TDS and TCS,understanding appropriate rate of TDS - assessee under default


TDS Threshold Calculation

TDS Compliance requirements - timely payment, timely filing of return and timely download and issue of TDS Certificates

Fees for delay in filing TDS return u/s 234E

Section 234E of the Income-tax Act, 1961 inserted by the Finance Act, 2012 provides for levy of a fee of Rs. 200/- for each day’s delay in filing the statement of Tax Deducted at Source (TDS) or Tax Collected at Source (TCS). The provision for Levy of Late filing fee was introduced to improve Filing Compliance and to avoid subsequent inconvenience to the taxpayers due to inordinate delays in availability of tax credits in their 26AS Statements.

This assumes further significance in view of the decision of the Hon’ble High Court of Bombay, dated February 6 2015, upholding the validity of the Levy for Late Filing u/s 234E. The court has observed the following in its decision in the case of Rashmikant Kundalia vs. UOI:
Immediate Attention:
  • The late filing of TDS returns by the deductor causes inconvenience to everyone and s. 234E levies a fee to regularize the said late filing.
  • The fee is not in the guise of a tax nor is it onerous.
  • The levy is constitutionally valid.

A Day’s delay in TDS remittance – Interest upto 3%!!A Day’s delay in TDS remittance – Interest upto 3%!!!
Yes, TDS remittance delayed by a day may cost the deductor up to 3%. So next time, as a deductor  if you are not serious about the due date for TDS remittance, just think about this.
Due date for TDS remittance
Ø Where the amount is credited or paid during the month of March – Due date 30th April.
Ø Other cases – within 7 days from the end of the month in which the deduction is made.
What if the above deadline is missed?
According to Section 201(1A) which is amended by Finance Act, 2010(effective from 01-07-2010):
“Without prejudice to the provisions of sub-section (1), if any such person, principal officer or company as is referred to in that sub-section does not deduct the whole or any part of the tax or after deducting fails to pay the tax as required by or under this Act, he or it shall be liable to pay simple interest,—
(i) at 1% for every month or part of a month on the amount of such tax from the date on which such tax was deductible to the date on which such tax is deducted; and
(ii) at 1.5% for every month or part of a month on the amount of such tax from the date on which such tax was deducted to the date on which such tax is actually paid,
and such interest shall be paid before furnishing the statement in accordance with the provisions of sub-section (3) of section 200”
So, as per the above section, if the tax was deducted, but was not remitted within the due date, interest will be applicable : from the date of deduction to the date of actual payment of TDS.
Relevant Points
1. Interest @ 1.5% will be applicable from the date of deduction till such amount is actually paid and for every month or part thereof. While calculating the period for interest, the period prescribed for making the payment (i.e period up to the due date) cannot be excluded.
2. This interest liability is absolute and should be deposited through self assessment; and the AO or any other Authority cannot waive off such liability for any reason.
3. While calculating the interest, the defaulted TDS amount shall be rounded off to the nearest multiple of 100, any fraction thereof may be ignored.
How 3% interest for a delay of 1 day?
Now, consider an example. Tax was deducted on certain payment made on 05-07-2010. As mentioned above, the due date for payment of this amount to the credit of Central Govt. is 07-08-2010, but the deductor makes the payment on 08-08-2010. Now, interest will be applicable not after the default, but from the date of deduction, which is 05-07-2010 and while calculating the period for interest, the period prescribed for making the payment to the Govt. cannot be excluded. So, applicable interest will be :
From 05-07-2010 to 04-08-2010 – 1 Month
From 05-08-2010 to 08-08-2010 – part of the month, to be considered as full month.
Thus, interest for 2 months @ 1.5% per month will be 3% and a delay of 1 day in remittance of TDS has resulted in payment of 3% interest by the deductor!!!

Downloading of TDS Certificates from TRACES made mandatory

Given below are some important information regarding downloading of TDS certificates. Refer to the following provisions of the Income Tax Act, 1961:

Downloading of TDS Certificates from TRACES made mandatory:   

In this regard, your attention is invited to the CBDT circulars 04/2013 dated 17.04.2013, No. 03/2011 dated 13.05.2011 and No. 01/2012 dated 09.04.2012 on the Issuance of certificate for Tax Deducted at Source in Form 16/16A as per IT Rules 1962. It is now mandatory for all deductors to issue TDS certificates after generating and downloading the same from “TDS Reconciliation Analysis and Correction Enabling System” or (hereinafter called TRACES Portal).

TDS Certificates downloaded only from TRACES hold valid: 

In view of above circulars, it may kindly be noted that the TDS Certificates downloaded only from TRACES Portal will be valid. Certificates issued in any other form or manner will not comply to the requirements referred in the Income-tax Act 1961 read with relevant Rules and Circulars issued in this behalf from time to time.

Due Date for downloading and Penalty for non-compliance: 

Please be advised that under the provisions of section 203 of the Income Tax Act, 1961 read with rule 31A, Certificate of tax deducted at source is to be furnished within fifteen (15) days from the due date for furnishing the statement of tax deducted at source. Failure to comply with the provisions of the Act will attract penalty under the provisions of section 272A of the Act, a sum of one hundred rupees for every day during which the failure continues.

40a(1a) Expenditure disallowance for non deduction of TDS

The Provision

The Finance Act (No.2) Act, 2004 has inserted sub-clause (ia) to clause (a) of section 40 of the Income-tax Act w.e.f. 01/04/2005.  It lays down the condition of deposit of tax deducted at source of allowability of certain expenses paid or payable to a resident while computing the total income of the assessee from business or profession.  They are:-
  1. Interest covered by sections 193, 194A;
  2. Commission or brokerage covered by section 194H
  3. Fees for professional or technical services covered by section 194J
  4. Payment to a contractor or sub-contractor covered by section 194C.  
Other payments requiring deduction of tax at source such as salary (s.192) and rent (s. 194-I) made to residents are not covered by this prohibitory provision. 

 Provision similar to sub-clause (ia) already exists in sub-clause (i) of clause (a) to section 40 where under interest, royalty, fees for technical services and other sums payable to non-residents are not allowed deduction in computing the income of an assessee if he has not deducted or after deduction has not paid the same on any of these items of expenditure.  Besides, the salary payable outside India or to a non-resident is, like wise, not allowable as deduction because of section 40(a) (iii) if tax deducted is not paid or is not deducted at source.

 Proviso to sub-clause (ia) permits deduction of the expense if tax is deducted there from in any subsequent year or is deducted in the relevant previous year but is paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of section 200.   Under section 200(1) read with Rule – 30 of the Income-tax Rules, the tax is to be paid within 7 days of the end of the month in which it is deducted.  If the amount liable to tax deduction is credited to the account of the payee on the last date of the accounting year of the assessee, the tax deducted thereon can be paid within two months of that date.  Since the accounting year in most cases is the financial year, such amount in respect of which payment of tax deducted, is made up to 31st May of the next year, will be allowed deduction in computing the income of the deductor-assessee even though actually paid in the next year.   Thus, the criterion for allowance is not the accrual or payment of the expense but the deposit of TDS on such expense within previous year or the time permitted by law.
5. Another criterion is that the "tax is deductible at source" from the expense.   Thus for example, expense on account of interest will not be deductible on the payee furnishing a declaration as prescribed in section 197A (1A) to the effect that no tax is deductible as his estimated total income of the year will be nil. Thus in such a case, the rigours of section 40(a) (ia) will not be applicable.
Objective of the Provision

6. The provision is intended to ensure better compliance of TDS provisions and to curb bogus or non-genuine payments largely in respect of wide spread hawala entry racket and other similar rackets prevalent in many parts of the country.  It supplements several existing weapons in the armory of the Income Tax Department for enforcement of TDS provisions, namely; interest u/s 201(1A), penalty u/s 271C, prosecution u/s 276B etc.  Being a penal provision that disallows bonafide expense in computing the total income, it needs to be interpreted strictly keeping in view the underlying objective.
Important Issues
7.  Several important issues arise in the implementation of this provision.  They are:-
  1. Legal validity – whether the principle of double jeopardy applicable
  2. Single transaction – no tax can be deducted subsequently
  3. Delay in the payment of tax deducted at source
  4. Deduction of payment of lower tax
  5. Tax paid voluntarily or collected involuntarily, without deduction from the payee
  6. How to obtain credit for excess payment of tax not deducted from the payee
  7. Tax not deducted at source but is paid by the payee in his assessment
  8. Tax on usance interest – whether deductible
  9. Disharmony between provision to section 40(a) (ia) and section 199
(i) Legal validity – whether principle of double jeopardy applicable

8.  Article 20(2) of the Indian Constitution lays down the principle against double jeopardy and states that no person shall be prosecuted for the same offence more than once.   The question that arises is if sub-clause (ia) of section 40(a) violates the principle against double jeopardy by disallowing bonafide business expenditure on which tax is not deducted and thereby increasing taxable income in addition to penalizing the assessee for the same offence by charging interest, levying penalty and initiating criminal prosecution.
9. In the context of the levy of penalty as also starting criminal prosecution for the same offence of non-deduction/non payment of tax, the Courts have held in the past that the rule of double jeopardy is applicable to criminal cases and cannot be applied to penalty and prosecution for the same offence of non-deduction in income tax cases.  [CIT v. Ram Chandra Singh (1976) 104 ITR 77 (Patna)].  Besides, penalty and prosecution are separate proceedings and the question of double jeopardy will not arise.  [PNB Finance and Industries v. ITO 157 ITR 385 (Del) and Sequoia Construction Co. Ltd. v ITO 158 ITR 496 (Del)]. 
Since disallowance of expenditure and levy of penalty/prosecution are different proceedings, it could be argued that the principle against double jeopardy will not be applicable and expense could be disallowed in computing the business expense in addition to other consequences for non deduction/payment of tax.
(ii) Single transaction - No tax can be deducted subsequently Application of the maxim "Lex Non Cogit Ad Impossibilia"
10.     If tax is deducted and paid in a subsequent year, the business expenditure can be reduced from total income in that year.  But tax can be deducted if there is another transaction between the assessee and the same payee or some amount should remain outstanding to enable deduction.  What happens if there was only one transaction and the payment was made in full without deduction of tax?  Could not the assessee rely on the well-known maxim of Lex Non Cogit Ad Impossibilia, which means that the law does not compel a person to do that what he can not possibly perform?   This principle has been well recognized by the Courts of law [For example, see Escorts Ltd. v. CIT 257 ITR 468, 476 (Del)].  The maxim may help in bonafide cases of non-deduction e.g. subsequent change of law or Court judgement or Board's clarification making a payment taxable from some earlier date.
(iii) Delay in payment of tax deducted at source

11. There may be some delays in payment of tax deducted at source beyond the period prescribed in sub-section (1) of section 200 read with Rule-30 of the Income-tax Rules.  Will the assessee lose the benefit of deduction of the prescribed expenditure in the computation of his income?  It appears, he will not lose the benefit.  The expression in sub-clause (ia) to the effect that "after deduction, has not been paid during the previous year," implies that even if, after deduction, there is delay in payment, the expense will be deducted in computing the total income if the tax deducted is paid within the previous year.     
(iv)  Deduction and payment of lower tax than required

12. Situations may also arise where the deduction of tax and its payment is lower than what was required under the law.  The issue would be; (i) if the full amount will be allowed as deduction: or (ii) it will only be proportionate to the tax deducted at source: or (iii) no deduction at all will be allowed. 
13.  While there is no direct decision on the subject, there are judgements, in the area of short deduction of tax, which show that the issue has to be judged on the basis of the facts and circumstances of each case.  If there was bonafide dispute about the liability for tax deduction or about the rate of tax deduction, it may be possible to claim deduction of the expenses in the computation of income even where the deduction was at a lower rate than what was held ultimately in tax litigation.    Although sub-section (1) and (1A) of section 201 was amended by Finance Act, 2001 with effect from 01.04.1962 to deem the assessee a defaulter and make him liable to pay interest if there is short deduction yet the nature of responsibility cast on the deductor is to form an honest and bonafide opinion as to the deduction of tax from salaries as was held in the case of Gwalior Rayon Silk Co. Ltd. v. CIT ((1983) 140 ITR 832 (MP).  Besides u/s 191(2), the deductee is liable to pay tax on his income and this liability is not extinguished in case of short deduction of tax.  
(v)  Tax paid voluntarily or collected involuntarily without deduction from the payee 

14.  Another situation would be where the tax was not deducted at source but was paid voluntarily or collected by the Income-tax authorities from the assessee through coercive methods prescribed in section 201.  The way sub-clause (ia) to section 40(a) is worded, a view can be taken that the assessee will not be entitled to the deduction of the expenditure where tax was not deducted by him but was voluntarily paid by him or involuntarily collected from him.   The main sub-clause (ia) as well as the proviso thereto makes deduction from the payee an essential condition for allowing expenditure as business deduction in the hands of the assessee.  However, in a similar provision contained in sub-clause (i) of section 40(a) in respect of payments to non-residents and foreign companies, the Rajasthan High Court, in Addl. CIT v. Farasal Ltd. (1987) 163 ITR 364-371-2 (Raj), interpreted the word "paid" in that sub-clause to include involuntary payment of tax collected by the Revenue.  In doing so, it took into account the fact that the object of section 40(a) (i) is to protect the interest of Revenue by ensuring that in respect of the amount chargeable under the Act and payable outside India, the tax is paid by the non-resident or deducted in cases where the non-resident does not have any agent in India from whom the tax can be recovered.  From this point of view, it is immaterial whether the Revenue has received payment of the tax due either voluntarily or by initiation of recovery proceedings against him.  Following the ratio of the said judgement of the Rajasthan High Court, the voluntary or involuntary payments of tax should be covered in the word "paid" used in section 40(a) (ia) also.  Deduction of expenditure should be allowed to the assessee in case of involuntary payments.   The word "paid" would also take in voluntary payments made by the assessee without deduction from the payee.
(vi) Credit for payment of tax not deducted at source

15.  Where the tax is paid by or is recovered from the assessee without having been deducted from the payee, the latter cannot get the credit for the deduction of tax at source because no such deduction was effected from the payment made to him.  The assessee also cannot issue him the certificate of tax deduction.  On the other hand the payee has paid the tax due in his assessment.  Who will then get the credit for such payment and in what manner is the question that is likely to arise in several cases.  While it is desirable by the Board to issue an instruction on the subject, the assessee paying the tax without deducting the same could claim the refund or seek adjustment against any tax demand outstanding against him or getting the refund if no demand is outstanding by relying on the ratio of Board's Circular No. 285 dated 21.10.1980 reported at 130 ITR 01 (St).  In that Circular, the Board considered the issue of excess payment of the amount not actually deducted or deductible at source and held that it can be refunded "to the person responsible for making such payment".  The assessee may have to show that the payee has paid the tax in his assessment and there has thus been no loss of revenue.
(vii) Tax not deducted at source paid by the payee in his assessment

16. Very often, issue that is arising is  as to whether the deduction for the expenses would be admissible to the assessee where no tax was deducted at source but the payee has in his assessment paid the tax? If so, in which year such deduction would be liable. 
17. Deduction of tax at source is only one of the modes of recovery and is "without prejudice to any other mode of recovery" (s. 202).  The charge of income tax u/s 4(1) of the Act is on the payee and this is also specifically provided in section 190(2) of the act, which states that the tax deduction provisions will not "prejudice the charge of tax on such income under the provision of sub-section (1) of section 4".  Besides, section 191 requires the payee to make that payment of the tax that is not deducted at source.  Finance Act 2003 has inserted an Explanation in section 191 which treats the assessee to be in default for the purposes of the  proviso to sub-section (1) of section 201 only to the extent of non-deduction of tax that "has not been paid by the assessee/payee direct".    
18. Gujarat High Court in CIT v. Rishikesh Apartments Co-Operative Society Ltd. (2002) 253 ITR 310 (Guj) held that "it would not be proper on the Board of the Revenue to levy any interest u/s 201 (1A)" where the payee has paid the tax directly at the time when it had become due.  Similar view has been taken by several other High Courts notably the Kerala High Court in the case Kannan Diwan Hill Produce Co. Ltd. v. CIT (1986) 161 ITR 477 (Ker) and Madhya Pradesh High Court in CIT v. Life Insurance Corporation of India (1987) 166 ITR 191 (MP).  Apart from the non-levy of interest, the deductor will not be liable for penalty u/s 221 since he will not be an assessee in default where the tax has been paid by the payee directly.
19. In such a situation, could the deduction of expense u/s 40(a) (1a) be denied?   One view is that section 40(a) (1a) stands on a different footing.    The pre-requisite for the allowability of expenditure is the deduction of tax at source and the deposit of the same with the Central Government before the expiry of time prescribed under sub-section (1) of section 200 on which "tax is deductible at source under Chapter XVII-B and such tax has not been deducted or after deduction has not been paid ……………..".   One has to look at the words used in the enactment and if they are clear and unambiguous, there is no scope in any intendment.  According to this view, deduction of the expenses should not be allowed even if the payee made the payment of the entire tax in his assessment.  
20. The other view proceeds on the basis that the denial of the deduction could lead to an absurd result and would also not be in consonance with the objective of this provision, namely to ensure the collection and recovery of tax.  The tax on the same income cannot be collected twice.  If the payee has made the payment in his assessment and the assessee is not to be treated as in default and no interest/penalty is leviable in view of Explanation to section 191, it would be unreasonable to deny deduction of the expense to the assessee.  It will also be absurd to require him to pay the tax in order to claim the deduction and since it would have been paid in excess and no certificate of deduction could be given to refund the excess payment to him.  It, therefore, appears to be fair and reasonable, though against the plain language of section 40(a) (ia) to allow the deduction for the expenses in the year in which the payment has been made by the payee direct.  Of course, it will be for the assessee to lead evidence to the satisfaction of the Assessing Officer that the payment of tax has been made directly and in the year in which it has been made.
  1. The second view appears preferable.
(viii)  Tax on usance interest – whether deductible

22.  Usance interest is very common in both, national and international purchases made on deferred payment basis.  Gujarat High Court in CIT v. Vijay Shipbreaking Corporation (2003) 261 ITR 113 (Guj) has held that usance charges represent usance interest charged by the bank/non-resident to be regarded as interest within the meaning of section 2(28A) and if the payer in India did not deduct income tax at source, he could not claim deduction of the expenditure on account of interest/usance charges and the entire amount thereof would be liable to be disallowed u/s 40(a)(ia) of the Act.  Similar view was taken by Madras High Court in CIT v.   C.C.C. Holidays (2003) 260 ITR 433 (Mad).
23. Though detailed, the judgement of the Gujarat High Court in Vijay      Shipbreaking seems to require re-consideration.   It hinges on the question as to whether usance interest arises from debt referred to in section 2(28A) which defines the word "interest".   The High Court has referred to the Jurisprudence by Roscoe Pound Part III page 176.7where it is stated that "Debt arises from the unwillingness or inability to pay cash down. When the purchase price becomes payable against delivery and the engagement to pay it at a later date or by installments". In this case there was no unwillingness to pay against delivery. With letters of credit as stipulated by the seller having been raised, and the two agreements as dictated by the seller having been signed on the dotted line, there could be no question of the party unwilling to pay a debt having been incurred. The Interpretation placed by the High Court would imply that where a sale takes place a debt is incurred which seems far-fetched. A debt can be said to have been incurred when there is failure to pay and that gives rise to an actionable claim.

24. Besides the Oxford Dictionary defines the word  'usance' to mean 'time given for payment of foreign exchange" So if the foreign seller gives, let us say, 180 days to the purchaser for payment, the so called interest charged for 180 days will not make the purchase price a debt.  It is in the nature of finance charges similar to the cost of material and manufacturing costs while making goods for sale.  Entry in the books of account and categorizing the payment as interest will also not be decisive as was held by the Supreme Court in Kedarnath Jute Manufacturing Co. v. CIT 82 ITR 363 (SC).  Besides, the Madras High Court in the case of CIT v. India Pistons (2006) 282 ITR 632(Mad) held that the payment of purchase price in installments for supply of goods to a non-resident and the interest on unpaid installment was not the same thing as loan and no tax was deductible at source.  It, therefore, appears that the last word on the nature of usance interest has not been said though the preponderance of judicial opinion is that tax is deductible at source on such interest.
(ix) Disharmony between provision to section 40(a) (ia) and section 199
25. Section 199 prescribes that the credit for the tax deducted at source will be allowable to the payee in the year in which the income liable to deduction is assessed to tax.  Normally, income is assessed on accrual basis.  The payee may not get the benefit of the deduction of tax at source if it is deducted by the assessee in a year subsequent to the year in which it is assessable in the payee's hands.  Principles of equity and justice will require that such credit should be allowed in the assessment year relevant to the previous year in which the payment is made.
26. To sum up, the above discussion would show that there are several issues that arise in implementing the provision. Basically, in the zeal of the Revenue to add yet another weapon in its armoury to strengthen the enforcement of TDS provisions it has lost sight of the implications of the basic concept that the TDS is merely one of the methods of collection and recovery of tax; the charge of tax on the income continues to be on the deductee because of charging section 4 of the Act. The provision was justified in the case of deductees being non-residents and the Revenue not being able to reach them for levy and collection of tax. Its extension to residents is the root cause of various anomalies and absurdities as pointed out above. But we have no option but to help its enforcement in as best a manner as possible.

Dilution of provision 
The drocarian provision is diluted in 2010 and 2013 but still the two pain areas are

- the disallowance is for paid during the year as well as payable at year end
- the disallowance can be avoided by submitting a CA certificate confirming that the income is ultimately offered to tax by payee. However interest under 201 is still payable

The defence that the income is ultimately offered is put to use when notice issued under TDS survey for non deduction/short deduction.

However point to note is when assessed under best judgement basis neither 40a(1a) nor 40a apply

No disallowance u/s 40(a)(ia) for short deduction of TDS-Kolkata ITAT

Kolkata ITAT in Deputy Commissioner of Income-tax Vs.  M/s. S. K. Tekriwal  has given a very important decision wherein it has settled that disallowance of u/s 40(a)(ia) if for non deduction of the requisite Tax. However no disallowance can be made u/s 40(a)(ia) for short deduction of tax or for deduction of tax under any other section. 

In this case the assessee deducted tax u/s 194C @ 1% whereas as per department he was required to deduct tax u/s 194I @ 10% hence there was shortfall of TDS, on this ground the disallowance was made. But the ITAT decided the matter in favour of assessee with following observations:

 " In the present case before us the assessee has deducted tax u/s. 194C(2) of the Act being payments made to sub-contractors and it is not a case of non-deduction of tax or no deduction of tax as is the import of section 40a(ia) of the Act. But the revenue's contention is that the payments are in the nature of machinery hire charges falling under the head 'rent' and the previous provisions of section 194I of the Act are applicable. According to revenue, the assessee has deducted tax @ 1% u/s. 194C(2) of the Act as against the actual deduction to be made at 10% u/s. 194I of the Act, thereby lesser deduction of tax.The revenue has made out a case of lesser deduction of tax and that also under different head and accordingly disallowed the payments proportionately by invoking the provisions of section 40(a)(ia) of the Act. The Ld. CIT, DR also argued that there is no word like failure used in section 40(a)(ia) of the Act and it referred to only non-deduction of tax and disallowance of such payments. According to him, it does not refer to genuineness of the payment or otherwise but addition u/s. 40(a)(ia) can be made even though payments are genuine but tax is not deducted as required u/s. 40(a)(ia) of the Act. We are of the view that the conditions laid down u/s. 40(a)(ia) of the Act for making addition is that tax is deductible at source and such tax has not been deducted. If both the conditions are satisfied then such payment can be disallowed u/s. 40(a)(ia) of the Act but where tax is deducted by the assessee, even under bonafide wrong impression, under wrong provisions of TDS, the provisions of section 40(a)(ia) of the Act cannot be invoked. Here in the present case before us, the assessee has deducted tax u/s. 194C(2) of the Act and not u/s. 194I of the Act and there is no allegation that this TDS is not deposited with the Government account. We are of the view that the provisions of section 40(a)(ia) of the Act has two limbs, one is where, inter alia, assessee has to deduct tax and the second where after deducting tax, inter alia, the assessee has to pay into Government Account. There is nothing in the said section to treat, inter alia, the assessee as defaulter where there is a shortfall in deduction. With regard to the shortfall, it cannot be assumed that there is a default as the deduction is not as required by or under the Act, but the facts is that this expression, 'on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction has not been paid on or before the due date specified in sub-section (1) of section 139'. This section 40(a)(ia) of the Act refers only to the duty to deduct tax and pay to government account. If there is any shortfall due to any difference of opinion as to the taxability of any item or the nature of payments falling under various TDS provisions, the assessee can be declared to be an assessee in default u/s. 201 of the Act and no disallowance can be made by invoking the provisions of section 40(a)(ia) of the Act."

Clarifications on Provisions of 194C, 194J and 194I - TDS to be deducted under which section for some confusing cases
In some cases, in respect of compliance with TDS requirements as Income tax Act,1961,
There is an ambiguity in respect of applicable provisions. Regarding this CBDT has been issued Circular 715/1995 for providing an aid for clarifications. Some of the important issues tabulated herewith:

1) Advertising Contract (Payments made to Advertising Agency)- 194C
2) Advertising Agency to Professionals (Models, Artists etc) - 194J
3) Contract putting up of Hoarding - 194C
4) Space and putting up of Hoarding - 194I
5) Payment by Individual to Agent of Air travel - No TDS u/s 194C
6) Clearing and Forwarding agents to Carriers - 194C
7) Couriers - 194C
8) Payment to Recruitment Agency - 194J
9) Company to Share registrar - 194J
10) Payment of Commission to external parties for procuring orders for company products - 194J
11) Sponsorship of Debates, Seminars etc - 194C
12) Payments to Hotels for hiring of rooms in regular basis - 194I
13) TDS on Notional income of Deposit in respect of Rent - No TDS
14) Rent Agreemant in the nature of Business centre - 194I
15) Composite rent agreement - 194I

For knowing about more details and clarifications please go through the 715/1995

TDS on Service tax Portion
 Rajastan High Court Judgement on TDS on service tax portion.
The existing concept is that only in case of rent, service tax portion is exmept from TDS based on wording in 194J ( as opposed to wording in other sections).
This judgement has lead to exemption of service tax portion from TDS in all cases.
TDS on service tax portion exempt : Will increase cashflow for service providers. Insist your customers to deduct lower TDS

CBDT Circular No. 1/2014 in F. No.275/59/2012-IT(B), Dated: January 13, 2014
CBDT had issued a  dated 28.04.2008, wherein it was clarified that tax is to be deducted at source under Section 194-I of the Income-tax Act, 1961 on the amount of rent paid/payable without including the service tax component.
Representations/letters have been received seeking clarification whether such principle can be extended to other provisions of the Act also.

In a recent judgement of the Rajasthan High Court dated 01.07.2013, in the case of CIT(TDS) Jaipur vs Rajasthan Urban Infrastructure , held that if as per the terms of the agreement between the payer and the payee, the amount of service tax is to be paid separately and was not included in the fees for professional services or technical services, no TDS is required to be made on the service tax component u/s 194J of the Act.

On re-examination of the matter, in exercise of the powers conferred under section 119 of the Act, the Board has decided that wherever in terms of the agreement/ contract between the payer and the payee, the service tax component comprised in the amount payable to a resident is indicated separately, tax shall be deducted at source under Chapter XVII-B of the Act on the amount paid/payable without including such service tax component.

                             New Rule

Bill Basic Amt
Service Tax

Total  Bill

TDS Rate

What vendor gets

TDS certificate



TDS on Payments to Transporters- Amendment to Section 194C w.e.f. June 1, 2015 

Section 194C of the Income Tax Act, 1961 prescribes that any payment to a contractor is subject to a Tax Deduction at Source (TDS) at the rate of:

·         1% in case the payee is an Individual or a Hindu Undivided Family, and
·         2% in case of other payees (i.e. partnership firm, company, trust, body of individuals or association of persons) if such payment exceeds Rs. 30,000 per contract or aggregate of such payments of contracts in a financial year exceeds Rs. 75,000.

TDS on account of a contractor during the course of plying, hiring and leasing goods carriage
Earlier Provision

The earlier provision (upto May 31, 2015) provides that no deduction of tax is required from payments made to the contractor during the course of plying, hiring and leasing goods carriage if the contractor furnishes his PAN to the payer.

New Provision effective June 1, 2015
The new provision of Section 194C, as was informed earlier at the time of the Union Budget, restricts the cases for non-deduction of tax. Non deduction of tax will be available only for small transport operators owning not more than 10 goods carriages.
If transporter is not owning more than 10 goods carriage at any time during the previous year, then we, as payers (Tax deductors) have to obtain a declaration from transporter along with his copy of PAN before credit or payment to transporter, whichever is earlier.

TDS on salary : Employer needs to obtain PAN of landlord if rent piad is above theshold limit

New rule lowers HRA exemption claim limit
The new rule is aimed at people claiming HRA exemption for living in their own house.
NEW DELHI: If you are a salaried taxpayer claiming HRA (house rent allowance) deduction, watch out. The central government has lowered the exemption limit for reporting the rent received. Salaried taxpayers claiming HRA exemption and paying a rent of over Rs 1 lakh per year have to give landlord's PAN (permanent account number). Till now, if the total rent paid was less than Rs 15,000 a month there was no need to submit the landlord's PAN details. The new rule effectively lowers the rent limit from Rs 15,000 a month to Rs 8,333 per month for claiming HRA exemption without making any disclosures.

"Further, if annual rent paid by the employee exceeds Rs 1,00,000 per annum, it is mandatory for the employee to report PAN of the landlord to the employer," the Central Board of Direct Taxes said in its latest circular. "In case the landlord does not have a PAN, a declaration to this effect from the landlord along with the name and address of the landlord should be filed by the employee," it said.

Though incurring actual expenditure on payment of rent is a pre-requisite for claiming deduction under section 10(13A) of the I-Tax Act, it has been decided as an administrative measure that salaried employees drawing HRA up to Rs 3,000 per month will be exempted from production of rent receipt.

TCS on Cash Sales transaction  - Black money now tightened

CBDT has issued Notification dated 30/12/2015, amending Rules 114B, 114C, 114D, 114E.

W.e.f. 01/04/2016, all assessees (Liable for Tax Audit u/s 44AB), will have to file Annual Information Return in Form 61A, in case of receipt of Cash payment exceeding Rs. 2 lacs for Sale of Goods/Services

CBDT clarified that TCS @ 1% will apply only on cash portion and not on entire amount (cash + cheque). CBDT Circular No. 23/2016 dt. 24 June 2016
Question 1: Whether tax collection at source under section 206C(1D) at the rate of 1% will apply in cases where the sale consideration received is partly in cash and partly in cheque and the cash receipt is less than two lakh rupees.
Answer : No. Tax collection at source will not be levied if the cash receipt does not exceed two lakh rupees even if the sale consideration exceeds two lakh rupees.
Illustration: Goods worth Rs. 5 lakhs is sold for which the consideration amounting to Rs.4 lakhs has been received in cheque and Rs.1 lakh has been received in cash. As the cash receipt does not exceed Rs.2 lakh, no tax is required to be collected at source as per section 206C (1D).
Question 2: Whether tax collection at source under section 206C (1D) will apply only to cash component or in respect of whole of sales consideration.
Answer: Under section 206C (1D), the tax is required to be collected at source on cash component of the sales consideration and not on the whole of sales consideration.
Illustration: Goods worth Rs. 5 lakhs is sold for which the consideration amounting to Rs.2 lakhs has been received in cheque and Rs.3 lakh has been received in cash. Tax is required to be collected under section 206C (1 D) only on cash receipt of Rs.3 lakhs and not on the whole of sales consideration of Rs.5 lakh.

Interest paid for delayed deposit of TDS is allowable expenditure
TDS IS PART OF SUM PAYABLE TO PAYEE and is trading liability- 
October, 13th 2017
References and links:
Lachmandas Mathura vs. CIT 254 ITR 799 (SC) 1997 (12) TMI 16 - SUPREME Court Interest paid on sales tax arrears is deductible u/s. 37(1) Ld. CIT(A) after considering the submission of assessee has deleted the addition made
Commissioner Of Income-Tax Versus Mysore Electrical Industries Limited 1991 (3) TMI 30 - KARNATAKA High Court
- Interest for failure to pay PF contribution was held deductible u/s. 37(1).
Bharat Commerce And Industries Ltd. Versus Commissioner of Income-Tax 1998 (3) TMI 2 - SUPREME Court
Recent judgment of Kolkata ITAT in case
DCIT, Circle-3(1), Kolkata Vs. M/s Narayani Ispat Pvt. Ltd dt. 30.08.2017 in ITA No.2127/Kol/2014 for Assessment Year: 2010-11 2017 (10) TMI 67 - ITAT KOLKATA
TDS/TCS are part of sum payable for business expenses. Deposit of TDS/ TCS results into payment to payee who get credit for TDS/ TCS deposited. In case of delay in deposit of TDS/ TCS, interest is payable for such late deposit. This is in relation to business expenditure. Therefore, interest paid for delay in deposit of TDS/ TCS is also a business expenditure. In this article author had discussed several aspects of TDS/TCS . Recently honourable Kolkata ITAT has considered this issue and allowed such interest under section 37.
This judgment of ITAT, on issue of interest for late deposit of TDS seems to be first reported judgment. In the judgment ITAT has also not referred to any other judgment on the issue.This way we can consider that generally such interest is being allowed by tax authorities.
Tax Deducted at Source(TDS) and Tax collection at source (TCS)
Tax may be deducted from various sums payable by assessee to his employees, service providers and suppliers. The tax has to be deducted as per provisions and then deposited within time prescribed from time to time.
Similarly Tax may be collected from customers or suppliers of goods as per law. TCS is also required to be collected in respect of prescribed transactions and then deposited within prescribed period.
TDS and TCS are part of trading or business operations:
In case of assessee engaged in business or profession he employ people or receives services from others, purchase or sell goods in course of business. TDS and TCS are intimately connected to such business operations.
Just like GST, VAT, sales tax, profession tax, or any other tax collected from other parties or otherwise payable in account of other government or authorities the amount of TDS and TCS are also payable. Amount of TDS and TCS arises in course of business or profession and such obligation is imposed on assessee and therefore, he deduct or collect tax and then pay to or deposit in account of concerned government or its department, as per prescribed method of deposits in banks or treasury.
TDS is part payment of business expenditure or trading liability:
TDS is a part of payment to be made to payee (supplier or service provider).
For example:
A. Suppose gross salary payable is ? 1000 K, out of which following deductions are made
For PF ? 100 K
For profession tax Rs. 10 K
TDS Rs. 90 K
Net salary payable to employees ? 800 K
In accounting entry ? 1000K will be debited to salary account, deductions will be credited to respective accounts. Then when payments are made respective account will be debited.
Salary of ? 1000 K (Rs. ten lakh) is allowable expenditure. PF, PT, and TDS are sums withheld by employer and are deposited in respective account, for which employees will get credit as the sums were deducted from their salary. Gross salary of ? 1000K is income of employees. The will get deductions for sums deducted from their salary. TDS will also be credited in their account with Income-tax Department and it will be reflected in their TDs report in form 26AS. PF will be credited in their account. Profession tax is tax paid on behalf of employees and is allowable in their hands against salary income.

Therefore, the amount first deducted and then paid or deposited for PF, P.Tax and TDS are part and parcel of salary payable by employer.
B. payment to contractor:
Suppose gross sum payable to a contractor is Rs. ten lakh, out of which TDS is ? 20K. The assessee shall pay ? 980K to contractor and deposit ? 20K as TDS for which contractor shall get credit against income-tax payable by him.
C. payment to professionals:
Suppose gross sum payable to a professional is Rs. ten lakh, out of which TDS is Rs. one lakh. The assessee shall pay ? 9 lakh to professional and deposit Rs. one lakh as TDS for which professional shall get credit against income-tax payable by him.
TDS can also be at lower rate:
Suppose contractor or professional furnishes permission or order form his Assessing Officer (AO) for TDS at lower rate, then the assessee will deduct tax at such lower rate and deposit amount based on such rate. The amount so deducted will be deposited and balance amount shall be payable to the contractor or professional.
Similarly in case of payment of salary, the amount of TDS can be lower, if employees had made investments in tax saving scheme and furnished evidence to the employer.
TDS is against personal liability of tax payable by payee:
Above discussions and examples are given just to emphasise that the payment of salary to employees or to contractors and professionals are made in course of business or profession and TDS is a part of full amount payable by assessee to his employees, contractor or professionals.
The sum do TDS is tax paid on behalf of payee. This will be adjusted against tax liability of payee. This will be credited in account / PAN of payee and reflected in tax credit in form 26AS.
Tax deductor has separate and independent personal liability to pay his income-tax
Tax deductor also earn income and he has separate and independent personal liability to pay his income-tax, on the total income which he earns during any previous year. A tax deductor, may not have tax liability due to exemption or loss. Even if there is no personal liability of income-tax, still he is liable to deduct or collect tax if makes payment of prescribed sums from which tax is to be deducted or collected.
This also make clear that the amount of TDS is not part of tax payable by tax deductor on his income. The tax deductor has to pay his income-tax separately. This can be by way of TDs of various sums received by him if they are subject to provisions of TDS/ TCS , balance income-tax payable by him has to be paid by him by way of instalment of advance tax, self- assessment tax, and in case on assessment additional liability arises, then pay tax determined by AO. These are his personal liabilities and his income-tax is payable out of his income.
Interest payable to employee, supplier service provider is allowable:
Suppose there is delay in payment of salary, or payment to contractor or professional and assessee is to make payment of interest for such delay, then interest so payable / paid will be allowable expenditure.
Allowability of interest payable under two circumstances:
In case TDS / TCS is deposited late, interest is payable by tax deductor / tax collector.
As discussed earlier, TDS is in discharge of business expenditure. Therefore, in case there is delay in deposit of TDS, interest paid for such delay should be allowed as business expenditure being incidental to business or profession and in relation to business expenditure.
In case instalment of advance tax, and self- assessment tax or assessed tax is paid, then also interest is payable by assessee. However, this is for delayed payment of personal income-tax of assessee and not of any other person. This is for delayed discharge of personal tax obligation. The income-tax payable by assessee on his income is not allowable, so the interest payable for delayed deposit of such tax is also not allowable.
The position about allowability of interest for delayed deposit of statutory liabilities like Excise duty, GST, VAT, sales tax, Cess, is well settled. Generally interest payable is compensatory in nature and is allowable. In other words, when it is compensatory in nature and is not in nature of penalty it is allowable.
However, allowability of interest for late deposit of TDS is a bit new area of litigation. Based on discussion, made hereinbefore, author had always considered that interest for delayed deposit of TDS/ TCS is allowable expenditure. However, when sums involved are small, assesses may avoid litigation.
Recent judgment of Kolkata Tribunal:
Recently a judgment, as referred in opening of the article, was pronounced in which some of aspects as discussed by author were considered in relation to allowability of interest paid for late deposit of TDS. The Tribunal, while confirming order of CIT(A) and dismissing ground of revenue, held that interest for delayed deposit is also allowable under section 37 of the Income-tax Act, 1961.
The relevant ground (with highlights added by author about interest on delayed deposit of TDS) reads as follows:
" On the facts and circumstances of the case, the Learned CIT(A) is not justified in deleting disallowance of interest of ? 15,880/- on service tax and Rs.70,000/- on TDS because of the fact that the assessee failed to deposit the taxes of other parties to the other parties to the Central Government account within due time.
Relevant facts on the issue of interest on TDS are analysed below:
The assessee during the year has claimed the interest & finance expenses in its profit and loss account for ? 3,48,00,349.00 which inter alia includes Interest paid for late deposit of TDS amounting to ? 70,777/-
Assessing Officer was of the view that interest paid for the late payment of TDS is not allowable for the deduction from the income.
AO relied on the judgment of Hon'ble Supreme Court in the case of Bharat Commerce Industries Ltd. Vs. CIT (1998) reported in 1998 (3) TMI 2 - SUPREME Court and disallowed the claim of such interest
On appeal of assessee the Ld. CIT(A) allowed the claim . Considering submission of assessee the the ratio laid down by the Hon'ble Supreme Court in the case of Bharat Commerce Industries Ltd. (supra) has been misunderstood by the AO as, in that case, the disallowance was made on account of interest under section 215 of the Act due to the delay in the payment of income tax on the income disclosed under Voluntary Disclosure of income and Wealth Act, 1976.
In the case before CIT(A) the issue relates to the interest charged on account of late deposit of TDS and not personal income-tax on income of assessee.
Assessee relied on Lachmandas Mathura vs. CIT 1997 (12) TMI 16 - SUPREME Court in which case Interest paid on sales tax arrears is deductible u/s. 37(1) and CIT vs. Mysore Electrical Industries Ltd. 1991 (3) TMI 30 - KARNATAKA High Court = 196 ITR 884 (Kar)in which interest for failure to pay PF contribution was held deductible u/s. 37(1) .
Ld. CIT(A) after considering the submission of assessee has deleted the addition made
by the AO by observing as under:-
"4-. Ground No. (i) relates to disallowance of ? 86,657/- made by the Assessing Officer The total amount of ? 86,657/- includes ? 15,880/- towards interest paid on service tax and ? 70,777/- towards interest disallowed the same following the decision of Hon'ble Supreme Court in the case of Bharat Commerce And Industries Ltd. Versus Commissioner of Income-Tax 1998 (3) TMI 2 - SUPREME Court = 230 ITR 733(SC). However, in that case the dispute was related to allowability of interest u/s.139 & 215 of the IT Act, 1961 whereas in the present case the expenditure related to interest paid on service tax and interest paid on TDS. In view of the facts and submission of the appellant, I find that the expenses are allowable u/s. 37 of the IT Act, 1961 as the same were incurred wholly and exclusively for the purpose of business. Therefore, the AO was not justified to disallow the same. Hence, he is directed to delete the addition."
Analysis of order of ITAT on issue of interest for TDS:
Tribunal considered the rival contentions of both the parties and perused the material available on record.
The AO has disallowed the interest expenses incurred by the assessee on account of late deposit of TDS after having reliance on the judgment of Hon'ble Supreme Court in the case of Bharat Commerce Industries Ltd. Vs. CIT (1998) (Supra) in which the Supreme Court has settled law that when interest is paid for liability to pay income tax by assessee ( that is personal income-tax) and interest is levied for late payment under any provision ( in that case it was S.139 and 215 **of I.T. Act) then such interest will not be allowable because income-tax itself is not allowable. In conclusion it was held as follows:
Under the Act, the payment of such interest is inextricably connected with the assessee's tax liability. If income-tax itself is not permissible deduction under section 37, any interest payable for default committed by the assessee in discharging his statutory objection under the Act, which is calculated with reference to the tax on income, cannot be allowed as a deduction.
Therefore, it was to be held that deduction of interest levied under sections 139 and 215 would not be allowable under section 37.
Per author: (** At present such interest on own tax liability will be u/s 234A, 234B and 234C) and this will not be allowable.
The Tribunal noted that the facts of the instant case are distinguishable as in the case is for interest paid for delayed deposit of TDS. The interest for the delay in making the payment of service tax & TDS is compensatory in nature.
As such the interest on delayed payment is not in the nature of penalty.
The issue of delay in the payment of service tax is directly covered by the judgment of Hon'ble Apex Court in the case of Lachmandas Mathura vs. CIT 254 ITR 799 (SC) 1997 (12) TMI 16 - SUPREME Court in favour of assessee. The relevant extract of the judgment is reproduced below (highlights added):
"The High Court has proceeded on the basis that the interest on arrears of sales tax is penal in nature and has rejected the contention of the assessee that it is compensatory in nature. In taking the said view the High Court has placed reliance on its Full Bench's decision in Saraya Sugar Mills (P.) Ltd. v. CIT 1978 (5) TMI 22 - ALLAHABAD High Court = [1979] 116 ITR 387 (All.) The learned counsel appearing for the appellant-assessee states that the said judgment of the Full Bench has been reversed by the larger Bench of the High Court in Triveni Engg. Works Ltd. v. CIT 1983 (10) TMI 49 - ALLAHABAD High Court = [1983] 144 ITR 732 (All.) (FB), wherein it has been held that interest on arrears of tax is compensatory in nature and not penal. This question has also been considered by this Court in Civil Appeal No. 830 of 1979 titled Saraya Sugar Mills (P.) Ltd. v. CIT decided on 29-2-1996. In that view of the matter, the appeal is allowed and question Nos. 1 and 2 are answered in favour of the assessee and against the revenue."

Tribunal held that in view of the above judgment, there remains no doubt that the interest expense on the delayed payment of service tax is allowable deduction.
Then Tribunal held that The above principles can be applied to the interest expenses levied on account of delayed payment of TDS as it relates to the expenses claimed by the assessee which are subject to the TDS provisions. The assessee claims the specified expenses of certain amount in its profit & loss account and thereafter the assessee from the payment to the party deducts certain percentage as specified under the Act as TDS and pays to the Government Exchequer. The amount of TDS represents the amount of income tax of the party on whose behalf the payment was deducted & paid to the Government Exchequer. Thus the TDS amount does not represent the tax of the assessee but it is the tax of the party which has been paid by the assessee. Thus any delay in the payment of TDS by the assessee cannot be linked to the income tax of the assessee and consequently the principles laid down by the Hon'ble Apex Court in the case of Bharat Commerce Industries Ltd. Vs. CIT (1998) reported in 230 ITR 733 cannot be applied to the case on hand.
Accordingly Tribunal concluded that :
Law laid down by the Hon'ble Supreme Court in the case of Bharat Commerce Industries Ltd. (supra) is not applicable in the instant facts of the case. And that the Assessing Officer in the instant case has wrongly applied the principle laid down by the Hon'ble Supreme Court in the case of Bharat Commerce Industries Ltd.(supra).
Law laid down by the Hon'ble Supreme Court in the case of Lachmandas Mathura (Supra) in which Hon'ble Supreme Court has allowed the deduction on account of interest on late deposit of sales tax u/s 37(1) of the Act. In view of the above, we conclude that the interest expenses claimed by the assessee on account of delayed deposit of service tax as well as TDS liability are allowable expenses u/s 37(1) of the Act.
Therefore Tribunal confirmed order of CIT(A) and dismissed ground of Revenue.
The order of the ITAT is based on settled legal position by way of precedence from the honourable Supreme Court. The law applied is correct. On facts also as discussed in article, TDS is nothing but a part payment to payee. If there is delay in such part payment and tax deductor is required to pay interest, such interest is also an allowable expenditure.
Author hopes that revenue will not challenge the judgment of ITAT.