2017 (7) TMI 540 - HC - Income Tax

Court rules department's PAN correction limits impermissible, directs verification and bars higher tax demand.

The court held that the department's limitation on correcting PAN errors in TDS statements to two alphabetical and two numerical characters was ... TDS liability - permitting the petitioner to correct PAN of the deductee - system is programmed to permit correction only in case four digits/characters are to be changed and no more - Held that:- In the present case, as noted, section 200A itself refers to correction statement of tax deducted at source. The intimation sent to the petitioner of shortfall in deduction of tax also referred to the possibility of correction but limited it to certain characters. In the affidavit in reply also same stand has been taken. Some anomalous situations would arise if genuine and bona fide errors are not allowed to be corrected only on the basis that such correction travelled beyond two alphabets and two numeric characters which the system would not accept. As is contended in the present case, the deductee i.e. M/s. Star (India) Pvt. Ltd. has already discharged its full tax liability. If the full effect of the department's decision is allowed, the deductee would not get the benefit of 2% of tax deducted by the petitioner and already deposited with the Government revenue. Since the PAN does not match, the deductor i.e. the petitioner would pay additional 18% which though is styled in the name of tax deducted at source, would be additional to what M/s. Star (India) Pvt. Ltd. would have paid by way of tax to the department. Essentially, “the tax deducted at source” would have to be given credit to the payee on whose behalf such tax is being deducted. In the present case, payee having already discharged its tax liability independently, such amount would remain in Government coffers not accounted for anyone's tax liability. In the result, we hold that the decision of department in not permitting the petitioner to correct PAN of the deductee in the statement of tax deducted at source was impermissible. In the present case, department shall verify the petitioner's claim of actual deduction of tax at the prescribed rate in case of M/s. Star (India) Pvt. Ltd., verify that the PAN sought to be corrected by the petitioner belongs to the said agency and that the tax was actually deposited in case of such deductor. If these questions are answered in favour of the assessee, the department shall not insist on raising higher demand from the petitioner of failing to deduct tax at source in terms of subsection( 1) of section 206AA of the Act. Issues Involved:1. Error in mentioning the Permanent Account Number (PAN) in TDS returns.2. Demand for unpaid dues due to incorrect PAN.3. Limitation on correction of PAN errors in TDS statements.4. Department's policy on correction of PAN errors.Issue-wise Detailed Analysis:1. Error in Mentioning the Permanent Account Number (PAN) in TDS Returns:The petitioner, a company engaged in the advertisement business, made payments to various recipients and deducted tax at source (TDS) at 2%. Due to an inadvertent error, the PAN of M/s. Star (India) Pvt. Ltd. was wrongly mentioned in the TDS returns for the second and third quarters of the financial year 2010-2011. The respondent authority found that the PAN provided did not match the actual PAN of the deductee, leading to the application of Section 206AA(1) of the Income Tax Act, which mandates a higher TDS rate of 20% in the absence of a valid PAN.2. Demand for Unpaid Dues Due to Incorrect PAN:The department issued an intimation dated 24.11.2014, raising a demand of Rs. 2.04 crores for short deduction of tax at source. The petitioner realized the error and attempted to correct the PAN declaration. However, the online system of the department did not permit the correction because the system allows changes only if up to four digits/characters are to be corrected.3. Limitation on Correction of PAN Errors in TDS Statements:The department's affidavit stated that the online system permits corrections limited to two alphabetical and two numerical errors in the PAN. This limitation is built into the software to avoid undue charging of higher tax rates due to bona fide data entry errors. The affidavit also highlighted the challenges of processing millions of TDS statements and correction statements in a technology-driven ecosystem.4. Department's Policy on Correction of PAN Errors:The court examined the statutory provisions under Chapter XVII of the Act, which pertains to the collection and recovery of tax at source. Section 200A allows for the processing of TDS statements and correction statements, indicating the possibility of correcting errors. The court noted that while the department recognizes the possibility of genuine errors, it limits corrections to four characters. This limitation was deemed illogical and not supported by any conscious policy decision.Judgment:The court held that the department's decision to limit PAN corrections to two alphabets and two numeric characters was impermissible. The court directed the department to verify the petitioner's claim of actual deduction of tax at the prescribed rate in the case of M/s. Star (India) Pvt. Ltd., ensure that the corrected PAN belongs to the said agency, and confirm that the tax was actually deposited. If these conditions are met, the department should not insist on raising a higher demand from the petitioner under Section 206AA(1) of the Act.Conclusion:The petition was disposed of with the court directing the department to allow the correction of the PAN error and verify the petitioner's claims, ensuring that the higher demand for TDS is not enforced if the corrected PAN is validated and the tax was duly deposited.