A construction company deducted Rs 31 lakh of tax under the contractor and professional-fee provisions across the second and third quarters of FY 2022-23. Cash flow failed after a principal client defaulted, and the tax was deposited between seven and eleven months late, in each case with interest, and before any notice was received. The quarterly statements were also filed late and the late-filing fee was paid. In June 2026 the company received a show-cause notice proposing prosecution under s.276B read with s.278B, naming the company, the managing director and a non-executive director who attends four board meetings a year and has no role in finance. No penalty proceeding of any kind has been initiated on these defaults. The company has its bank statements showing the client default, the challans with dates, the interest computation, and board minutes recording that day-to-day finance was delegated to the managing director.
Date every default and every deposit against the due date for the relevant quarterly statement, and check where those dates fall in relation to 1 October 2024. For defaults from that date there is a statutory bar on prosecution where the deducted tax is deposited before the due date for the quarterly statement, so the answer can be entirely different on either side of the line. Here the defaults are earlier, which means the bar is not available and the case has to be built on discretion, on the identity of the accused and on compounding rather than on immunity.
Delay in crediting deducted tax to the Central Government within the statutory period is itself the offence, and subsequent deposit with interest does not wipe it out. Belated deposit has been held not to extinguish criminal liability unless the statute so provides. Interest on late payment is compensatory and the statement filing fee is a separate charge, so paying both leaves the prosecution exposure untouched. Building the reply on payment alone wastes the one opportunity to influence the sanction decision. Nor is the age of the default an answer: the library now holds an entry on the limitation for launching a prosecution of this kind, which reads the punishment prescribed for the offence as putting it outside the general criminal bar so that no period runs at all. That entry records that this is a reading of the provisions and not a decision, so use it to close the point off before it is pleaded rather than to build a defence on.
The penalty for failure to deduct is attracted only by a failure to deduct at source, not by belated payment or non-payment of tax that was actually deducted, so a company that deducted and paid late is not exposed to it on these facts. That is worth stating in the reply because it narrows the department's own picture of the default to a payment delay. The company's status as an assessee in default under the deduction provisions is a separate matter again, with its own consequences and its own escape routes.
Directors identified as principal officers have been properly arrayed as accused where they answered that description, so the objection has to be about role and not about the office held. Against that, the statutory presumption of a culpable mental state operates against a person in managerial charge and can be rebutted only at trial rather than by affidavits at the pre-trial stage, and a conviction has been upheld where the accused offered no plausible rebuttal at all. The board minutes delegating finance to the managing director therefore belong in the reply to the show-cause notice, when the department is still deciding whom to name, because their value falls sharply afterwards.
A prosecution has been quashed where the deducted tax with interest had been deposited before sanction was granted, no penalty proceedings had been initiated, and the assessee had offered sufficient justification for the delay. All three features are present here, and the client-default evidence is the justification. Put the challans, the interest payment and the absence of any penalty proceeding on the record now, so that they exist before the sanction decision rather than after it.
The current compounding guidelines abolished the old categorisation of offences, removed the limit on the number of applications and removed the earlier outer time limit for applying, and extended compounding to the late-deposit offence. That makes an application a live commercial option to be costed alongside the defence rather than something considered only after a complaint is filed. Run the numbers on the compounding charge against the cost and exposure of a trial before advising. The library now carries the computation as well - a single monthly rate on the tax actually in default, run over the same period on which the interest under the deduction provisions has already been worked out, and capped at the tax in default - so the arithmetic can be put in front of the client on one page. The entry records that the guidelines text behind it was read on a secondary source rather than on the department's own, so check the rate against the guidelines before quoting it in an application.
Where a penalty founded on concealment was cancelled on the footing that there was no concealment, the prosecution built on the same concealment could not survive. Settlement of the same allegations through the statutory settlement machinery has likewise been held to preclude a prosecution premised on the very same concealment. Neither authority is about late deposit of deducted tax, so the reasoning is available only if the department also runs a proceeding on the same facts that ends in the company's favour, and it should not be offered as a direct answer to this show-cause notice.
For pre-October 2024 defaults, prosecutions of this shape are often compounded rather than fought, because the offence itself is difficult to dispute once the challan dates are admitted. Quashing does happen where the tax and interest were paid before sanction, no penalty was initiated and the delay has a documented commercial explanation, but it is fact-specific and far from assured. The non-executive director's position is usually the part most capable of improvement, and it improves most if the role evidence goes in before the sanction decision.