TDS Survey and related issues – Best practices followed in Investigation/Identification of TDS Survey cases

Special provisions for Conducting TDS/TCS Survey [Section 133A(2A)]

§  There were no specific provisions for TDS/ TCS survey in the Income-tax Act till 2014.

§  Verification of TDS/ TCS was earlier done by regular surveys under section 133A(1) of the Act.

§  Section 133A(2A) has been introduced by the Finance (No. 2) Act, 2014 with effect from 01.10.2014, which only entitles the income-tax authorities to conduct survey in regard to TDS proceedings.

§  TDS surveys have been found to be very effective in detecting non-deduction or short deduction of tax at source, or in identifying cases where deduction was made but tax was not deposited with the government.

§  Authority having jurisdiction as to the Tax deduction at source matters, has the power to conduct survey.

Power to authorize survey operations under section 133A [Proviso to section 133A(6)

No action under section 133A shall be taken by an income-tax authority [i.e. a Principal Commissioner or Commissioner, a Principal Director or Director, a Joint Commissioner or Joint Director, an Assistant Director or a Deputy Director or an Assessing Officer, or a Tax Recovery Officer; and an Inspector of Income-tax, for the purposes of clause (i) of sub-section (1), clause (i) of sub-section (3) and sub-section (5)] without obtaining the approval of the Principal Director General or the Director General or the Principal Chief Commissioner or the Chief Commissioner, as the case may be.

Explanation. - In this section, -

 (a) “income-tax authority” means -

  (i)  a Principal Commissioner or Commissioner, a Principal Director or Director, a Joint Commissioner or Joint Director, an Assistant Director or a Deputy Director or an Assessing Officer, or a Tax Recovery Officer; and

  (ii) includes an Inspector of Income-tax, for the purposes of clause (i) of sub-section (1), clause (i) of sub-section (3) and sub-section (5), who is subordinate to the Principal Director General or the Director General or the Principal Chief Commissioner or the Chief Commissioner, as may be specified by the Board;

CBDT specifies authorities for approving & monitoring Survey [CBDT Order No. 267 dated 22.11.2022]

§    Authorisation for conducting survey shall be issued by JDIT/JCIT with the prior approval of DGIT/CCIT in case of : (i) Directorate of Investigation, (ii) Directorate of Intelligence & Criminal Investigation, (iii) Central Charges and (iv) TDS Charges; 

§    Where TDS charge is headed by the Principal Chief Commissioner, approval shall be granted by the Principal Chief Commissioner.

§    Concerned Pr.CIT/ CIT/ Pr.DIT/ DIT shall monitor and ensure that survey is conducted in accordance with the statutory provisions along with the guidelines and instructions issued by CBDT from time to time.

§    Pr. DGIT/ DGIT/ Pr.CCIT/ CCIT for exercising powers and functions under Section 133A to be exercised by their subordinates in territorial areas or persons or incomes assigned to them under Section 120

§    CBDT clarifies that the specification does not extend to the authorities exercising powers and functions under Section 144B i.e. Faceless Assessment, and Faceless Penalty (Amendment) Scheme, 2022.

 

Purpose of survey

(i)  Information gathered during the course of surveys/verification regarding:

§  Non-deduction

§  Short deduction of TDS,

§  Non-deposit

§  Late deposit

§  Short deposit of tax already deducted.

(ii)  Whether TDS has been made against the expenditures which require deduction.

(iii) Whether deduction has been made at proper rate.

(iv) Whether the tax deducted has been deposited to Government account in due time.

(v)  Whether the statements have been filed.

 

Types of defaults committed by the deductors

Mainly two types of substantive defaults are committed by the deductors:

(a)      Tax deducted or collected but not deposited;

(b)     Tax not deducted/collected at all or, even if deducted/collected, short deduction or collection of tax

Besides, there are a large number of procedural defaults, such as:

(a)    Failure to furnish or late-furnishing of statement under section 200(3) of the Act;

(b)   Failure to issue or late issue of TDS Certificates (Form 16, 16A, 16B, 16C;

(c)    Failure to furnish statement of perquisites under section 191(2C) of the Act;

(d)   Failure to file statements in Form No. 24Q, 26Q, 27Q, 27A, 27EQ and 26B within the prescribed time.

Guidelines for TDS/TCS Surveys - Non-Deduction/ Short Deduction Defaults

For finding out defaults, including default of non-deduction/short deduction, survey team may verify the following issues:

(a)      Whether tax has been deducted at the appropriate rate and under appropriate section.

(b)     TDS under inappropriate section:

 

§  192 vs. 194J : - Salary paid by coaching institutes or by hospitals to its skilled employees, liable to TDS under section 192, is often camouflaged as payment to professionals and TDS is made under section 194J

§  194C vs. 194J :- this is the most commonly found type of short deduction cases. For example, payment to recruitment agencies are often subjected to TDS under section 194C while it should be under section 194J

§  194C vs. 194I :- instances of this include payment made by corporate customers to hotels pursuant to a fixed rate concessional agreement. Another instance is payment by tenant shops to mall owner where TDS is made under section 194C while it should be under section 194I

Follow best practices

TDS Surveys can be effective tools for detection of non-compliance in TDS/TCS and identifying defaults under section 40(a)(i)/(ia)/(iii) of the Act.

The following indices have been listed in the CAP for selecting a potential case for survey.

(i)           If case is in prosecution list (where TDS/TCS not deposited after deduction);

(ii)         If TDS payment trend is in stark contrast to other deductors in similar business;

(iii)       If there is a negative trend in payment under a particular Section as compared to preceding Financial year

(iv)        If a Tax evasion petitions (TEP) has been filed filed by the deductee against deductor for non deduction of TDS);

(v)         If Assessing Officer has made a huge disallowance u/s 40(a) (ia)

(vi)        If deductor is a habitual late filers/non-filers of TDS Statement which is primarily due to late payment or non/short deduction

(vii)      If there is a negative growth in TDS payment as against healthy growth in Advance tax payment;

(viii)    If deductor make frequent corrections in TDS Statements and also the name of deductors is regularly changed.

(ix)        If deductor is a sick unit or units with negative operating margins as reported in Tax Audit report under section 44AB

(x)         If a grievance petition has been filed by the deductee against deductor

(xi)        If against deductor, there is some adverse news/information available through media/internet;

(xii)      If analysis of case laws decided against deductor suggests TDS defaults

 

Basis of selection of TDS Survey cases

(i)          Deposit of TDS is lower than earlier years

(ii)         Any complaint from deductee/outsider giving information of non payment of TDS.

(iii)       Tax Evasion Petitions (TEPs)

(iv)       Analysis of Newspaper reports/ information available through internet

(v)         Analysis of case law decided in favour of revenue

(vi)       Information arising out of details filed alongwith

(vii)     TDS certificate under section 197 for any lower rates or no deduction of income-tax on their receipts in Form No 13

(viii)    Third party information

(ix)       Analysis of TDS Date

§  Cases in prosecution list

§  Non filing of TDS/TCS Statement

§  Habitual late filers of TDS/TCS statement [late filing is closely linked to late payment]

§  Cases showing shift in TDS [particularly from section 194J/194-I to 194C]

 

Work relating to identifying top deductors paying less/no tax with respect to previous financial years:

In past few years it has been observed that the list of top deductors is fluctuating very frequently in each CsIT (TDS) charge. This is mainly due to sudden break in depositing TDS or by paying very less TDS by many top deductors in relevant financial years. The downfall in TDS deduction of top deductors of the region needs to be monitored. The analysis of the downfall in TDS deduction should consider quantum of deduction, nature of the payment and reason for downfall.

§   Generating a list of top deductors on the system through TRACES functionality, for the last three financial years.

§   Ascertaining reasons for lower tax deduction or collection, based on the type of industry/business.

§   Issuing letters to the deductor to ascertain the reason for negative growth and thereafter taking corrective measures such as spot verifications or referring the matter for prosecution in the case to the CIT (TDS), if the tax so deducted/collected is being utilized by the TAN holder for business.

§   In case of listed companies whose financial results are available in public domain, if there is fall in TDS as compared to earlier year but financial results show business growth, the case must be picked up for survey/spot verification.

§   Survey/spot verification may also be resorted to in case of deductors showing negative growth.

 

Checklist for survey in TDS cases

A. Before Survey

§  Collecting evidence of any default made by the assessee.

§  Verification of the information from the relevant assessment records.

§  Nature of business and payments made by the assessee.

§  Examination of the payments with reference to the heads of TDS.

§  Whether deduction has to be made under any other head.

§  TDS return of the assessee for the last 3 years.

§  No. of branches of the assessee company.

§  Whether more than one TAN is applied.

§  Collection of information from e-TDS returns filed.

§  Reconnaissance of the premises to find out the computer infrastructure, division handling TDS matter etc.

      Be prepared

§  With the business model of the assessee from Tax Audit Report/Internet

§  With the structured questionnaire for statement

§  With the Data from the ITD system/ Return of income

§  With list of documents that may be asked on arrival at the premises

 

B. During Survey

§  Examination of the P&L account of the current year and last 2 years.

§  Nature of the payments in these years.

§  Identification of the deduction made under any of the TDS provision of Section 192 to 196D.

§  Comparison of the payments shown in the P&L account and the TDS return filed.

§  Collection of information of TDS certificate issued to different persons.

§  Whether the tax has been deducted at the appropriate rate and under appropriate Section.

§  Whether the tax deducted has been paid to Government account within the prescribed time limit

§  In case of TDS on salary payments, the deduction claimed by employees, i.e. NSC deposit, PPF, House rent payment, donation under section 80G, etc. should be verified. The perquisite valuation of the employees should be examined

§  Regarding deduction against interest on securities, in cases of cumulative deposits/bonds, tax is to be deducted every time interest is credited in the account of the payer and is not to be postponed till its maturity

§  In respect of TDS against payments to contractors/sub-contractors, tax is to be deducted from

(a)   adjustable advance payments;

(b)   gross payments in respect of composite works contract;

(c)   payments made in pursuance of a contract or subcontract, free of tax;

(d)  payments made for all types of contracts, including service contract, transport contract, material contract, advertising contract, broadcasting contract, telecasting contract, labour contract and works contract;

(e)    payments made to clearing and forwarding agents for carriage of goods; and

(f)  payments made to courier agencies for carrying documents, letters, etc.

§  With regard to TDS on rent, tax has also to be deducted in respect of

(a)  fixed monthly warehousing charges;

(b)  composite charges paid/payable for use of premises or other services;

(c)  nonrefundable advance, adjustable loan or deposit made; and

(d)  room rent for hotel accommodation taken on a periodical basis

§  Following documents are also to be veried during TDS survey

(a)     Trial Balance

Ø Current year’s “detailed trial balance” as on date of inspection should be obtained immediately

(b)   Cash Book

(c)    Specific ledger accounts

Ø Verify the TDS payable account by obtaining the ledger copy

(d)   Balance sheet

Ø Verify the Assets schedule in the balance sheet for any increase in the assets like any construction work or any installation of new machinery, capital-work-in-progress, loans and advances etc. Please verify the TDS item-wise on this.

Ø Check the Annual Maintenance Contracts of all machinery or vehicles in assistance.

(e)    Audit report

(f)    Challans

(g)   Rent agreement

(h)   Contract agreement

 

             Be professional

§   Execute operations in professional way

§   Function like a team

§   Delegate tasks to team members

§   Do not sit idel [it sends a very wrong message to assessee]

§   Be courteous yet firm in your approach

§   Keep the Range Head updated of the progress

§   Collect only those documents that are required [Avoid garbage]

 

Other points to consider in TDS Survey

In case of survey under section 133A(2A) [for TDS/TCS] :

§   The income tax authority can not impound any books etc.

§   No inventory of cash etc can be made.

So the scope of TDS surveys is limited to collection of information and verification of documents to ascertain the TDS/TCS liability.

Record statement

§   Record statement under section 133A

§   General information of the business activity

§   Record the discrepancies found

§   Point out where proper deduction has not been made and record the reason

 

Issue summons under section 131(1)

§   Where the required document could not be produced during the course of survey, issue summons under section 131(1) to produce on a particular date.

 

C.  After Survey i.e. Post-survey Work in TDS/TCS Cases

After conclusion of Survey, the Assessing Officer is required to take the following follow-up action:

(a)    A preliminary report is to be sent within 48 hours and final report to be sent within 60 days [Ref: Para - 2(iv) of Board’s direction issued vide F. No. 299/105/2014–Dir (Inv. III)/241 dated 9.8.2017 stipulated that all Income-tax authorities conducting survey u/s 133A shall submit such reports. However, the terms ‘undisclosed income detected’ will be ‘TDS/TCS failure detected’ and ‘nature of concealment’ will be termed as ‘nature of TDS/TCS failure’. As regards fulfilment of three conditions of manual scrutiny selection are concerned–‘Not applicable’ may be written]. But outcome of survey needs to be recorded in the reports.

(b)   Show-cause to be issued at the earliest, preferably during the survey, particularly in cases involving defaults of tax deducted/collected but not deposited.

(c)    Other TDS ranges must be informed in cases of branch offices which are filing their TDS returns separately to examine similar defaults.

(d)   Order under section 201(1)/201(1A) to be passed immediately after collection of all relevant details and giving reasonable opportunity;

(e)    It is important that consequential proceedings under section 201(1) of the Act are initiated as expeditiously as possible and keeping in mind the limitation laid down in section 201(3) of the Act

(f)    It may be kept in mind that a claim of direct payment by the payee is governed by proviso to section 201(1) read with Rule 31ACB and Form no. 26A read with Notification no. 11/2016 dated 2.12.2016 of the Board. However, even in such cases the liabilities for interest under section 201(1A) and penalty under section 271C remain

(g)   Penalty proceedings under relevant section should be initiated

(h)   Prosecution proceedings under relevant section should be initiated following the SOP dated 09.12.2016 for prosecution in TDS cases.