Chapter 3  
A-System Appraisals

 

3.2 Tax deduction at source under sections 194C and 194E of Income Tax Act, 1961 

Test check of functioning of TDS charge across the country revealed irregularities on a account of failure to comply with statutory provisions in respect of mandatory deduction at source from payments to contractors/sub-contractors and non resident sportsmen/sports associations involving revenue effect of Rs. 164.24 crore. These included inter alia, failure to file TDS return, failure to deduct taxes at source, remit into government account and to initate penalty proceedings against defaulters.

Introductory

3.2.1 Deduction of tax at source on the taxable income is a convenient and economical method of tax collection. The taxes deducted at source have been steadily rising over the years and stood at 42 percent of the collection of income and corporate tax as on 31.3.1997.

The Income Tax Act, 1961 prescribes deduction of tax on income, inter alia, income from any person responsible for paying any sum to any resident contractor or sub contractor for carrying out any work in pursuance of a contract between the contractor and the Government, Local Authority, Statutory Corporation, Company, Co-operative Society, Registered Society, Trust, University and Firm and payments made to non-resident sportsmen/sport associations/institutions.

The objectives of deduction of tax at source are two fold:

(i) Collection of tax revenue while the income is being earned.

(ii) Safeguard against possible escapement/concealment of taxable income by tax payers by not returning/disclosing their true income.

Scope and coverage of review

3.2.2 A review on ‘Tax deduction at source with reference to Section 194C, payments to contractors and sub-contractors and Section 194E,-payments to Non-resident sportsmen or sports associations, was conducted for the period 1993-94 to 1995-96. In all 202 TDS wards/circles were covered and 29842 TDS returns (25%) test checked out of 1,05,594 TDS returns. Returns for 1996-97 were also test checked in the case of Gujarat, Kerala, Orissa, Himachal Pradesh, Andhra Pradesh, Tamil Nadu, Assam, Bihar and Jammu & Kashmir, wherever records were made available. The purpose of the review was to evaluate the performance of tax implementation machinery in terms of compliance with control and monitoring procedures for timely realisation of revenue.

Audit Constraint-production of records

3.2.3 As per Board Circular No.1856, TDS returns alongwith certificates where no immediate action is called for, shall be kept in bundles and alphabetically arranged for easy retrieval and shall be weeded out only after 5 years. However, in a few cases indicated below, the returns were prematurely weeded out and mixed up with old records and consequently these were not made available to audit.

Gujarat- 1 TDS Ward of Ahmedabad (1993-94 to 1995-96)
Maharashtra-14 ITO/TDS Wards of Mumbai (1993-94)
                   3 ITO/TDS Wards in Pune (1993-94)
                   2 ITO/TDS Wards in Nagpur (1993-94 & 1994-95)
Karnataka - 10 Wards/Circles (1994-95 & 1995-96)

In Karnataka charge in one of the wards ITO (TDS Gudag) all the relevant records were burnt due to arson and rioting.

Failure to maintain the records yearwise and category wise and to list them out impeded easy retrievability and cross checking of returns by audit with TDS certificates in Karnataka charge as well as in Kerala charge. In Maharashtra charge, it was claimed by the Department that there were no pending demand cases. However, this could not be verified due to non availability of records.

In Rajasthan charge, out of 10 TDS wards records of 7 TDS wards were not made available to audit for the entire period.

Audit Highlights

3.2.4 (i) Out of 29,842 cases test checked by audit taxes were deducted short or not deducted at all in 2,177 cases involving revenue effect of Rs.24.01 crore attracting interest and penalty of Rs.31.83 crore. The defaulters included about 330 drawing and disbursing officers of Government departments and tax deductors of about 20 Public Sector Undertakings involving revenue effect of Rs.40 crore(approx.) inclusive of penalty and interest.

[Para 3.2.5]

(ii) In 498 cases, TDS of Rs. 2.42 crore was remitted late into government account, delay ranging from 17 days to 3 years, attracted interest of Rs.0.18 crore including 1 case of leading Public Sector Undertaking in Gujarat charge where tax deducted was deposited in personal account amounting to Rs.2.22 lakh.

(Para 3.2.6)

(iii) Failure in 2,028 cases to issue timely TDS certificates attracted penalty of Rs.5.26 crore. In 88 cases certificates were issued before TDS amount was deposited into government account.

[Para 3.2.7]

(iv) In 764 cases the tax deductors had not applied for the allotment of TAN and in another 2,825 cases, though the tax deductors had applied for TAN the cases were either pending or numbers were issued very late involving delay ranging between 23 days to 40 months.

(Para 3.2.8)

(v) There was no coordination between TAN allotting authority and TDS authority for monitoring of receipt of filing of annual returns. In Jaipur, same TAN was allotted to different 17 tax deductors and was rectified on audit observation.

(Para 3.2.9)

(vi) Out of 1,66,244 effective tax deductors, 29,747 annual returns were not furnished or furnished belatedly. In 26,270 cases, no penalty proceedings were initiated and in 8938 cases, the belated returns attracted penalty of Rs.32.72 crore.

(Para 3.2.10)

(vii) The procedures prescribed for watch of receipt of annual returns and for test check of returns including cross verification by assessing officers were not adhered to.

(Para 3.2.11)

(viii) There were 15 cases where assessees had claimed excess credits of Rs. 57.64 lakh.

(Para 3.2.12)

(ix) In 6523 cases, demand on account of interest and penalty amounting to Rs.63.61 crore was outstanding as on 31 March 1997.

(Para 3.2.14)

(x) In 108 cases, penalty action had become time barred involving amount of Rs.2.70 crore. In 104 cases pertaining to Gujarat, though penalty action had been initiated, no action for final disposal has been taken for more than two years involving Rs.1.49 crore.

(Para 3.2.15)

(xi) In Maharashtra charge, BCCI had failed to deduct tax at source on guarantee monies paid to non resident sports persons/bodies for participation in Wills World Cup held in India in 1996 involving Rs. 60.40 lakh. Interest and penalty thereon amounted to Rs.86.47 lakh.

(Para 3.2.17)

(xii) No internal audit was conducted in TDS charges with minor exceptions.

(Para 3.2.18)

Tax Deduction at Source from Contractors and Sub-Contractors Section 194C

3.2.5 Non-deduction/Short deduction of tax at source

Under the Income Tax Act, the authority making payments to resident contractors for carrying out work, including supply of labour, carriage of goods and passengers by any mode of transport (other than railways), catering, advertising, broadcasting and telecasting in pursuance of any contract shall deduct tax at source at the time of credit of such sum to the account of contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, at the rate of 2 percent (1 percent for advertisement and payments to sub-contractors) where the consideration of contract exceeds Rs.20,000/- (substituted for Rs.10,000 with effect from 1 July 1995). The Assessing Officer is, however, required to issue certificate allowing deduction of tax at any lower rate or non deduction of tax on an application made by the contractor or sub-contractor. Failure to deduct tax or pay tax attracts interest at the rate of 15 percent per annum on the amount of such tax from the date such tax is deductible to the date on which such tax is actually paid. If a person fails to deduct tax, he shall be liable to pay by way of penalty a sum equal to the amount of tax which he failed to deduct.

Test check of records of Gujarat, Kerala, Orissa, Himachal Pradesh, Andhra Pradesh, Karnataka, Madhya Pradesh, Haryana, Tamil Nadu, Uttar Pradesh, Assam, Haryana (UT), Punjab, Delhi, West Bengal, Maharashtra, Bihar and J&K charges revealed that the provisions of the Act are not being followed by tax deductors. Table given below summarises the position of non deduction/short deduction of tax at source.

(Rs. in lakh)

TDS wards/ Circles checked by audit

Total Returns

Returns test checked by audit

Cases where non deduction/ short deduction noticed

Amount involved

Interest and penalty leviable

202

1,05,594

29,842

2,177

2,401.45

3,182.97

 
The cases mentioned above included omission of tax deduction/short deduction on the part of various Government Departments/PSUs and Autonomous bodies. Some illustrative cases, charge-wise, are given below:

(Rs. in lakh)

Charge

Year

Tax Deductors

Amount not deducted/ short deducted

Penalty & Interest

Total

Delhi

1993-94 to 1996-97

1. Doordarshan Commercial Service 2. Commercial Broadcasting Service of AIR

524.90

524.90 198.00

1,247.80

Payment of Rs.26,258 lakh was made to advertising agencies without deducting tax at source.

Delhi

1995-96

Ministry of External Affairs

1.71

1.71 0.51

3.93

 

Payments were made to Indian Tourism Development Corporation against catering contract. No tax at source was deducted.

Karnataka

1993-94 to 1995-96

1. 290 Tax deductors of various departments, Town/City municipalities. 2. Karnataka Land Army Corporation

497.83

497.83 204.24

1199.90

Non deduction/short deduction of tax at source was noticed from various payments

Tamil Nadu

1993 to 1996-97

1. Panchayat Union Poonamallee 2. AIR Chennai 3. DDK Chennai 4. Sports Dev. Authority 5. Rural Dev. Department 6. Ennore Thermal Power Station 7. M/s. Priya Lotteries Pvt. Ltd.

185.78

185.78 61.25

432.81

Payments were made to various agencies without deducting tax at source

Uttar Pradesh

1993-94 to 1995-96

1. Garhwal Mandal Vihas Nigam, Dehradun 2. Kumao Vikas Mandal Nigam, Nainital 3. UP Tourism Dev. Corporation Lucknow

149.27

149.27 67.17 (approx.)

365.71

Payment of Rs.7143.48 was made to private tour operators for providing buses for conducting all India tours without deducting tax at source

Uttar Pradesh

1994-95 & 1995-96

1. Information and Public relations Department 2. UP Education Pariyojana Parishad 3. M.P SRTC Lucknow 4. Lucknow Dev. Authority 5. U.P.SEB, Shakhti Bhawan, Lucknow

27.48

27.48 8.24 (approx.)

63.29

Payment of Rs.1,657 lakh was made against advertisement contracts but TDS was not deducted/short deducted

Gujarat

1994-95 & 1995-96

State Road Transport Corporation, Gujarat

90.73

90.73 40.93

222.39

Lease rent was paid to private leasing and financial companies for hiring of buses but tax was not deducted at source

Maharashtra

1993-94 to 1995-96

1. BCCI 2. Civil Supplies, Bombay 3. Police Department, Bombay 4. Distt. Supply Officer, Kolhapur, Chanderpur and Thane 5. Distt. Seed Officer, Dhule 6. Public Works Thane & Aurangabad 7. Directorate Police Wireless Pune 8. DP Health Services Kolhapur 9. State Police & Custom Authorities Ratnagiri 10. Election Officer, Ratnagiri, Raigarh, Thane, Nagpur & Sholapur

67.51

67.51 26.89

161.91

No tax at source was deducted from the payments made to various contractors

Maharashtra

1993-94 to 1996-97

Hindustan Petroleum Corporation Ltd.

46.97

46.97 19.25

113.19

In 43 cases tax at source was deducted from contractors at lower rates though no certificate from the competent authority authorising the tax deductor to deduct the tax at lower rate was attached with return

Maharashtra

1995-96

Central Warehousing Corporation Mumbai

1.80

1.80 0.54

4.14

TDS was not deducted from payment of Rs.78.16 lakh made to a contractor who was having tax deduction exemption certificate. Audit perusal revealed that exemption certificate was relevant to financial year 1996-97 and not to 1995-96.

Assam

1989-90 to 1995-96

Greater Lunghe Water Supply Division

32.22

32.22 14.49 (approx.)

78.93

Payment of Rs.1611.08 lakh was released to a firm Subhash Project & Market Ltd. without deducting tax at source.

Haryana & Himachal Pradesh

1994-95 1995-96

1. Chief Electoral Officer Haryana 2. Chief Electoral Officer Himachal Pradesh

28.73

28.73 7.58

65.04

Payment of Rs.1389.98 lakh was made against contracts for preparation of voters identity cards to Haryana State Electronics Development Corporation & Himachal Pradesh State Electronic Development Corporation without deducting tax at source. No evidence regarding certificate issued by AO for non deduction of TDS was on record

Madhya Pradesh

1993-94

1. Election office 2. Nagar Nigam 3. MP SR TC Depot. 4. M.P. H.B. Division 5. Registrar of Universities 6. Public Service Commission 7. Dugdha Sangh Sehkari Marydit Raipur and Jabalpur etc. 8. FCI Jabalpur

14.45

14.45 6.10

35.00

Payments were made in 43 cases but tax was not deducted at source

Haryana (UT)

1994-95 to 1995-96

1. 1.M/s.Telephone Cables Ltd. 2. M/s. Winsome Yarns Ltd. 3. M/s. Samrat Forging Ltd.

3.21

3.21 1.39

7.81

In 5 cases of Pvt. Limited Companies tax at source was deducted at lower rate without producing certificate for deduction of tax at lower rates

Bihar

1994-95 to 1995-96

1. P.H. Divisions Chaibasa 2. P.H. Division Chakradharpur

2.91

2.91 1.00

6.82

Payment of Rs.196.55 lakh was made to contractors and sub-contractors but no tax was deducted at source.

West Bengal

1994-95 & 1995-96

Tourism Development Corpn.

Expenditure booked did not specified details

Tax being deductible on the portion relating to hire charges, need to be quantified

-

 

Amount of Rs.325.20 lakh and Rs.196.32 lakh was booked against the head “expenditure on conducted tour” which included amount paid for hiring of buses from private parties.

 

Audit observation in the case of Doordarshan Commercial Service Delhi and Commercial Broadcasting Service of AIR, Delhi was not accepted by the department stating that no cheques are being issued to advertising agencies and payment is adjusted through book adjustment and it is not practically feasible to deduct tax at source. The reply is not tenable as the tax is required to be deducted at source at the time of payment or credit to the account of the payee, whichever is earlier.

Non-deduction of surcharge

Tax deduction at source under section 194C is required to be increased by amount of surcharge in respect of the domestic companies.

Test check of Assam, Delhi, Bihar and Maharashtra revealed that in 401 cases surcharge of Rs.45.36 lakh was not realised alongwith the tax at source.

Some illustrative cases are given below:

(Rs. in lakh)

Charge

Tax deductors

Cases

Surcharge not levied

Penalty and interest leviable

Total

1. Maharashtra

1. Indian Oil Corpn. 2. Mistry Extrusion (P) Ltd. 3. Mr. Praveen Dani 4. Anuradha Silk Industries 5. Ramachandra Sirnivas Saraf 6. Bharat Kumar & Co. 7. Star Silk Mills 8. Indo-German Chamber of Commerce 9. CPWD, CBD, Belapur 10. CIDCO

19

1.21

1.21 0.49

2.91

2. Assam

1.M/s. Numaligarh Refinery Ltd. 2. Telecom Electrical Division, Guwahati

41

1.06

1.06 0.23

2.35

3. Bihar

23 Tax deductors

340

18.33

18.33 3.20

39.86

 
Deduction at source on net value

The tax at source is to be deducted on the gross value of work done. Test check of TDS certificates issued to 6 contractors in Punjab and 8 Haryana (UT) charges during 1993-94 revealed that TDS was deducted after excluding the cost of material from gross value of work done. This resulted in short deduction of tax of Rs.2.56 lakh as shown below:

(Rs. in lakh)

Charge

Tax deductor

Year

Cases

Amount short deducted

Penalty and interest

Punjab

Divisional Engg. Bhatinda

1993-94

6

0.28

0.28 0.16

Haryana (UT)

SDE Const. SD No.2 Chandigarh

-do-

8

0.74

0.74 0.36

Total

   

14

1.02

1.54

 

Failure to remit Tax Deducted at Source to Govt. account.

3.2.6 Any person deducting tax at source shall pay the sum so deducted to the credit of the Central Government within specified time, i.e., in the case of deduction by or on behalf of the government on the same day and in other cases, within two months. Omission to remit tax within specified period attracts interest at the rate of 15 percent per annum from the date on which such sum was deductible to the date on which such tax was actually paid to Government account.

Test check of Maharashtra, Kerala, Orissa, Andhra Pradesh, Bihar, Madhya Pradesh, Tamil Nadu, Uttar Pradesh, Assam, Delhi and West Bengal charges has revealed that in 498 cases, the amount of Rs. 242.17 lakh collected on account of TDS was remitted late into Government account. The delay ranged from 17 days to 3 years. Interest leviable for late remittance worked out to Rs.17.53 lakh. Some of the major defaulters are listed as under:

(Rs. in lakh)

Charge

Year

Tax Deductor

Amount of TDS

Delay

Interest leviable

Maharashtra

1995-96

Steel Authority of India (Nagpur) Ex.Engg. Ujjaine Canal Div. I (Solarpur)

0.93 0.10

3 years 213 days

0.42 0.12

Delhi

-do-

Northern telecom

4.36 (14 cases)

17 days to 43 days

0.05

Assam

1993-94

Ex.Engg. PWD TCC Div. Guwahati

4.50 (10 cases)

7 months to 11 months

0.47

Madhya Pradesh

1993-94 1995-96

Ex.Engg. MP Housing Board, Bhilai Commissioner Municipal Corpn. Raipur

4.31 5.55

1 month to 6 months 1 month to 7 months

0.18 0.35

 

In Gujarat charge, a leading Public Sector Undertaking, Sardar Sarovar Project, received demand draft for Rs.2.22 lakh on account of tax deducted on advance payment to a contractor during 1994-95. Instead of crediting the amount to Government account, the same was credited to personal account of Assistant Manager. Thus, in addition to Rs.2.22 lakh, which remained out of Government accounts, Rs.1.55 lakh on account of interest was also recoverable.

Failure to timely certify tax deducted

3.2.7 Every person deducting tax shall issue a certificate on Form 16A, to the person from whom the sum has been deducted within one month from the end of the month during which the credit has been given or the sum has been deducted. If any person fails to issue a certificate, penalty not less than one hundred rupees, which can extend to two hundred rupees per day, is leviable.

Test check of Gujarat, Kerala, Karnataka, Madhya Pradesh, Haryana, Uttar Pradesh, Delhi and Maharashtra charges has revealed that in 2,028 cases the certificates were not issued by the tax deductors within the specified time. The delay, ranging between 45 days to 2 years involved penalty of Rs.526.45 lakh.

Some of the illustrative cases are given below.

(Rs. in lakh)

Charge

Tax deductors

Year

Cases

Delay

Penalty leviable

Maharashtra

Doordarshan Kendra, Mumbai

1993-94 to 1995-96

132

4 days to 447 days

6.12

Delhi

Stephen chemical Ltd. Delhi Punjab Fibres Ltd. Delhi

1995-96 1996-97

12 41

65 days to 159 days 43 days to 358 days

1.83 6.58

Karnataka

Karnataka Food & Civil Supply Department Low Level Canal Div. Bly. HMT :Ltd. Oceamine Peninsula (P) Ltd.

1995-96 1994-95 to 1996-97 1996-97 1996-97

5 6 4 14

249 days to 253 days 79 days to 255 days 52 days to 284 days 50 days to 408 days

1.26 1.16 0.51 2.13

Kerala

DMI & DE Ltd. KSHB, TVM

1994-95 to 1996-97

6

81 days to 477 days

1.19

Gujarat

1. Doordarshan Kendra 2. All India Radio 3. Sardar Sarovar Project 4. City Electricity Board 5. State Road Trans.Corpn. 6. Civil Supplies Department 7. Tractor Corpn. 8. Film Dev. Corpn. 9. State Warehousing Corpn. 10. Forest Dev. Corpn. 11. State Petroleum Corpn.

1992-93 to 1996-97

311

137 days to 484 days

296.93

 

Defective TDS Certificates

Tax deductors while issuing TDS certificates should record PAN/GIR No. of TDS payee/assessment ward etc. so as to correlate, the certificate with assessment files for purpose of cross checking/allowance of credit. Scrutiny of records of Kerala, Uttar Pradesh and West Bengal charge revealed that in 1,698 cases (22 cases, 1,644 cases and 32 cases respectively) PAN/GIR No. and relevant assessment ward was not recorded. In these cases, remittances to Government account with credits actually allowed could not be cross linked by audit.

Irregular TDS Certificates

A tax deductor is required to issue a T.D.S. Certificate only after deposit of the tax deducted at source. Test check of records of Uttar Pradesh and Delhi for financial year 1994-95 revealed that in 88 cases ( 58 and 30 respectively) certificates were issued before making payment/depositing the sums into government account.

Besides the above case, in Punjab, Ludhiana charge, an instance of fraudulent issuing of TDS certificates, recording fictitious challan number and date without depositing of the amount into government account amounting to Rs.19.28 lakh was unearthed on a public complaint. Failure to check the TDS returns alongwith challans at initial stages led to the non detection of fraud.

Failure to apply/ allot Tax Deduction Account Number (TAN)

3.2.8 Every person deducting tax at source shall apply to the assessing officer for the allotment of Tax Deduction Account Number within one month from the end of the month in which tax was deducted. TAN is to be quoted in all challans, TDS certificates, periodical returns etc. Failure to apply for TAN attracts penalty which may extend to five thousand rupees.

Test check of Gujarat, Kerala, Orissa, Andhra Pradesh, Rajasthan, Haryana, Delhi and Uttar Pradesh charges, revealed that in 764 cases, TAN was not recorded in the returns and further verification revealed that the tax deductors had not applied for TAN. No action for levy of penalty was taken. Penalty at the maximum amount on this account worked out to Rs.38.20 lakh.

Besides, in 2,825 cases of Rajasthan, Madhya Pradesh, Haryana, Uttar Pradesh and Delhi charges, though the tax deductors had applied for TAN, the TAN allotting authority had not allotted the number at all or issued very late. Period of delay ranged between 23 days to 40 months.

Some illustrative cases are as under:

 

Charge

TAN allotting authority

Cases

Period of application

Delay

Madhya Pradesh

ITO (Computer) Jabalpur

1,211

February 1995 to December 1997

Not allotted even upto May 1998 (date of audit)

Rajasthan

ITO Jaipur Ward

15

April 1994 to November 1996

3 months to 26 months.

Haryana

ITO (Computer) Faridabad, Karnal, Ambala and Hisar

1,433

October 1994 to March 1997

12 months to 40 months

 

Absence of Co-ordination between TAN Allotting authority and TDS authority

3.2.9 As per computerisation plans of the Income Tax Department, the task of allotment of tax-deduction account number (TAN) in metropolitan charges is assigned to an officer (ACIT/DCIT computers) other than the TDS authority. Whenever new numbers are allotted, TAN authority shall intimate TDS authority to enable the TDS authority to update the records and take effective action on tax deductors who fail to furnish annual returns. TDS authority on finding from annual returns that TAN has not been allotted, shall intimate TAN allotting authority for taking appropriate punitive action.

Audit scrutiny of Gujarat, Karnataka, Madhya Pradesh, Delhi and Maharashtra charges, has revealed that no such co-ordination existed between TAN allotting authority and TDS authority. In Jaipur though the ITO (TDS) was also TAN allotting authority, the same TANs were allotted to different tax deductors in 17 cases and were amended subsequent to audit observation.

Non filing/ belated filing of Annual Returns

3.2.10 Every person responsible for deduction of tax is required to furnish annual return in respect of tax deducted by him within the prescribed time. Due date of filing annual returns for deductions from payments to contractors and sub-contractors is 30 June falling in the financial year immediately following the previous year. Omission to furnish annual return attracts penalty at the rate of Rs.100/- but may extend to Rs.200/- per day.

Audit scrutiny of TDS wards/circles of Gujarat, Kerala, Orissa, Rajasthan, Himachal Pradesh, Andhra Pradesh, Haryana, Madhya Pradesh, Assam, Haryana (UT), Delhi, West Bengal, Jammu & Kashmir, Karnataka, Tamil Nadu, Uttar Pradesh, Punjab, Maharashtra and Bihar charges revealed that in a large number of cases the returns were either not filed or filed belatedly and the enforcement of penal provisions by the TDS authority was lacking. The following table indicates the position of annual returns received in TDS wards/Circles and test checked by audit.

 

Year

Due date of submission of annual return

Effective tax deductors

Cases where returns filed in time

Cases where returns filed belatedly/ not filed

Cases where penalty proceedings initiated

Cases where no penalty proceedings initiated

1993-94

30 June, 1994

15,018

13,097

1,921

816

1,105

1994-95

30 June, 1995

46,932

37,352

9,580

1,076

8,504

1995-96

30 June, 1996

71,985

61,743

10,242

1,333

8,909

1996-97

30 June, 1997

32,309

24,305

8,004

252

7,752

Total

 

1,66,244

1,36,497

29,747

3,477

26,270

 

In 202 wards, out of 29,842 TDS returns checked by audit (refer para 5), in 8,938 cases returns were filed belatedly. Penalty in such cases leviable worked out to Rs.3,272.50 lakh.

Some illustrative cases included in the above table are briefly discussed as under:

(i) In Gujarat charge, Civil Construction wing of AIR Rajkot, had been deducting TDS from various persons since September 1989 but did not file TDS returns. Penalty leviable thereon worked out to Rs.12.38 lakh. Doordarshan Kendra, Ahmedabad also deducted TDS from various persons during 1993-94 to 1995-96 but did not file TDS return inviting penalty of Rs.2.43 lakh.

(ii) In Kerala charge, it was seen that Executive Division I, D.E. Unit of Kerala State Housing Boards (TDS Trivendrum) had not filed returns from 1994-95 to 1996-97. Penalty leviable worked out to Rs.1.71 lakh. (iii) In Tamil Nadu charge, Tamil Nadu Aids Control Society and Panchayat Union Council, Poonamallee did not file returns from 1993-94 to 1995-96. Penalty leviable worked out to Rs.5.49 lakh.

(iv) In Maharashtra charge, 28 Election Officers, 3 State Government Department including 1 Central Works Division and Doordarshan Mumbai did not file the returns during 1993-94 to 1995-96. Operation Business group and Drilling Business group of ONGC also have not filed returns during 1993-94 to 1996-97. Penalty leviable in all 34 cases worked out to Rs.81.65 lakh.
 

Lack of effective monitoring and control

3.2.11 Receipt of Annual Returns

As per instructions of the Board dated September 1990 I.T.O. (TDS) is required to ensure that all persons within his jurisdiction who are liable to deduct or collect tax at source are brought on his registers. For this purpose he is required to organise an internal survey of important assessment records as also an out-door survey of organisations within his jurisdictions viz. Trade and commerce, Accounts, Registrar of Companies, Business houses, Firms, Companies, Clubs, Hospitals, Educational institutions etc. who are responsible for deducting tax at sources. He is also required to ensure that the statutory returns are received within specified time, whether correct amount has been deducted and whether interest and penalty leviable has been invoked. In order to initiate timely action on issue of notices of demand including interest and penalty, various control registers have been prescribed by the Board, as detailed in para 16.

Test check of Gujarat, Orissa, Karnataka, Uttar Pradesh, Assam (excepting ITO ward-3 Shillong), Punjab, and Tamil Nadu (in respect of 6 wards), revealed that there existed no effective watch over receipt of annual returns or to ensure that all returns due from the effective tax deductors were received nor were such internal or outdoor surveys conducted in TDS wards. In Kerala charge, though surveys were reported to have been conducted, no such evidence was produced to audit nor was there any substantial increase in the number of tax deductors.

Norms for check of returns As per instructions of the Board issued in October 1990, there would be a sample checking of the correctness of TDS returns filed by the tax deductors. The CCIT/CIT is required to lay down detailed guidelines for the method of selection of sample and also prescribe percentage of returns to be checked by TDS authorities. Test check of the records of TDS wards in Maharashtra, Gujarat, Kerala, Orissa, Himachal Pradesh, Andhra Pradesh, Rajasthan, Karnataka, Uttar Pradesh, Assam, Haryana, Delhi, Punjab, West Bengal, Tamil Nadu, Bihar and Jammu & Kashmir revealed that no such guidelines for method of selection and percentage of returns to be checked were laid down by the CCIT/CIT. Besides, it was seen that no specific checks have been laid down by the Board for cross verification of outstation challans, with the result the TDS authorities had not carried out prescribed test checks of TDS returns.
Absence of cross verification by Assessing Officers

As per the Board’s instructions dated September 1990 a small percentage of TDS certificates presented to the concerned assessing officer with the returns of income are required to be verified by the assessing officer with reference to the records of concerned ITO (TDS) before giving credit for such TDS in order to safeguard against wrong and bogus claims. The percentage of certificates to be subjected to cross verification has been left to the respective CCIT/CIT.

Audit scrutiny of the Maharashtra, Gujarat, Kerala, Orissa, Andhra Pradesh, Karnataka, Madhya Pradesh, Haryana, Tamil Nadu, Uttar Pradesh, Assam, Haryana(UT), Punjab, West Bengal, Bihar, Jammu and Kashmir charges, revealed that such percentage of cross check was neither prescribed by the respective CCIT/CIT nor was such cross verification being done. In absence of the cross verification, especially in the cases involving high revenue effect, possibility of frauds cannot be ruled out. In Punjab CIT, Patiala charge audit had noticed an instance where an assessee firm was allowed TDS refund of Rs.18,844 on the basis of Form 16A issued by FA&CAO DCW Patiala during the financial year 1994-95. However, cross verification with return filed by the FA&AO with ITO(TDS) Patiala revealed that no such amount was deducted from the assessee.

Irregular credits without corresponding income being taxed

3.2.12 Cross verification by audit of TDS returns with income tax returns of Punjab, Haryana, Gujarat, Kerala and Maharashtra charge, revealed excess credit of Rs.57.64 lakh in 15 cases. Some illustrative cases are as under:

(i) In Punjab, Bhatinda charge, an assessee received advance payment of Rs.57 lakh during 1995-96 on which tax at source was deducted. However, against this contract, receipt of Rs.6.65 lakh only was assessed to tax whereas credit of entire tax deducted at source on Rs.57 lakh was allowed. Thus, assessee availed excess credit of Rs.1.50 lakh ( including interest).

(ii) In Haryana charge, in the case of an assessee firm against the TDS of Rs.0.46 lakh certificate was issued for Rs.0.80 lakh which resulted in excess credit of Rs.0.34 lakh.

(iii) In Gujarat, Vadodra charge, three firms, had claimed credit of TDS amounting to Rs.4.27 lakh on payment of Rs.200 lakh received by them during the financial years 1992-93 to 1994-95. During scrutiny of Profit and Loss account it was found that only an amount of Rs. 31.23 lakh was credited as contract receipts in accounts. Against permissible TDS credit of Rs.0.63 lakh on the basis of contract receipt of Rs.31.23 lakh, excess credit of Rs.3.64 lakh was allowed.

(iv) In Maharashtra, CCIT Mumbai charge, in the case of an assessee TDS credit of Rs.81.34 lakh was allowed as against TDS certificate for Rs.46.50 lakh during 1994-95 resulting in excess credit TDS of Rs.34.84 lakh.

(v) In same charge audit scrutiny of trading account of an assessee for the year 1994-95 revealed that the gross receipts from contracts was shown at Rs.122.04 lakh whereas as per the TDS certificates the gross contract receipts were Rs.180.07 lakh. Thus, there was a difference of Rs.58.03 lakh between the contract receipts as per TDS certificates and accounts of the assessee. The assessee was allowed credit of entire TDS of Rs.2.06 lakh deducted on gross receipts of Rs.180.07 lakh though gross receipt of Rs.122.04 lakh only was included in the return of income. Excess credit availed by the assessee was Rs.0.66 lakh.

(vi) In the case of an assessee firm, in Maharashtra, CCIT Mumbai charge, audit scrutiny revealed the tax of Rs.3.98 lakh was deducted at source from gross receipts of Rs.196.67 lakh in assessment year 1995-96. The assessee had credited Rs.45.60 lakh only to profit and loss account out of Rs.196.67 lakh, but was allowed credit of entire amount of Rs.3.98 lakh excess TDS credit availed by assessee amounted to Rs.3.06 lakh.

The department did not accept the objection stating that the assessment was done under Section 143(1)(a) and the point raised was not covered by prima facie adjustment. Department’s reply is not acceptable for the reason that as per the details available from the documents filed alongwith the return the assessee had not credited the entire income as shown in TDS certificates, to his accounts. The excess TDS credit should have either been disallowed or entire income brought to tax.

(vii) In the case of another assessee firm, in Maharashtra, CCIT Pune charge, the assessee was allowed credit of TDS of Rs.4.45 lakh, which was deducted from the gross amount of Rs.222.30 lakh in the assessment year 1996-97, though Rs.148.55 lakh only was assessed to tax. Similarly for the assessment year 1995-96 TDS credit of Rs.1.79 lakh, deducted on gross receipts of Rs.89.33 lakh was allowed though Rs.36.35 lakh only was brought to tax. The assessee was thus allowed excess credit of Rs.2.53 lakh.

Irregularities in Returns

3.2.13 Omission to attach Challans with the returns

A tax deductor is required to furnish a copy of challan with the return through which the tax deducted was remitted to Government account.

Test check of Kerala, Tamil Nadu, Haryana , Bihar charges, revealed that in 30 cases, copies of challans were not attached with the return. In 7 cases of Maharashtra charge, xerox copies of challans were attached with the return. No certificate regarding authentication with original challan was recorded on the xerox copies. In Tamil Nadu and Delhi charges 7 challans were not attested by the bank authorities.

Omission to classify income tax and surcharge

When annual TDS returns are filed with the Income Tax department, copies of challans through which the payments are made to the credit of the Central Government should be enclosed with the returns. The Income Tax and Surcharge deducted from the payments made to contractors should be indicated separately under the specific heads provided for, such as “Income Tax” and “Surcharge”.

In 20 cases out of 5,007 cases under CCIT, Mumbai and in 5 cases out of 2,703 cases under CCIT, Pune it was observed from the challans enclosed with the TDS returns that a combined figure was shown, instead of indicating separately under the heads Income Tax and Surcharge. Clubbing of Income Tax and Surcharge is irregular and may lead to improper allocation of revenue between Centre and States as only income tax is divisible.

Misclassification of challan

Receipts on account of Income Tax from companies are creditable to Major Head 020-Corporation Tax and Other than companies to 021-Taxes on Income other than Corporation tax.

Test check of Kerala, Gujarat and Karnataka charges, has revealed that proper classification showing the correct head of account is not being recorded on challans nor are the correct forms of challans used for remittance into Government account. In Kerala and Gujarat charges, in 181 cases amount of Rs.258.53 lakh actually creditable to 020-Corporation Tax was credited to 021-Taxes on income other than Corporation tax leading to excess allocation of income tax receipts divisible between Centre and States. In Karnataka, ACIT(TDS) Mysore charge, an amount aggregating Rs.17.96 lakh stated to have been remitted by a tax deductor between February 1995 to December 1995, was not traceable and the head of account under which the amount was classified could not be located.

Analysis of Demand outstanding

3.2.14 Whenever a demand notice is issued on account of short/non deduction of tax, penalties leviable etc. the demand is required to be paid within 30 days from the date of issue of such demand notice.

Test check of Demand and Collection Registers of Gujarat, Kerala, Orissa, Himachal Pradesh, Andhra Pradesh, Rajasthan, Karnataka, Madhya Pradesh, Haryana (UT), Tamil Nadu, Uttar Pradesh, Assam, Haryana, Punjab, Delhi, West Bengal, Maharashtra, Bihar and Jammu and Kashmir charges, revealed that the outstanding demands by way of penalty and interest as on 31 March 1997, stood at Rs.5,311.88 lakh and Rs. 1,049.36 lakh respectively. Yearwise break up of outstanding demand is given below:

Penalty

(Rs. in lakh)

Year

Demand raised

Demand collected

Demand outstanding

 

Number

Amount

Number

Amount

Number

Amount

1993-94

1,162

231.88

899

183.32

263

48.56

1994-95

2,830

2,098.36

2,455

1,766.73

375

331.63

1995-96

10,302

9,353.81

8,926

7,400.29

1,376

1,953.52

1996-97

12,511

2,886.92

10,201

73.07

2,310

2,978.17

Total

26,805

14,570.97

22,481

9,423.41

4,324

5,311.88

Interest

1993-94

386

596.69

174

3.43

212

593.26

1994-95

1,092

286.36

617

85.02

4.75

201.34

1995-96

2,086

143.68

1,307

59.27

779

84.41

1996-97

2,259

252.98

1,526

107.11

733

170.35

Total

5,823

1,279.71

3,624

254.83

2,199

1,049.36

Grand Total

32,628

15,850.68

26,105

9,678.24

6,523

6,361.24

(Demand and Collection Register (TDS) of Tamil Nadu charge did not have break up of penalty and interest. In Maharashtra also penalty and interest figure were not available separately Entire figure taken under penalty)

Imposition of penalties

3.2.15 Under the Income Tax Act, 1961, no order of penalty should be passed after the expiry of the financial year in which the proceedings, in the course of which action for the imposition of penalty has been initiated, are completed, or six months from the end of the month in which action for imposition of penalty is initiated, whichever period expires later. Test check of Registers of penalties of Gujarat, Orissa, Himachal Pradesh, Andhra Pradesh, Rajasthan, Haryana, Madhya Pradesh, Tamil Nadu, Uttar Pradesh, Assam, Haryana (UT), Punjab, Delhi, Maharashtra, Bihar and Jammu & Kashmir revealed that out of 6,590 cases, where penalty proceedings were initiated, in 2,735 cases these were dropped. In 108 cases, action had become time barred. The yearwise details are as under:

(Rs. in lakh)

Year

Cases where penalty proceedings initiated

Cases where penalty levied

Cases where penalty proceedings dropped

Time barred cases

Tax effect of time barred cases

1993-94

903

137

729

18

198.25

1994-95

1,970

756

695

30

29.12

1995-96

2,278

535

1,064

56

38.14

1996-97

1,439

93

247

4

4.83

Total

6,590

1,521

2,735

108

270.34

 

These include 59 cases of Maharashtra charge, proposals for which were sent to the concerned authorities for initiating penal action. But no penalty orders were issued even after expiry of the limitation period. The penalty involved worked out to Rs.263.75 lakh. Besides, in Gujarat charge in 192 cases though penalty action under Section 272(A(2)(c) or 272(A(2)(G) had been initiated by Income Tax Officer (TDS) these were lying pending with DCIT TDS Ahmedabad for 2 to 3 years. As a result additional revenue of Rs.149.13 lakh in 104 cases remained to be collected. In 88 cases, penalty chargeable was not quantified. In Karnataka charge, no prescribed register of penalties was maintained in any wards/circles. Audit could not test check the position.

Maintenance of Registers

3.2.16 In order to ensure proper documentation in the office of ITO (TDS) and to facilitate regular monitoring by higher authorities, a number of control registers has been prescribed. Audit scrutiny revealed that many prescribed registers were either not being maintained or improperly maintained thus defeating the purpose of controls. The position of non maintenance/improper maintenance of registers is as under:-

 

Registers

Not maintained

Not maintained properly

Remarks

1. Register for allotment of TAN to tax deductors for Tax deduction at source

Tamil Nadu (Tambaram, Tuticorin, Madurai, Karaikudi, Nagercoil, Trichy II, Chennai III, IV, V, VII & VIII) Haryana (UT)

Kerala (Alwaye, Trivendrum & Ernakulam), Orissa, Karnataka, Madhya Pradesh, Haryana, Assam, West Bengal

Not maintained in Alphabetic order and prescribed format date of receipt not recorded, allotment number status of applicant not recorded, columns not filled in.

2. T.D.S. Control Register NO.1 (for offices of Govt. & local authorities)

Gujarat (one ward under Ahmedabad, one ward under Vadodra for 1995-96 and one ward under Surat for 1994-95), Tamil Nadu (same ward as mentioned against Sr. No.1) Assam (Guwahati for 1995-96), Jammu & Kashmir (TDS Jammu), Haryana (UT) & Delhi

Gujarat (one ward under Ahmedabad, one under Vadodra), Kerala (3 wards as shown against No.1) Orissa (Cuttack & Dhenkawal),Andhra Pradesh, Karnataka, Madhya Pradesh (Gwalior, Jabalpur & Bhillai) Haryana, Assam (Shillong) & Bihar

Proforma not maintained, columns not filled in, control register number 1 and 2 combined, source wise entries not given. Records were not produced in the case of Haryana (UT) & Delhi

3. TDS Control Register No.2 (for tax deductors other than Govt. & local authorities)

Gujarat (one ward under Ahmedabad, one ward under Vadodra for 1995-96 and one ward under Surat for 1994-95), Kerala (Alwayee & Ernakulam), Tamil Nadu (wards as shown in Sr. No.1), Uttar Pradesh (1993-94), Assam (Guwahati upto 1995-96), Jammu & Kashmir (TDS Jammu) Haryana (UT) & Delhi

Gujarat (Ahmedabad, one ward) Orissa (Cuttack & Dhenkawal), Andhra Pradesh (Hyderabad), Karnataka, Madhya Pradesh (Gwalior, Jabalpur, Bhillai), Haryana, Assam (Shillong), Bihar & West Bengal

-do- Records were not produced in the case of Haryana (UT) & Delhi

4. Demand & Collection Register (TDS)

Orissa (except ITO-TDS Rourkela), Tamil Nadu (Tambaram, Tuticorin, Madurai, Karaikudi, Nagercoil and Trichy-II), Uttar Pradesh (1994-95 & 1995-96).

Gujarat (Ahmedabad), Kerala, Haryana, Assam, Maharashtra, West Bengal.

Old demands not carried over to subsequent years, source wise details not given, nil demand, cases not recorded, section wise details not given, challan nos. not recorded

5. Daily Collection Register (TDS)

Orissa, Tamil Nadu (Same wards as mentioned in Sr.No.4) Jammu & Kashmir (TDS Jammu) West Bengal (2 units) & Delhi

Andhra Pradesh, Haryana (Hisar), West Bengal (6 units)

Not in proforma, challans not recorded, cross reference to D&C register not recorded, section wise collection not shown. Records were not produced in the case of Delhi.

6. Register of penalties under section 271C, 272A and 272BB

Gujarat (Vadodra), Orissa, Haryana, Tamil Nadu (same wards as against Sr.No.4 ), Assam, Punjab (Bhatinda & Jallandhar) West Bengal (3 units), Karnataka

Gujarat (Ahmedabad), Kerala, Haryana (UT), Punjab, Maharashtra, West Bengal (5 units)

Not in proper form, action initiated not recorded, date of issue of penalty order not recorded, section wise penalties not recorded. Delhi records not produced to audit.

7. Register of cases for prosecution proceedings under section 276B/276BB

Gujarat (Vadodra), Orissa, Himachal Pradesh, Tamil Nadu (same wards as against Sr.No.4), Assam, Punjab (Amritsar upto 95-96 & Other wards for entire period), West Bengal (7units) Jammu & Kashmir (TDS Jammu)

Gujarat (one ward of Ahmedabad)

Not in prescribed format

8. Alphabetical Register of Employees (ITNS-IIB)

Orissa, Tamil Nadu (same wards as against S.No.1), West Bengal & Jammu & Kashmir (TDS Jammu) & Delhi

-

Delhi records not produced to audit.

9. Special watch Register

Orissa, Tamil Nadu (same wards as against Sr.No.1), West Bengal, Jammu & Kashmir (Jammu) & Delhi

-

Delhi records not produced to audit.

 

Deduction of tax at source from non resident sportsman and sports associations (194E)

3.2.17 Under the Income Tax Act, 1961, an income payable to a non resident sportsman not being an Indian citizen is liable to tax deduction at source if-

  • the assessee participates in India in any game (other than specifically mentioned under 115BB), or sport or advertisement,

  • contributes articles relating to any game or sport in India in newspapers, journals etc.,

  • in the case of non resident association/institution guarantee money payable or paid in relation to sports played in India at the rate of 10% at the time of credit/payment of such income.

During the course of review, two cases of failure to file returns/deduct tax at source, noticed in West Bengal and Maharashtra charges, are briefly stated as under:

In West Bengal charge, under the existing procedure, any non resident sportsmen intending to join any Sports Association like Mohan Bagan Athletic Club, Mohammedan Sporting Club etc, were required to register their names first in the books of the Indian Football Association. Scrutiny of the records of Indian Football Association Calcutta revealed that during the financial year 1995-96, as many as six non-resident sportsmen registered their names to play in favour of three sports associations namely the Mohan Bagan Athletic Club, Peerless Sporting Club and Mohammedan Sporting Club. None of these sports associations had submitted their annual returns in respect of tax deducted at source from the payments made to those non-resident sportsmen. In Maharashtra charge the records of Board for Control of Cricket in India, for the years 1991-92 to 1997-98 revealed that the BCCI made payments towards guarantee money in respect of Wills World Cup held in India 1996 to various non-resident sports bodies as follows.

S.No.

Assessment year

Payee

Amount (Rs.)

Tax-deductible at source (Rs. )

1.

1993-94

Zimbabwe

1,52,750

15,275

2.

-do-

England

34,80,822

3,48,082

3.

1995-96

West Indies

2,73,24,794

27,32,479

4.

-do-

New Zealand

31,52,000

3,15,200

5.

1996-97

-do-

94,78,350

9,47,835

6.

1997-98

South Africa

1,24,47,600

12,44,760

7.

-do-

Australia

43,58,878

4,35,887

   

Total

6,03,95,194

60,39,518

 

From payments made to England, New Zealand and Australia (Sr.No.2,4,5 and 7) no tax at source was deducted on the stated ground of Double Taxation Avoidance Agreement. The argument is not tenable for the reason that as per article 22(2) of the DTAA between India and Australia, India and U.K. and India and New Zealand, items of income of a resident of one of the contracting states which are not expressly mentioned in the agreement and such income is derived from source in the other contracting state may be taxed in that other state. These specified categories did not include income by way of prize or guarantee money. Hence, income arising from sources in India to a non-resident sports-body of New Zealand, Australia and U.K. was taxable in India and attracted the provisions of section 194E for deduction of tax at source and the guarantee monies paid to the sports body of Australia, New Zealand and England were liable to be taxed at source.

In the case of Zimbabwe, South Africa and West Indies, there is no Double Taxation Avoidance Agreement with India. Hence payment made to the non resident sports bodies of West Indies, South Africa and Zimbabwe attracted liability of deduction of tax at source. As per information available on records, the BCCI had not deducted tax at source from the payments made to non resident sports bodies of Zimbabwe, West Indies and South Africa amounting to Rs.60.40 lakh. Failure to deduct tax at source and to file TDS return thereon attracted interest and penalty amounting to Rs.86.47 lakh (total tax effect worked out to Rs.146.87 lakh)

Internal Audit

3.2.18 Internal Audit was introduced in the Income Tax Department to play a corrective and vigilant role against errors of omissions and commissions.

TDS wards III, V, VII and VIII Chennai TDS Special Ward Tambaram TDS ward Tirunelveli TDS ward Nagercoil TDS ward Cuddalore TDS ward Pondicherry TDS wards I & II Trichy

Test check of Gujarat, Kerala, Orissa, Rajasthan, Karnataka, Madhya Pradesh, Uttar Pradesh, Assam, Haryana, Punjab, Maharashtra and Bihar charges has revealed that no internal audit of TDS wards/circles was conducted during 1993-94 to 1996-97.

In Andhra Pradesh charge, internal audit was taken up for the first time in September 1997 to October 1997 for 1995-96 and 1996-97 under one charge only.

In Haryana, though the department intimated that internal audit was being conducted every year, no reports/connected records were produced before audit.

In Delhi charge, no internal audit was conducted till June 1995, when a unit for the purpose was set up.

In Tamil Nadu internal audit was not conducted in 11 wards out of 21 TDS wards.

The absence of Internal Audit of TDS wards/Circles, resulted in non detection of most of the irregularities found during the course of review and early remedial action found wanting.

Lacuna in the Act

3.2.19 (i) There is no statutory time limit for processing of TAN with the result that large number of applications for allotment of numbers are awaiting action.

(ii) There is no provision laid down under the Income Tax Act for completion of assessments of TDS returns within a specified period with the result, a large number of returns are pending for assessment.

(iii) There is no provision for levy of penalty against tax deductors for filing incomplete TDS returns as in the case of concealment of income during filing of Income Tax returns.