BACKGROUND
Section 199(1) of the Income Tax Act 1961 permits
claim of Tax Deduction at Source (TDS) when such payment is made to credit of
the Central Government. However, instances have come to the notice of several
persons including tax authorities that in spite of the fact that
- deductor has deducted tax at source and payment
thereof is not made to the credit of Central Government ( Consequently this
will not reflect in the TDS return of the deductor and as such will not further
reflect in 26AS of the deductee)
OR
- deductor has deducted tax at source and payment
thereof made to the credit of Central Government but such deductor has
defaulted in filing TDS Return ( Consequently this will not reflect in 26AS
of the deductee)
PROBLEM
Presently in either of the situations mentioned in
the preceding paragraph, deductee is denied benefit of TDS since in either case
such TDS does not reflect in 26AS of the deductee. With the electronic filing
of Income tax Returns being mandatory in respect of most of the assessees, deductee
( Assessee filing Return of Income) does not get credit of such TDS when return
of Income is processed by CPC . This results in
- Either reduction in Refund Claimed in the
Return of Income
OR
- or results in a demand when Return was filed claiming
no refund.
UNFAIRNESS
1. Reduction
in the refund claimed or resulting demand, consequent upon non- granting of
credit of TDS (either not paid / return of TDS not filed) is unfair for the
deductee because such demand remains as outstanding demand on the CPC Website
and such demands get adjusted with future refunds due to the assessee
(Deductee).
2. In a
situation where Tax is deducted but not deposited, section 205 of the Income
Tax Act, 1961 comes to the rescue of the deductee. The said section reads as
under :
Head Note of the Section: Bar against direct demand on
assessee.
205. Where tax is deductible at the source under
[the foregoing provisions of this Chapter], the assessee shall not be called
upon to pay the tax himself to the extent to which tax has been deducted from
that income.
3. If we
paraphrase the above mentioned section, we can note that following ingredients
will emerge namely:
- Tax is deductible from the deductee
- Such Tax is deducted from the income
- Assessee shall not be called upon to pay the
tax himself to the extent of such tax deduction
4. To
reiterate the rights of the Assessee in such situations, CBDT has issued
directions to the field officers vide reference number 275/29/2014-IT-(B) dated
01-06-2015. The relevant extracts are reproduced here:
- Grievances have been received by the Board
from many taxpayers that in their cases the deductor has deducted tax at source
from payments made to them in accordance with the provisions of Chapter-XVII of
the Income-tax Act, 1961 (hereafter ‘the Act’) but has failed to deposit the
same into the Government account leading to denial of credit of such deduction
of tax to these taxpayers and consequent raising of demand.
- As per section 199 of the Act credit of Tax
Deducted at Source is given to the person only if it is paid to the Central
Government Account. However, as per section 205 of the Act, the assessee shall
not be called upon to pay the tax to the extent the tax has been deducted from
his income where the tax is deductible at source under the provisions of
Chapter- XVII. Thus, the Act puts a bar on direct demand against the assessee
in such cases and the demand on account of tax credit mismatch cannot be
enforced coercively.
5. It
appears that above mentioned instruction was not observed by the field officers
(Reasons well known) and hence CBDT again has issued an office
memorandum on 11-03-2016 (OFFICE MEMORANDUM F.NO.275/29/2014-IT (B), DATED
11-3-2016). Relevant Extracts of the said Memorandum reads as under :
- Vide letter of even number dated
1-6-2015, the Board had issued directions to the field officers that in case of
an assessee whose tax has been deducted at source but not deposited to the
Government’s account by the deductor, the deductee assessee shall not be called
upon to pay the demand to the extent tax has been deducted from his income. It
was further specified that section 205 of the Income-tax Act, 1961 puts a bar
on direct demand against the assessee in such cases and the demand on account
of tax credit mismatch in such situations cannot be enforced coercively.
- However, instances have come to the notice of
the Board that these directions are not being strictly followed by the field
officers.
- In view of the above, the Board hereby reiterates
the instructions contained in its letter dated 1-6-2015 and directs the
assessing officers not to enforce demands created on account of mismatch of
credit due to non-payment of TDS amount to the credit of the Government by the
deductor. These instructions may be brought to the notice of all assessing
officers in your Region for compliance.
CONCLUSION FROM
THE ABOVE
Thus, one will note from the above two
clarifications from CBDT that demand arising out of the situation of Tax
Deducted and not deposited, demand cannot be enforced from the assessee.
However, till date, the issue of TDS
being deducted, not deposited with central government by the deductor and
deductee ( Assessee) claiming such TDS and consequent refund in the return of
Income, is still not addressed by CBDT in spite of the fact that above
instruction/ office memorandum has been released .
SOLUTION
In the light of above, relevant rules should
authorise assessee to
- Ask CPC to Block such demand from further
adjustment on the website and for the purpose a specific option be permitted to
be included in case of mismatch of TDS such as “TDS Mismatch since TDS
Deducted but not deposited by the deductor”
- Assessee is permitted to send a proof of Tax
Deduction by the deductor (If Available) as a response to outstanding tax (TDS)
demand.
- Besides relevant Rules should provide for a
proof of deduction to be submitted to the deductee on a Quarterly basis which
will substantiate a claim of the deductee that TDS is deducted since
entire hypothesis of the section 205 is based on the fact that “Tax is deducted”.
This is essential since deductor is an agent of Income Tax Department and as
such there is a privity between Tax department and the deductor which is
unfortunately lacking between deductor and deductee.
- Lastly a deductee may be permitted
to lodge an online query when such deduction is not reflecting as a credit in
26AS against such deductors. A deductee will have to at least obtain a PAN and
TAN of the persons he deals with to lodge such queries.
