[Opinion] Delay in Deposit of TDS | Prosecute if you can’t Penalise?

Sumit Mangal & Radhika Sharma – [2023] 152 taxmann.com 126 (Article)

Introduction

Tax Deducted at Source (TDS) is a crucial component of the Indian tax system, ensuring timely collection of taxes and reporting of taxable transactions. Non-compliance with TDS obligations can have serious ramifications, including prosecution, as stipulated under Section 276B of the Income Tax Act, 1961 (“Act“). However, recent developments, such as the Supreme Court’s ruling in the case of US Technologies International (P.) Ltd. v. CIT [2023] 149 taxmann.com 144/293 Taxman 27/453 ITR 644, have shed light on a perplexing aspect: while penalty cannot be imposed for delay in deposit of TDS under Section 271C of the Act, prosecution may be launched under Section 276B of the Act. In this article, we explore this dichotomy and the implications it has on taxpayers.

The Supreme Court’s Ruling and the Absence of Penal Consequences?

In the case of US Technologies International (P.) Ltd. (supra), the Supreme Court ruled that on mere belated remitting of the TDS after deducting the same by the concerned person/assessee, no penalty shall be leviable under Section 271C of the Act. This is due to the specific language of Section 271C which only covers failure to deduct tax and does not cover situation of belated deposit of tax, unlike the language in Section 201 of the Act which deals with levy of interest that covers both the situations. This landmark decision has created a significant paradox within the tax framework. On one hand, the law prescribes prosecution for delayed deposit of TDS under Section 276B of the Act. On the other hand, the absence of any penalty for such delays raises questions regarding the effectiveness and fairness of the legislation.

Interestingly, there is another penalty provision under the Act that lays down penal consequences if the taxpayer is treated as the assessee in default as defined under Section 201 of the Act; however, this provision was not discussed in the judgment of US Technologies International (P.) Ltd’s. case (supra). As per Section 221 of the Act, if the taxpayer fails to deduct or pay the tax in accordance with the provisions of the Act, the taxpayer shall be treated as an assessee in default and shall be liable to a penalty not exceeding the amount of tax in arrears.

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