TDS liability on deductors where payees have not paid tax - certificate requirement may determine assessee in default status on remand.

Failure to deduct tax at source attracts liability on the deductor where payees have not themselves paid the tax; the Explanation to section 191 and the first proviso to section 201 require that a deductor must obtain and produce the prescribed certificate (Form 26A under Rule 31ACB) showing the payee paid tax, otherwise the deductor may be treated as an assessee in default. No material or certificate was found on record to show payees paid tax, so the matter is remanded to the assessing officer to examine payee tax payments and decide afresh on deeming the deductor an assessee in default.

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Issues: (i) Whether the Assessing Officer/AO, TDS failed to apply the Explanation to section 191 and the proviso to section 201 by not examining whether the payees had paid tax directly, and whether the matter should be remanded to the AO for such examination.

Issue (i): Whether the AO/TDS proceeded to treat the assessee as an "assessee in default" under section 201 without ascertaining direct payment of tax by the payees as required by the Explanation to section 191 and without the requisite certificate under the first proviso to section 201.

Analysis: The Tribunal examined the Explanation to section 191 (direct payment) and the first proviso to section 201 which together impose on the deductor the duty to consider whether the payee has furnished a return and paid tax and, where applicable, whether a certificate in the prescribed form has been furnished. The record showed no finding that information existed about direct payment by the payees and no certificate in the prescribed form was furnished by the deductor. In these circumstances the Tribunal found that the jurisdictional and substantive prerequisites specified in the Explanation to section 191 and the proviso to section 201 were not fulfilled by the AO/TDS prior to holding the assessee to be in default.

Conclusion: The additional legal ground is allowed and the matter is remanded to the Assessing Officer to examine and adjudicate afresh whether the relevant payees had paid tax directly (and related compliance with the proviso to section 201), in favour of the assessee.

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