Section 234E levying ‘fee’ for late filing of TDS statements

Background

Recently, the Bombay High Court, on writ petition No. 771 of 2014 filed by the petitioner Mr Rashmikant Kundalia and others (the Petitioner), held that the late filing of Tax Deducted at Source (TDS) statements by the deductor causes inconvenience to everyone concerned and hence, section 234E of the Income Tax Act, 1961 (the Act) levies a fee to regularise the said late filing. The Court has observed that the said fee is not in the guise of a tax nor is it onerous. Further, it has also denied condoning any delay for payment of such fee vis-a-vis filing of the TDS statements on account of filing a writ petition.

Facts of the case

The petitioner was a practising chartered accountant who has received several notices on behalf of his clients under Section 200A of the Act demanding a fee for late filing of TDS statements under section 234E of the Act.
Section 234E of the Act seeks to levy a 'fee ' for non-filing or late filing of TDS statements at the rate of INR 200 per day till the time such default continues.
The petitioner argued that what was sought to be levied under the said Section was a 'fee ' which could be levied only for a service that was rendered, failing which the levy of such a fee was unconstitutional as no specific or special service was provided by the Revenue to the person paying such a fee.
It was argued that a 'fee ' is known in the commercial and legal world to be a form of consideration against any kind of services received, and it cannot be collected or levied for any non-compliance or default.
Accordingly, the Petitioner had filed a writ petition before the Bombay High court under Article 226 of the Constitution of India challenging the constitutional validity of Section 234E and demanding it to be struck down from the legislation.
The key issue before the Bombay High Court is whether the provision of Section 234E of the Act violates any provisions of the Constitution of India. The following paragraphs discuss the issue and High Court's ruling.

Tax Authorities' contention

Timely submission of TDS statements containing details of persons on whose behalf tax is deducted is crucial as until and unless the Revenue receives details of the tax deducted (through TDS statements), timely processing of income-tax returns of taxpayer's seeking credit of TDS is not feasible .
In case the tax department goes ahead and processes the income-tax returns of the taxpayer without giving credit for TDS due to non-filing of TDS statements by the deductor, the grievance of the taxpayer would be multiplied and instead of issuing a refund to him incorrect demands would to be raised.
Due to delayed submissions of TDS statements, the tax department has to revise the assessment order already passed on behalf of the taxpayer for determining his correct tax liability; consequently, this creates additional work for the tax authorities.
Moreover, in case of any delay in processing income-tax refunds, additional interest needs to be paid to taxpayers for want of information of tax deducted and credited thereof.
The fee under section 234E is levied to address this additional work burden forced upon the tax authorities by the deductor for not furnishing the information on time which he is statutorily bound to furnish within the prescribed time.

Taxpayer's contention

In addition to advocating the arguments mentioned above, the petitioner contended that the taxpayers who are deducting tax at source are discharging an administrative function of the tax department and that they are working as an "honorary agent" of the department. There are already numerous penalties prescribed for a default and hence the levy of fee under section 234E is "exponentially harsh and burdensome" and also "deceitful, atrocious and obnoxious".
A 'fee' is known in the commercial and legal world as a recompense of some service or some special service performed, and it cannot be collected for any dis-service or default. The Legislature has not stated what constitutes the nature of service for filing returns late.
The provisions of Sec 234E of the Act were extremely onerous in as much as the tax authorities were not vested with any power to condemn the delay in filing the TDS statements and there were no provisions for appeal against the levy of this fee.

Bombay High Court's Ruling

The tax department cannot accurately process the return on whose behalf the tax has been deducted (the deductee) until information of such deductions is furnished by the deductor within the prescribed duration. The timely processing of returns is the bedrock of an efficient tax administration system.
If the income tax returns, especially that bear refund claims, are not processed in a timely manner, then
i.   a delay occurs in the granting of credit of TDS to the deductee and it consequently leads to delay in issuing refunds to the deductee, or raising of infructuous demands against the deductee;
ii.   the confidence of taxpayers in general on the tax administration is thus, eroded;
iii.   the delayed payment of refunds affects the government financially as the government has to pay interest for the delay in granting the refunds; and
iv.   the delay in receipt of refunds results into a cash flow crunch, especially for business entities.
As stated earlier, due to late submission of TDS statements, the tax department is burdened with extra work which is not required when TDS statements are furnished within the prescribed time. This fee therefore, is payment for the additional burden forced upon the tax department.
In other words, the late filing of the TDS return/statements is regularised upon payment of the fee as set out in section 234E which is nothing but a privilege and a special service to the deductor.
Relying on various judicial precedents, the High Court has observed that Section 234E of the Act does not violate any provision of the Constitution and is therefore intra vires, Constitution of India.