Tax Insights
from India Tax & Regulatory Services
www.pwc.in
District Court upholds prosecution for delay in deposit of taxes
deducted – reasonable cause not substantiated by evidence
June 6, 2019
In brief
Recently,1 the Mumbai District Court sentenced the taxpayer for three months rigorous imprisonment and monetary fine for delay in deposit of taxes that was deducted. The court observed that the reasonable cause cited by the taxpayer was not substantiated by evidence on record. Further, the court held that the taxes deducted on behalf of the Government must be deposited to the credit of the Central Government and not be used for other purposes.
In detail
Facts
The taxpayer, a film producer, was under an obligation to deduct taxes under the provisions of Chapter XVII-B of the Income-tax Act, 1961 (Act).
The taxpayer, during the financial year (FY) 2009- 10, had deducted taxes but failed to deposit it within the prescribed timelines to the credit of the Central Government Treasury.
However, the taxpayer deposited the taxes along with interest and penalty after a delay of 12 months.
1 Court case No. 95/ SW/ 2014
2 Section 279 of the Act inter alia provides for obtaining sanction from the Principal Commissioner or Commissioner or Commissioner (Appeals) or the appropriate authority before launching prosecution.
3 Section 278AA of the Act postulates an express bar on punishment under section 276B of the Act if it is proved that there was reasonable cause for such failure.
In view of the taxpayer’s default, the Revenue issued a notice requiring the taxpayer to show cause, as to why
prosecution proceedings should not be initiated under section 276B of the Act on failure to deposit taxes deducted within the stipulated time.
In the absence of a reasonable cause for delay in the deposit of taxes, the Revenue launched
prosecution proceedings against the taxpayer in accordance with section 2792 of the Act.
Issue before the District Court
Whether the taxpayer has committed an offence
punishable under section 276B of the Act in lieu of delay in deposit of taxes to the credit of the Central Government?
Taxpayer’s contentions
Existence of reasonable cause3 for delay in deposit of taxes:
o The complaint is not maintainable
considering the taxes along with interest and penalty have been deposited to the credit of the Central
Government.
Tax Insights
2 pwc
o The taxpayer was under financial constraints during the period under consideration, as there was no active film production and income comprised of only sale receipts of old films.
o First time defaulter.
o Lack of competent staff.
o Accountant’s negligence.
Reliance was placed upon Central Board of Direct Taxes (CBDT) instruction dated 28 May 1980, according to which prosecution under section 276B of the Act is not
expected to be proposed if the amount involved is not significant and the amount of default has been deposited to the credit of the Central Government.
The default of deposit of taxes within the stipulated time was not accompanied by mens rea.
Revenue’s contentions
The taxpayer admitted that it deducted taxes but failed to deposit them within the stipulated period.
The taxes deducted belongs to the Government and the payer acts in fiduciary
capacity. Thus, the taxpayer is bound to remit such taxes to the credit of the Central Government once the same is deducted.
The taxpayer has failed to justify reasonable cause by bringing any documentary evidence on record.
Deposit of tax amount along with interest and penalty will not exonerate the taxpayer from liability under section 278B of the Act.
4 Madhumilan Syntax Limited & Ors v. Union of India & Anr. [2007] 290 ITR 199 (SC)
Reliance was placed on the Supreme Court’s judgement,4 which inter alia held that once a statute requires paying tax and stipulates a period within which such payment is to be made, the payment must be made within that period. If payment is not made within that period, it would tantamount to default and appropriate action can be taken under the Act.
Presence of mens rea is not a prerequisite ingredient to the offence under section 276B of the Act, as the said section does not contain the word
“knowingly.” The liability to deposit the taxes deducted is an absolute liability cast upon the taxpayer. Further, the late deposit of taxes does not absolve the taxpayer from the rigours of this section.
District court ruling
There is no material on record to substantiate the reasonable cause cited by the taxpayer.
Admission is the best form of evidence to prove the
allegations. In the instant case, the taxpayer has not denied the delay in deposit of taxes to the credit of the Central Government.
The Legislature’s wisdom to provide for prosecution and dire consequences in spite of the already existing
provisions with regard to levy of penalties cannot be
doubted, given the rampant attitude of defiance displayed by few affluent sections of the society, as evidenced by the recent growth in economic offences and violations of income-tax law.
The main objective of
prosecution provisions is to punish the offenders found guilty of tax evasion and other tax-related offences, and to instil the fear of law in those who even contemplate evading payment of
legitimate taxes.
The scope and purport of penalty and prosecutions are separate and independent.
The Act contains provisions dealing with compounding of such offence. However, the taxpayer has not availed the said remedy for no apparent reason.
The taxes deducted on behalf of the Government should be deposited with the
Government account. The deductor is not supposed to finance their business using Government’s money.
The court rejected the plea for leniency and sentenced the taxpayer to three months rigorous imprisonment along with fine of INR 5,000.
The takeaways
The judgement is a clear indication of the strict approach of the tax department and the courts, regarding the stringent compliance with the provisions of Chapter XVII-B of the Act.
Therefore, it becomes imperative for taxpayers to closely monitor their withholding tax compliance to avoid any adverse
consequences. Further, in case of default, the taxpayer must suitably weigh the remedies available under the Act.
Let’s talk
For a deeper discussion of how this issue might affect your business, please contact your local PwC advisor
Tax Insights
For private circulation only
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwCPL, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. Without prior permission of PwCPL, this publication may not be quoted in whole or in part or otherwise referred to in any documents.
© 2019 PricewaterhouseCoopers Private Limited. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers Private Limited (a limited liability company in India having Corporate Identity Number or CIN : U74140WB1983PTC036093), which is a member firm of PricewaterhouseCoopers International Limited (PwCIL), each member firm of which is a separate legal entity.
About PwC
At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 158 countries with over 250,000 people who are committed to delivering quality in assurance, advisory and tax services.
Find out more and tell us what matters to you by visiting us at www.pwc.com.
In India, PwC has offices in these cities: Ahmedabad, Bengaluru, Chennai, Delhi NCR, Hyderabad, Kolkata, Mumbai and Pune. For more information about PwC India’s service offerings, visit www.pwc.in
PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.
© 2019 PwC. All rights reserved
Follow us on:
Our Offices
Ahmedabad Bengaluru Chennai
1701, 17th Floor, Shapath V, Opp. Karnavati Club, S G Highway,
Ahmedabad – 380051 Gujarat
+91-79 3091 7000
6th Floor
Millenia Tower ‘D’
1 & 2, Murphy Road, Ulsoor, Bengaluru – 560 008 Karnataka
+91-80 4079 7000
8th Floor
Prestige Palladium Bayan 129-140 Greams Road Chennai – 600 006 Tamil Nadu
+91 44 4228 5000
Hyderabad Kolkata Mumbai
Plot no. 77/A, 8-2-624/A/1, 4th Floor, Road No. 10, Banjara Hills, Hyderabad – 500034,
Telangana
+91-40 44246000
56 & 57, Block DN.
Ground Floor, A- Wing Sector - V, Salt Lake Kolkata - 700 091 West Bengal
+91-033 2357 9101/
4400 1111
PwC House Plot No. 18A,
Guru Nanak Road(Station Road), Bandra (West), Mumbai – 400 050 Maharashtra
+91-22 6689 1000
Gurgaon Pune For more information
Building No. 10, Tower - C 17th & 18th Floor,
DLF Cyber City, Gurgaon – 122002 Haryana
+91-124 330 6000
7th Floor, Tower A - Wing 1, Business Bay, Airport Road, Yerwada, Pune – 411 006 Maharashtra
+91-20 4100 4444
Contact us at