Aasawari Kadam, Advocate
It is that time of the year, the budget has been announced by the Hon’ble Finance Minister and the income-tax fraternity is dissecting the possible implications of proposed amendments in the Finance Bill, 2023 (“the Bill”). Similarly, this article is an attempt towards studying the possible implications of two penal provisions
i.e. (I) 271C and 276BA of the Income-tax Act, 1961 (“the Act”) which provides for penal and prosecutorial consequences respectively of non- deduction or non-payment of TDS as per the provisions of chapter XVII-B and (II) section 271FAA which provides for penal consequences of furnishing inaccurate information in the statement of financial transactions or reportable accounts as required under section 285BA.
I] Proposed amendments to Section 271C of the Act
- Section 271C & 276B at present
It is known that a person responsible for paying any sum to another person has to withhold or deduct tax, which is called ‘Tax Deducted at Source’ or TDS, before actually making payment to the other person. The tax so deducted has to be remitted to the account of the government by such payer/ deductor before the prescribed due dates and also follow the prescribed compliance requirements. Deduction of tax at source is one of the methods of tax-recovery provided by the Act. So it naturally follows that a person failing to deduct TDS or remitting the TDS so deducted to the account of the Government shall incur a penalty for such failure.
It prescribes for levy of a sum equal to the amount of TDS which such deductor failed to deduct as per provisions of chapter XVII-B or pay the tax deducted on the dividend distributed as per section 115-O, pay the tax deducted as per section 194B i.e. winnings from lottery or crossword puzzle of the Act.
Further section 276B of the Act provides for prosecution proceedings in case of failure to pay the amount of TDS to the account of the government. Section 276B provides for a minimum imprisonment of 3 months up to a maximum of 7 years with a fine. Prosecution proceedings can be initiated in all the above situations specified in section 271C except for failure to deduct TDS in as much as Section 276B provides for prosecution only in case of failure to remit the TDS to the account of the government.
- Proposed amendments to section 271C & 276B
- The Bill vide clauses 113 and 119, proposes to widen the scope of section 271C and 276B to include non-payment of TDS deducted as per sections 194R and 194S with effect from 1st April, 2023. It further provides that in case section 194BA, as proposed in the Finance Bill 2023, is inserted in the Act, then section 194BA shall also be included within the scope of section 271C and 276B of the Act with effect from 1st July, 2023.
- To begin with, section 194R was introduced with an objective to plug leakages of tax revenues as the revenue department observed that the person receiving such benefits do not often report such transactions in their books. It became effective only from 1st July, 2022 and it provides for deduction of tax at source at 10% by any person who is responsible for providing any benefit or perquisite, which can be wholly or partly in kind, to a resident, arising from such business or profession carried out by the resident. Thus, section 194R requires the existence of a business relationship between the parties and does not concern retail customers or salaried persons, who are covered under section 192. The section is clear that the tax is to be deducted before passing on such a benefit or perquisite. One simple example of a transaction covered under section 194R can be where a company engaged in the manufacture of televisions and other electronic appliances, provides such free electronic appliances to their sellers/ distributors/ retailers for meeting a sales target or simply for promoting their sales.
No TDS shall be deducted if the aggregate value of transactions does not exceed Rs. 20,000 in a year or if the payer is an individual whose turnover does not exceed Rs. 1 Crore in case of a business or Rs. 50 Lakhs in case of a profession.
Section 194R being newly introduced does not provide for penalty in case of failure to pay the tax deducted under the section which is proposed to be done through the Bill according to the Memorandum. The Bill proposes to add sub-clause (iii) to clause (b) of section 271C to levy 100% penalty on failure to pay TDS deducted under section 194R on on before the prescribed due date as per Act and it also provides for prosecution by way of amendment to section 276B by inserting sub-clause (iii) to clause (b) thereto in case of the above failure.
Even though the intent of the legislation is to plug leakages of tax revenue, the legislators cannot go about and impose tax arbitrarily. At the first glance, the section 194R is not clear as to what amounts to perquisites or benefits. The language and intent of section 194R needs reconsideration since it is subjective, vague and open to wide interpretation. CBDT vide circular no. 12/2022 dated 16th June, 2022 has actually created more anomalies than to provide more clarity on the subject. To give a couple of examples, the deduction of tax under section 194R is irrespective of whether it is taxable in hands of the recipient under section 28(iv) or not and also in case a benefit or perquisite is received by an employee of the company then such employee shall be liable to tax under sections 194R as well as 192 at the hands of its employer, which results in double taxation. The section does not cover/ conceal all the four corners which will give wider power to the Assessing Officer to use their discretion for imposing a penalty under section 271C arbitrarily and increase income- tax litigation.
- Section 194S deals with deduction of tax at source on payment of consideration for transfer of a ‘virtual digital asset’ (“VDA”). The section came into force on 1st July, 2022. A VDA is defined under section 2(47A) of the Act which includes cryptocurrency/ virtual digital currency, Non-Fungible Tokens (“NFT”) and any other digital asset as the Central Government may notify. It is recognised as a movable property under section 56(2)(x). Indians were already dealing in cryptocurrency before 2013 when it was formally acknowledged by RBI for the first time by issuing circular1 prohibiting dealing in cryptocurrencies or other VDAs which was later set aside by the Supreme Court2. Hence after almost 10 years, the legislation to tax income on such transactions is long overdue.
Section 194S provides for deduction of tax at source at 1% of the income generated on transfer of ‘Virtual Digital Asset’ (“VDA”) which may be in cash or in kind, wholly or partly. There may be a situation where the consideration is wholly in kind
i.e. exchange of one VDA for another VDA. The CBDT has clarified3, that in such a case both the parties will be buyers as well as sellers and therefore, TDS shall be paid by both the parties before such VDAs can be exchanged.
Further, the CBDT clarifies4 that if section 194S becomes applicable to a transaction, such income shall not be subjected to any other section of the Act, say 194Q which is applicable on purchase of goods. Speaking of goods, tax shall be deducted under section 194S from the consideration after netting of tax paid as per the Goods and Service Tax Act (“GST Act”) from the same.
Section 194S also provides that no tax shall be deducted in case the aggregate value of consideration paid does not exceed Rs. 50,000 during a financial year in case of a specified person or Rs. 10,000 otherwise. Specified person is an individual or HUF not carrying any business or profession and in case they are, their total sales, gross receipts or turnover does not exceed Rs. 1 crore in case of business and Rs. 50 Lakhs in case of a profession. Thus threshold for non- specified persons i.e. firms, companies, etc. is quite low at Rs. 10,000 only, thereby increasing their compliance burden to that extent.
By way of sub-clause (iv) to sub-section (1) of section 271C, it is proposed to bring non-payment of TDS deducted as per 194S within the scope of both the sections 271C and 276B of the Act. Similar to section 194R, section 194S came into effect only on 1st July, 2022 therefore, there were no penal provisions in case of failure to pay TDS on the aforementioned transactions, hence the amendment. The due date of deposit of taxes and filing returns thereof is the same as that applicable to the other sections concerning deduction of TDS
- The aforementioned amendments to section 271C with respect to inclusion of sections 194R and 194S shall take effect from 1st of April, 2023.
- The Bill has finally proposed to carve out online gaming from the provisions of section 194B concerning winnings from lotteries, crossword puzzles, races including horse races, card games and other games, etc. and insert section 194BA in the Act. While the move is welcome and there is not much hue and cry about it from the gaming community, it also raises a few questions which require clarifications, like “winnings” in context of online gaming is not defined, therefore, clarity is needed as to whether things like referral bonus points, money on signing up with a platform, etc will also be included within the meaning of winnings. The section does not provide for a minimum threshold of Rs. 10,000 which was there under section 194B which can act as a deterrent to small players making a negligible winnings from such games who will be, irrespective of the amount of winnings, subjected to TDS at 30%. On the other hand a simultaneous amendment to section 115BBJ is proposed, wherein income tax of 30% should be calculated on a user’s net winnings i.e. after deducting the entry fee, for instance, which a gamer must have paid to enter a contest or tournament. It is proposed that TDS shall be deducted at the end of a Financial Year or if there is withdrawal from an online user account during the year, TDS shall be deducted at the time of such withdrawal in the manner prescribed. The deductor has to ensure payment of tax, before releasing net winnings, in a case where the net winnings are wholly in kind or partly in cash and partly in kind. Once again, with the introduction of this new section the due diligence and compliance burden of the online gaming platforms will increase.
If section 194BA is inserted in the Finance Act, 2023, as a consequent effect thereof sub-clause (v) to clause (b) shall be inserted in section 271C for failure to pay TDS which is deducted under section 194BA and by extension the default shall also be subject to prosecution proceedings under section 276B of the Act. The proposed insertion of this section, the online gaming sector is clearly under the radar of the department. This amendment shall take effect from 1st July, 2023.
6. In order to cover up any possible escapement of tax revenue, amendments are proposed by adoption of a stronger language in case of sections 271C and 276B to curb tax inasmuch as it provides that the payer/deductor shall ensure the payment of tax as per the relevant sections mentioned therein. The amendments propose that the person responsible to deduct tax shall “ensure the payment of ” which means that the deductor should either himself pay the tax or ensure that the payee has paid the relevant amount of tax.
II. Proposed amendments to section 271FAA dealing with penalty in case of violation of section 285BA
- Section 271FAA at present
Section 271FAA of the Act came into effect from 1st April 2015 and it provides for levy of Penalty in a case where a specified person furnishes inaccurate statement of specified financial transactions or reportable account as required under section 285BA of the Act. Section 285BA of the Act was introduced to keep a track of high-value transactions undertaken by a person during a year. This statement is to be furnished to the Director or Joint Director of Income-tax (Intelligence and Criminal Investigation). Whereas sub- section (1) specifies persons, responsible for registering or maintaining books of account or other documents, who are required to file the statement. The nature/ type of transactions as well as the minimum threshold value on or above which information has to be submitted in the statement is provided in Rules 114E of the Rules. Rules 114E to 114H provide further clarifications, computation of value of transactions, manner of reporting, etc.
Self-certifications by reportable persons and the account holders is one of the requirements under the Rule 114H of the Rules for different purposes. There must have been incidences of submission of false self-certifications which is held to be amounting to furnishing inaccurate information and hence the amendment to penalise the same.
Section 271FA provides for penalty on failure to furnish such statement financial transaction or reportable account whereas section 271FAA provides for penalty in case of furnishing inaccurate particulars in the statement of specified financial transaction or reportable account. Section 271FAA provides for a penalty of flat Rs. 50,000 on account of failure to carry out the due diligence requirements prescribed under sub-section (7) or deliberate furnishing of inaccurate particulars, it also covers situations where it is only at the time of filing the statement or even post filing that a person becomes aware of such inaccuracy but hides it from the income-tax authorities.
- Proposed Amendment
- The Bill proposes to amend the section to provide that the prescribed authority for levying of penalty under section 271FAA shall be the authority prescribed under section 285BA of the Act.
- The Bill proposes to introduce sub- section (2) to the present section 271FAA wherein, in case there is a default on the part of prescribed Financial Institutions falling under clause (k) to sub-section
(1) to provide accurate information on account of furnishing of false or incorrect information by the respective account holder in such financial institution, then the financial institution shall be levied an additional penalty of Rs. 5,000 for every inaccurate specified financial transaction or reportable account over and above the penalty of Rs. 50,000. However, the prescribed financial institution will be entitled to recover the additional penalty of Rs. 5,000 paid by it from the account of such account-holder in the manner prescribed. This amendment shall come into effect on 1st April, 2023.
For what amounts to “inaccurate information” under this section, explanations/ interpretation laid down by the Ld. Courts under section 271(1)(c) have to be borrowed. In PriceWaterhouseCoopers (P.) Ltd. v. CIT  25 taxmann.com 400 (SC), the Hon’ble Apex Court set aside the penalty levied under section 271(1)(c) on account of a bonafide mistake on the part of assessee by holding that “Notwithstanding the fact that the assessee is undoubtedly a reputed firm and has great expertise available with it, it is possible that even the assessee could make a “silly” mistake”. However, section 271FAA has made it clear that the furnishing of inaccurate information should be deliberate on the part of the person responsible or if he becomes aware of the correct information subsequently, he fails to inform the income-tax authorities about the same, this gives some elbow room for pleading bonafide mistake or an inadvertent error on the part of such person. Therefore, the actual account holder, being the person responsible for furnishing any alleged inaccurate information, should also be given an opportunity to explain his case.
Therefore, the Bill is progressive piece of legislation where the Legislature has brought the present provisions up to date with the latest developments and technologies in the world, while imposing stricter norms on non- compliance thereof. It will therefore also increase the due-diligence and compliance requirement of an assessee. While avoidance of tax cannot be permissible but there is a need to strike a balance with arbitrary levy of penalty and initiation of prosecution proceedings under the guise of non-compliance.
- “Statement on Developmental and Regulatory Policies” on April 5, 2018
- Internet and mobile association of India v. RBI (2020) 10 SCC 274,
- Circular no. 13 of 2022 dated 22nd June, 2022
- Ibid footnote 3