DRAT REP TO INCOME TAX DEPARTMENT U/S 276B

The Principal CCIT (NWR),

Chandigarh.

 

Sub: Representation about issues relating to prosecution u/s 276B/ 276BB of the Income Tax Act, 1961 and rules/circular and procedures relating to the same.

 

Respected Sir,

The law relating to prosecution under the Income Tax Act, 1961
(hereinafter called the “Act”) is in the statute book since long. But these have come to be implemented more vigorously only recently.
This is more so in the case of provisions of sections 276B and
276BB of the Act as there is spurt of notices issued under these
sections by following the Instruction No. 285/90/2013-IT(Inv) dated 07.02.2013 issued by the Board. This Instruction was subsequently advertised by Press Information Bureau, Govt. Of India through a Press Release dated 06.08.2013. By this Instruction, only a limited modification/revision has been made in the already existing Instruction dated 24.04.2008.

We are an association of Tax Practioners. In the last 3 months, we have been approached by Tax Practioners of the area and also the Industrialists as well as businessmen about the launching of Prosecution Proceedings u/s 276B & 276BB through service of Show cause Notices (SCN) in more than 2500 cases.

There are certain issues, difficulties, concerns and apprehensions arising out of the interpretation of above Instruction so issued by the Board and the mode of implementation of these instructions in the field. These are the problems being faced by the tax payers as well as the tax practitioners and the concern of the society needs to be addressed. The same are being brought to your kind notice for their proper redressal :

1.  COLLECTION MECHANISM: Beyond any doubt, collection
of tax is the prime sacred responsibility of the Departmental authorities. The mechanism of TDS under Income Tax Act, 1961 ensures collection of such taxes at point of origin of
income. To make such TDS provisions more effective, various provisions like interest u/s. 201(1A), penalty u/s. 221(1), penalty u/s.271C/ 271CA and prosecution provision under section 276B/276BB are incorporated into the statue book. Disallowance of expense u/s. 40(a)(ia) in the hand of payer of income for Non-Deduction/Deposit of tax at source is another weapon in the armory of the authorities.

 

2.  OBJECTIVE: It will be appreciated that the objective of such stringent law is to administer the tax law in smooth and
effective manner and to collect legally levied tax.
Generally speaking, such stringent laws are unavoidable
because of non-compliance attitude of the public at large.
As a policy matter (enacted in to law), such punitive
measures are necessary evils in our system but careful
handling of such provisions is very much important so as
not  to  lose  the  intent and objective for which these
draconian provisions are made. Facts of each and every case need to be analysed with microscopic eye carefully because set of circumstances and overall conduct of assessee is unique and peculiar in each and every case. Further, discretionary powers must be  used  by  the implementing officers in a judicious manner after due application of mind. The circumstances must be weighed judicially and discretion be used in most transparent manner. This was also considered by Hon’ble Punjab & Haryana High Court in the case of Bee Gee Motors and Tractors and Another vs. ITO (1996) 218 ITR 155, wherein the Court, at Para 5, held that the Instructions & discretion regarding prosecution must be used Judicially, other-wise it would be violative of Article 14 of Constitution of India.

 

3.  BOARD INSTRUCTIONS:  Your kind attention is invited to
the recent Instruction F.No. 285/90/2013-IT(Inv) dated 07.02.2013 issued in Partial modification of earlier instruction F. No. 285/90/2008-IT(Inv-I)/05 dated 24.04.2008 by CBDT, New Delhi which is being pursued by the department very ambitiously, if aggressive is a harsh word. The following are the major issues arising out of this new Instruction, its interpretation and implementation thereof:-

 

i.          Discrimination on amount:

We hereby bring to your kind notice the paragraphs 3.1(i) and (ii) of Instruction F.No.285/90/2008-IT(Inv.)/05 dated 24.04.2008 pertaining to guidelines/procedure for identification and processing of potential prosecution cases pertaining to offences u/s. 276B and 276BB of the Income Tax   Act, 1961 which   have   been   modified   vide F.No.285/90/2013-IT(Inv.) dated 07.02.2013. The earlier instruction was   to process cases for offences u/s.276B/276BB if assessee defaults/delays for a period of more than 12 month in deposit of TDS after deduction. Now The Board has specifically mentioned that where tax deducted is Rs.100000/- or more and the same is not
deposited by the due date prescribed under the Act, shall
mandatorily be processed for prosecution and where such
amount is between Rs.25000/- and Rs.100000/- the same
may be processed for prosecution depending upon facts and
circumstances of the case. The discrimination only on the
basis of amount of default without considering the facts of case might not be justified in all the cases. The relevant text of revised Instruction dated 07.02.2013 reads as under :

 

           

“2. Instances have come to notice wherein certain deductors/collectors are retaining with them large amounts of TDS/TCS and are depositing the same just before the expiry of 12 months from the date of deduction, thereby avoiding launching of prosecution against them.

 

3.Considering that the relevant provisions of the Act do not lay down       any specific time limit for the said default in deposit of TDS/TCS for launching of prosecution and with a view to enable the field formations to take appropriate action in such cases, the Central Board of Direct Taxes (the Board) has decided to modify paragraph 3.1(i) and (ii) of the said guidelines. The modified guidelines are as under :”

 

It is evident from above language of limited modification that the intent of the Board is to punish defaulters who make payment just before expiry of 12 month period being the threshold limit for launch of prosecution as per Instruction dated 24.04.2008. The intent is not to launch prosecution in cases of even a single day delay. The interpretation now being given to the amendment by TDS wing is that now even a single day delay in deposit of TDS will attract launch of prosecution u/s 276B/276BB.

ii.        Manner of determination of threshold:

Further while determining the threshold of default of Rs. 1,00,000/-, all the defaults occurring during the year are being aggregated which is not in accordance with the law. As per the provisions of Income Tax Act, each default of TDS is an independent default which occurs with delay in payment of TDS each month. Therefore, the threshold of
Rs. 1,00,000/- should be determined with reference to each default and  aggregate of all TDS defaults during the year should not be resorted to.

 

iii.    Reasonableness:

 

It is also to bring to your kind notice that the instruction is being used by the field officers mechanically without appreciating the spirit of the instruction. The purpose of the instruction, in our opinion, is to punish those assessees who wilfully plan their affairs to circumvent the earlier instruction in this regard. Instruction is to mandatorily process for prosecution the cases as defined in clause (a) of Para 3.1(i) and not to mandatorily initiate the prosecution proceedings.  Sir, focus should be to catch hold of Habitual/wilful defaulters and Non-depositors instead of prosecuting those who have voluntarily complied with the law- may be a little late. We request your honour to instruct the field officers to examine the reasonableness of reply, overall intent & behaviour of assessee before granting of approval for prosecution.

 

The Instruction dated 07.02.2013 has only partly modified the Instruction dated 24.04.2008. Regarding the earlier instructions in force on the subject, there is no modification. It is important to bring to your Kind attention the old Instruction F. No. 255/339/79-IT(Inv.) dated 28.05.1980 issued by Ministry of Finance. The relevant text of this Instruction reads as under :

 

“The prosecution under section 276B should not normally be proposed when the amount involved and/or the period of  default is not substantial and the amount in default has also been deposited in the meantime to the credit of the Government. No such consideration will, of course, apply to levy of interest under Section 201(1A).”

 

The above Instruction is still in force and the same has not been withdrawn. Regarding the amount involved, some light has been thrown by new Instruction dated 07.02.2013. But regarding the period of default, if not substantial, the above Instruction dated 28.05.1980 holds good as on date also. Delays of one day or even less than a month should not be held to be “substantial” attracting prosecution proceedings. The above Instruction dated 28.05.1980 and especially the above cited relevant Para of this Instruction came to notice of Hon’ble P& HC in the case of Bee Gee Motors vs. ITO (supra) and on interpretation, the Hon’ble Court quashed the prosecution proceedings.

 

Further, Instruction No. 5051 dated 07.02.1991 lays down that if interest u/s 201(1A) chargeable is less than Rs. 10,000/-, prosecution proceedings u/s 276B/276BB need not be initiated. Hence, the Board has already considered the cases from perspective of “Reasonableness”. But the field officers are ignoring the test of reasonableness and materiality while issuing relevant SCNs.

 

It is an undisputed fact since long and even the Board through Instruction F.No. 285/90/2008 dated 16.05.2008 has stated that offence u/s 276B/276BB is a technical offence. Hence, the said offence, even if any, should be viewed liberally and benefit of doubt on Interpretation of a Technical issue be taken in favour of the assessee.

 

iv.      Retrospective :

The instructions issued on 07.02.2013 cannot be and should not be applied to cases happening before the date of these instructions. The Hon'ble Supreme Court of India in the case of Commissioner of Central Excise, Bangalore vs. Mysore Electricals Industries Ltd. (Appeal Civil) 4488 of 2005) has held that any amendment or withdrawal of instruction can't have retrospective effect and can have effect only from the date of its amendment. The Hon'ble Court has held that only a beneficial circular can be applied retrospectively while an oppressive circular has to be applied prospectively. However, the field officials are
issuing notices even for the cases pertaining to period before the date of this instruction i.e. 07.02.2013. The SCNs are being issued for AYs 2010-11 and onwards. We request your honour to instruct the field officers that modified instructions issued on 7th Feb., 2013 not be given retrospective affect. Applicability of these instructions should be restricted to F. Y. 2013-14 and onwards and not for the earlier years. The default for the earlier years may be examined in  accordance  with the  law/instruction then in force. Rather the prosecution proceedings be initiated in cases where the TDS amount is not deposited even after reminders by the department and certainly not in cases where the TDS amount is deposited voluntarily earlier to the notice from the department.

It is further submitted that Instruction dated 24.04.2008 says that Prosecution proceedings should be initiated within 60 days of detection. The instances of delay in deposit for earlier years are already within the knowledge of field formations as notices for recovery of interest u/s 201(1A) and notices under other relevant provisions were served on assessees in almost all cases. Hence, the detection has already been done more than 2-3 years ago. But the prosecution proceedings are being initiated in violation of Board guidelines issued through Instruction dated 24.04.2008. Regarding reasonableness of limitation period for initiating prosecution proceedings, we rely upon ratio of law laid down by Hon’ble Calcutta High Court's in the case of Vinar & Co. & Anr. vs. ITO & Ors. (1992) 193 ITR 300 (Cal).

 

v.        Para 2 of the recent  instruction clearly says that period of default of 12 months is being reduced in order to check  circumvention  of provisions  of TDS/TCS  by certain deductors/collectors who deposit the same just before the expiry of period of 12 months from the date of deduction. Sir, that does not mean that default of even one day should be considered as circumvention of law and the deductor be prosecuted. Failure to pay has to be construed as refusal to pay and will not cover cases of mere delayed payment. It was so held by the Hon’ble Madras High Court in Rayala Corporation (P) Ltd. vs. V.M. Muthuramalingam, ITO (1981) 129 ITR 675 (Mad).

 

vi.      The directions by the Board are that such defaults must be processed for prosecution, not compulsory prosecution in all such cases.   At the time of processing of such cases, judicious application of mind is of utmost importance so as to examine the reasonableness and causes of such delay. In other words the instruction does not suggest using the provisions in a mechanical manner. Any law in a civil society will punish the wilful defaulters and not just the occasional defaulters more so when the provisions have already been complied with voluntarily.

 

4.       Text of section 276 B

It is worthwhile examining the wording of the relevant provision closely. The text is as follows :

“276B. Failure to pay tax to the credit of Central Government under Chapter XIID or XVIB

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 XVII B; or

(b) the tax payable by him, as required by or under,

(i) s/s (2) of section 115 – O; or

(ii) the 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.”

Firstly, the very heading suggests that there should be a failure to pay the tax. Secondly, the placement of clause (a) in the section, makes it clear that it pertains to the tax deducted as per the provisions of Chapter XVII B – and not the ‘payment as per provisions of Chapter XVII B. Thus, failure to pay is on a different footing. Put differently, payment need not be within the time specified in that Chapter.

In short, the section contemplates total failure and not mere delay. As against this, even if the tax is already paid with interest, the notices for prosecution are being issued. The notices also mention the fact of prior payment. This then, is clearly against the wording and spirit of the provision.

It is pertinent to note that CBDT has issued instruction no. 1335 of CBDT, dated 28-5-1980 to the effect that prosecution should not normally be proposed when the amounts involved are not substantial and the amount in default has also been deposited in the meantime to the credit of the Government.

The Hon’ble Punjab and Haryana High Court, taking cognizance of this           instruction, has already struck down the prosecution in the case of Bee   Gee Motors & Tractors v ITO (Supra).

It is necessary to compare the text of section 276B with provisions of section 40(a)(ia). Section 40(a)(ia) contemplates a time limit for the payment of tax as well; and not merely the deduction as per Chapter XVII B. For mere delay, there are already adequate provisions viz. section 40(a) (ia) disallowance; 201(1A) – interest, 271 C and 221 – penalty. Thus, section 276B clearly applies to total failure and not a mere delay.

Incidentally, even under Service Tax, the Central Board of Excise & Customs has issued a circular no. 14/2011 dated 12.05.2011 stating that, “provisions relating to prosecution are to be exercised with due diligence, caution and responsibility after carefully weighing all the facts on record. Prosecution should not be launched merely on matters of technicalities. Evidence regarding the specified offence should be beyond reasonable doubt, to obtain conviction. The sanctioning authority should record detailed reasons for its decision to sanction or not to sanction prosecution, on file.” In its introductory paragraphs, it also mentions the purpose of prosecution stating that, “While minor technical omissions or commissions have been made punishable with simple penal measures, prosecution is meant to contain and tackle certain specified serious violations” It is all the more unfair that in certain jurisdiction, the limit fixed for prosecution is as low as Rs. 25,000/-.

 

5. PRACTICAL SITUATION: Your kind attention is also invited to some of the following circumstances that happen in actual life and which need to be considered while processing and deciding any case for initiating proceedings u/s.276B/276BB:-

(i) Sometimes No Govt. Money Is withheld by Assessee: -

Many a times the TDS is deposited by the assessee from his own pocket  e.g. first in case of EMI payments and secondly where TDS is to be deposited by the deductor even where payment has not been made to the deductee on account of routine credit period in trade. So the notion that deductor deducted the amount from deductee and used the Govt. money might not apply in every case.

 

(ii)  Assessee being ignorant about TDS Provisions:- 

Law relating to TDS is very technical and sometimes assessee is ignorant about TDS Provisions. Where it comes to the knowledge of the assessee e.g. at the time when pointed by the auditor, Tax is deducted and deposited at that point of time by assessee. Sir, it is important to mention here that Finance Act, 2010, to further encourage voluntary compliance of TDS Provisions by assessee amended provisions of section 40(a)(ia) to provide that where any sum on which tax is deducted and paid on or before the due date specified in section 139 (1) such expenditure shall be allowed as deduction in computing the income of the previous year.

 

(iii) Persons Responsible to comply may be Different person:-

Generally persons who are responsible for complying with TDS provisions are different from the person who is issued
the show cause notice for prosecution. Like in case of small enterprise it is the part-time accountant and in
case  of large  enterprise  it  is  the  employee who  is entrusted the job of compliance of TDS Provisions. But ultimately it is the assessee who has to suffer the agony of prosecution.

         (iv) Effects on Social Life:-  

Launching of prosecution is a social disqualification and prospect of landing in imprisonment cause great disturbance to the person and his family as well. This will discourage the morale of assesses at large.

(v) Focus of Tax Administration:- Focus should be to catch hold of Habitual/wilful defaulters and   Non- depositors instead  of  prosecuting  those  who  have  voluntarily complied with the law may be a little late.

 

(vi) Not  a  source  of Revenue:- Prosecution   provisions and consequent compounding fees are not and should not be
used as a source of revenue collection. At present, it has
taken the shape of a impression in the mind of general
public (The assessees) and   the members of the BAR
association that the proceedings under sections 276B and
276BB particularly for the earlier years (more than 2 years old cases), are being initiated as a mode of revenue collection- that too when voluntary compliance, albeit late, has already been made and due taxes along with interest thereon has already been deposited.

 

(vii) Compounding Fee : For the above discussed offence u/s 276B/276BB for late deposit of TDS by some days, the compounding fees has been prescribed @ 5% p.m. for period of delay plus establishment expenses which are minimum of Rs. 10,000/- and maximum of Rs. 50,000/-. Relegating the assessee, for this limited delay on account of a technical offence, to payment of compounding fee is unjust, harsh and unreasonable on the part of field formations. Even on the issue of quantification of period of delay, the interpretation given to the Board Instruction by the field formations is that 1 day delay in deposit of TDS is taken as 2 months for the purposes of computing the compounding fees. This, in our opinion, is not in consonance with the intent of Board Instruction and ratio of law laid down by Hon’ble Gujarat HC in the case of CIT vs. Arvind Mills Ltd. (2012) 204 Taxman 38.

 

SUGGESTIONS:

- From the above it is obvious that while prosecution instils fear in the mind of public but at the same time it breeds harassment also which ultimately leads to more non-compliance. If a law-abiding person paying tax all his life happens to commit a mistake once, he should not be put behind the bars. His conduct should be seen on overall basis.

- The prosecution provisions should be given wide publicity so that public at large is educated. Though the provisions relating to prosecution are in the statute book since long yet the department has started using the same in large number of cases only recently.

It is suggested that the same should be used only after giving wide publicity.

-Instructions and guidelines should also be issued to the effect that the reasonableness of reply should be examined in depth at the AO(TDS) and JCIT(TDS) level. It is only when, in their opinion, the case is considered fit,  the  matter  be  brought  before the CIT(TDS) for seeking approval for prosecution.

Sir, Your early action in the matter is solicited. It will reduce
unnecessary litigation and harassment to the assessee on this score and create goodwill and also ensure natural justice.

                                                                                                                           

Thanking You

 

Yours Sincerely