How far back can the department go to treat you as an assessee in default for a TDS lapse?
Not indefinitely. The Court quashed notices reaching more than four years back, holding the department had exceeded its authority — and that a CBDT circular cannot enlarge what the statute allows.
Decided by the High Court (Delhi High Court — Dr S. Muralidhar J and Vibhu Bakhru J) on 2016-03-09, reported as [2016] 67 taxmann.com 124 (Del) / [2016] 238 Taxman 625 (Del) / [2016] 385 ITR 436 (Del) / [2016] 285 CTR 48 (Del); W.P.(C) Nos. 8535 to 8537, 8641 to 8644 and 8647 of 2011 with connected applications. It bears on section 201(1), section 201(1A), section 201(3) of the Income Tax Act 1961, in TDS Defaults matters.
TDS default notices routinely arrive for years long closed, and the first instinct is to start reconciling. The prior question is whether the department was in time at all — and the limitation limbs differ depending on whether a TDS statement was filed.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The petitioners were telecom companies - Vodafone Essar Mobile Services Ltd and, among others, Tata Teleservices Ltd, whose facts the Court took as the lead. Tata Teleservices sold recharge coupon vouchers and starter kits to channel partners under tax invoices on what it said was a principal-to-principal basis, so that the difference between the maximum retail price and the price charged to the channel partner was the partners' and retailers' business income and not commission within s.194H; it had filed its TDS statements under s.200. In 2011 the Department initiated proceedings under ss.201(1) and 201(1A) for non-deduction in periods more than four years before 31 March 2011 - for Vodafone Essar Mobile Services, assessment years 2003-04, 2004-05 and 2005-06. The Department relied on the proviso to s.201(3), inserted with effect from 1 April 2010 by the Finance (No. 2) Act 2009, and said the decision in CIT v. NHK Japan Broadcasting Corpn no longer held good after 1 April 2010. It also said the notices followed this Court's decision in CIT v. Idea Cellular Ltd., which had held such payments to be commission under s.194H, and were permissible under s.153(3)(ii); and, as to Vodafone Essar Mobile Services specifically, that they were triggered by a Supreme Court order of 12 August 2010 in Civil Appeal No. 6692 of 2010 relating to assessment year 2002-03.
The writ petitions were allowed and the notices quashed (paras 33-34). The four-year rule laid down in CIT v. NHK Japan Broadcasting Corpn was not displaced by the insertion of the proviso to s.201(3) by the Finance (No. 2) Act 2009, and Circular No. 5 of 2010, which explained the proviso as expanding the time for completing proceedings and passing orders in 'pending cases', cannot be read as enabling the Department to initiate proceedings under s.201 for a period earlier than four years before 31 March 2011 (paras 24, 28). The Revenue's reliance on s.153(3)(ii) and on Idea Cellular was held misconceived: that provision can apply only to the assessee in whose case a court has made an order, and there must be a finding or direction on the very issue, of which there was none (paras 21-22). The Supreme Court's order for assessment year 2002-03 did not cover the notices for 2003-04 to 2005-06 (paras 30-31). The Court did not decide the challenge to the constitutional validity of s.201(3) and its proviso, which the petitioners did not press once their construction was accepted (para 32).
The Court began from CIT v. NHK Japan Broadcasting Corpn, where, there being no limitation in s.201, it had held on the authority of State of Punjab v. Bhatinda District Co-op Milk Producers Union Ltd. that action must be initiated within four years, and had observed that the deductor's liability is vicarious and cannot hang over him for all time (paras 7-9); that was followed in CIT v. Hutchison Essar Telecom Ltd. and, after the 2009 amendment, in CIT (TDS)-I v. C.J. International Hotels (P.) Ltd., which the Court said settles the question (paras 10, 16-17). It then rejected each of the Revenue's arguments. Section 153(3)(ii) applies only to the assessee in whose case the court order was made and requires a finding or direction on the point, as Rajinder Nath v. CIT holds; Idea Cellular contained no such direction (paras 21-22). On the circular the Court's reasoning is the opposite of a circular being subordinate to the statute: there is no question of 'harmonious construction' of a CBDT circular, which is at best an external aid to construing s.201(3) and the proviso, and it is well settled that where a circular favours an assessee it should be applied even where that interpretation goes contrary to the legislative intent - K.P. Varghese v. ITO, and the contemporanea expositio principle explained in Spentex Industries Ltd. and Deshbandhu Gupta & Co. (paras 25-27). The circular was also evidence of the Department's own contrary understanding of the position (para 25). Having accepted the construction, the Court found it unnecessary to reach the vires challenge (para 32).
The said proviso cannot be interpreted, as is sought to be done by the Department, to enable it to initiate proceedings for declaring an Assessee to be an Assessee in default under Section 201 of the Act for a period earlier than four years prior to 31st March, 2011.
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Handle my notice → Ask a CA on WhatsAppNot indefinitely. The Court quashed notices reaching more than four years back, holding the department had exceeded its authority — and that a CBDT circular cannot enlarge what the statute allows. This was decided by the High Court (Delhi High Court — Dr S. Muralidhar J and Vibhu Bakhru J) and bears on section 201(1), section 201(1A), section 201(3) of the Income Tax Act 1961. It is reported as [2016] 67 taxmann.com 124 (Del) / [2016] 238 Taxman 625 (Del) / [2016] 385 ITR 436 (Del) / [2016] 285 CTR 48 (Del); W.P.(C) Nos. 8535 to 8537, 8641 to 8644 and 8647 of 2011 with connected applications. TDS default notices routinely arrive for years long closed, and the first instinct is to start reconciling. The prior question is whether the department was in time at all — and the limitation limbs differ depending on whether a TDS statement was filed. If it applies to you, the first step is this: Fix two dates: the end of the financial year of payment, and the date any TDS statement for it was filed.
The petitioners were telecom companies - Vodafone Essar Mobile Services Ltd and, among others, Tata Teleservices Ltd, whose facts the Court took as the lead. Tata Teleservices sold recharge coupon vouchers and starter kits to channel partners under tax invoices on what it said was a principal-to-principal basis, so that the difference between the maximum retail price and the price charged to the channel partner was the partners' and retailers' business income and not commission within s.194H; it had filed its TDS statements under s.200. In 2011 the Department initiated proceedings under ss.201(1) and 201(1A) for non-deduction in periods more than four years before 31 March 2011 - for Vodafone Essar Mobile Services, assessment years 2003-04, 2004-05 and 2005-06. The Department relied on the proviso to s.201(3), inserted with effect from 1 April 2010 by the Finance (No. 2) Act 2009, and said the decision in CIT v. NHK Japan Broadcasting Corpn no longer held good after 1 April 2010. It also said the notices followed this Court's decision in CIT v. Idea Cellular Ltd., which had held such payments to be commission under s.194H, and were permissible under s.153(3)(ii); and, as to Vodafone Essar Mobile Services specifically, that they were triggered by a Supreme Court order of 12 August 2010 in Civil Appeal No. 6692 of 2010 relating to assessment year 2002-03. The matter was decided on 2016-03-09 by the High Court (Delhi High Court — Dr S. Muralidhar J and Vibhu Bakhru J). On those facts the High Court held as follows. The writ petitions were allowed and the notices quashed (paras 33-34). The four-year rule laid down in CIT v. NHK Japan Broadcasting Corpn was not displaced by the insertion of the proviso to s.201(3) by the Finance (No. 2) Act 2009, and Circular No. 5 of 2010, which explained the proviso as expanding the time for completing proceedings and passing orders in 'pending cases', cannot be read as enabling the Department to initiate proceedings under s.201 for a period earlier than four years before 31 March 2011 (paras 24, 28). The Revenue's reliance on s.153(3)(ii) and on Idea Cellular was held misconceived: that provision can apply only to the assessee in whose case a court has made an order, and there must be a finding or direction on the very issue, of which there was none (paras 21-22). The Supreme Court's order for assessment year 2002-03 did not cover the notices for 2003-04 to 2005-06 (paras 30-31). The Court did not decide the challenge to the constitutional validity of s.201(3) and its proviso, which the petitioners did not press once their construction was accepted (para 32).
The Court began from CIT v. NHK Japan Broadcasting Corpn, where, there being no limitation in s.201, it had held on the authority of State of Punjab v. Bhatinda District Co-op Milk Producers Union Ltd. that action must be initiated within four years, and had observed that the deductor's liability is vicarious and cannot hang over him for all time (paras 7-9); that was followed in CIT v. Hutchison Essar Telecom Ltd. and, after the 2009 amendment, in CIT (TDS)-I v. C.J. International Hotels (P.) Ltd., which the Court said settles the question (paras 10, 16-17). It then rejected each of the Revenue's arguments. Section 153(3)(ii) applies only to the assessee in whose case the court order was made and requires a finding or direction on the point, as Rajinder Nath v. CIT holds; Idea Cellular contained no such direction (paras 21-22). On the circular the Court's reasoning is the opposite of a circular being subordinate to the statute: there is no question of 'harmonious construction' of a CBDT circular, which is at best an external aid to construing s.201(3) and the proviso, and it is well settled that where a circular favours an assessee it should be applied even where that interpretation goes contrary to the legislative intent - K.P. Varghese v. ITO, and the contemporanea expositio principle explained in Spentex Industries Ltd. and Deshbandhu Gupta & Co. (paras 25-27). The circular was also evidence of the Department's own contrary understanding of the position (para 25). Having accepted the construction, the Court found it unnecessary to reach the vires challenge (para 32). In the words reproduced by the source cited on this page: "The said proviso cannot be interpreted, as is sought to be done by the Department, to enable it to initiate proceedings for declaring an Assessee to be an Assessee in default under Section 201 of the Act for a period earlier than four years prior to 31st March, 2011." The decision followed or applied CIT v. NHK Japan Broadcasting Corpn. [2008] 305 ITR 137 / 172 Taxman 230 (Delhi) - followed (paras 7-9, 24); CIT v. Hutchison Essar Telecom Ltd. [2010] 323 ITR 230 (Delhi) - followed (para 10); CIT (TDS)-I v. C.J. International Hotels (P.) Ltd. [2015] 372 ITR 684 / 56 taxmann.com 458 (Delhi) - treated as settling the question (paras 16-17); K.P. Varghese v. ITO [1981] 131 ITR 597 / 7 Taxman 13 (SC) - relied on for the binding effect of a circular favourable to the assessee (para 26); Rajinder Nath v. CIT [1979] 120 ITR 14 / 2 Taxman 204 (SC) - relied on to reject the s.153(3)(ii) argument (para 22); CIT v. Idea Cellular Ltd. [2010] 325 ITR 148 / 189 Taxman 118 (Delhi) - relied on by the Revenue and held not to supply any finding or direction (paras 19, 22); Followed by the Delhi High Court in Bharti Airtel Ltd. v. Union of India [2016] 76 taxmann.com 256 (Delhi), W.P.(C) No. 2166 of 2012, 19 December 2016 (S. Ravindra Bhat and Ms. Deepa Sharma, JJ.), for assessment years 2002-03 to 2007-08.
It was decided by the High Court on 2016-03-09 and is reported as [2016] 67 taxmann.com 124 (Del) / [2016] 238 Taxman 625 (Del) / [2016] 385 ITR 436 (Del) / [2016] 285 CTR 48 (Del); W.P.(C) Nos. 8535 to 8537, 8641 to 8644 and 8647 of 2011 with connected applications. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 201(1), section 201(1A), section 201(3), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The writ petitions were allowed and the notices quashed (paras 33-34). The four-year rule laid down in CIT v. NHK Japan Broadcasting Corpn was not displaced by the insertion of the proviso to s.201(3) by the Finance (No. 2) Act 2009, and Circular No. 5 of 2010, which explained the proviso as expanding the time for completing proceedings and passing orders in 'pending cases', cannot be read as enabling the Department to initiate proceedings under s.201 for a period earlier than four years before 31 March 2011 (paras 24, 28). The Revenue's reliance on s.153(3)(ii) and on Idea Cellular was held misconceived: that provision can apply only to the assessee in whose case a court has made an order, and there must be a finding or direction on the very issue, of which there was none (paras 21-22). The Supreme Court's order for assessment year 2002-03 did not cover the notices for 2003-04 to 2005-06 (paras 30-31). The Court did not decide the challenge to the constitutional validity of s.201(3) and its proviso, which the petitioners did not press once their construction was accepted (para 32). It arises in TDS Defaults matters, on section 201(1), section 201(1A), section 201(3) of the Income Tax Act 1961, and was decided by Delhi High Court — Dr S. Muralidhar J and Vibhu Bakhru J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Check the notice against the applicable limb of s.201(3) as it stood for that year. Do not accept a CBDT circular as the source of a longer period — the statute governs.
Superseded by amendment. Followed while the pre-2014 provision governed: the Delhi High Court applied it in Bharti Airtel Ltd. v. Union of India [2016] 76 taxmann.com 256 (Delhi), decided 19 December 2016, for assessment years 2002-03 to 2007-08, whose case review records this judgment followed. But the four-year outer limit came from the proviso to s.201(3) as it stood before 1 October 2014. Section 201(3) was substituted by the Finance (No. 2) Act 2014 with effect from 1 October 2014 to read 'seven years from the end of the financial year in which payment is made or credit is given' - a change recorded in this Court's own judgment in C.J. International Hotels, extracted at para 16 of this decision - and the sub-section has been altered again since. The four-year rule this case enforces has no counterpart in the present provision. Its residual value is the narrow proposition that the extended period does not revive periods already time-barred, and the general proposition at paras 25-27 that a CBDT circular favourable to an assessee binds the Department even where the interpretation runs against the legislative intent. Note also that the report records the Supreme Court, in rejecting the Revenue's appeal against NHK Japan Broadcasting Corpn, as having left the question open (para 16). No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Two things the entry previously got wrong. The Court did not say that a circular cannot override the statute; it said the opposite - that there is no question of 'harmonious construction' of a CBDT circular, that a circular is at best an external aid to construing the section, and that a circular favourable to an assessee is to be applied even where that reading goes against the legislative intent (paras 25-27, on K.P. Varghese). And the constitutional challenge to s.201(3) and its proviso was not decided: the petitioners did not press it once their construction was accepted (para 32). The four-year rule itself is history for recent periods - s.201(3) was substituted from 1 October 2014 to allow seven years and has been altered again since - so check the limitation as it stands for the year in question rather than relying on this case. What survives generally is the circular point and the narrow proposition that an extended period does not revive periods already time-barred. The judgment does not record whether the Revenue took the decision to the Supreme Court, and the report carries no citator banner. The present text of s.201(3), after the substitution that followed the 2014 amendment, was not confirmed against the statute in this read; it must be checked before any limitation period is asserted for a recent year. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The writ petitions were allowed and the notices quashed (paras 33-34). The four-year rule laid down in CIT v. NHK Japan Broadcasting Corpn was not displaced by the insertion of the proviso to s.201(3) by the Finance (No. 2) Act 2009, and Circular No. 5 of 2010, which explained the proviso as expanding the time for completing proceedings and passing orders in 'pending cases', cannot be read as enabling the Department to initiate proceedings under s.201 for a period earlier than four years before 31 March 2011 (paras 24, 28). The Revenue's reliance on s.153(3)(ii) and on Idea Cellular was held misconceived: that provision can apply only to the assessee in whose case a court has made an order, and there must be a finding or direction on the very issue, of which there was none (paras 21-22). The Supreme Court's order for assessment year 2002-03 did not cover the notices for 2003-04 to 2005-06 (paras 30-31). The Court did not decide the challenge to the constitutional validity of s.201(3) and its proviso, which the petitioners did not press once their construction was accepted (para 32).
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
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You deducted the TDS but paid it late. Is penalty under s.271C leviable?