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TDS is always a controversial issue for every assessee. Considering the defaults in TDS by deductor and disclosure of the same by auditors in CARO and Tax Audit Report, a question arises about a default for which one can have some different view. Take example:  


A company (deductor) has deducted the tax from the payment say @ 2% in the month of say October 1, 2010. The tax was paid to the Government in time, quarterly return was also filed and the certificate is also issued.


During the course of statutory audit, say on April 15, 2011 the auditor has pointed out that the tax should have been deducted @ 10% instead of 2%. They advised the company to deposit the differential tax otherwise; this amount will be shown under CARO as default in statutory liability.       


A prudent auditor will disclose the default in CARO. The Tax Auditor will disclose the same in Form 3CD and proportionate disallowance of expenditure u/s 40(a)(ia). This is a general and well accepted practice.


Based on the Supreme Court Judgement in case of Hindustan Coca-Cola Beverages (P.) Ltd (293 ITR 226). As per this decision, though there is a default on the part of deductor that he has not deducted or short deducted the TDS but once the deductee has paid the tax by way of filing return then the differential tax amount cannot be recovered from the deductor. The defaulter may be liable for the penal action (like interest, etc.) related to the default. This is a well accepted decision applied for every section of TDS.


As per the example given above, the deductee has paid his advance tax installment by 15-03-2011 and the default was recognized on 15th April, 2011. Now, it is understandable that the advance tax was paid by considering the income upto march which will definitely include the income of October on which tax deducted was short. Now, my concern is regarding the disclosure of the default in CARO as default in depositing undisputed amount of statutory dues (here, TDS) with the appropriate authority.


This clause of CARO is about payment of tax (statutory dues) to the Government (appropriate authority) and default in such payment which lasted for 6 months on the last day of the financial year. But in above case, actually the differential liability is already been paid to the appropriate authority by the deductee and hence there is no more the liability on the deductor to pay the same hence no default as on the last day of the financial year by the defaulter.


So, the query here is that when the statutory due is already paid to the Government, there should not be any disclosure in the CARO about the same. The disclosure may remain in the tax audit report as it makes it mandatory to disclose the short deduction of tax while the CARO only wants the disclosure of arrears outstanding for more than 6 months.  

 - Shreya Sanghvi

Published by

Shreya Sanghvi
(Manager - Taxation)
Category Income Tax   Report

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