Income Tax 2025

Appearance

Consequences ​

of failure to deduct or pay or, collect or pay.

398(1) ​

If a person, including the principal officer of a company,––

  • (a) who is required to deduct or collect any amount under this Act; or
  • (b) referred to in section 392(2)(a), being an employer,— (i) does not deduct or pay; or (ii) does not collect or pay; or (iii) after deducting or collecting fails to pay, the whole or any part of the tax, as required by or under this Act, he shall be deemed to be an assessee in default in respect of such tax in addition to any other consequences which that person may incur under this Act.

398(2) ​

Any person,—

  • (a) including the principal officer of a company, who fails to deduct; or
  • (b) responsible for collecting tax as per section 394(1) (Table: Sl. Nos. 1 to 5 and 9), who fails to collect, the whole or any part of the tax, as required under this Chapter, shall not be deemed to be an assessee in default if the payee or buyer or licensee or lessee has — (i) furnished his return of income under section 263; (ii) taken into account the amount for computing income in that return of income; and (iii) paid the tax due on the income declared by him in such return of income, and the person furnishes a certificate to this effect from an accountant in the prescribed form.

398(3) ​

  • (a) Without prejudice to sub-section (1), if any person, as referred to in that sub-section does not deduct or collect the whole or any part of the tax or after deducting or collecting fails to pay the tax as required under this Act, he shall be liable to pay simple interest— (i) at 1% for every month or part of a month on the amount of such tax from the date on which such tax was deductible or collectible to the date on which such tax is deducted or collected; and (ii) at 1.5% for every month or part of a month on the amount of such tax from the date on which such tax was deducted or collected to the date on which such tax is actually paid;
  • (b) the interest referred to in clause (a) shall be paid before furnishing the statement as per the provisions of section 397(3)(b).
  • (c) if the person referred to in sub-section (1) is not deemed to be an assessee in default under sub-section (2), then the interest as per clause (a)(i) is payable from the date on which that tax was deductible or collectible to the date of furnishing of return of income by the concerned payee or buyer or licensee or lessee, as the case may be;
  • (d) when an order is made by the Assessing Officer for the default under sub-section (1), the interest shall be paid by the person as per such order.

398(4) ​

Where the tax has not been paid after it is deducted or collected, the amount of the tax together with the amount of simple interest on it as referred to in sub-section (3)(a) shall be a charge upon all the assets of the person referred to in sub-section (1).

398(5) ​

The order shall not be made under sub-section (1) deeming a person to be an assessee in default for failure to deduct or collect the whole or any part of the tax from any person––

  • (a) after six years from the end of the tax year in which tax was deductible or collectible; or
  • (b) after two years from the end of the tax year in which the correction statement is delivered under section 393(3)(f), whichever is later.

398(6) ​

The provisions of sections 286(1) and 286(3) shall apply to the time limit prescribed in sub-section (5).

398(7) ​

No penalty shall be charged under section 412 from the person mentioned in sub-section (1), unless the Assessing Officer is satisfied that such person, without good and sufficient reasons, has failed to deduct and pay such tax.

Explanation

Section Summary: ​

Section 398 of the new income tax law outlines the consequences for failing to deduct, collect, or pay taxes as required under the Act. It specifies the conditions under which a person (including the principal officer of a company) will be deemed an "assessee in default," the interest liabilities for such failures, and the circumstances under which penalties may or may not apply. The section also provides relief in cases where the payee has already accounted for and paid the tax in their return.

Key Changes: ​

  1. Interest Rates: The section introduces specific interest rates for delays in deducting, collecting, or paying taxes:
    • 1% per month (or part of a month) for the period from when the tax was deductible/collectible to when it was actually deducted/collected.
    • 1.5% per month (or part of a month) for the period from when the tax was deducted/collected to when it was actually paid.
  2. Relief from Default: A person will not be deemed an assessee in default if the payee has filed their return, accounted for the income, and paid the tax due, provided a certificate from an accountant is furnished.
  3. Time Limits: An order deeming a person as an assessee in default cannot be made after six years from the end of the tax year in which the tax was deductible/collectible, or two years from the end of the tax year in which a correction statement is delivered, whichever is later.
  4. Penalty Protection: No penalty will be charged unless the Assessing Officer is satisfied that the failure to deduct or pay tax was without good and sufficient reasons.

Practical Implications: ​

  1. For Taxpayers:
    • Employers or entities responsible for deducting or collecting tax must ensure timely compliance to avoid being deemed an assessee in default and incurring interest liabilities.
    • Payees (e.g., employees, contractors) must ensure their income is correctly reported and taxes are paid to avoid triggering penalties for the deductor/collector.
  2. For Businesses:
    • Companies must maintain accurate records and ensure timely payment of deducted or collected taxes to avoid interest charges and potential asset liens.
    • Businesses should obtain and retain certificates from accountants to avoid being deemed in default if the payee has already paid the tax.
  3. For Compliance Processes:
    • Tax authorities have a defined window (six years or two years, depending on the situation) to take action against defaulters.
    • Interest calculations must be precise, and payments must be made before filing the required statements.

Critical Concepts: ​

  1. Assessee in Default: A person who fails to deduct, collect, or pay tax as required by the Act is treated as an assessee in default, making them liable for penalties and interest.
  2. Simple Interest: Interest is calculated at a fixed rate (1% or 1.5%) per month or part of a month, depending on the stage of default.
  3. Charge on Assets: Unpaid tax and interest become a charge on all assets of the defaulter, giving the tax authorities a claim over those assets.
  4. Relief Conditions: To avoid being deemed in default, the payee must have filed their return, accounted for the income, paid the tax, and provided an accountant's certificate.

Compliance Steps: ​

  1. Timely Deduction/Collection: Ensure taxes are deducted or collected as per the Act's requirements.
  2. Timely Payment: Pay the deducted or collected taxes to the government within the stipulated time.
  3. Documentation: Maintain records of deductions, collections, and payments, and obtain accountant certificates where applicable.
  4. Interest Payment: Calculate and pay interest as per the prescribed rates before filing the required statements.
  5. Monitor Time Limits: Be aware of the six-year and two-year time limits for orders deeming a person as an assessee in default.

Examples: ​

  1. Scenario 1: An employer fails to deduct TDS from an employee's salary. If the employee files their return, declares the income, and pays the tax due, the employer can avoid being deemed in default by obtaining an accountant's certificate.
  2. Scenario 2: A company deducts TDS but delays paying it to the government by three months. The company will owe 1.5% interest per month on the unpaid amount for those three months.
  3. Scenario 3: A contractor fails to collect TCS from a buyer. If the buyer has already paid the tax in their return, the contractor can avoid penalties by providing an accountant's certificate.

This section emphasizes the importance of timely compliance and provides mechanisms to avoid penalties if the payee has already fulfilled their tax obligations.