Here you will get the complete detail about Consequences of failure to deduct or pay TDS – Deduction of Tax at Source (TDS), Collection of Tax at Source (TCS)/Withholding Tax – Income Tax
SECTION 201(1): FAILURE TO DEDUCT OR FAILURE TO PAY TDS
If any person who is liable to deduct TDS does not deduct the whole or any part of the tax or after deducting fails to pay the whole or any part of the tax, then, he shall be deemed to be an Assessee in Default in respect of the tax not so deducted or not to paid. Consequently he shall be liable to pay interest under section 220 and penalty under section 221 for being Assessee in Default.
Section 201(1) does not apply if there is a delay in deduction or delay in payment of TDS.
Provided that any person, who fails to deduct the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid to a resident or on the sum credited to the account of a resident shall not be deemed to be an assessee in default in respect of such tax if such resident-
(i) has furnished his return of income under section 139;
(ii) has taken into account such sum for computing income in such return of income; and
(iii) has paid the tax due on the income declared by him in such return of income,
and the person furnishes a certificate to this effect from a chartered accountant in such form as may be prescribed.
No penalty shall be charged u/s 221 from such person,unless the AO is satisfied that such person has without good and sufficient reasons failed to deduct and pay the tax.
SECTION 201(1A): LATE DEDUCTION OF TDS OR LATE PAYMENT OF TDS
If any person, does not deduct the whole or any part of the tax within the time prescribed or after deducting fails to pay the tax within the time prescribed, he shall be liable to pay simple interest –
(i)at 1% for every month or part of a month on the amount of such tax from the date on which such tax was deductible to the date on which such tax is deducted and
(ii)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 to the date on which such tax is actually paid, and such interest shall be paid before furnishing the quarterly return of TDS.
Provided that in case any person, fails to deduct the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid to a resident or on the sum credited to the account of a resident but is not deemed to be an assessee in default under the first proviso of sub-section (1), then the interest under clause (i) shall be payable from the date on which such tax was deductible to the date of furnishing of return of income by such resident.
Where the assessee failed to deduct tax u/s 194C, but it was found that the contractor had paid the advance tax and self-assessment tax over and above the tax payable, thereby not causing any loss to the revenue. Hence if the revenue is permitted to to levy interest u/s 201(1A) even if the tax is paid on due date, the revenue would derive undue benefit by getting interest on the amount of tax which had already been paid on the due date. Such position cannot be permitted. [CIT v Rishikesh Apartments Co-op. Housing Society Ltd. (2002) 253 ITR 310 (Guj)].
The order under section 201(1) for interest and penalty shall be passed within 7 years from the end of the Financial Year in which payment is made or credit is given.
However, no time limits have been prescribed for passing an order under section 201(1) where:
the deductor has deducted but not deposited the tax deducted at source, as this would be a case of defalcation of government dues,
the employer has failed to pay the tax wholly or partly, under subsection (1A) of section 192, as the employee would not have paid tax on such perquisites,
the deductee is a non-resident as it may not be administratively possible to recover the tax from the non-resident.