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TAX FORUM: QUESTIONS & ANSWERS
Time limit for initiation of action for TDS failure
I am a practising chartered accountant. There is a reasonable doubt as to whether tax deduction at all is necessary in quite a few cases. Where the assessing officer takes the view that it is necessary, the client usually adopts the cautionary approach to deduct tax. But where there has been no deduction in the past, action is being taken under Sec. 201 for collecting tax along with interest placing a heavy burden on the taxpayer, though the tax has been fully collected from the deductees in these cases. Payees of such amount do not accept belated deductions, since they have already filed returns for those years. The assessing officers take the view that there is no time limit for initiation of action against the deductor as none is prescribed. What is the remedy in such cases?
Apart from the question of time limit, the best course is to take steps to prove that the deductee has accounted for the receipt and paid the tax thereon, wherever it was payable. A certificate from the chartered accountant dealing with the deductee’s case should ordinarily be acceptable as proof of such accounting.
It has been decided in a number of cases that it is not open to revenue to collect from the deductee tax failed to be deducted, where the tax had already been paid by the deductee as, for example, decided in State Bank of Patiala v CIT (1999) 236 ITR 281 (P&H), ACIT v Om Prakash Gattani (2000) 242 ITR 638 (Gau) and CIT v Adidas Marketing P. Ltd. (2007) 288 ITR 379 (Del). If it could be so established, the issue would no longer be material, since the only further liability could possibly be interest for the period starting from the date on which tax was required to be deducted and the date on which the deductee had paid the tax.
As for the time limit for action, where no time limit is prescribed under the statute, it is the uniform view taken by the courts that there can be no inference of indefinite time and that in such cases action should be initiated within the reasonable time from the date on which the alleged violation or offence had taken place. In CIT v NHK Japan Broadcasting Corporation (2008) 305 ITR 137 (Del), failure to deduct tax related to a payment during the accounting year 1989-90, that is, assessment year (AY) 1990-91, action was initiated for failure to deduct tax by notice under Sec. 201 only in December 1999. It was sought to be justified on the ground that the assessing officer came to know about the omission only in November 1998. The date of knowledge was found irrelevant. The High Court observed that the four-year time limit, which is prescribed for reassessment cases, should be the outer time limit for initiation of action against such defects of technical nature. In coming to the conclusion, the High Court pointed out that it should not be forgotten that the tax liability is primarily that of the deductee with deductor’s liability being a vicarious one. Liability to deduct tax cannot, therefore, “remain hanging on his head for all time to come” as was pointed out before the High Court. The cancellation of the proceedings by the Tribunal was, therefore, upheld.
Similar view was taken by the Tribunal in ITO v G.D. Goenka Public School (No.1) (2008) 306 ITR (AT) 28 (Del) followed in (2008) 306 ITR (AT) 78 (Del).
S. RAJARATNAM
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