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Analysis of TDS provisions under Income Tax Act

CA ATUL AGGARWAL, New Delhi, March 2016 

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Provisions of TDS were introduced in the Income Tax Act, 1961, by the Finance Act 2004. These provisions were introduced to enable the Government to collect revenue at the same time when being earned by the assessee. Hitherto, the Government was collecting revenue only at the time of filing the return at the year-end. But after TDS provisions were introduced money started coming in the coffers of the Government on a monthly basis.


Any person required to give a payment to another person on a certain transaction is duty bound by the Income Tax Act, 1961, to deduct a sum of money from the payment and deposit it into government account. The amount so paid to the Government is considered prepaid tax of the recipient and is reflected in the tax credit statement (Form 26AS) of the recipient.
The deductor is required to issue a Tax Deducted at Source (TDS) certificate to the deductee.
Some of the important Income Tax Act sections and the implications of deductions under them are explained below.
 
TDS on salary payment (Section 192)
 
When a person is in employment he earns income by way of salary. The employer is duty bound to deduct TDS from the salary of each employee every month. While giving the salary it is important to note that there is no financial limit prescribed under the section. The employee has to give a declaration to the employer about his/her income from other sources apart from the salary and any other deduction he is entitled to under the Income Tax Act. Based on such a declaration the employer deducts tax considering the employee’s income from the salary, other income, deductions, etc.
The Supreme Court held in the case of Larsen & Toubro (181 Taxman 71), that an employer is under no obligation to collect and examine the supporting evidence to a declaration submitted by an employee to the effect that he has actually utilised the amounts for the specified purposes in deciding the liability to TDS under Section 192.
 
Important: Where the employer deducts TDS from the employee’s salary but fails to deposit it with the Government  the Income Tax Department is not entitled to levy tax again i.e. the department is liable to give the  TDS credit to the employee (Captain J G JOSPH Vs CIT (2005)92ITD58).
 
TDS on rent (Section 194 i)
It is also an important Income Tax Act provision since lots of people earn income through property on account of rent.
This section specifies that TDS is to be deducted only if the monthly payment of rent is greater than Rs15,000 per month. Also it is important to know that TDS is to be deducted only if the payer is not an individual/HUF. 
 
The TDS is deducted at the rate of 10% in the case of rent paid for the use of land, building, etc and 2% in the case of use of plant and machinery. In the case of a co-owner of the property the TDS has to be deducted on the amount paid to each co-owner. However, if the amount paid to each co-owner is less than Rs 15,000 per month, then no TDS is deducted though the rent paid by the tenant is greater than Rs 15,000 per month.
TDS on payment for acquisition of immovable property other than agricultural land (Section-194 IA)
This is an important Section introduced by the Finance Act 2013 with effect from June 1, 2013. The Section was introduced to curb the flow of black money involved in real estate transactions and to earn revenue out of capital gains accrued to the assessee. As per this Section the purchaser of immovable property is required to deduct TDS of 1% of the consideration paid. Further the TDS is liable to be deductible if the consideration is more than Rs 50 lakhs. 
Non-reflection of TDS credit in Form 26AS (Board circular 275/29/2014-IT-(B)) 
The assessee can get the TDS certificate from the deductor and that certificate is sufficient to claim credit of having paid tax, though TDS may not reflect in Form 26AS. 
 
Non- furnishing of PAN (Section 206AA)
If the receiver of income does not furnish his or her PAN to the payer, then the payer shall deduct tax at the rate of 34.608 %( earlier it was 20%). So it should be remembered that PAN is to be given to the deductor without fail.
Relief where TDS is not deducted (Section 201)
 In case a person accidentally/ otherwise fails to deduct TDS, this section provides an escape route so that the person may not be considered a defaulter. The person who fails to deduct such TDS can approach the recipient of the income and ask him to provide a certificate in Form No-26A under Rule 31AB of the Act from the Chartered Accountant of the recipient.

Important Issues
 
As per CBDT circular No.1/2014 dated 13.1.2014, TDS is not required to be deducted on Service Tax. TDS is not attracted when payment is made on account of reimbursement of expenses. It should be noted that if expenses are reimbursed only by a separate bill, then only the payment is not subject to TDS. Otherwise TDS is deductable. (ITO Vs Dr Willmar Schwabe India Pvt Ltd)
 
 Relevance of Form 15H/15G
 
As per Section 194A of the Income Tax Act, 1961, all banks and financial institutions have been mandatorily instructed to deduct TDS on all interest payments exceeding Rs. 10,000 in any financial year. Thus, whenever any customer receives more than Rs. 10,000 as interest from a bank, the bank will have to deduct Tax on such income arising in the hands of the customer and will directly pay this Tax to the Government on behalf of the customer.
But there is a case wherein the interest received on Fixed Deposits/ Recurring Deposit was more than Rs. 10,000 and therefore TDS on the interest had to be deducted, but that person was not liable to pay Income Tax. 
 
In such cases, the assessee can furnish Form 15G/ Form 15H for Nil/ Lower Deduction of TDS.
 

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