Another case of delayed deposit of TDS leads to prosecution

Introduction

In a recent judgment Sowparnika Projects and Infrastructure Pvt. Ltd. and Ors. v/s ACIT TDS Circle-3(1), Criminal Review Petition No. 456/2019 (Judgment), the Hon’ble Court of the LIX Additional City Civil and Session Judge, Bangalore City (District Court) has dismissed criminal revision petition filed by Sowparnika Projects and Infrastructure Private Limited (Company) and its director and upheld the launching of prosecution proceedings for delayed deposit of tax deducted at source (TDS) by the Company pertaining to Financial Year (FY) 2012-13.

Background

Under the Income-tax Act, 1961 (IT Act), certain payments to resident taxpayers are subject to TDS – i.e. the payer has to deduct the applicable tax at source (1^st Obligation) and deposit the same with the government within stipulated timeframe (2^nd Obligation). The stipulated timeframe has been prescribed in the Income-tax Rules, 1962 (IT Rules) which provides that the general time-limit for depositing TDS with the government is 7 days from the end of the month in which deduction is made (Due Date). Failure to comply with these obligations is an offence and attracts penal consequences – monetary (interest, penalty, fine) as well as non-monetary (imprisonment ranging from 3 months to 7 years). However, IT Act also provides that a person would not be punished for such failure if he proves that there was ‘reasonable cause’ for such failure.

Where such offence is committed by a company, IT Act provides that (i) the company would be liable to pay fine; and (ii) the director, manager, secretary or other officer of the company to whom such neglect can be attributed would be liable for prosecution. Further, in such cases of prosecution, the IT Act also contains a presumption – though rebuttable – as to the culpable mental state of the accused (Rebuttable Presumption).

Judgment

In the instant case, during FY 2012-13, the Company had made certain payments which were subject to TDS. Though the Company complied with the 1^st Obligation (it deducted TDS amounting to INR 99.10 lakhs), it failed to comply with the 2^nd Obligation (i.e. it did not deposit TDS with the government by the Due Date). There was a delay to the extent of 2 to 15 months in depositing the TDS.

Consequently, the tax authorities launched prosecution against the Company and its director (together, referred as ‘Accused’) for delayed deposit of TDS. Notably, the sanction order for the prosecution was passed in the FY 2017-18 only (i.e. after a lapse of more than 3 years from the concerned default). The Hon’ble Special Court for Economic Offences, Bangalore (Special Court) passed an order convicting the Accused and dismissed their application for discharge. 

The Accused, thereafter, filed a revision petition before the District Court.

Following were the contentions and arguments raised by the Accused in their defence and the District Court’s observations/conclusions with respect to those contentions:

Comments

Lately, in cases of delayed deposit of TDS with the government, the instances of initiation of prosecution proceedings against the directors has been on the rise. Since the IT Act does not make a distinction between a complete failure to deposit the TDS with the government OR a delayed deposit of TDS with the government, the tax authorities have generally been launching prosecution proceedings even in case of delayed deposit of TDS with the government. This order will further strengthen the stand of the tax authorities in cases where the prosecution has been launched after a significant delay. In another recent case, delayed deposit of TDS had led to prosecution (please see our Ergo dated 20 September 2019).

It is noteworthy that considering the stringency in such punishments, with a view to ensure that minor default cases don’t get selected for prosecution, recently, the government has brought out a set of guidelines (please see our Ergo dated 13 September 2019) which, inter alia, provides that for cases pertaining to delay in deposit of TDS amounting to INR 25 lakhs or less, (i) such cases would normally not be selected for prosecution if the delay does not exceed 60 days from the due date, and (ii) even in exceptional circumstances (like habitual offenders), prosecution may be initiated only with the prior approval of a collegium of two senior tax officers.

-       Sanjay Sanghvi (Partner), Raghav Kumar Bajaj (Principal Associate) and Ujjval Gangwal (Associate)

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