Section 398 — Failure to deduct, collect or pay
Old Act equivalent: Section 201 of IT Act 1961 Sub-part: B.—Deduction and collection at source
Statutory Text
- (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, does not deduct or pay, or does not collect or pay, or after so deducting or collecting 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 in addition to any other consequences which that person may incur under this Act.
(2) Irrespective of anything contained in sub-section (1), 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, on the amount paid or credited to the account of payee or, on the amount collected or debited to the account of the buyer or licensee or lessee, as the case may be, shall not be deemed to be an assessee in default in respect of such tax, 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 form as may be prescribed.
(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.
(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).
(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 397(3)(f), whichever is later.
(6) The provisions of sections 286(1) and 286(3) shall apply to the time limit specified in sub-section (5).
(7) No penalty shall be levied under section 412 on 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 or collect and pay such tax.
Sub-sections
Sub-section (1) — Assessee in default
Any person (including principal officer of company) who fails to deduct, collect, or pay tax is deemed assessee in default, in addition to other consequences under the Act.
Sub-section (2) — Safe harbour
Person not deemed assessee in default if the payee/buyer/licensee/lessee has: (i) filed return under section 263, (ii) included the amount in income, and (iii) paid tax due — and the deductor/collector furnishes a chartered accountant’s certificate to this effect. For TCS, applies to Sl. Nos. 1-5 and 9 only.
Sub-section (3) — Interest
Two-tier interest regime: (i) 1% per month for period of non-deduction/non-collection (from due date to actual deduction/collection); (ii) 1.5% per month for period of non-payment (from deduction/collection to actual payment). Interest to be paid before filing TDS/TCS statement. Where safe harbour applies, interest under (i) runs only till the payee files return.
Sub-section (4) — Charge on assets
Tax deducted/collected but not paid, together with interest, constitutes a charge upon all assets of the person in default — creates a statutory first charge.
Sub-section (5) — Time limit for orders
No order of default after 6 years from end of tax year in which tax was deductible/collectible, or 2 years from end of tax year in which correction statement was delivered, whichever is later.
Sub-section (6) — Extension of time limits
Provisions of sections 286(1) and 286(3) (relating to extension/exclusion of time limits) apply to the time limit under sub-section (5).
Sub-section (7) — Penalty safeguard
No penalty under section 412 unless AO is satisfied that the failure was without good and sufficient reasons — provides a reasonable cause defence.
Provisos
None.
Explanations
None.
Tables
None.
Key Structure
- Applies to: Any person required to deduct or collect tax, including principal officer of a company; employers under section 392(2)(a).
- Conditions: Failure to deduct, failure to collect, or failure to pay after deducting/collecting.
- Time limits: Order for default — 6 years from end of tax year in which tax was deductible/collectible, or 2 years from correction statement delivery, whichever is later. Interest: 1% per month (non-deduction/non-collection period) + 1.5% per month (deducted/collected but not paid period).
- Monetary limits: None specified — interest and charge apply to full amount of tax in default.
- Exceptions: Not deemed assessee in default if payee has filed return, included amount in income, and paid tax due (with CA certificate). Penalty only where failure is without good and sufficient reasons.
Cross-References
- s263 — return of income (required for safe harbour under sub-section 2).
- s286 — time limit extensions applicable under sub-section (6).
- s392(2)(a) — employer paying tax on non-monetary perquisites.
- s394 — TCS provisions; Sl. Nos. 1-5 and 9 for safe harbour.
- s397(3)(b) and (f) — statement filing and correction statement provisions.
- s412 — penalty for failure to deduct/collect (requires absence of good and sufficient reasons).
Amendment Notes
None noted from the extracted pages.
Practical Notes
- The two-tier interest structure is a key compliance cost: 1% per month for not deducting/collecting + 1.5% per month for deducting/collecting but not depositing. The second rate is higher to discourage misappropriation of deducted/collected tax.
- The safe harbour under sub-section (2) is the most important defence for deductors/collectors — if the payee has already paid the tax, the deductor is not in default. However, a CA certificate in prescribed form is mandatory. Practitioners should obtain this proactively.
- For TCS, the safe harbour applies only to Sl. Nos. 1-5 (alcoholic liquor, tendu, timber, scrap, minerals) and 9 (parking lot, toll plaza, mine, quarry) — it does not apply to motor vehicles (Sl. No. 6), LRS (Sl. No. 7), or overseas tour packages (Sl. No. 8).
- Sub-section (4) creates a statutory charge on all assets — this has priority implications in insolvency and winding-up proceedings. Tax authorities can invoke this charge even against secured creditors in certain situations.
- The 6-year limitation for passing orders is a hard outer limit, extendable only by the correction statement window (2 years from correction). Practitioners should track these deadlines carefully.
- The reasonable cause defence under sub-section (7) for penalty is subjective — documenting reasons for any delay or shortfall in deduction/collection is essential for avoiding penalty under section 412.