1. Legal Status of Default
- Deductor becomes “Assessee in Default”for:
- Failure to deduct TDS or
- Failure to deposit deducted TDS
2. Financial Penalties
A. For Non-Deduction
| COMPONENT | CALCULATION |
| Principal Amount | Equal to TDS not deducted |
| Interest | 1% per month from due date of deduction to actual deduction date |
B. For Non-Payment After Deduction
| COMPONENT | CALCULATION |
| Principal Amount | Equal to TDS not paid |
| Interest | 1.5% per month from deduction date to payment date |
3. Additional Consequences
- Disallowance of Expense(Section 40(a)(i)):
- 30% disallowance for late payment (after due date but before FY end)
- 100% disallowance if not paid by FY end
- Penalty(Section 271C):
- Equal to amount of tax not deducted/paid
- Prosecution(Section 276B):
- Rigorous imprisonment: 3 months to 7 years
- Fine (discretionary)
4. Mitigation Provisions
- Reduced Penaltyif:
- Default disclosed in updated return (Section 270AA)
- Voluntary payment before notice
- Waiver Availablewhen:
- Deductee has paid taxes on income
- Valid proof submitted to AO
5. Recent Judicial Trends (2023-24)
- Hindustan Coca-Cola Case(SC 2023):
-
- Confirmed deductor liability even if deductee pays tax
- CBDT Circular 12/2023:
-
- Stricter verification of waiver applications
- E-assessment Protocols:
-
- Automated demand generation via CPC-TDS
- Limited window for response (15-30 days)
6. Practical Defense Strategies
- Immediate Actions:
-
- Pay outstanding with interest
- File revised return with late fee
- Documentation:
-
- Maintain proof of deductee’s tax payment
- Preserve bank challans
- Legal Remedies:
-
- File waiver application (Form 13B)
- Appeal to CIT(A) within 30 days
7. Industry-Specific Risks
- Real Estate: High scrutiny on contractor payments
- IT Sector: Focus on NRI payments
- Banking: FD interest deductions
8. Compliance Calendar for Default Resolution
| DAY | ACTION |
| 0 | Identify default |
| 1-7 | Calculate interest liability |
| 8-15 | Make payment with interest |
| 16-30 | File correction statement |
| 31-45 | Apply for penalty waiver |
Pro Tip: Use the TDS Default Resolution Dashboard on the income tax portal for real-time status monitoring and automated interest calculation.
This provision creates a strong deterrence against TDS non-compliance while providing structured resolution mechanisms. Regular internal audits and automated deduction systems can help prevent defaults. For ongoing cases, professional representation before tax authorities is recommended to navigate the complex waiver process effectively.
