With the plethora of provisions mandating the deduction of taxes at source, it has become necessary for a payer of almost every sum to abide by tax deduction at source (TDS) provisions.
Non-deduction entails (i) deeming the payer as “assessee in default”, resulting in recovery of non-deducted tax amount; (ii) interest liability; (iii) disallowance of expenditure; and (iv) penalty equivalent to tax amount.
However, considering the complexities and intricacies involved, it often happens that, inadvertently, no taxes or taxes at “reduced” rates are deducted by the payer on certain amounts, that is, the tax department could have a different view on the need to deduct or the rate of deduction.
In such a case, the non-deducted/short-deducted tax amount is sought to be recovered from the payer, despite the fact that the recipient would usually have already paid taxes on the amount received from the payer. This, in essence, results in collection of the same taxes twice—from the recipient as well as the payer—as, practically, the recipient of the sum is usually unable to take the credit of taxes which are subsequently recovered from the payer of the sums.
It is also important to remember that the non- deductibility in computing income for defaults in TDS was earlier restricted to payments to non-residents. This has been extended to payments to residents. This has serious implications, and casts a very onerous obligation on a payer.
The Supreme Court recently, in the case of Hindustan Coca Cola Beverage (P) Ltd (293 ITR 226) vide a judgement dated 16 August 2007, had an opportunity to examine the issue of whether the payer can be called upon to pay the non-deducted/short-deducted tax amount when the recipient of the sum has already offered the amount to tax and the same has been subjected to tax in the recipients’ hand.
The court held that in a case where the tax amount (supposed to be deducted by the payer of the sum) has been paid by the recipient of the income, the same could not be once again recovered from the payer of the sum. The court referred to the Central Board of Direct Taxes (CBDT) circular No. 275/201/95-IT(B) dated 29 January 1997, which provides that no demand can be enforced if the tax deductor has satisfied the officer in charge that taxes due have been paid by the deductee-assessee.
This is a very welcome judgement which reiterates the principle of non-payment of the same taxes twice to the exchequer. It assumes greater significance considering the practical limitation of the recipient to avail credit of taxes subsequently recovered from the payer. Effectively, the Supreme Court has held that as long as the taxes reach government coffers from the recipient, there should not be any further obligation on the payer to deposit the taxes again. In this context, it is pertinent to note the ruling provides relief as regards the recovery of taxes from the payer but does not alter the interest and penal liability.
While the Supreme Court decision lays down that no taxes ought to be recovered from the payer in case of non-deduction/deduction at lower rate, where the recipient has paid taxes on the amount received, it may not be feasible for the payer to satisfactorily prove that taxes have been paid by the recipient. It may so happen that the assessment of the recipient may not have happened till the time of recovery of taxes from the payer, and the tax authorities may deny the payer’s claim. A possible solution could be to track the tax payment details of the recipient based on the Permanent Account Number (PAN) of the recipient by the tax authorities themselves, rather than placing the onus on the payer of the sum. This seems fairly logical in the current era of e-filing. Also, the applicability of the court decision in cases where the recipient is exempt, or does not pay any taxes (on account of losses, deductions and so on), may be challenged by the tax authorities on the premise that no taxes have been paid by the recipient.
It would be worthwhile for CBDT to clear the air on the above practical fronts, to avoid long-drawn litigation. Basically, especially in relation to domestic payments, CBDT should clarify that as long as the income is taxable and shown as such in the income of the recipient, TDS should not be recovered from the payers (even if the recipient may not be paying tax on account of losses, and so on). The rationale for this is that there are other remedies available to the tax department (interest and penal provisions), which it can initiate against the payer in any case.
As mentioned above, non- or short-deduction of tax at source triggers a disallowance, and the allowance of deduction is deferred to the year of payment of TDS.
In this context, an important dimension is that while no taxes have to be paid by the payer, the expenditure amount disallowed in the hands of the payer earlier would be lost forever. For, allowance of expenditure (which was earlier disallowed) is permissible in subsequent years, when the non-deducted taxes are paid by the payer. Now, based on the Supreme Court decision, there is no obligation on the payer to pay the non-deducted/ short-deducted tax amount as long as the same is paid by the recipient. Thus, in the absence of any tax being paid by the payer (because it is being paid by the recipient), the expenditure amount, which was earlier disallowed, would not be allowable in the hands of the payer.
Considering that the disallowance section is being introduced to plug revenue leakage, the allowance of expenditure in the hands of the payer merits consideration in a case where the taxes are being paid by the recipient. Drawing an analogy from the Supreme Court decision, CBDT should consider the allowability of sums earlier disallowed in the hands of the payer upon payment of taxes , not only by the payer, but by the recipient as well.
To sum up, the Supreme Court decision undoubtedly settles the position in respect of non-collection of taxes from the payer of the sums where the same has been paid by the recipient.
However, intervention by CBDT on clarifying the practical bottlenecks and consideration of allowability of expenditure earlier disallowed in the hands of the payer would go a long way in demystifying the entangled non-tax deductibility issues.
Ketan Dalal is executive director of Pricewaterhouse-Coopers.Your comments and feedback are welcome at firstname.lastname@example.org