Section 201 of The Income-tax Act – When a Person will be considered as Assessee in Default & What is the Relief Mechanism

1. Background

Tax Deduction at Source (TDS) is an important mechanism under the Income-tax Act, 1961 (“the Act”) to ensure early and efficient collection of tax. Chapter XVII-B of the Act imposes statutory obligations on specified persons (deductors) to deduct tax at source while making certain payments. Section 201 contained in Chapter XVII-B of the Act prescribes the consequences of failure to deduct or pay TDS and, at the same time, providing a relief mechanism to avoid double taxation.

This Article provides a detailed analysis of section 201, covering its scope, interest liability and statutory relief measures.

2. Section 201(1) – Concept of “Assessee in Default”

2.1 Statutory Provision

Under section 201(1), where any person:

Fails to deduct the whole or any part of tax, or
After deducting, fails to pay the tax as required under the Act,

such person shall be deemed to be an “assessee in default” in respect of such tax.

2.2 Consequences of being treated as Assessee in Default

Once a deductor is treated as an assessee in default:

A demand for the amount of TDS not deducted / not paid can be raised,
Interest under section 201(1A) becomes payable,
Recovery proceedings may be initiated,
Penalty proceedings may be triggered.

3. Proviso to Section 201(1) – Statutory Relief from Default

3.1 Purpose

The proviso to section 201(1) was introduced to mitigate genuine hardship to the assessee and to prevent double recovery of tax where the recipient of income (deductee) has already discharged the tax liability.

3.2 Conditions for availing Relief

A deductor shall not be deemed to be an assessee in default for failure to deduct tax, if all the following conditions are satisfied:

The deductee has furnished his return of income under section 139;
The deductee has taken into account the relevant income for computing total income;
The deductee has paid the tax due on such income;
The deductor furnishes a certificate from a Chartered Accountant in the prescribed form.

These conditions are mandatory.

4. Rule 31ACB and Form 26A

4.1 Rule 31ACB of the Income-tax Rules, 1962

Rule 31ACB prescribes the procedure and form for furnishing the accountant’s certificate as required under the proviso to section 201(1).

4.2 Form 26A

Chartered Accountant’s certificate is to be furnished in Form 26A
It certifies that the deductee has:

Filed return of income,
Included the relevant income, and
Paid the tax due.

Form 26A is required to be furnished electronically in accordance with the prescribed procedure.

5. Interest Liability under Section 201(1A)

5.1 Nature of Interest

Interest under section 201(1A) is mandatory and compensatory in nature.

5.2 Rates of Interest

Failure to deduct tax: Interest at 1% per month or part thereof, from the date on which tax was deductible to the date on which tax is actually deducted.
Failure to pay tax after deduction: Interest at 1.5% per month or part thereof, from the date of deduction to the date of payment.

5.3 Interest liability where Relief under Section 201(1) is availed

Even where the deductor is not treated as an assessee in default due to compliance with the proviso to section 201(1):

Interest at 1% per month or part thereof is payable
From the date tax was deductible
Up to the date of furnishing of return of income by the deductee.

6. Interaction with Section 234E and Section 271H

6.1 Fee under Section 234E

Rs 200 per day for delay in filing TDS statements
Subject to a maximum of the amount of TDS
Mandatory

6.2 Penalty under Section 271H

Minimum: Rs 10,000
Maximum: Rs 1,00,000
For failure to file TDS statements or furnishing incorrect statements

No penalty shall be levied if:

TDS is deducted and paid,
Interest and fee are paid, and
TDS statement is filed within the prescribed time limits.

7. Time Limit for Passing Order under Section 201

Section 201 also prescribes limitation periods for passing orders treating a person as assessee in default, which vary based on whether a TDS statement has been filed and the nature of default. These provisions ensure certainty and finality in TDS matters.

8. Practical Compliance Steps

Identify instances of non-deduction or short deduction
Ascertain whether deductee has paid tax
Obtain CA certificate and file Form 26A
Pay applicable interest under section 201(1A)
File pending or corrected TDS statements
Issue TDS certificates to deductees

9. Major Judicial Pronouncements on Section 201

The legal position relating to section 201 is now largely settled through several landmark judicial pronouncements. A few major decisions are summarised below:

i. Hindustan Coca-Cola Beverage (P) Ltd. v. CIT (Supreme Court)

The Supreme Court held that where the deductee has already paid tax on the income received, the Revenue cannot recover the same tax again from the deductor. However, the deductor remains liable for interest for the period of default.

ii. CIT v. Eli Lilly & Co. (India) (P) Ltd. (Supreme Court)

The Court explained the scheme of TDS provisions and clarified that interest under section 201(1A) is mandatory and compensatory, irrespective of whether the failure was bona fide or unintentional.

iii. CIT v. Bharti Cellular Ltd. (Supreme Court)

The Supreme Court emphasised that section 201 proceedings are distinct and independent and the Revenue must first establish that the payment is chargeable to TDS before treating the payer as an assessee in default.

10. Summary

Section 201 strikes a balance between strict enforcement of TDS provisions and equitable relief to deductors. While the law imposes stringent consequences for non-compliance, the proviso to Section 201(1), read with Rule 31ACB, ensures that double taxation is avoided where the deductee has already discharged the tax liability.

Need Professional Assistance ? Please consult us.