Section 206AB of Income Tax Act – The Story So Far

The Revenue’s love for TDS provisions is ‘boundless’ and ‘infinite’. The evidence of this is their tinkering of TDS provisions in every Finance Bill. They cannot ‘live’ without amending the TDS provisions in every Finance Bill.

Finance Act, 2021 had inserted a new provision with an objective of to ensure filing of return of income by those persons, who have suffered a reasonable amount of TDS/TCS[i]. Section 206AB provides for TDS at double rate[ii] would be applicable if person has not filed the return of income for both of the two assessment years relevant to the two previous years immediately prior to the previous year in which tax is required to be deducted, for which the time limit of filing return of income under section 139(1) has expired; and the aggregate of tax deducted at source and tax collected at source in his case is Rs. 50,000 or more in each of these two previous years. As per literal reading, the taxpayer had to check after the due date of return, whether or not, the payee has filed the return for atlease one of two years for which due date to file return has lapsed.

Given the complicated nature of compliance, the CBDT came up with a Circular[iii] clarifying that the deductor or the collector may check the PAN functionality at the beginning of the year and then he is not required to check the PAN utility during that financial year[iv]. Thus, CBDT gave a concession to the tax deductor in order to reduce the burden on tax deductor, which burden was cast on tax deductor CBDT itself.

Now the Finance Bill, 2022 proposes to further rationalise the provision and therefore the 2 year time limit is reduced to 1 year. Post amendment, the new provision reads as under:

(3) For the purposes of this section “specified person” means a person who has not “furnished the return of income for the assessment year relevant to the previous year immediately preceding the financial year in which tax is required to be deducted, for which the time limit for furnishing the return of income under sub-section (1) of section 139 has expired and the aggregate of tax deducted at source and tax collected at source in his case is rupees fifty thousand or more in the said previous year:” (amended portion in bold)

The provision is effective from 01.04.2022 and accordingly will apply to credits/payments made after 01.04.2022. As per proposed provisions, return of preceding previous year should be filed before the due date applicable for such assessment year. Or else, the provisions of section 206AB will be applicable.

There are many taxpayers (Say Mr. N) in our country, who love their country so much that they file their tax returns after due date, so that they can contribute to the exchequer by way of interest, late fee and penalties.

Fast forward to August 2022. The IT portal is working smoothly, and relevant tax return utilities are in place. Thus, the due dates are not extended. Mr. N is liable to file return by 31st July 2022 for AY 2021-22. Mr. N has not filed his tax return for AY 2022-23. X Pvt Ltd pays interest to him every month. Till July, the relevant year for which return should be filed by Mr. N is AY 2021-22 as due date for AY 2022-23 has not expired. However, post July, the filing of return for AY 2022-23 is to be seen. On literal reading, provision of section 206AB are applicable. Under old provisions, section 206AB would not be attracted, if Mr. N has filed return atleast for AY 2021-22.

The question is whether CBDT circular providing that check at the beginning of the year is sufficient, whether is applicable in changed circumstances also. If yes, no problem. Tax deductors will be grateful to CBDT to reduce their burden.

However, if the Circular does not apply or the CBDT does not clarify, what would be the obligation of the tax deductor. In my humble opinion, the provision is applicable. The question is how will the tax deductor comply. May be the tax deductor need to keep checking, after each due date of return, the PAN functionality. But one is not sure, how will PAN functionality have details of due date all the payees, which will vary depending on TP case, audit case or non-audit case. I am not able to fathom, how this can be done.

Further, CPC mayidentify non-compliance with provisions of section 206AB and straight away create demand, while processing TDS and income tax returns. This will increase litigation. A clarification in time by CBDT may therefore be helpful.

[i] Page 77 of Memorandum Explaining the Finance Bill, 2021

[ii] Or 5%, whichever is higher.

[iii] Circular 11 of 2021

[iv] Para 4 of Circular.

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