Businesses especially small and medium scale has been badly hit by demand notices from Income Tax Department for payment of fees for late filing of TDS returns.

Actually with effect from July 1, 2012, the IT Department has made it mandatory to pay late fee of Rs. 200 per day since the due date, in case of late filing of TDS returns by imposition of new ruling u/s 234E. This new provision, says that, “if TDS return is filed late, then U/s 234E late fees of Rs. 200/- per day will have to be deposited before filing TDS / TCS return, however it is specified that late fees should not exceed TDS/TCS deductible/collectible for that quarter. In addition to this, if TDS and late fee and interest due thereon as well as TDS return is not deposited within one year from the due date then penalty U/s 271H ranging from 10 thousand to 1 lakh may be imposed.”

It further states that, “as per the provisions of the law, if the Deductor is charged penalty u/s 234E, this penalty cannot be waived off and has to be paid to the IT Department using challan no. 281.”

In view of above, the IT department has issued demand notices to thousands of tax payers across the country for an estimated amount of Rs. 500 – 700 crore.

In this article, we would discuss the provisions in detail, and also try to find out if there a solution to tackle this kind of demand notice.

Income Tax Provision does not empowers IT department to raise such demand
The provision clearly states that if TDS return is filed late, then under section 234E late fees of Rs. 200/- per day will have to be deposited before filing TDS / TCS return. Thus, once TDS statement has been accepted without late fee, and then such late fee cannot be recovered later on.

Further, it is pertinent to note that section 200(3) of the Income Tax act, 1961 states that TDS statement shall be filed after paying the tax deducted and rule 31A. Also, section 204 of the act has made mention of Section 190 to Section 203AA and Section 285, however, does not cover Section 234E.

Therefore if any late fee is due and not deposited along with the TDS statement, it cannot be recovered later by the IT department.

Hon’ble Kerala High Court Stayed the recovery of such fees

The Judgement of the Hon’ble High Court of Kerala has come as a big relief to the tax deductors. This provision had been challenged in the Kerala High Court on the grounds that there is no provision in the Income Tax Act, 1961, which empowers the IT department to recover the penalty for late filing of TDS returns.

The levy in nature of “fee” has been challenged as illegal, arbitrary, unreasonable, invalid and unconstitutional in a writ petition filed by a lower primary school in Kerala.

The Kerala High Court has acknowledged and admitted the writ petition and has granted 2 months stay order to all the proceedings initiated against the petitioner under Section 234E of the Income Tax Act. Also, the standing counsel for the IT Department has taken notice for all the respondents in the writ petition.

Way Forward
In case if you have received a demand notice for late filing of TDS returns, you may look to peruse any of following measures.

Rectification under section 154

Aggrieved taxpayers should look to file request for rectification under section 154 of the Income Tax Act, 1961. On receiving the application the Assessing Officer has to pass an amendment order within 6 months from the end of the month in which the said application is received or he may reject the application within such time. If he rejects your above mentioned arguments with reasons not acceptable to you then you can go for an appeal.

Appeal with Commissioner of Income Tax (Appeals)

The concerned assessees receiving such notices must approach the IT Commissioner (CIT), Appeals for getting their penalty waived off. A taxpayer from Mumbai, being one such affected person, who has received a demand notice from the department for paying Rs 56,000 as late fee for defaulting on TDS, at the rate of Rs 200 per day since the due date. However, the affected assessee said such penalty can’t be recovered under any of the existing law and hence he has decided to go for appeal.

To Conclude
An assessee cannot be treated in default also U/s 201(1) or 206C (6A) due to non-payment of late fee. And even the TDS return (statement) is also not treated as defective, like non-payment of tax and interest treats an income tax return as defective U/s 139(9) of the act.

If a person has not paid late fee then, even though it shall not be charge on all assets because Sec. 201(2) & 206C (8) does not cover late fee. Sec 234E also doesn’t say that in case of default in depositing late fee, the defaulting persons will be deemed an assessee in default.

In view of the above late fee cannot be recovered later on, by way of any notice , neither notice of demand U/s 156 can be issued for this. If any notice is issued by way of processing TDS statement U/s 200A, then rectification of mistake U/s 154 of the act or filing an appeal before Commissioner of Income Tax (Appeals) is an option.