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Income Tax Penalties for Employers

Failure to deduct tax – Where the employer has failed to deduct tax or when short deduction of tax has been done, following statutory provisions are attracted.

  • Charging of interest u/s 201(1A) – The deductor is treated to be ‘assessee in default’ in respect of the short deduction/non deduction of tax. Under Section 201(1A) he is liable to pay simple interest @ 12% per annum on the amount of tax in arrear from the date on which such tax was deductible to the date on which such tax is actually paid, to the credit of Central Govt. Further w .e.f. 1.6.2006 such interest shall be paid before furnishing the quarterly statement of each quarter . As per Finance Act 2007 w .e.f. 1.4.2008 interest is to be charged at the rate of one percent for every month or a part of the month. Charging of interest u/s201(1A) is mandatory and there is no provision for its waiver.
    • Procedure for interest calculation : The calculation of interest is to be done as per Rule 1 19A and is summarized below:
      • The period for which such interest is to be calculated is to be taken in months. Any fraction of a month is to be taken as a full month.
      • The amount of tax in respect of which interest is to be calculated is to be rounded off to nearest multiple of Rs. 100 ignoring any fraction of Rs. 100.
  • Penalty u/s 221- The assessee in default is liable to imposition of penalty where the assessing officer is satisfied that the defaulter has failed to deduct tax as required without good and sufficient reason. The quantum of penalty is not to exceed the amount of tax in arrear .
  • Penalty u/s 271C- A penalty equivalent to the amount of tax the deductor has failed to deduct, is leviable u/s 271C. Such penalty is however only leviable by a Joint Commissioner of Income T ax.

Failure to deposit tax in govt. account after deduction – Where the employee has deducted the tax at source but failed to deposit wholly or partly , the tax so deducted in government account, the following statutory provisions are attracted.

  • Interest u/s 201(1A)- The deductor is treated as an assessee in default and interest u/s 201(1A) @12% as explained above is leviable. Further , the tax along with the simple interest u/s 201(1A) becomes a charge upon all the assets of the deductor.
  • Penalty u/s 221- Penalty to the extent of tax not deposited is leviable by the A.O. as discussed earlier.
  • Prosecution proceedings u/s 276 B - Where the deductor has failed to deposit tax deducted at source, in govt. a/c without a reasonable cause then he is punishable with rigorous imprisonment for a term which shall not be less than 3 months but which may extend to 7 years and with fine.

Failure to apply for T .A.N or to quote T .A.N. – Where a person who is responsible to deduct tax at source has failed, without reasonable cause.

  • To apply for T .A.N. within prescribed period or
  • After allotment, failed to quote such T AN in challans for payment of tax or TDS certificate or returns of TDS (as required u/s 206) – then a penalty u/s 272BB of a sum of Rs.10,000 may be imposed by the assessing officer.

Failure to furnish TDS certificate or returns/ statement of tax deduction at source- Where the employer has failed to issue TDS certificate (form 16) within one month of the end of financial year or has failed to furnish the quarterly statement of tax in form 24Q, within the time prescribed u/s 200(3) (rule 31A), then a penalty of Rs. 100 is leviable for each day during the period for which default continues. The quantum of penalty is not to exceed the tax deductible and it is to be levied only by a Joint Commissioner or Joint Director after giving the assessee an opportunity of being heard.


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