Terminology used in this Article :

TDS is Tax Deducted at Source. This is a misnomer. This is not a tax at all.

TDS is only a Tentative Deposit of Sum which is later refunded or appropriated towards tax assessed and levied on another. Till such time this is not tax and this is not Government’s money.

AT is Advance Tax. An assessee knows and estimates what he is earning in the current year, for which he pays estimated tax. This is a tax payment but TDS is not a tax payment, but only a Tentative Deposit of Sum.

HIC is abbreviation for Honest Innocent Citizen.

Payee is the assessee on whose behalf a Tentative Deposit of Sum is made with a bank.

The basic assessment procedure under the IT law is — an assessee has to file the Return of Income, the computation of which is made by deducting the expenditure from the income and the net income is to be taxed. A net loss may also arise. It is the duty of the Department to make the assessment, levy tax and collect the same.

The Department also envisages collection by way of Advance Tax on the estimated income the assessee is earning in the current year.

The Income-tax Department is maintained to do the exercise of assessment, levy of tax and collect. This governmental agency is expected to be efficient in the matter of levy and collection of such taxes. Inefficiency and lethargy should not be there and the governmental agency cannot shirk its responsibility and shift such responsibility on the HIC.

Further, S. 269 mandatorily has made payments above Rs.20000 to be made only by cheques. Even though this is much against the law of ‘legal tender’, when payments are made by cheques, the recipient automatically discloses it in his accounts, which is to come to the notice of the I.T. Department. It is difficult to suppress the same. If in spite it is suppressed, the I.T. Department is to unearth the same.

‘Bonded Labour’ under the Bonded Labour System (Abolition) Act, 1976 means ‘forced or partly forced labour under which a debtor enters into an agreement with the creditor’. HIC is declared an ‘assessee in default’ and thereby presumed legally a ‘debtor’ and the Government a ‘creditor’. Such a law is against the Constitution and would be ‘bonded labour’ under the Bonded Labour Abolition Act, 1976.

The following questions and answers would give a proper appraisal of the issue :

(1) Can a HIC be mandatorily forced to undertake the work/labour of collecting and remitting TDS into the bank much against his will and consent, and that too without any consideration or remuneration ?

Whether such enforcing of work/labour is bonded labour which would infringe the personal freedom and liberty of a HIC guaranteed under the Constitution ?

Ans. : HIC are mandatorily forced and made responsible to collect TDS and deposit in a bank, failing which such HIC is deemed an ‘assessee in default’.

An HIC is to make payment for services and utilities availed by him, which is his expenditure and liability. Unless such liability is timely cleared, his business and business relationship suffers.

The provisions relating to TDS in the Income-tax Act run to 35 pages and the IT Rules to some pages. These are cumbersome and an HIC cannot understand and follow them. Qualified auditors do not undertake this table work as this is considered a clerical work. Clerks may be appointed, but they are not trained and well versed. Moreover, it is not a work for a full-time clerk. If part-time freelance clerks are employed, the business secrets cannot be kept.

Forcing a person and making him responsible to do a particular work, namely, collecting and remitting TDS is practically an ‘enforced bonded labour, which infringes on one’s personal freedom and liberty assured in the Constitution of India. No person could be compelled by any law to undertake a particular work against his will and consent. This is against the Constitution.

(2) What are the cumbersome procedures and services to be complied with by such HIC ?

Ans. :

(a) Refer Income-tax Reckoner and determine how much tax has to be deducted from each kind of payment made by HIC. Different services with different tariffs need a competent assistant who can rightly understand them. Several services fall under two categories and any decision becomes debatable.

(b) Two cheques are to be written, one for the payment less TDS and the other for the TDS amount. If the magnitude of the business is more, the volume of cheque writing multiplies.

(c) The TDS cheques have to be rightly entered in the TDS challan. Writing of challans is now laborious and meticulous care is necessary, as the computer Forms are cumbersome.

(d) When the deduction is made as per law, many recipients do not furnish their PA No. Either they have not obtained it or they have misplaced it. The HIC deductor has no power or authority to insist on their giving the PA No. Even if he discharges the responsibility of collecting and depositing in bank, the HIC is punished for the lack of PA No. of the recipient. This is not the mistake of the HIC, but punishment is provided u/s.206. This is ridiculous. The Government is keen to get the TDS money. The HIC collects and deposits it and discharges his function. The Government must be satisfied with such money deposited. The HIC should not be punished if the recipient does not furnish his PA No. when the address is given.

(e) The TDS cheque written has to be sent to the bank with the challan filled and an assistant is to go to the bank.

(f) When the cheque is received by the bank, acknowledgement is never given immediately, but deferred till the cheque gets encashed. An assistant has to go to the bank several times to collect the challan acknowledged. If the collection of the challan is forgotten, no proof will be available. Monitoring this is a cumbersome responsibility. When the challan acknowledgement is given by the bank, they scribble in the challan No., and it is not decipherable many a time. The assistant going to the bank is helpless.

(g) The challan has to be collected and it is to be rightly placed in the file and safeguarded. This requires a filing assistant. If this challan is missed, nuisance entails.

(h) Within one month individual certificates have to be prepared and the number of forms for such purpose are so many and the right form and updated form has to be used. Such forms have to be purchased from the printers as and when required. An assistant has to go to buy this form and many a time the form is not readily available. Filling up this form is not easy by an assistant unless he knows his job.

(i) In such certificates the Director or a responsible person has to sign even though he cannot be made to check the particulars contained in the form. This is to be counter-checked by another assistant. When the signatory of the certificate is authorised is another issue.

(j) Once in three months the Quarterly Return manually with all the deduction details referring to each and every transaction is to be prepared, which is an elaborate and meticulous work.

(k) The Quarterly Return details have to be fed in computer, which requires a software and a data programmer and the accuracy has to be checked. For any typographical mistake of the data programmer, the HIC is punished.

(l) The acknowledgement for having filed the Quarterly Return has to be preserved. The Department on many occasions sends notices for not having received the same. Jurisdictional changes and jurisdictional clashes arise and notices are received, which have to be replied.

For so much of honorary work done by HIC incurring enormous expenses, he is always cornered as ‘Assessee in default’ — an irony of fate.

The fact remains, the Sections, the nature of transactions, the procedures, the multifarious forms, are so cumbersome, even the Income-tax Officials find it difficult to understand.

Irrespective of the onerous difficulties unduly cast on the HIC, the writer suggests a simple remedy. TDS stamps can be sold in post offices. When payments are made by cash/cheques, TDS stamps will also be issued along with, duly endorsed. Such stamps will be pasted in the Returns. Even this the Department will misplace. The assessee should always send a xerox and obtain acknowledgment from the Department. Cumbersome procedures can be avoided. If TDS stamps are not issued in time, interest is to be charged automatically by the Department at the time of assessment.

(3) When such services are honorarily rendered, whether the HIC can be punished/penalised for any lapses ?

Ans. : Rendering service in the interest of the country is to be appreciated and honoured. The TDS provisions and especially the recently introduced Section 40(1)(ia) are draconian and against all cannons of law, justice, equity and fair play. Legally such laws cannot be sustained.

If the IT Department is not efficient to collect rightful taxes from an assessee, it cannot make an HIC ‘assessee in default’ in the place of the defaulting tax-payer who only has to be punished. Thereby, this provision amounts to letting off defaulters, Department and the assessees and punishing an HIC. There is no justice and equity in penalising HIC.

(4) Whether such punishment or penalising be more than the punishment prescribed under law for the real defaulter or evader of taxes ?

Ans. : Cases have now arisen that the punishment on the HIC is much more than the punishment prescribed for the real defaulter. The defaulter commits the crime, but the punishment prescribed for the defaulter is much less than the punishment prescribed for the HIC for failure to deduct Tentative Deposit and remit to the bank.

If an HIC makes a payment, and if he does not deduct tax at source, such payment is considered as income in the hands of the HIC. When the payment is made, the payee deducts his expenditure and pays income tax only on his net income. If the payee evades taxes, the punishment on this is very much less than the punishment given to the HIC when the total payment is considered as income in the hands of the HIC for no fault of him, which gets assessed at about 33%.

Several instances have come to light when agents, under law of agency, collect money and remit to their principal. Over-zealous officers consider that on such collection and payment by agents, tax should be deducted, failing which the entire payment made to their Principal is treated as income in the hands of such agent. All these penalties and punishments are not equitable as HICs are forced with such work and responsibility due to the indolence and inefficiency of Governmental agency in preventing tax evasion. Such an attitude by the over-zealous officers is driving HIC to the roads.

(5) When taxes have been paid on the income by the payee, whether punishment for non- deduction of tax be imposed on the HIC ?

Ans. : When an honest payee has paid his taxes on all his income less his expenditure and given valid proof for the same, the proceedings and actions under law should be dropped. Duplication of payment of taxes arising on the self same transaction is unethical. The deductor should not be punished when the rightful payee has paid his taxes if/this is proved by the payer. There is no legal sanction for such duplication in tax levy and collection.

(6) Whether the payment made to the payee can be deemed as income of the HIC by any stretch of imagination ?

Ans. : Agents render services for their principals, The law of agency applies between them. Some agents are authorised to collect by their principals. They collect in their name, on behalf of their principals. The principals receive the same and disclose in their accounts. The principals incur various expenses which are deducted from the receipts from their agents. Over-zealous officers insist that such agents should deduct tax at source from payments made by them to their principals. While there is no need for such tax deduction, the officers assess the sum total of amounts paid as income in the hands of the agents. While the principal is to pay tax on his net income, the agent is forced to pay tax on the gross income of the principal. This is totally ridiculous. The gross receipt of the principal cannot be deemed to be the income of the agent. The Section 40(1)(ia) has to be reconsidered.

Concluding, the Constitutional validity, equity and justice of the law relating to TDS needs a judicial review.

Source : Article by Mr. U. Mohamed Khalilullah a renowed Chartered Accountant, article published in the Chartered Accountants society.