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Meaning and consequences of assessee in default as per Income tax Act, 1961

assessee in default
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Definition-Who is assessee in default as per Income Tax Act, 1961

As per Income Tax Act, 1961 the term “assessee in default” has nowhere been defined. However the term, in general is interpreted to refer to an assessee who has defaulted in discharging its obligations with respect to payment of tax, interest etc. under Income tax.

There is a widespread belief that an assessee becomes in default only when the assessee fails to honour the notice of demand issued under section 156 which is totally misplaced. There are many deeming sections which render assessee in default directly without the requirement of issuance of any notice.

The following sections of the Income tax Act, 1961 (as amended by Finance Act, 2014) which refer to the term “assessee in default” can be of help in comprehending the true meaning of the term.

Section

Relevant part of the section

2(7)

Definition of assessee- "assessee" means a person by whom  any tax or any other sum of money is payable under this Act, and includes- every person who is deemed to be an assessee in default under any provision of this Act

115Q

When company is deemed to be   in   default- If any principal officer of a domestic company and the company does not pay tax on distributed profitsin accordance with the provisions of section 115-O, then, he or it shall be deemed to be an assessee in defaultin respect of the amount of tax payable by him

115QC

When company is deemed to be   assessee in default- If any principal officer of a domestic company and the company does not pay tax on distributed income in accordance with the provisions of section 115QA, then, he or it shall be deemed to be an   assessee in default   in respect of the amount of tax payable by him or it and all the provisions of this Act for the collection and recovery ofincome-tax shall apply.

115TC

Securitisation trust to be   assessee in default- If any person responsible for making payment of the income distributed by the securitisation trust and the securitisation trust does not pay tax, as referred toin sub-section (1) of section 115TA, then, he or it shall be deemed to be an assessee in default in respect of the amount of tax payable.

115T

Unit Trust of India or Mutual Fund to be an assessee in default-   if any person responsible for making payment of the income distributed by the [specified company as referred to in clause (h) of section 2 of the Unit Trust ofIndia (Transfer of Undertaking and Repeal) Act, 2002 (58 of 2002) or a Mutual Fund and the specified company] or the Mutual Fund, as the case may be, does not pay tax, as is referred to in sub-section (1) or sub-section (2) of section 115R, then, he or it shall be deemed to be an assessee in default in respect of the amount of tax payable.

140A(3)

If any assessee fails to pay the whole or any part of such tax or interest or both in accordance with the provisions of sub-section (1), he shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default in respect of the tax or interest or both remaining unpaid.

191

Direct payment- if any person ..... does not deduct, or after so deducting fails to pay, or does not pay, the whole or any part of the tax, as required by or under this Act, and where the assessee has also failed to pay such tax directly, then, such person shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default

201

Consequences of failure to deduct or pay- where any person ............. does not deduct, or does not pay, or after so deducting fails to pay, the whole or any part of the tax, as required by or under this Act, then, such person, shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default in respect of such tax.

206C

Profits and gains from the business of trading in alcoholic liquor, forest produce, scrap, etc -If any person responsible for collecting tax in accordance with the provisions of this section does not collect the whole or any part of the tax or after collecting fails to pay the tax as required by or under this Act, he shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in defaultin respect of the tax.

218

When assessee deemed to be in default- If any assessee does not pay on the date specifiedin sub-section (1) of section 211, any instalment of the advance tax that he is required to pay by an order of the Assessing Officer under sub-section (3) or sub-section (4) of section 210 and does not, on or before the date on which any such instalment as is not paid becomes due, send to the Assessing Officer an intimation under sub-section (5) of section 210 or does not pay on the basis of his estimate of his current income the advance tax payable by him under sub-section (6) of section 210, he shall be deemed to be an assessee in default in respect of such instalment or instalments.

226

Other modes of recovery- If the person to whom a notice under this sub-section is sent fails to make paymentin pursuance thereof to the [Assessing] Officer or Tax Recovery Officer], he shall be deemed to be an assessee in default in respect of the amount specified in the notice.

Now, On the basis of the above, it can be concluded that under the following circumstances, a person is regarded/deemed to be an assessee in default;

1. Failure to pay any tax, interest or any other sum of money payable under I tax Act under a notice of demand issued under section 156 and the time allowed (generally 30 days but  could be shorter with the approval of JCIT) in the notice has expired

2. Failure to pay tax under special provisions related to on distributed profits/income  of company/UTI, MF/Securitisation trusts would render the person responsible or the payer as assessee in default. Please note it would render the assessee as in default without any notice of demand.

3. Failure to pay tax, interest payable for any assessment year (whether or not ITR filed and whether or not notice of demand issued)

4. Defaults to deduct/collect tax at source or failure to pay the tax so deducted /collected. Please note it would render the assessee as in default without any notice of demand. However the person responsible can avert the status of assessee in default by obtaining a certificate from a chartered accountants in form 26A (for TDS defaults) and in Form 27BA (for TCS defaults). Read more Click Here >>

To know more about various TDS defaults and consequences Read more Click Here >>

5. Failure to pay instalment of advance tax demanded under a notice of demand u/s 156 by the Assessing Office.

6. Failure to pay money demanded under notice by the Assessing Officer or Tax Recover Officer in respect of own or third party arrears. (Remember that the IT Act defines "assessee" as a person by whom any tax or any other sum of money is payable under this Act)

Consequences of being assessee in default as per Income Tax Act, 1961

The consequences of being assessee in default are as under:

1. Levy of Interest u/s 220
Simple interest @ 1% per month is payable on the amount not paid within the time allowed in the notice u/s 156. However, t he Principle Chief Commissioner / Chief Commissioner / Principle Commissioner/Commissioner can reduce the interest if being satisfied with all the three following conditions that:
(a) Payment of such amount has/ would cause genuine hardship to the assessee;
(b) Default was due to the circumstances beyond the control of the assessee, and
(c) The assessee has co-operated in the inquiry relating to assessment/recovery proceedings

2. Penalty u/s 221
Assessing Officer may direct payment of a penalty which cn be any amount or amounts not exceeding the tax in arrears. The AO may, if satisfied that the default was for good and sufficient reasons, not direct the penalty.

3. Recovery Proceedings u/s 222, 227, 229 and 232
Apart from penalties, recovery proceedings shall be initiated against the assessees/person responsible under section 222, 227, 229 or 232 of the Act.

4. Prosecution Proceedings
The consequences do not stop at mere imposition of penalties and steps to recover arrears but include the risk of being prosecuted under Chapter XXII of the Income tax Act, 1961 sections including 276B, 276BB, 276C depending upon the natureand gravity of the default.

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