How to Deal with demand notice for late TDS returns

Businesses especially small and medium scale has been badly hit by
demand notices from Income Tax Department for payment of fees for late filing
of TDS returns.
Actually with effect from July 1, 2012, the IT Department has made
it mandatory to pay late fee of Rs. 200 per day since the due date, in case of
late filing of TDS returns by imposition of new ruling u/s 234E.  This new
provision, says that, “if TDS return is filed late, then U/s 234E late fees of
Rs. 200/- per day will have to be deposited before filing TDS / TCS return,
however it is specified that late fees should not exceed TDS/TCS
deductible/collectible for that quarter. In addition to this, if TDS and late
fee and interest due thereon as well as TDS return is not deposited within one
year from the due date then penalty U/s 271H ranging from 10 thousand to 1 lakh
may be imposed.”
It further states that, “as per the provisions of the law, if the
Deductor is charged penalty u/s 234E, this penalty cannot be waived off and has
to be paid to the IT Department using challan no. 281.”

In view of above, the IT department has issued demand notices to
thousands of tax payers across the country for an estimated amount of Rs. 500 –
700 crore.
In this article, we would discuss the provisions in detail, and
also try to find out if there a solution to tackle this kind of demand notice.
Income Tax Provision does not empowers IT department to raise such
demand The provision clearly states that if TDS return is filed late, then
under section 234E late fees of Rs. 200/- per day will have to be deposited
before filing TDS / TCS return. Thus, once TDS statement has been accepted
without late fee, and then such late fee cannot be recovered later on.
Further, it is pertinent to note that section 200(3) of the Income
Tax act, 1961 states that TDS statement shall be filed after paying the tax
deducted and rule 31A. Also, section 204 of the act has made mention of Section
190 to Section 203AA and Section 285, however, does not cover Section 234E.
Therefore if any late fee is due and not deposited along with the
TDS statement, it cannot be recovered later by the IT department.
Hon’ble Kerala High Court Stayed the recovery
of such fees
The Judgement of the Hon’ble High Court of Kerala has come as a
big relief to the tax deductors.  This provision had been challenged in the
Kerala High Court on the grounds that there is no provision in the Income Tax
Act, 1961, which empowers the IT department to recover the penalty for late
filing of TDS returns.
The levy in nature of “fee” has been challenged as illegal,
arbitrary, unreasonable, invalid and unconstitutional in a writ petition filed
by a lower primary school in Kerala.
The Kerala High Court has acknowledged and admitted the writ
petition and has granted 2 months stay order to all the proceedings initiated
against the petitioner under Section 234E of the Income Tax Act. Also, the
standing counsel for the IT Department has taken notice for all the respondents
in the writ petition.
Way Forward
In case if you have received a demand notice for late filing of
TDS returns, you may look to peruse any of following measures.
Rectification under section 154 
Aggrieved taxpayers should look to file request for rectification
under section 154 of the Income Tax Act, 1961.  On receiving the
application the Assessing Officer has to pass an amendment order within 6
months from the end of the month in which the said application is received or
he may reject the application within such time. If he rejects your above
mentioned arguments with reasons not acceptable to you then you can go for an appeal.
Appeal with Commissioner of Income Tax
The concerned assessees receiving such notices must approach the
IT Commissioner (CIT), Appeals for getting their penalty waived off. A taxpayer
from Mumbai, being one such affected person, who has received a demand notice
from the department for paying Rs 56,000 as late fee for defaulting on TDS, at
the rate of Rs 200 per day since the due date. However, the affected assessee
said such penalty can’t be recovered under any of the existing law and hence he
has decided to go for appeal.
To Conclude 
An assessee cannot be treated in default also U/s 201(1) or 206C
(6A) due to non-payment of late fee. And even the TDS return (statement) is
also not treated as defective, like non-payment of tax and interest treats an
income tax return as defective U/s 139(9) of the act.
If a person has not paid late fee then, even though it shall not
be charge on all assets because Sec. 201(2) & 206C (8) does not cover late
fee. Sec 234E also doesn’t say that in case of default in depositing late fee,
the defaulting persons will be deemed an assessee in default.
In view of the above late fee cannot be recovered later on, by way
of any notice , neither notice of demand U/s 156 can be issued for this. If any
notice is issued by way of processing TDS statement U/s 200A, then
rectification of mistake U/s 154 of the act or filing an appeal before
Commissioner of Income Tax (Appeals) is an option.
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