Consequences of Failure to Deduct TDS

Payment of tax to the government according to the TDS provisions as provided in the Section 201(1A) & Section 40(a) has to be made by the income tax payee within the given time duration. If a person fails to deduct TDS in prescribed time or opts for short deduction, he is considered as ‘assessee in default’. The income tax department can then carry a proceeding against him for recovering the unpaid tax amount. Depending upon the amount that he has failed to pay as tax, the person can be made to pay penalty as well. Moreover, to discourage the person, the income tax department can also disallow the claim of expense on such account until the tax is fully paid.

Tax Deduction at Source

A person who deducts TDS does so as a government agent. The Honorable Supreme Court in the case-Hindustan Coca Cola Beverage (P) Ltd. V/s Commissioner of Income Tax 293 ITR 226 (SC) had given the decision that in cases where the payer has not deducted his tax but the payee has paid the tax on his own, no default exists with the payer. The circular of 1997 states that even in such situation there will be no alteration in the liability to pay interest until the tax payment and the penalty has been paid in full by the deductee assessee.

In this case, the income tax department considers the interest to be paid from the date on which the tax was to be paid to the date on which it was paid summotto as advance tax by the payee. However, in such a situation, since the payee has made the payment as advance tax, it becomes difficult to charge computation interest with the payment of tax deduction at source.

If the advance tax is less than the deductible amount, he will have to pay penalty for default TDS. Apart from this, the payee will not get the benefit of expense claim even though the tax on his income has been paid as technically speaking no tax deduction at source has taken place.

There are many confusing aspects in the deduction at source activity and hence the government is trying to come up with amendments for making this clearer. According to the new expected amendments the taxpayer will not come in the bracket of ‘assessee in default’ if he produces his income tax return thoroughly. It should include the payments that he has received without tax deduction from the taxpayer.