There are instances where assessee fail to deduct or short-deduct the TDS on certain payments. Non-Deduction or short deducted results in the assessee being labelled as “Assesse in Default” under section 201(1) of the Income Tax Act, 1961. These labels “Assesse in Default” comes with the consequences such as interest payment on short deduction/Non-Deduction, prosecution under section 276B, penalty under section 271C and 30% disallowance of expenditure under section 40(a)(ia). However, the Act provides relief under the proviso of Section 201(1) to overcome the title of “Assesse in Default”.
Legal Provisions
Section 201(1) of the Income Tax Act stipulates that failure to deduct or pay TDS leads to being deemed an “Assessee in Default.” However, the proviso to section 201(1) along with rule 31ACB provides relief for resident payees who have met certain criteria, including PAN validation and tax payment. Section 40(a)(ia) pertains to disallowance of expenditure due to non-deduction or non-payment of TDS.
Section 201(1) of the Income Tax Act states that where any person required to deduct TDS under the provisions of the Act but does not deduct or does not pay then, such person shall be deemed to be an assessee in default in respect of such tax.
Any person who fails to deduct or pay TDS under the provisions of the Act on the amount paid or credit to the resident payee shall not be deemed to an assessee in default in respect of such tax if such resident payee (Deductee)-
Provided that the person has to pay a simple interest on the sum not deducted or pay from the date which such tax was deductible to the date of furnishing of return of Income. * To be paid by “Deductor” *.
As per the sub-rule (1) of the Rule 31ACB of the Income Tax Rule 1962, the certificate from the chartered accountant under the proviso to section 201(1) shall be furnished in form 26A electronically.
In case of non-deduction or non-payment of tax deducted at source (TDS) from certain payments made to residents, the expenditure on which tax was deductible is disallowed under section 40(a)(ia) for the purposes of computing income under the head “Profits and gains of business or profession”. The disallowance shall be restricted to 30% of the amount of expenditure on which TDS is not deducted.
The CBDT vide notification number 11/2016 dated 2nd December 2016 has provided the procedure for furnishing and verification of Form 26A for removing default of Short Deduction and or Non-Deduction of Tax at source.
*Earlier to this notification form 26A was filled offline. *
Now log in to TRACES of deductor and the status of form 26A will be changed to pending for processing at TDS-CPC.
After processing, the Status of the form can be processed, rejected, processed with partial rejection, or processed with rejection.
If the status is “Processed” Traces will re-calculate the short deduction and late deduction interest will be generated accordingly by the TRACES, which can be viewed by the Deductor.
At times, Traces may require verification through Form 26A to the relevant A.O. In such situations, Form 26A is Processed with the remark “Contact AO for short deduction/Non-Deduction”.
In such cases, the deductor or their authorized representative must visit the relevant A.O with supporting documentation and request that the officer declare the deductor as “Assessee not in default”. The officer will verify the validity of the short deduction/Non-deduction transactions, the payee’s filed return of income, and tax payments. They will also ensure that interest under section 201(1) has been paid up until the date of the payee’s filed return. If everything checks out, the A.O may declare the deductor as “Assessee not in default”.
The government offers Form 26A as an excellent opportunity to save taxes and avoid default, but many people are not aware of these reliefs. I hope that the information provided above is helpful to you.
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Form 26A offers a pathway to rectify TDS defaults, granting relief from being deemed an “Assessee in Default.” By adhering to the prescribed procedure and fulfilling requirements, taxpayers can avoid penalties, prosecution, and disallowed expenditures.
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