[Opinion] Need to Rationalise TDS Prosecution Provisions

Pranay Bhatia – [2024] 166 taxmann.com 606 (Article)

Tax laws encompass numerous complex provisions, with one of the most pressing issues being the initiation of prosecution proceedings in cases of TDS (Tax Deducted at Source) payment defaults. Under current regulations, failure to remit the deducted tax to the Central Government within the specified timeframe constitutes an offense. Consequently, defaulters may face severe penalties, including imprisonment ranging from a minimum of three months to a maximum of seven years, along with additional financial interest and penalties. This stringent provision has created concern among tax depositors who, due to genuine circumstances, may have missed the deadline for remitting taxes to the Central Government. Despite having subsequently deposited the taxes along with the applicable interest, they remain subject to these rigorous provisions. This highlights the need for a more balanced approach, ensuring that taxpayers acting in good faith are not unduly impacted by such stringent measures.

The department currently follows internal Standard Operating Procedures (SOPs) and guidelines outlined in the CBDT circular to issue show-cause notices (SCNs) to defaulters, ensuring a standardised approach. This process promotes consistency and uniformity in handling cases, though there remains room to consider the unique merits of each case for a more tailored resolution.

In light of these challenges, there is a compelling need to rationalize TDS prosecution provisions in line with principles upheld by judicial jurisprudence. As emphasised by the Hon’ble Apex Court, bail should be the norm, while imprisonment should remain the exception. Imprisonment should only be considered in cases with clear evidence of malicious intent, attempts to evade justice, obstruction of legal processes, or threats to witnesses. Adopting this approach ensures a fairer and more balanced application of justice.

By integrating the principles established in judicial precedents from higher courts with existing guidelines and SOPs, authorities at the grassroots level can significantly reduce the number of TDS prosecution cases escalating to higher forums. A thorough, case-by-case evaluation will enable more effective issue resolution. In instances where the TDS, along with interest, has been duly deposited and delays were due to legitimate reasons, each case should be carefully assessed before applying stringent prosecution provisions. For instance, in a recent judgment1, the Hon’ble Bombay High Court quashed prosecution proceedings for delays in TDS deposits, noting that the TDS had already been paid along with interest. This ruling reinforces the importance of considering specific facts before applying stringent provisions.

The need for compounding has become more pronounced due to the hesitance at grassroots levels to assess each case individually. Compounding allows defaulters to avoid imprisonment by paying applicable fees to waive prosecution charges. According to current guidelines, prosecution is generally not pursued for non-payment (including delayed payment) of TDS if the amount is INR 25 lakhs or below and the delay is less than 60 days from the due date. Defaulters also have the option to appeal to higher forums to contest prosecution orders.

Click Here To Read The Full Article