Clash of titans, sec 192 Vs sec 206AA

Citation-: Rashtriya Ispat Nigam Ltd. v. Addl CIT (TDS), ITAT Visakhapatnam), ITA Nos. 115 To 117/Vizag/2015, Date of Pronouncement- 22/01/2016 , Assessment Years 2011-12 to 2013-14

This article is analysis of recent judicial pronouncement in the case of Rashtriya Ispat Nigam Ltd. v. Addl CIT (TDS) :-

1) The reason for this opening paragraph is to equip the reader to plan his order of reading. Invariably, it happens that, each of the reader is at different level of maturity and has different priorities at different times.

2) Rather than agreeing, it is more important to think and apply you mind on an issue. Thus objective of my article will be fulfilled even if one dis-agrees with my views.

Background-:

3) As you would be aware, section 206AA starts with “Non-Obstante Clause” over riding all other provisions of the Act. It makes the provision independentof other provisions contained in the law, even if the other provisions provide to the contrary.

4) When the deductor does not have PAN of deductee, the section requires deductor to deduct TDS at a rate higher out of the following

at the rates specified in the relevant provisions of the Act, or
at the rate or rates in force, or
at the rate of twenty percent.
5) In this case, emerging out of various reasons, the employer / deductor did not have PAN of employees.

Takeaway-:

6) TDS is deducted as per provisions of section 192 of employees without giving PAN.

7) Even if there is no PAN, if the deductor has deducted TDS as per provisions of sec 192, Section 206AA does not over-ride section 192 in terms of the requirement of “at the rates specified in the relevant provisions of the Act.

8) Thus, it is clear that the onus is on the revenue to demonstrate that the correct tax has not been recovered from the person who had the primary liability to pay tax. Without doing so, the A.O. cannot simply compute the short deduction by applying flat rate of 20% tax on gross payment.

Facts in specific

9) The assessee is a large public sector company with more than 17000 employees.

10) The assessee categorised the defaults into 7 categories and made his submission with regard to each of the seven categories.

11) The assessee submitted that basically the short deduction was computed for the following defaults.

i. Invalid PAN then and not yet corrected.

ii. Invalid PAN then but valid PAN obtained later.

iii. Invalid PAN then but valid PAN was available then.

iv. PAN not available then and now too.

v. PAN not available then but PAN obtained later.

vi. Rounding off of TDS to nearest ten rupees.

vii. Error in employee categorisation into female and senior citizen.

12) The assessee has taken all out efforts to collect PAN numbers from each employee like;

13) The assessee has filed rectification request and corrected most of the defaults by obtaining correct PAN from the employees. Although, it has corrected most of the defaults, the defaults mentioned in category (i) and (iv) was not rectified, because even now few employees have not furnished correct PAN.

14) The assessee further submitted that for such discrepancies, the tax was calculated at 20% without even allowing basic exemption limit, which has an adverse impact in the case of employees, whose income is subject to tax at progressive rate of taxation.

15) In spite of repeated reminders, few employees did not furnished PAN for various reasons. However, the assessee has filed rectification statements and corrected most of the defaults by obtaining correct PAN from the employees. Although, it has corrected most of the defaults, the defaults mentioned in category (i) and (iv) was not rectified, because even now few employees have not furnished correct PAN.

16) However, the correct amount of TDS recoverable from the payments have been deducted and paid to the Govt. Account. There is no short fall in recovery of TDS as per law. The short deduction was determined by applying higher rate of TDS without even deducting basic exemption limit allowable under the Act, which has an adverse impact in the case of employees, whose income is subject to tax at progressive rate of taxation.

Arguments – revenue

17) Once PAN is not made available even after opportunity given by CIT(A), section 206AA comes into play which starts with “Non-Obstante Clause” giving over-riding effect to all other provisions of the Act.

Arguments – assessee

18) The assessee argued that it has already taken all possible efforts.

19) The assessee further submitted that for such discrepancies, the tax was calculated at 20% without even allowing basic exemption limit, which has an adverse impact in the case of employees, whose income is subject to tax at progressive rate of taxation.

20) The assessee further submitted that demand can be made against the assessee, only when there was a failure on the part of employees in the payment of tax. To this effect placed its reliance on the following two decisions. (i) Jagran Prakashan Ltd v. DCIT [2012] 345 ITR 288 (All)(ii) Allahabad Bank v. ITO(TDS), Algarh in ITA No. 448 to 454/Agra/2011. Therefore, requested to set aside the order of CIT(A).

Judgement – First Appellate Authority – CIT(A)

21) The CIT(A), after considering the explanation of assessee, set aside the issue to the file of AO/TDS officer, in respect of defaults referred in clause (ii), (iii) and (v) and directed the AO/TDS officer to verify the revised TDS returns and wherever correct PAN and status of employee is quoted by the assessee.

22) Later credit should be given against the short deduction determined. In respect of cases falling under category (i) and (iv), upheld the action of AO/TDS officer.

23) With these observations, the CIT(A) allowed the appeal for statistical purpose. Aggrieved by the CIT(A) order, the assessee is in appeal before us.

Judgement – Second Appellate Authority – ITAT

24) Section 206AA of the Act, provides for deduction of tax at higher rates, in case the deductee fails to furnish the correct PAN to the person responsible for deducting tax at source.

25) In the event, the deductee fails to furnish PAN, then the deductor shall deduct tax at the rates which is higher of (i) at the rates specified in the relevant provisions of the Act, or (ii) at the rate or rates in force, or (iii) at the rate of twenty percent.

26) A careful study of the provisions of section 206AA made it clear that it is not automatic that a flat rate of 20% shall be deducted wherever PAN is not furnished. The deductor shall compute the tax in the manner specified under section 206AA of the Act, by applying the rate specified under the relevant provision of this act, or at the rate or rates in force and then, compared to flat rate of 20% to decide whichever is higher.

27) In the instant case, the assessee deducted TDS on salary payments to employees under sec. 192 of the Act. Sec. 192 of the act provides for computation of tax under normal rates in force for the financial year in which payment is made, on the estimated income of the assessee.

28) The assessee contended that it has deducted tax at source as per the applicable rates in force in the manner specified under sec. 192 after allowing basic exemption limit.

29) We find force in the arguments of the assessee, for the reason that the payment covered under dispute is salary to employees. TDS on salary shall be deducted in the manner specified under sec. 192 of the Act, after allowing basic exemption limit and deductions towards investments in savings scheme etc.

30) Unlike other provisions of TDS, TDS on salary cannot be deducted by applying flat rate of tax on gross payment. Therefore, sec. 206AA provides for higher of the three, i.e. at the rates specified in the relevant provisions of the Act, or at the rate or rates in force or at the rate of twenty percent. It is not necessarily that all payments are comes under 20% flat rate, in some cases the rate of tax may be at 10% and in some cases it may be at 30%. Unless, this was done, the A.O. cannot apply flat rate of 20% and compute the short deduction of tax. Thus, it is clear that the onus is on the revenue to demonstrate that the correct tax has not been recovered from the person who had the primary liability to pay tax. Without doing so, the A.O. cannot simply compute the short deduction by applying flat rate of 20% tax on gross payment.

31) It is settled position of law that a short deduction of tax at source, by itself does not result in a legally sustainable demand under sec. 201(1) and 201(1A). The taxes cannot be recovered once again from the assessee in a situation where the recipient of income has already paid the due taxes on such income. Unless, the A.O. verified himself that the recipient of income has not paid the tax on such income and also demonstrate that the rate applied by him was in accordance with the provisions of sec. 206AA, the assessee cannot be hold as assessee in default under sec. 201(1) and 201(1A).

Comments of author-:

32) TDS is a secondary and conditional liability. It does not absolve the assessee [employee in this case] from his Primary and absolute liability to pay taxes.

33) Practically speaking, section 206AA has put an onerous liability on deductor but one has to accept it as it is.

34) Karnataka High Court has already in the case of Smt. A. Kowsalya Bai dt June 5, 2012 watered down the rigour of section 206AA whereby the criteria of basic exemption has been take care of.

35) With respect, I hav only one query that, as been observed by ITAT, whether the onus stands shifted on revenue to show that there is failure to deduct TDS ?

36) The revenue / CIT(A) / AO could have taken following stand;

a) section 206AA penalises the offence of non furnishing of PAN by requiring higher TDS.

b) Section 200, 200A and / or 201 unlike section 234E does not specifically deal with default u/s 206AA.

c) The deductor should have deducted TDS at a rate of 20% or averate rate as mentioned in section 192 whichever is higher.

d) Legislature has, in its wisdom has drafted the section to act as deterent against those errant employees.

e) The order could have passed directly u/s 200(3) r.w.s 206AA. Refer following paragraph of the ITAT A Bench, Chennai in the case of Smt. G. Indhirani, M/s Rajaguru Spinning Mills Ltd., Shri A. Dhakshinamurthy, M/s Padma Textiles, M/s Murthy Lungi Company, on one side v DCIT, CPC, (TDS), Gaziabad dt 10-July-2015.

When Section 234E clearly says that the assessee is liable to pay fee for the delay in delivery of the statement with regard to tax deducted at source, the assessee shall pay the fee as provided under Section 234E(1) of the Act before delivery of the statement under Section 200(3) of the Act. If the assessee fails to pay the fee for the periods of delay, then the assessing authority has all the powers to levy fee while processing the statement under Section 200A of the Act by making adjustment after 01.06.2015. However, prior to 01.06.2015, the Assessing Officer had every authority to pass an order separately levying fee under Section 234E of the Act. What is not permissible is that levy of fee under Section 234E of the Act while processing the statement of tax deducted at source and making adjustment before 01.06.2015. It does not mean that the Assessing Officer cannot pass a separate order under Section 234E of the Act levying fee for the delay in filing the statement as required under Section 200(3) of the Act.

( Author CA. Yogesh S. Limaye can be reached at yogesh@salcoca.com)