Tax Deduction At Source

The final research proposal submitted in fulfillment of the course Taxation Law
- I, Semester VII during the academic year 2019-20

Submitted by-

C. Monica

Roll No. - 1617

B.B.A LLB

Submitted to-

Dr. G P Pandey

September, 2019

Chanakya National Law University,

Mithapur, Patna, 800001

ACKNOWLEDGEMENT

I am feeling highly elated to work on under the guidance of my Taxation Law - I faculty.
I am very grateful to him for the exemplary guidance. I would like to enlighten my readers
regarding this topic and I hope I have tried my best to bring more luminosity to this topic.

I also want to thank all of my friends, without whose cooperation this project was not
possible. Apart from all these, I want to give special thanks to the librarian of my
university who made every relevant materials regarding to my topic available to me at the
time of my busy research work and gave me assistance.

OBJECTIVE OF THE STUDY

The researcher seeks to understand the nature and meaning of TDS, how it is to be paid, who
is liable to pay, what are the conditions of payment and the procedure of payment. The
researcher, while dealing with nature and meaning of TDS will cover up the statutory basis of
it, responsibilities of the person who deducts and collector, penalty on failure to file TDS

HYPOTHESIS

The researcher has adopted the hypothesis that:

Non-deduction of TDS by the deductor becomes a punishable offence

RESEARCH METHODOLOGY

The research includes different options. They are:

• Exploratory research:

It is usually a small-scale study undertaken to define the exact nature of a problem and to gain
a better understanding of the environment within which the problem has occurred. It is the
initial research, before more conclusive research is under taken.

• Descriptive research:

It is to provide an accurate picture of some aspects of market environment. Descriptive research

is used when the objective is to provide a systematic description that is as factual and accurate
as possible. It provides the number of time something occurs, or frequency, lends itself to
satisfied calculations such as determining average number of occurrences.
 Table of Contents
1. INTRODUCTION ................................................................................................................. 4

2. RESPONSIBILITIES OF DEDUCTOR................................................................................ 6

3. NATURE OF PAYMENTS COVERED UNDER TDS ....................................................... 8

4. IMPORTANT JUDGMENTS ............................................................................................. 13

5. CONCLUSION .................................................................................................................... 15

BIBLIOGRAPHY .................................................................................................................... 16
 1. INTRODUCTION

Tax Deduction at Source, generally referred to as TDS is a system through which the income
tax is deducted at very source of generation of income of a person. This concept was evolved
by the Income Tax Department in order to make collection of tax secured and convenient for
the Central Govt.1It helps Govt. remove system of tax evasion.2 With this the system in which
the assessment of income tax at the end of a financial year has been replaced. Under TDS the
person making certain specific payment to certain other person against his or her services will
at the time of making such payment will deduct a fixed rate of income tax which will then have
to be deposited with the Central Govt. The person deducting is referred to as ‘deductor’ and
the person from whose income tax is being deducted is known as ‘deductee’. Chapter XVII –
Collection and recovery of tax, Sec. 190 to Sec. 260CA of the Income Tax Act 1961 deal with
the concept of TDS.

TDS finds its justification in the principle ‘pay as and when you earn’. 3 It is not applicable on
all kinds of payments made or incomes generated. There are certain heads that have been dealt
with under the ITA, on which only TDS would be applicable. According to the nature of
payment made different rates of TDS have been fixed by the Central Govt. The mode of
payment has no relevance here. Irrespective of whether the payment is made in cash, credit or
by cheque TDS will be applied. It is applicable on the following kinds of payment:

 Salaries
 Interest payments by banks
 Commission payments
 Rent payments
 Consultation fees
 Professional fees

TDS becomes chargeable only on the incomes that are above a set threshold level, if the earning
is below that set amount then no TDS is required to be deducted. There are different levels set
for different kinds of payment. Also TDS is not applied in cases of an individual making
payment of professional fees to lawyers, doctors etc.

1
https://cleartax.in
2
https://economictimes.indiatimes.com
3
https://help.myitreturn.com
The people who are collecting or deducting tax are compulsorily required to obtain a TAN(
Tax deduction/collection Account Number). This no. will have to be produced on the TDS
certificates and other TDS related transaction documents.

After the deductor has deducted TDS and deposited it with the Govt. then a TDS certificate is
issued. However, it is not mandatory to issue this certificate in all the cases. This acts as a prima
facie evidence at the time of tax payment at the end of a financial year and so the adjustments
can be made in the tax payments by deductee for TDS already having been applied.

The researcher will further discuss the role and responsibilities of deductor and deductee, the
procedure of deduction, the current rates of deduction, the statutory provisions etc. in this
project work.
 2. RESPONSIBILITIES OF DEDUCTOR

The persons who have been given authority to deduct under the ITA by the nature of payment
that they make are mainly the following (sec.204):

 Principal Officer who is appointed specifically for the TDS purposes. In case of pvt.
Co. it may be the employer or if any employee makes payment on his behalf then the
employee.
 Drawing & Disbursing Officer, popularly known as DDO, this is in case of Govt.
offices.
 Local authority, Corporation of Company – This applies in case of ‘interest on
securities’, other than Central or State Govt.

DUTIES OF DEDUCTOR: The duty of person deducting TDS is discussed u/s 200. There are
certain other incidental responsibilities inferred from other provisions of the Act as follows

 He is responsible to obtain TAN, which is a 10 digit alpha numeric code, from the
deductee. In case it is not provided then the tax will be deducted at specified rate or
20% whichever is higher.
 Must also receive the PAN from the deductee.
 Must make proper deductions at the specified rates only.
 The sum deducted must be paid within time prescribed, to the credit of Govt. or as per
directed by board using challan no. 281 for depositing.
 Statements of deduction must be filed in specified time duration. After the payment is
made to the Central Govt. the deductor must prepare statements for that period as
prescribed and deliver them to IT Authorities and it must be verified as prescribed.
 Issuance of TDS certificate
 He must file for the returns as prescribed. Before 2005 all the deductors were required
to file annual returns of TDS but this changed and now they are required to file quarterly
statements of TDS in accordance with form 26Q.

Other than the above a deductee can approach a deductor for non deduction of source tax. In
such a case an advance income tax declaration under form 15 G/15 H needs to be furnished.
Also, in case excess deduction is made then like tax return the deductee can make a claim for
refund.
The deductor has to be vigilant for non – deduction at source if the following criteria is fulfilled
by the assesse:

1. In case the earning of a resident as per Ss. 192A, 194 or 194EE does not exceed the
max. chargeable amount of income tax.
2. In case the earning of an individual not being a firm or a Co., as per Ss. 193, 194A, 194
DA or 194I does not cross the max. chargeable amount of income tax.
3. In case of a senior resident’s earning being as per Ss. 192A, 193, 194, 194A, 194EE or
194DA.
 3. NATURE OF PAYMENTS COVERED UNDER TDS

According to the provisions of ITA 1961 only the following kinds of payment are covered
under TDS:

1. Salary (Sec. 192) – Any person who is responsible for the payment of any income
falling under ‘Salaries’ will be liable to deduct income tax at the average rate prevailing
in that particular financial year, while making such payment.
If any perquisite not provided for through monetary payment to such income is payable
then without making any deductions at the time the payment becomes due, the deductee
may pay tax on such income wholly or partly. This must also be treated as if deduction
was made under ‘Salaries’ at source. Also the assesse must provide complete and
correct particulars of the profits he receives in lieu of his salary.
If the employee in a particular financial year has worked under 2 or more employers
then he will have to give the details about the salary received or due from the previous
employer and the deductions made or due to be made, to the deductor for further
computation of TDS.
In case the assesse is a Govt. servant or employee in a cooperative society, university
etc. then if he is entitled to some reliefs, he can provide such details to the deductor to
claim them.
If the assesse is getting any other income other than that falling under ‘salaries’ or if it
comes under ‘loss of income from house property’ , then he must give the details about
the tax charged or deductions made on such incomes, to the deductor.
The deductor may increase or reduce the deduction depending upon the fact if in any
previous financial year, there was any deficiency in deductions.
The trustees are liable to make deductions if any contributions and interest thereon
made by employer in superannuation fund of employee becomes payable.
2. Provident fund (Sec. 192A) – The trustees of the provident fund at the time of payment
of an accumulated amount to the employee where it is participating in his total income
are duty bound to deduct income tax at the rate of 10 %, provided that aggregate amount
is not less than Rs. 50000.
In case a person fails to provide his PAN to the deductor then the deductions may be
made at a high marginal rate also.
3. Interests –
A. Interest on securities (Sec. 193) – The person liable to pay any interest on securities to
a resident must make deduction of tax whenever it becomes payable. Upto Rs. 5000 os
exempted for the financial year. There are certain exceptions in this case provided u/s
193 such as interest:
˖ Paid on securities of a Co. in dematerialized form
˖ Payable to Life Insurance Corp. of India, General insurance Corp. of India or to
any other insurer
˖ Payable to HUF, resident in India, on debentures issued by a Co.
˖ Payable on securities of Central or state Govt.
˖ Payable on 6 ½ percent Gold Bonds or 7 percent Gold Bonds, held by individual
not a non – resident.
˖ Payable on 4 ¼ percent national defence bonds held by individual not a non –
resident.
˖ Payable on 7 years national saving certificate.
B. Other Interests (Sec. 194A) – Any person not being an individual or an HUF at the time
of payment of such interest is liable to deduct income tax. But if in previous financial
year the specified limits u/s 44AB are crossed by HUF or individual by their business
turnover then they will also have to deduct.
C. Interest from Indian Co.- TDS will be applied on interest paid to a non-resident or a
foreign co.
D. Interest on certain bonds and Govt. securities – TDS will be applied where the interest
is being paid to a foreign institutional investor or a qualified foreign investor. It is on
following kinds of investment:
˖ A rupee denominated bond of Indian Co.
˖ A Govt. security
4. Dividends – The principal officer of an Indian Co. or any company that has made
declarations for payment of dividends within India, must before making such payment,
deduct income tax. Exceptions are following:
˖ If the shareholder is an individual then if payment is made by account payee
cheque or if the dividend does not exceed Rs. 2500.
˖ In case the shareholder is LIC, GIC or any other insurer
˖ In case dividends falls u/s 115 – O
5. Winnings from lotteries, puzzles, horse race (Sec. 194B & Sec. 194BB) – If the amount
exceeds Rs. 10000 then the person making payment will have to deduct income tax
when it becomes payable. In case of horse racing, the license must have been granted
by the Govt.
6. Contractor Payments (Sec. 194C) – If a person is liable to make any payment to a
contractor resident of India against the performance of the task in the contract, then he
will have to deduct tax at source as follows:
˖ When payment is to an individual or HUF, then 1% of income.
˖ When payment is other than the above, then 2% of the income.

Exceptions:

˖ If the payment is made by HUF or individual for personal works to the

contractor.
˖ If payment does not exceed Rs. 30000. But if the aggregate of all such
amounts exceeds Rs. 1 lakh in a financial year then deduction must be done.
7. Insurance Commission (Sec.194D)– The person making payment in form of
commission or reward to a person resident of India for procurement of insurance must
deduct income tax before making such payment. No deductions to be made where the
amount or the aggregate does not exceed Rs. 50000.
8. Payments under Life Insurance policy(Sec.194DA) – If certain payments are to be made
to an Indian resident under a life insurance policy then the payer must deduct income
tax before making the payment at the rate of 10 %. If aggregate of amount is less than
Rs 100000 then no deductions shall be made.
9. Payments to non – resident sportsmen or entertainer (Sec. 194E) – At the time of
making such payments the deductor must deduct income tax at the rate of 20%.
10. Payments for deposits in National savings scheme(Sec. 194 EE) – No deductions must
be made in such case if the aggregate amount is less than Rs 2500. Also this does not
apply to the heirs of the assesse for the same amount.
11. Repurchase of Mutual Funds or UTI (Sec. 194F) – The payer must deduct income tax
before making such payment.
12. Commission:
˖ On sale of lottery tickets (Sec. 194G) – Here TDS is applicable on a person
involved in stocking, distributing, selling , purchasing of lottery tickets and
earns through commission, remuneration or prize on that lottery.
 ˖ Commission or brokerage(194H) – Any person not being individual or society,
is responsible to deduct income tax from the commission or brokerage that is
paid to a resident at the rate of 5%, before making the payment. If the amount
or the aggregate is less than Rs 15000 then TDS is not applied.
In case of an individual or HUF if their total gross turnover by business crosses
specified limits u/s 44AB then the commission or brokerage paid by them in
that financial year will come under TDS.
13. Rent(194I):
 Here the deductor if not an individual or HUF then TDS is applicable at:
˖ 2% for use of machinery, plant or equipment.
˖ 10% for land, building, land appurtenant to building, furniture etc.

TDS will be applied only when such amount or its aggregate crosses Rs 240000.
Also, where the rent is paid for real estate assets to a business trust then TDS is not
applied.

 Payment of rent by certain individuals or HUF(194IB): In such cases if the rent

exceeds Rs 50000 for a month or its part, and is payable to a resident then TDS
must be applied at 5 %.
14. Immovable property(Sec.194IA):
Payment on transfer of immovable property other than agricultural land: The transferee
at the time of credit of consideration to resident transferor against transfer of immovable
property must apply TDS. It will not be applied in case transfer is of less than Rs 50
lakhs.
Payment of compensation on acquisition of immovable property: Any person
responsible for paying to compensation or consideration or enhanced
compensation/consideration must deduct income tax before such payment, at 10%. No
deductions are made if it is not more than Rs 250000.
15. Payment under specified agreement: Any person liable to pay to a resident under an
agreement mentioned in Sec. 45(5A), then he must apply TDS at 10%.
16. Fees for professional or technical services(Sec. 194J): Any fees of following nature
payable by any person will fall under TDS:
˖ Fees for professional services,
˖ Fees for technical services ( other than sec. 192)
˖ Royalty
 ˖ Sec. 28(va)
If amount or aggregate of above is more than Rs 30000 at 10%. In case payee works at
call centre it must be 2%.
This is not applicable on such fees paid before 1st July 1995.
In case of HUF or individual if such fees are paid in financial year when their gross
turnover by business exceeds limits specified u/s 44(AB), then TDS will apply, even in
cases such fee is paid for personal purposes.
17. Funds/Trusts –
Income from infrastructure debt fund: The person responsible for making payment to a
foreign co. or a non-resident not being co., by an infrastructure debt fund must deduct
income tax before making such payment at 5%.
Income in respect of investment fund: The person making payment to unit holder in an
investment fund must deduct income tax before making payment at:
˖ 10% if payee is resident
˖ Rates in force if payee is non-resident or a foreign co.
Securitization trust: Under such trust if income is payable to a resident investor then
TDS will be applied at:
˖ 25% if payee is an individual or HUF
˖ 30% if it is any other person
˖ At rates in force if payee is non-resident

TDS rates vary in case of non-residents from that of residents. The researcher here has
discussed mainly the case of residents only. After the Amendment was done in Sec. 276 B in
1989, it became a law that only if a person deducts tax but does not pay there is an offence.
Failure to deduct tax only attracts penalty u/s 271 C. If withholding tax is not being deducted
or not submitted at time then u/s.40a(i), his allowances are cancelled, deduction in year of
payments. If the TDS is deducted by the payer, but not submitted within time then interest
@1.50 per month or part of the month (varying for different situations and nature of payments)
from the date of deduction to date of deposit (Sec.201 (1A)) will be charged.
 4. IMPORTANT JUDGMENTS
1. Madhumilan Syntex Ltd. & Ors vs UOI & Anr4

FACTS: In this case the assesse had not credited TDS in the account of Central Govt. as
required by Sec. 194C and 200 of ITA, 1961 read with Rule 30 of IT Rules, 1962. The
amount was credited later with interest. The IT officer issued a notice to Company that they
had not deposited TDS in compliance with Sec. 276 B of the Act. Thus they were
punishable u/s 278B. Assesse based his contention Vinar & Co. & Anr. V. Income Tax
Officer & Ors. wherein HC observed “there is no provision in ITA imposing criminal
liability for delay in deduction and non-payment in time. U/s 276B delay in payment of
income tax is not an offence.”

The prosecution must not normally be issued in cases where the amount is not substantial
and in the meantime the amount has also been deposited in the Govt. account.5

2. Vijay Singh vs UOI & Anr.6

In this case also the Hon’ble HC had given its judgment in favour of the assesse for a TDS
default of 28776 for a period of 5 months and some days.

3. Sequoia Construction Co. Ltd. & Ors. vs. P.P. Suri, Income Tax Officer7

Here in this case also there was delay in the deposit of TDS. But since the reasonable cause
was shown by the assesse, the appellate authorities had dropped the penalty proceedings. It
was held that “Dropping of penal proceedings must weigh with Trial Court while judging
the reasonable cause. Continuance of prosecution proceedings would be a sheer exercise in
futility and harassment of assessee.”

4. UOI vs. Pyarelal Tarachand & Anr.8

In this case the High Court had refused from interfering in the decision when the trial court
had already acquitted the assesse for it was proved that he had not defaulted intentionally
or deliberately.

3. Uber India Systems (P.) Ltd. v. JCIT9

4
AIR 2007 SC (148)
5
Instruction no. 1335 CBDT, dated 28-05-1980.
6
(2005) 199 CTR (MP) 653.
7
(1985) 47 CTR (DEL) 277: (1986) 158 ITR 496 (DEL).
8
(2003) 180 CTR (MP) 551: (2003) 264 ITR 525(MP)
9
( 2018) 173 ITD 268/171 DTR 179/ 196 TTJ 459 ( Mum)(Trib)
The assesse in this case was Uber India. When a survey was conducted it was found in
default for not complying with Sec. 194C on pay-outs to driver partners. A demand notice
was issued and the penalty proceedings started. The contention of assesse here was that it
was not ‘person responsible for making payment, as it was only responsible for providing
marketing and support services to Dutch Co, Uber BV which was actually liable to make
payment to the driver-partners. There were practical reasons why assesse could not collect
TDS on direct cash payments to driver-partners.The decision was given in the favour of
assesse.
 5. CONCLUSION
The hypothesis stands disproved. By the perusal of the above mentioned provisions and
judgments the researcher has come to the conclusion that the default in TDS is not generally
considered as a punishable offence if the default is for a short time and also along with
interest is deposited into the account of the Govt. Also in case there is a reasonable cause
shown by the person as to why he could not file TDS in time then also the court seems to
favour the assesse only. Where the assesse does not deduct TDS it does not become
punishable but where he does deduct and does not deposit it, then it becomes punishable.
The system of TDS is quite complicated with the rates, the procedure, conditions etc.
varying in almost every other kind of payment, different in case of residents, non-residents,
HUF, companies etc. But still the Govt. introduced this system only with the purpose of
stopping tax evasion and for the convenience of tax collection as it is done one every
individual’s level. So it helps reducing the tax collection burden of govt. agencies, also
convenient for the person whose income it is charged as he does not have file for tax later
and this helps in widening tax collection base. It helps in maintaining a steady flow of
income for govt.
 BIBLIOGRAPHY

Books:

 Ravi Shinde, Lectures on Law of Taxation, 2014.

 Dr. S R Myneni, Law of Taxation
 Gandhi, V.P., Some Aspects of India’s Tax Structure- An Economic Analysis, Vora &
Co. Publishers, Bombay, 1970.
 Dr. V.K. Singhania, Students Guide to Income tax, Taxmann Publications Pvt. Ltd.,
New Delhi.
Websites:

 https://cleartax.in
 https://economictimes.indiatimes.com
 https://help.myitreturn.com
 https://policybazaar.com
 https://taxguru.com
 http://legalraasta.com