You May Not be Defaulter u/s 201 Even if TDS Was Not Deducted !

defaulterThe provision of section 201 is well known to all deductors because the notices from TDS wing or Internationa Tax deivison of the tax department are very common. Now, if you did not deduct the tax at source , even where the tax deduction was required as per law , does not necessarily land you in trouble of being declared as defaulter under section 201 of the Income Tax Act. This post is quickly stating you why ?

Section 201 and Defaulter

Section 201 of the Income Tax Act clearly provides that if where any person who is required to deduct tax at source but does not deduct, or does not pay, or after so deducting fails to pay, the whole or any part of the tax, as required by or under this Act, then, such person, shall  be deemed to be an assessee in default in respect of such tax.

Generaly when the AO(TDS) finds from his internal system (ITD) that you paid any sum and did not deduct the tax , a notice maybe issued if it was a default  in the opinion of A.O . So , under section 201 , he provides you an opportunity to state why you should not be treated as defaulter.

What if , you find that the tax was indeed deductibel , but you for some reason did not deduct the tax ? Will simply succumb to the notice ?

Not So Fast !

For quite a number of years , TRibunal and High Courts have gone into the issue of deduction and failure to deduct the tax and penal consequances for not deducting the tax. One of the conlcusion by courts and tribunals are that one of the main intentions of TDS provision is to protect the revenue leakage. So, if the assessee can prove that the revenue ( tax) was actually paid by the deductee , the deductor pay not be conidered defualter. These thoughts were incorporated in the FInance Act 2012 when a Proviso to section 201 was inserted as a relief provision . This was made effective from 01/07/2012 .

What this proviso says is that a dedcutor may not be considered if following conditions are fulfilled :

(i) The deductee has furnished his/its return of income under section 139;
(ii) has taken into account such sum for computing income in such return of income; and
(iii) has paid the tax due on the income declared by him in such return of income,

and the deductor furnishes a certificate to this effect from an accountant in such form as may be prescribed

What Should You Do ?

In case you find that the tax was not deducted by you for any reason , it is in your interest that you contact the dedcutee to asceratin if the tax return was filed by them, if yes date and acknowledgment should be procured. It should also be asceratined if the said amount was considered for computing income. It is best if you procure a confirmation on that .

Now refer the Rule 31ACB which was notified . The said Rule states to obtain a certifcate from chartared accountant in  Form 26A

The Rule 31ACB is as under :

Form for furnishing certificate of accountant under the first proviso to sub-section (1) of section 201 .

31ACB . (1) The certificate from an accountant under the first proviso to sub-section (1) of section 201 shall be furnished in Form 26A to the Director General of Income-tax (Systems) or the person authorised by the Director General of Income-tax (Systems) in accordance with the procedures, formats and standards specified under sub-rule (2), and verified in accordance with the procedures, formats and standards specified under sub-rule (2).

(2) The Director General of Income-tax (Systems) shall specify the procedures, formats and standards for the purposes of furnishing and verification of the Form 26A and be responsible for the day-to-day administration in relation to furnishing and verification of the Form 26A in the manner so specified.


If you fulfill all the conditions given in Proviso to section 201 , you are not defualter.

If you get a notice, enlcose your explanation along with the certificate.

What if Order is Already Passed and Case is Before Appeal

If order u/s 201(1) has already been passed and you have filed an appeal against the , you need to examine the order of A.O and see if he referred any thing about Proviso t section 201(1) . If he has not , then this inaction will creep an illigality in his order .

The illigalilty is that the Proviso is a law enacted by Parliament so, when the officer invoked the provision u/s 201(1) , he/she will have to enquire if the conditions given under the Proviso has been satisfied . This is his statutory duty under Income Tax Act. Only after he conduct enquiry on thos e points and find that proviso conditions are not satosfoed that he can declare the deductor a deaulter . If he fails in conducting enquiry , his order is not complete and likely to be quashed by CIT(A) if you raise the issue.

So, if you find that illigality, submit a fresh ground before with all proof that the Proviso to section 201 (1) is satisfied and that the A.O just ignored the proviso .

What if My Case Relates to Period Prior to July 2012

The good news is that proviso to section 201 is retrospective .If you are before appellate authrities , you can invoke proviso to section 201(1) as the ITAT , Rajkot Bench in case of Gujarat Pipavab Port Ltd vs DCIT[2013] 40 174 (Rajkot – Trib.) has held that Proviso to sec. 201(1) is retrspective in nature .

Relevant portion of the decision is as under  :

Keeping in view the fact that the first proviso to sub-section (1) of section 201 not only seeks to rationalize the provisions relating to deduction of tax at source but is also beneficial in nature, in that it seeks to provide relief to the deductors of tax at source from the consequence flowing from non/short-deduction of tax at source after ensuring that the interest of the revenue is well-protected, it is to be held that the said proviso would apply retrospectively and, therefore, to both the assessment years under appeal

So, even in cases where conditions of Proviso to sec. 201(1) is satisfied , additional grounds should be filed with CIT(A) or ITAT for relief .


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