Taxpublishers.in - Monday Corner Answer to the Quiz for the week (23 Jun 2025)

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Quiz for the week (23 Jun 2025): Poly Co Ltd is engaged in manufacturing activity. It paid job work charges of Rs.30 lakhs during the previous year 2021-22 in a unit which was closed in the previous year 2023-24. The assessee omitted to deduct tax at source. The actual TDS liability was Rs.50,000 for the said expenditure. In April, 2025 the Assessing Officer initiated proceedings for the non-deduction of tax at source and passed an order for remittance of TDS amount and interest under section 201(1A). In March, 2025, he initiated proceedings for levy of penalty under section 271C. The tax counsel of the assessee says that levy of tax and interest is not correct and only penalty could be levied. Decide whether the amount of tax deductible at source plus interest under section 201(1A) and penalty under section 271C, are leviable? Best Answer : The requirement of deducting tax at source became very effective due to the introduction of section 40(a)(ia) due to inbuilt consequence of disallowance of expenditure in computing income under the head ‘Profits and gains of business or profession’. Originally, the entire expenditure was liable for disallowance due to non- deduction of tax at source and whereas now it is liable for disallowance @30% of the expenditure for which there was failure to deduct tax at source. The further proviso to section 40(a)(ia) says that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purpose of this sub-clause (i.e. section 40(a)(ia)), it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of the return of income by the payee. Thus, if the payees have admitted the receipts liable for TDS in their ITRs, the payer shall not be deemed to be an assessee in default and in such case, the disallowance will not apply. Section 201(1) says that where any person who is required to deduct tax at source does not deduct or does not pay (after deduction), the whole or any part of the tax as required by or under the Act, then, such person shall be deemed to be an assessee in default in respect of such tax. The proviso to this section says that the person who omits to deduct or who omits to remit after deduction, shall not be deemed to be an assessee in default if the payee (i) has furnished his ITR under section 139; (ii) has taken into account such sum for computing income in such ITR; and (iii) has paid tax on the income declared by him in such return of income. Further the payee must furnish a certificate in From No.26CA in compliance with rule 31ACB. One would notice that annexure A of Form 26A has to be certified by a chartered accountant certifying the furnishing of return, payment of tax etc., by the payee. Form 26A is meant for the payer to confirm that the income was paid to the payee without deduction of whole or any part of the tax and confirmation of the payment of interest under section 201(1A) of the Act. Section 220 of the Income-tax Act, 1961 says that where the assessee has not paid the amount specified as payable in a notice of demand under section 156 within 30 days of the service of the notice, he shall be deemed to be in default. Section 221 says that where an assessee is in default or deemed to be in default in making payment of tax, he shall, in addition to the amount of the arrears and interest payable under section 220(2) is liable for penalty equal to the amount of tax in arrears. The section is worded in such a way that the Assessing Officer may impose penalty not exceeding the amount of tax in arrears. Section 271C says that if any person fails to deduct the whole or any part of the tax is required to deduct as per the provisions of Chapter XVII-B of the Act, he shall be liable to pay, by way of penalty, a sum equal to the amount of tax which such person failed to deduct or pay or ensure payment thereof. This penalty is imposable by the Assessing Officer w.e.f. 01.04.2025 and previously it could be levied only by the Joint Commissioner. Adverting to the facts of the case, the imposition of penalty could be done by only by the Joint Commissioner in March, 2025 and not by the Assessing Officer. The Assessing Officer has initiated proceedings for payment of the amount equivalent to the amount of tax deductible at source with interest @1% for every month from the date on which tax was deductible to the date on which such tax is deducted. Thus, the amount of tax deductible at source but not deducted and also the interest till the date of order is imposable. The assessee in case takes shelter under the proviso to section 201(1) then it may do so in order to minimize the damage. The fact that the assessee has to pay an amount equal to the amount of TDS with interest for the delayed remittance would be of no avail to him or to the payees. If the payees have furnished Form 26A then to that extent, the payer can save from payment of TDS amount and corresponding interest amount. After the Assessing Officer passes an order raising demand for the TDS amount and interest and if the assessee does not pay within 30 days or within a shorter time specified in the notice of demand, he shall be deemed to be an assessee in default and liable for penalty not exceeding the amount specified in the notice of demand. Independent of this, the taxpayer could be liable for penalty under section 271C which could have been imposed by the Joint Commissioner before 1st April, 2025. After the said date, the power to impose penalty is vested with the Assessing Officer. The assessee hence has to ascertain from the payees as regards their compliance with regard to filing of the ITR for the assessment year 2022-23. In case, they have filed the ITR promptly, the assessee may obtain a certificate in Form 26A and prove that there was no scope for treating itself as an assessee in default. Since many years have elapsed since the year of incurring the expenditure, the payees may not able to claim credit for the TDS amount when remitted now and thus the payment by the assessee would remain unclaimed. Beyond all the above said aspects, it is amusing that the assessee being a corporate entity whose books of account would have been subjected to statutory audit under the Companies Act, 2013 and tax audit under section 44AB the aspect of non-deduction of tax at source must have come to light much earlier to the taxpayer. It is surprising that how the taxpayer and the tax auditor have let go the situation.

Quiz for the week (23 Jun 2025):

Poly Co Ltd is engaged in manufacturing activity. It paid job work charges of Rs.30 lakhs during the previous year 2021-22 in a unit which was closed in the previous year 2023-24. The assessee omitted to deduct tax at source. The actual TDS liability was Rs.50,000 for the said expenditure. In April, 2025 the Assessing Officer initiated proceedings for the non-deduction of tax at source and passed an order for remittance of TDS amount and interest under section 201(1A). In March, 2025, he initiated proceedings for levy of penalty under section 271C. The tax counsel of the assessee says that levy of tax and interest is not correct and only penalty could be levied. Decide whether the amount of tax deductible at source plus interest under section 201(1A) and penalty under section 271C, are leviable?

Best Answer :

The requirement of deducting tax at source became very effective due to the introduction of section 40(a)(ia) due to inbuilt consequence of disallowance of expenditure in computing income under the head ‘Profits and gains of business or profession’. Originally, the entire expenditure was liable for disallowance due to non- deduction of tax at source and whereas now it is liable for disallowance @30% of the expenditure for which there was failure to deduct tax at source. The further proviso to section 40(a)(ia) says that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purpose of this sub-clause (i.e. section 40(a)(ia)), it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of the return of income by the payee.

Thus, if the payees have admitted the receipts liable for TDS in their ITRs, the payer shall not be deemed to be an assessee in default and in such case, the disallowance will not apply.

Section 201(1) says that where any person who is required to deduct tax at source does not deduct or does not pay (after deduction), the whole or any part of the tax as required by or under the Act, then, such person shall be deemed to be an assessee in default in respect of such tax. The proviso to this section says that the person who omits to deduct or who omits to remit after deduction, shall not be deemed to be an assessee in default if the payee (i) has furnished his ITR under section 139; (ii) has taken into account such sum for computing income in such ITR; and (iii) has paid tax on the income declared by him in such return of income. Further the payee must furnish a certificate in From No.26CA in compliance with rule 31ACB.

One would notice that annexure A of Form 26A has to be certified by a chartered accountant certifying the furnishing of return, payment of tax etc., by the payee. Form 26A is meant for the payer to confirm that the income was paid to the payee without deduction of whole or any part of the tax and confirmation of the payment of interest under section 201(1A) of the Act.

Section 220 of the Income-tax Act, 1961 says that where the assessee has not paid the amount specified as payable in a notice of demand under section 156 within 30 days of the service of the notice, he shall be deemed to be in default. Section 221 says that where an assessee is in default or deemed to be in default in making payment of tax, he shall, in addition to the amount of the arrears and interest payable under section 220(2) is liable for penalty equal to the amount of tax in arrears. The section is worded in such a way that the Assessing Officer may impose penalty not exceeding the amount of tax in arrears.

Section 271C says that if any person fails to deduct the whole or any part of the tax is required to deduct as per the provisions of Chapter XVII-B of the Act, he shall be liable to pay, by way of penalty, a sum equal to the amount of tax which such person failed to deduct or pay or ensure payment thereof. This penalty is imposable by the Assessing Officer w.e.f. 01.04.2025 and previously it could be levied only by the Joint Commissioner.

Adverting to the facts of the case, the imposition of penalty could be done by only by the Joint Commissioner in March, 2025 and not by the Assessing Officer.

The Assessing Officer has initiated proceedings for payment of the amount equivalent to the amount of tax deductible at source with interest @1% for every month from the date on which tax was deductible to the date on which such tax is deducted. Thus, the amount of tax deductible at source but not deducted and also the interest till the date of order is imposable. The assessee in case takes shelter under the proviso to section 201(1) then it may do so in order to minimize the damage.

The fact that the assessee has to pay an amount equal to the amount of TDS with interest for the delayed remittance would be of no avail to him or to the payees. If the payees have furnished Form 26A then to that extent, the payer can save from payment of TDS amount and corresponding interest amount.

After the Assessing Officer passes an order raising demand for the TDS amount and interest and if the assessee does not pay within 30 days or within a shorter time specified in the notice of demand, he shall be deemed to be an assessee in default and liable for penalty not exceeding the amount specified in the notice of demand.

Independent of this, the taxpayer could be liable for penalty under section 271C which could have been imposed by the Joint Commissioner before 1st April, 2025. After the said date, the power to impose penalty is vested with the Assessing Officer.

The assessee hence has to ascertain from the payees as regards their compliance with regard to filing of the ITR for the assessment year 2022-23. In case, they have filed the ITR promptly, the assessee may obtain a certificate in Form 26A and prove that there was no scope for treating itself as an assessee in default.

Since many years have elapsed since the year of incurring the expenditure, the payees may not able to claim credit for the TDS amount when remitted now and thus the payment by the assessee would remain unclaimed.

Beyond all the above said aspects, it is amusing that the assessee being a corporate entity whose books of account would have been subjected to statutory audit under the Companies Act, 2013 and tax audit under section 44AB the aspect of non-deduction of tax at source must have come to light much earlier to the taxpayer. It is surprising that how the taxpayer and the tax auditor have let go the situation.