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Case law › Income-tax Act 2025 › Chapter XIX › Section 398
Chapter XIXwas s.201, s.206C

Section 398 of the Income-tax Act, 2025

Section 398 — Consequences of failure to deduct or pay or, collect or pay. Successor to s.201, s.206C of the 1961 Act.

Where this section sits

Section 398 is in Chapter XIX — Collection and Recovery of Tax, which runs from section 390 to section 430.

← Section 397  ·  Section 399 →

What this section does

Sub-section (1) deems a person required to deduct or collect tax — including the principal officer of a company and an employer referred to in section 392(2)(a) — to be an assessee in default in respect of the tax where he does not deduct or pay, does not collect or pay, or having deducted or collected fails to pay the whole or any part of it, in addition to any other consequence under the Act.

Sub-section (2) relieves him of that deeming, but only for a failure to deduct or, for a person collecting under section 394(1) (Table: Sl. Nos. 1 to 5 and 9), a failure to collect. He is not deemed an assessee in default if the payee, buyer, licensee or lessee has furnished his return under section 263, has taken the amount into account in computing income in that return and has paid the tax due on the income declared, and the person furnishes a certificate to that effect from an accountant in the prescribed form.

Sub-section (3) charges simple interest without prejudice to sub-section (1): 1% for every month or part of a month from the date the tax was deductible or collectible to the date it is deducted or collected, and 1.5% for every month or part of a month from deduction or collection to actual payment. It must be paid before furnishing the statement under section 397(3)(b). Where the person escapes default under sub-section (2), the 1% interest still runs to the date the payee furnishes his return, and where the Assessing Officer makes an order for the default, interest is paid as per that order.

Sub-section (4) makes the unpaid tax with interest a charge on all the assets of the person. Sub-section (5) bars an order under sub-section (1) for a failure to deduct or collect after six years from the end of the tax year in which the tax was deductible or collectible, or two years from the end of the tax year in which a correction statement is delivered under section 397(3)(f), whichever is later, and sub-section (6) applies sections 286(1) and 286(3) to that limit. Sub-section (7) bars a penalty under section 412 unless the Assessing Officer is satisfied that the failure was without good and sufficient reasons.

Why it is there

A deductor or collector holds money that belongs to the revenue, and the section makes him answerable for it as if the tax were his own. The relief in sub-section (2) recognises that the tax may already have reached the exchequer through the payee's own return, so he is spared the tax but not the interest for the period it was late. The split rate is deliberate: failing to deduct at all costs less per month than deducting and then keeping the money.

Who it applies to

The figures, and what each one turns on

Read the condition in the same row. A figure quoted without it is a wrong answer with a citation attached.
WhatFigureThe condition on itWhere
Interest for failure to deduct or collect1% for every month or part of a monthOn the amount of tax, from the date it was deductible or collectible to the date it is actually deducted or collectedSub-section (3)(a)(i)
Interest for failure to pay after deduction or collection1.5% for every month or part of a monthOn the amount of tax, from the date it was deducted or collected to the date it is actually paidSub-section (3)(a)(ii)
Interest where the person is not treated as an assessee in default1% for every month or part of a monthFrom the date the tax was deductible or collectible to the date the payee, buyer, licensee or lessee furnishes his return of incomeSub-section (3)(c)
Time limit for an order deeming a person an assessee in defaultSix years from the end of the tax year in which the tax was deductible or collectible, or two years from the end of the tax year in which a correction statement is delivered under section 397(3)(f), whichever is laterApplies to a failure to deduct or collect the whole or any part of the tax from any personSub-section (5)

What this means in practice

Sub-section (2) rescues only the tax, and only for a failure to deduct or collect — a person who deducted and then did not pay cannot use it at all, and even a successful claim leaves the 1% interest running under clause (3)(c) up to the date the payee filed his return. The accountant's certificate is part of the condition, not optional support. The limitation in sub-section (5) is a "whichever is later" test, so a correction statement filed years afterwards can revive a period that looked closed. Penalty is not automatic, whereas interest carries no such qualification.

An example

Illustrative only, and invented for this page. The figures are chosen to show the rule biting, not taken from any real matter.

A company was required to deduct Rs. 10 lakh in June but did not, and the payee filed his return the following July after including the amount and paying tax on it. With an accountant's certificate in the prescribed form the company escapes being treated as an assessee in default for the Rs. 10 lakh, but still pays interest at 1% for every month or part of a month from the date the tax was deductible to the date the payee furnished that return. Had it deducted the Rs. 10 lakh in June and paid it only in October, the rate would have been 1.5% a month.

Where you meet this section

You meet this section as an order treating you as an assessee in default with a demand for tax and interest, usually following a mismatch in the statements filed under section 397, and as the interest computed before a statement is furnished under section 397(3)(b).

The words themselves

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
Section 398(3)(a)(ii), Income-tax Act, 2025.
after six years from the end of the tax year in which tax was deductible or collectible
Section 398(5)(a), Income-tax Act, 2025.

What people get wrong

What this replaced

The correspondence is the Income Tax Department’s own, from its comparison utility for the 1961 and 2025 Acts. A renumbering is the easy half; whether the words changed is the half that decides cases.

See the full 1961 to 2025 concordance.

Rules that serve this section

Rules of the Income-tax Rules, 2026 that work section 398. Where the rule’s own heading names the section we say so; the rest are marked on reading the rule, which is our derivation and not the department’s. A rule that serves the section silently and that we have missed will not appear here.

All of them are in the Rules 2026 index.

Circulars of the Board on this section

A circular binds the department, not you and not a court. Every one below was written under the 1961 Act; it reaches this section because the department’s own concordance carries the provision it names to this one.

See every circular and notification on this section, or the circulars index.

Notifications that reach this section

A notification is made under a power the Act gives and, within that power, is law. These too were made under the 1961 Act and are placed here by the department’s concordance.

See every circular and notification on this section, or the notifications index.

Case law carried across

Read this before you rely on it. Every decision below was decided under the Income-tax Act, 1961. It appears here because it is tagged to a 1961 provision that the department’s own mapping carries to section 398. That is an inference we have drawn, not a holding on the new section: where the words changed in the move, the reasoning may not survive. Treat this as the place to start looking, not as authority on the 2025 Act.

Explainers

Read with

What this page does not tell you. It does not reproduce the section. Everything above was written from the section’s own text as the Income Tax Department publishes it — the text is here, and nothing here is advice on your facts. Where a figure matters, read the sub-section it comes from.