interest thereon.

The petitioner was directed to appear before the authorities on 22.03.2012 on that day the petitioner was directed to submit month wise bills of advertisements received and trade discount given thereon by the next date i.e., on 23.03.2012. On 23.03.2012 another notice was issued calling the petitioner to submit reply along with the documents for by 12 noon on 26.3.2012.   The petitioner, therefore, filed writ petition before the High Court. The petitioner submitted that there is no material with the Department to proceed under Section 201 of the Act.   The Department submitted that by notice only information has been called from the petitioner and there is no lack of jurisdiction in the authority to proceed. The High Court ordered that the petitioner may appear and submit necessary information as required and the Department may proceed to pass appropriate orders in accordance with the law.

On 26.03.2012 the petitioner submitted a letter to the Department stating that the information sought for is not readily available and it needs a herculean manual exercise of compilation of more than 1.8 lakhs bills. The petitioner submitted that the relationship of the petitioner with the advertising agency is principal to principal and not as principal and agent and therefore there is no liability of the petitioner to deduct tax at source.   On 28.03.2012 an assessment order was passed holding that the petitioner to be an assessee-in-default for non deduction of tax at source for Rs.10.95 crores under Section 201 (1) of the Act on which interest under Section 201(1A) amounting to Rs.2.63 crores.

The petitioner filed an amendment application against the order of assessment which was allowed by the court. The petitioner submitted the following before the Court:

• There were no foundational facts on the basis of which the Department could have assumed jurisdiction under Section 201 and 201(1A) of the Act for initiating the proceedings;
• The petitioner allowed trade discount to advertising agencies on the advertisements received in accordance with the established trade practice and allowing of trade discount cannot be terms as commission paid by the petitioner to the advertising agency for any service;
• An advertising agency is not an agent of the petitioner and the transaction between the petitioner and advertising agency is on principal to principal basis;
• Section 194H is not attracted on the trade discount allowed by the petitioner to advertising agency and the proceedings initiated under Section 201 and 201(1A) are without jurisdiction;
• The Income Tax Authorities have wrongly assumed jurisdictional facts although no such jurisdiction acts exist so as to enable the Department to initiate proceedings under Section 201/201(1A) of the Act;
• The letter dated 12.09.1995 issued by the Department clarified that where the media raises only a bill for an advertising contract including therein, inter alia, commission at the specified percentage to be retained by advertising agency, the media is not required to deduct tax at source since such a payment is subject to TDS by the advertiser at the time of payment;
• No agreement with any advertising agency has been entered into by the petitioner nor is there any relevant factor on the basis of which it can be said that the advertising agency is an agent of the petitioner;
• The Assessing Authority has relied on an article published in the newspaper Business Standard on 31.10.2006 which article contain some opinion of the Central Board of Direct Taxes that deduction of tax at source is to be made on commission or brokerage given to the advertising agency. The said article was wholly irrelevant which vitiates the order of the Assessing Authority;

The Department put forth the following submissions before the court:

• The petitioner is not entitled to invoke the jurisdiction of High Court under Article 226 of the Constitution of India since the assessment order has already been passed and the petitioner be relegated to avail of the alternative remedy of statutory appeal as provided under the Act;
• There is no lack of jurisdiction in initiating the proceedings under Section 201 and 201(1A) of the Act;
• The payment which is being made by the petitioner to the advertising agency in the name of 15% discount is nothing but payment of commission to advertising agency to the petitioner in bringing business to the petitioner i.e., advertisements;
• The Assessing Officer has rightly recorded a finding that the jurisdictional facts as required for applicability of Section 194H are fully present and neither the initiation of the proceedings were without jurisdiction nor can the assessment order be held to be without jurisdiction;
• The petitioner, in spite of giving opportunity could not provide details of month wise trade discount allowed by it to different advertising agencies hence, no error has been committed in assessing the tax liability on 15% of gross receipts of revenue from the advertising agency, which amount has been disclosed by the petitioner himself in the survey on 15.03.2012;
• If the advertising agency could not have rendered services to the petitioner, it could not have received any discount or payment and the advertising agency acts on behalf of the news agency since it is a news agency, which decides as to what type of advertisement it publishes;
• There is a contract between the news agency and advertising agency through the INS, since the petitioner are the members of the INS and the INS enters into agreement with the advertising agency for accrediting the said agency thus there is a implied contract between the petitioner and the advertising agency;
• The principal and agent relationship can also exist without any written or codified agreement;
• Under Section 201, the deductor who fails to deduct tax at source, is an assessee in default and apart from interest and penalty, the tax which was not deducted can very well be recovered from the deductor;
• If there is any mistake in the order of the assessment, it is open for the petitioner to invoke Section 154 of the Act for correction of mistake, if any.

 The High Court framed the following issues to be decided in this case:

• Whether against a deductor who fails to deduct the tax at source, the liability of payment of tax can also be fastened against the deductor under Section 201 apart from liability of interest and penalty?
• Whether with regard to tax which was required to be deducted at source, the liability is of the assessee with regard to whose income the tax was required to be deducted at source or the liability is of the deductor for payment of tax which could not be deducted?
• Whether, according to Section 191 read with Section 201, a deductor, who fails to deduct tax at source, can be deemed to be an assessee in default without adverting to the issue and recording a finding that the assessee who is liable to pay tax directly had not paid tax?

The High Court held that the Income tax act is an integrated act delineating a scheme for payment of income tax. For interpreting the provisions of Section 201 of the Act, the High Court analyzed Sections 190 and 191 of Chapter XVII.   While interpreting the provisions of Section191and Section 201(1) a harmonious construction has to be adopted and such interpretation is to be put which gives meaning and purpose to both the provisions. On analysis of the same it is clear that the deductor who fails to deduct income tax at sourced shall be deemed to be assessee in default only when the assessee has also failed to pay such tax directly.   Thus, it flows that there is no occasion to treat the deductor as an assessee in default unless the assessee has not paid the tax directly.

The Court further held that in a case where the deductor fails to deduct the tax, the consequences are different as compared to in a case where the deductor deducts the tax and does not pay to Government. It is relevant to notice that Section 201(1A) specifically provides for payment of only simple interest when tax has not been deducted or not.   Sub section (2) provides for creating a charge on the assets of the deductor, if the tax deducted is not paid.   But nothing under Section 201 can be read as to mean that when the tax has not been deducted by the deductor, the tax not deducted can be realized from the deductor.   No such provision is made under Section 201 obviously because the liability to pay income tax is on the assessee direct in whose case, the tax has not been deducted.   In the present case, the income tax authorities in proceeding under Section 201 apart from directing recovery of interest from the petitioner has also directed for recovery of tax which is alleged to be short deducted, which is beyond the scope of Section 201 and is an action of the authorities without jurisdiction.

Therefore the Court held that in a case where tax has not been deducted at source, the short deducted tax cannot be realized from the deductor and the liability to pay such tax shall continue to be with the assessee direct, whose income is to be charged and a person who fails to deduct the tax source, at best is liable for interest and penalty only.

CHANGES IN SECTION 201:

Finance Act, 2012 inserted proviso to Section 201(1) which provides that any person, including the principal officer of a company, who fails to deduct the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid to a resident or on the sum credited to the account of a resident shall not be deemed to be an assessee in default in respect of such tax if such resident—

(i)  has furnished his return of income under section 139;

(ii)  has taken into account such sum for computing income in such return of income; and

(iii) has paid the tax due on the income declared by him in such return of income,

and the person furnishes a certificate to this effect from an accountant in such form as may be prescribed.

It is further provided thatno penalty shall be charged under section 221 from such person, unless the Assessing Officer is satisfied that such person, without good and sufficient reasons, has failed to deduct and pay such tax.

Proviso to Section 201(1A) was inserted by Finance Act, 2012 which provides that in case any person, including the principal officer of a company fails to deduct the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid to a resident or on the sum credited to the account of a resident but is not deemed to be an assessee in default under the first proviso of sub-section (1), the interest under clause (i) shall be payable from the date on which such tax was deductible to the date of furnishing of return of income by such resident.

CONCLUSION:

From the above it is clear that the provisions relating to payment of tax and payment of interest operate in two different areas.   If the tax has not been deducted at source, the liability is upon the assessee to pay directly as per Section 191 of the Act and upon failure to deduct the tax at source, the liability is upon the person who failed to deduct tax at source to pay interest under Section 201(1A) of the Act.