As per Section 276B of the Income Tax Act, 1961 (“IT Act”), if a person fails to deposit the tax deducted by him with the Central Government within the stipulated period, an offence is deemed to have been committed under the present section. The section is reproduced herein below:
Section 276B- Income Tax Act – Failure to pay tax to the credit of Central Government under Chapter XII-D or XVII-B
If a person fails to pay to the credit of the Central Government, –
(a) the tax deducted at source by him as required by or under the provisions of Chapter XVIIB ; or
(b) the tax payable by him, as required by or under, –
(i) sub-section (2) of section 115-O ; or
(ii) second proviso to section 194B,
he shall be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extend to seven years and with fine.
That the offence in TDS default cases is of technical nature and no mens rea on the part of the accused is required to be established by the prosecution. The belated filing of TDS along with interest itself proves the commission of the offence under Section 276 B of IT Act.
In a case of Company, every person who, at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company as well as the company shall be deemed to be guilty of the offence.
Provided that nothing contained in this sub-section shall render any such person liable to any punishment if he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence.
Further, as per Section 2(35) of the IT Act, “principal officer”, used with reference to a local authority or a company or any other public body or any association of persons or any body of individuals, means –
(a) the secretary, treasurer, manager or agent of the authority, company, association or body, or
(b) any person connected with the management or administration of the local authority, company, association or body upon whom the Assessing Officer has served a notice of his intention of treating him as the principal officer thereof;
Generally, the Income Tax Department serves a notice under Section 2(35) of the IT Act to the officials of a Company before making such officer an accused along with the Company in a criminal prosecution.
Defense
The defense to the offence committed under Section 276B of the Income Tax Act, 1961 has been provided under Section 278AA of the Income Tax Act, 1961 which is reproduced herein below:
Section 278AA – Punishment not to be imposed in certain cases
Notwithstanding anything contained in the provisions of section 276A, section 276AB, or section 276B, no person shall be punishable for any failure referred to in the said provisions if he proves that there was reasonable cause for such failure.
That the payment of TDS amount belatedly along with interest is not an alibi in criminal prosecution for belated filing of TDS under section 276 B of IT Act. The onus of proving that there was a reasonable cause in belated filing of TDS is on the accused, and any failure to discharge it can have severe repercussions on the Accused/Company as well as the officials who have been arraigned as a party in a criminal complaint. In addition to the fine, the minimum punishment prescribed under the IT Act is 3 months which can be extended up to 7 years.
In the case of Golden Gate Properties Ltd. and Ors. Vs. The Income Tax Department, Criminal Petition No. 868/2014, MANU/KA/3316/2019, the High Court of Karnataka again clarified the settled position of law that a person can be prosecuted for filing the TDS belatedly, despite the fact that the said person has filed the TDS amount along with interest before the initiation of the criminal proceedings for such default.
Available Resources
In the present scenario, only 2 options are available with the accused:
- To contest the trial on merits before the Magistrate and demonstrate before the Magistrate that there was a reasonable cause for failure to deposit the TDS within the stipulated time; and
- To apply for compounding as per the compounding guidelines issued by the Income Tax Department.
Reasonable Cause
The term reasonable cause has not been defined under the IT Act. Further, there is no straight jacket formula to determine what constitutes reasonable cause under Section 278AA of the IT Act and the same will vary from case to case.
In the case of ITO v. Roshni Cold Storage, Criminal Appeal Nos. 524 and 525 of 1987, the Hon’ble Madras High Court considered huge financial losses as reasonable cause for delay in remittance of TDS given that the party claiming this defense substantiates their claim with sufficient evidence.
Paucity of funds and financial stringency have been considered as reasonable cause.
Ref.: PNB Finance and Industries Ltd. v. Miss. Gita Kripalani, ITO, [1986]157ITR385(Delhi);
ITO v. Taurus Equipment (P.) Ltd. [1979]118ITR982(Patna)
Sequoia Construction Co. P. Ltd. v. P. P. Sun, [1986]158ITR496(Delhi)
Greatway (P.) Ltd. v. Asst. CIT, MANU/PH/0083/1991
In the case of Sonali Autos Private Limited vs. State of Bihar, 2017 SCC OnLine Pat 3620, the Hon’ble Patna High Court considered oversight on the part of the Accountant, who was appointed to deal with Accounts and Income Tax matters, to be a reasonable cause for not depositing the tax within time. In the said case, the Hon’ble Court also held as under:
“Reasonable cause would mean a cause which prevents a reasonable man of ordinary prudence acting under normal circumstances, without negligence or inaction or want of bonafides.
Therefore, the reasonable cause needs to be demonstrated before the Magistrate by the Accused by leading appropriate evidence.
Compounding of offence
As per Section 279 (2) of the IT Act, most of the offences under the Income Tax Act including the offence under Section 276B of IT Act, either before or after the institution of proceedings, can be compounded by the Principal Chief Commissioner or Chief Commissioner or a Principal Director General or Director General.
The Central Board of Direct Taxes has formulated the detailed guidelines for compounding of the offences. All the conditions as stipulated under the Compounding Guidelines need to be fulfilled and then only the offence can be compounded.
Only offences under the Income Tax Act can be compounded
Prosecution instituted under Indian Penal Code (IPC), if any, cannot be compounded. However, section 321 of Criminal Procedure Code, 1973 , provides for withdrawal of such prosecution.
In case, the prosecution complaint filed under the provisions of both the IT Act and the IPC are based on the same facts and, the complaint under the IT Act is compounded, then the process of withdrawal of the complaint under the IPC may be initiated by the Competent Authority.
Filing of Compounding Application
The compounding application may be filed suo-moto at any time after the offence(s) is committed irrespective of whether it comes to the notice of the Department or not. However, in a case in which prosecution complaint has already been filed in a court of law it should be filed not later than 12 months from the end of month of filing of complaint in Court.
In case, the compounding application is filed after 12 months but before 24 months then the compounding will be subject to increased compounding charges at the rate of 1.25 times of the normal compounding charges.
In case, the compounding application is filed after 24 months but before 36 months then the compounding will be subject to increased compounding charges at the rate of 1.50 times of the normal compounding charges.
Compounding Charges
The compounding charges shall include –
- Compounding fee– 3% per month or part of a month of the amount of tax in default disclosed in the compounding application for first ‘occasion’ in cases wherein compounding application has been filed in response to intimation of prosecution proceedings by the Department
- Prosecution establishment expenses – to be charged @ 10% of the compounding fee subject to a minimum of Rs.25,000/- ; and
- Litigation expenses, including Counsel’s fee – paid/payable by the Department in connection with offence(s) compounded by a single order.
Generally, the offences under Section 276B of the IT Act can be compounded upto 3 times. However, in exceptional circumstances compounding requested in more than three occasions can be considered only on the approval of the Pr. CCIT.
The complete compounding guidelines can be accessed at the below link:
