Prosecution Sanction for Delayed TDS Deposit: Not Justified if Voluntarily Deposited with Interest Before Show Cause Notice

Prosecution Sanction for Delayed TDS Deposit: Not Justified if Voluntarily Deposited with Interest Before Show Cause Notice

Issue: Whether a delayed deposit of TDS, even with interest, is sufficient grounds for the Commissioner (TDS) to grant sanction for prosecution under Section 276B of the Income-tax Act, 1961, against the assessee and its directors, especially when the deposit was made voluntarily before the show cause notice for prosecution was issued.

Facts:

• For Assessment Year 2014-15, the assessee was liable to deduct TDS from payments to other companies and deposit it.
• There was a delay in the deposit of TDS, but it was subsequently deposited along with 18% interest after a delay of ten months.
• The Commissioner (TDS) passed an order granting sanction to prosecute the assessee and its directors.
• It was noted that this was not a case where TDS was entirely not deducted or deposited.
• It was undisputed that before the issuance of the show cause notice for prosecution, the TDS amount, along with interest, was voluntarily deposited by the assessee.

Decision: The court held that delayed compliance with the provision of deducting and depositing TDS, standing alone, would not suffice for the grant of prosecution sanction. Therefore, the impugned order granting prosecution sanction was to be set aside.

Key Takeaways:

• Mens Rea in Prosecution: While Section 276B itself doesn’t explicitly mention mens rea (guilty mind), courts often consider the intention and conduct of the assessee when deciding on prosecution. Voluntarily depositing the TDS along with interest before being show-caused for prosecution indicates a lack of malafide intention to evade tax.
• Distinction Between Delay and Non-Deposit: The judgment implicitly distinguishes between a mere delay in deposit (which may attract interest and penalty) and a complete failure to deduct or deposit, which is a more serious offense warranting prosecution.
• Role of Voluntary Compliance: If the assessee rectifies the default (by depositing TDS and interest) before the initiation of prosecution proceedings, it acts as a significant mitigating factor against prosecution.
• Sanctioning Authority’s Discretion: The sanctioning authority (Commissioner (TDS) in this case) must apply its mind judiciously and consider all relevant facts, including subsequent compliance, before granting prosecution sanction. Automatic sanction merely for delayed payment may not be upheld.
• Prosecution as a Last Resort: Criminal prosecution is a severe measure and should generally be reserved for cases involving deliberate defiance of tax laws or significant attempts at evasion, rather than for mere delays that have been rectified.
• CBDT Instructions: While not explicitly cited in the current judgment, the CBDT has issued instructions (e.g., Circular No. 24/2019, dated 9 September 2019) that advise against prosecution in certain cases of delayed TDS deposit, especially when the amount is small and the delay is short, and the amount has been deposited. This ruling aligns with the spirit of such instructions.