Common Tax Defaults & Penalties Under the Income-Tax Act
Adhering to tax laws is crucial for every taxpayer. Non-compliance, whether intentional or due to oversight, can lead to various defaults and penalties under the Income-Tax Act, 1961. This article outlines some common tax defaults and the associated consequences.
Defaults Related to Filing Income Tax Return
1. Failure to File ITR or Belated Filing
Every person whose total income exceeds the basic exemption limit is required to file an Income Tax Return by the specified due date.
- Penalty u/s 234F: If the return is not filed by the due date, a late filing fee is levied. For total income exceeding ₹5 lakh, the fee is ₹5,000. For total income up to ₹5 lakh, the fee is ₹1,000.
- Interest u/s 234A: Interest at 1% per month or part of a month is charged on the unpaid tax amount from the due date until the date of filing.
- Loss Carry Forward: Certain losses (e.g., business losses, capital losses) cannot be carried forward to future years if the return is not filed by the original due date.
- Assessment u/s 144: If a return is not filed, the Assessing Officer may proceed with a Best Judgment Assessment (Section 142(1) notice is often issued first), which can lead to higher tax demand.
Even if you file a belated return, the late filing fee and interest will apply.
2. Filing a Defective Return (Section 139(9))
If the Income Tax Department finds your filed ITR defective (e.g., missing essential information or incorrect data), they may issue a notice under Section 139(9). If the defect is not rectified within the specified time (usually 15 days), the return may be treated as if it was never filed, attracting consequences as above.
Defaults Related to Tax Payment
1. Default in Payment of Advance Tax
Taxpayers with an estimated tax liability of ₹10,000 or more (after TDS/TCS) must pay advance tax in installments throughout the financial year.
- Interest u/s 234B: Levied if less than 90% of the assessed tax is paid as advance tax. Interest is 1% per month on the shortfall from the end of the financial year till the date of return filing.
- Interest u/s 234C: Levied for deferment of advance tax installments. Interest is 1% per month for the period of deferment.
2. Default in TDS/TCS Compliance
Entities required to deduct TDS (Tax Deducted at Source) or collect TCS (Tax Collected at Source) must do so at specified rates and deposit it with the government within the prescribed time. Non-compliance attracts significant penalties and interest.
- Interest u/s 201(1A): Interest is charged for failure to deduct/collect tax, or for delayed deposit of deducted/collected tax. Rates vary (e.g., 1% per month for failure to deduct, 1.5% per month for delayed deposit).
- Penalty u/s 271C: Penalty equal to the amount of tax not deducted or collected.
- Penalty u/s 271CA: Penalty for failure to collect TCS.
- Penalty u/s 234E/234EE: Penalty for delayed filing of TDS/TCS statements.
- Higher TDS/TCS for non-filers: Section 206AB and Section 206CCA mandate higher rates of TDS and TCS for specified persons who have not filed their ITRs.
Defaults Related to Concealment/Misreporting of Income
1. Penalty for Concealment/Misreporting of Income (Section 270A & 271(1)(c))
This is one of the most severe penalties and is levied if a taxpayer conceals particulars of income or furnishes inaccurate particulars of income. The penalty quantum depends on the nature of the misreporting:
- Misreporting of income: Penalty is 50% of the tax payable on such under-reported income.
- Under-reporting of income due to misrepresentation or suppression of facts: Penalty is 200% of the tax payable on such under-reported income.
These penalty provisions are robust and are often accompanied by interest and can even lead to prosecution in serious cases.
Other Common Defaults & Penalties
- Failure to maintain proper books of accounts: Penalties can be levied under Section 271A.
- Failure to get accounts audited: Penalties can be levied under Section 271B.
- Failure to comply with notices: Non-response to notices issued by the Income Tax Department (e.g., Section 142(1) notice) can result in penalties or best judgment assessment.
- Non-cooperation with tax authorities: Impeding tax proceedings can lead to prosecution.
It is vital for all taxpayers to be aware of their obligations under the Income-Tax Act to avoid these common defaults and the severe financial implications of penalties and interest.