Section 398 Consequences of failure to deduct or pay or, collect or pay.

Income-tax Act, 2025

At a Glance

Document 1 reproduces Section 398 of the Income-tax Act, 2025 (enacted text). Document 2 reproduces Clause 398 of the Income Tax Bill, 2025 - Old Version (bill text). Both texts address consequences where a person required to deduct or collect tax fails to do so or fails to pay tax so deducted/collected. The provisions affect persons required to deduct/collect tax (including principal officers of companies), employers (per section 392(2)(a)), payees/buyers/licensees/lessees and the Revenue. Effective date or enactment date: Not stated in the document.

Background & Scope

Statutory hooks: the clause/provision is located at Clause/Section 398 within the Deduction and Collection at Source chapter of the Income Tax Bill/Act, 2025. It interacts expressly with sections 392, 393/394, 286 and 412, and with procedural provision for statements u/s 397(3)(b)/(f) in the texts. The text sets out (i) deeming a person an assessee in default where tax is not deducted/collected or paid, (ii) limited exceptions where a person will not be deemed an assessee in default, (iii) interest liabilities with rates and periods, (iv) charge over assets, (v) time-limits for making the deeming order, and (vi) penalty condition. Definitions: the texts do not provide definitions for "principal officer", "payee", "buyer", etc., within the clause; such meanings are presumed from other provisions. Not stated in the document: legislative history, explanatory memorandum, or effective date.

Statutory Provision Mode

Text & Scope

The clause prescribes consequences where a person required to deduct or collect tax under the Act (including the principal officer of a company, and where specified the employer u/s 392(2)(a)) fails to deduct/collect or, having deducted/collected, fails to pay the tax. The primary consequences are:

• Deeming as an assessee in default in respect of the tax (sub-s. (1)).
• A limited exception to the deeming rule where the payee/buyer/licensee/lessee has filed a return, included the relevant amount in income and paid tax thereon, and the person furnishes an accountant's certificate in prescribed form (sub-s. (2)).
• Liability to pay simple interest at specified rates for delays in deduction/collection and for delay in payment after deduction/collection (sub-s. (3)(a)).
• Interest payment prerequisites before furnishing the statement u/s 397(3)(b) (sub-s. (3)(b)).
• Where not deemed an assessee in default under sub-s. (2), interest for the first part (1% per month) is payable only until the date of furnishing of return by the payee/buyer/licensee/lessee (sub-s. (3)(c)).
• When AO makes an order for default, interest as per that order is payable (sub-s. (3)(d)).
• Where tax has been deducted or collected but not paid, tax plus simple interest becomes a charge on all assets of the person (sub-s. (4)).
• Limitation: no order deeming a person an assessee in default shall be made after six years from end of the tax year in which tax was deductible/collectible, or after two years from end of tax year in which correction statement is delivered under the referenced section, whichever is later (sub-s. (5)).
• Sections 286(1) and 286(3) apply to the time-limit in sub-s. (5) (sub-s. (6)).
• No penalty u/s 412 shall be levied/charged on the person unless AO is satisfied there were no good and sufficient reasons for failure to deduct/collect and pay (sub-s. (7)).

Interpretation

The clause adopts a compliance-first approach: primary liability is placed squarely on the person required to deduct/collect/pay; however, it provides a narrow safe harbour where the recipient has declared and paid tax and an accountant certifies compliance. Interest is strict and two-tiered: a lower rate for delay in deduction/collection, and a higher rate for delay after deduction/collection. The charge on assets reflects a statutory prioritisation of withheld/collected tax as a trust-like obligation. The limitation and requirement of AO satisfaction for penalty indicate a balancing of Revenue powers and taxpayer protections. Not stated in the document: legislative intent beyond the text and any guidance on what constitutes "good and sufficient reasons."

Exceptions/Provisos

Primary exception: sub-s. (2) exempts the person from being deemed an assessee in default if the payee/buyer/licensee/lessee has (i) furnished return under s.263, (ii) taken the amount into account in computing income in that return, and (iii) paid tax due thereon, and the person furnishes an accountant's certificate in prescribed form. The text requires the accountant's certificate but does not specify whether the accountant must be a chartered accountant or other class: Not stated in the document.

Illustrations

• Example 1: A company fails to deduct TDS on contractor payments. If the contractor files income tax return under s.263, includes the payment in taxable income and pays tax, and the company produces the prescribed accountant certificate, the company will not be deemed an assessee in default under sub-s. (2). (All elements referenced in the clause.)
• Example 2: A seller charged TCS but failed to collect and remit the tax. Interest at 1% per month applies from when tax was collectible to date of collection; 1.5% per month applies from collection to payment. If seller never collected and buyer did not file return/pay tax, the seller remains an assessee in default and AO can make an order within the limitation periods stated. (All elements referenced in the clause.)

Interplay

The clause expressly interacts with sections 392 (employer), 394 (table of collectors), 397 (statements), 286 (time-bar provisions), 412 (penalty), and the cross-reference to correction statement provisions (either s.397(3)(f) or s.393(3)(f) depending on text). The clause makes the accountant's prescribed form and statement filing under s.397(3)(b)/(f) material to application of interest and limitation. Not stated in the document: any rules or circulars clarifying "good and sufficient reasons" or the form's content.

Key Differences Between Document 1 (Enacted Section 398) and Document 2 (Bill - Old Version)

• Structure and wording of sub-section (1): Document 1 and Document 2 are substantively similar in deeming a person an assessee in default for failure to deduct/collect/pay. Difference: Document 2 enumerates the three failures ((i) does not deduct or pay; (ii) does not collect or pay; (iii) after deducting or collecting fails to pay) explicitly as separate sub-clauses; Document 1 uses a compressed phrasing.
  • Practical impact: no substantive change in legal effect; primarily drafting style..
• Cross-reference to correction statement time-limit: Document 1 refers to "correction statement ... u/s 397(3)(f)"; Document 2 refers to "correction statement ... u/s 393(3)(f)" (different section number).
  • Practical impact: this is a substantive drafting discrepancy - the correct cross-reference determines which procedural provision governs the correction statement and the calculation of the limitation period. If the enacted text uses s.397 while the bill used s.393, the practical consequence is that the limitation trigger aligns with whichever section actually prescribes correction statements; mismatches can create interpretive confusion and potential challenges over time-bar computation.
• Penalty language in sub-section (7): Document 1 states "No penalty shall be levied u/s 412 on the person ... unless the Assessing Officer is satisfied that such person, without good and sufficient reasons, has failed to deduct or collect and pay such tax." Document 2 states "No penalty shall be charged u/s 412 from the person ... unless the Assessing Officer is satisfied that such person, without good and sufficient reasons, has failed to deduct and pay such tax."
  • Practical impact: Document 2 omits explicit reference to "collect" in the final clause and uses "charged" instead of "levied" and reverses phrasing ("from the person"). The omission of "collect" may narrow the penalty condition in the bill's drafting (potentially excluding failure to collect), whereas the enacted text (Document 1) expressly includes failure to collect. Thus, if the enacted text includes "collect," it expands the protective threshold for the person only where there is good reason for non-deduction/collection; if the bill lacked "collect," penalty protection might not apply to collectors. Practically, the difference affects penalty exposure for persons required to collect (e.g., sellers/licensors) versus those required only to deduct.

Practical Implications

• Compliance and risk areas: Persons required to deduct/collect must ensure timely deduction/collection and prompt deposit; failure exposes them to being treated as assessee in default, interest, and possible charge on assets. The safe-harbour requires the recipient to have: filed return under s.263, included the amount, and paid tax - and the deductor/collector must obtain the prescribed accountant certificate. Absence of any of these three elements results in default liability.
• Record-keeping/evidence: Retain proof of deduction/collection, bank/payment advices showing deposit to Government, the accountant's certificate in prescribed form, documentation proving the payee's filed return and tax payment. Given the potential AO inquiry and the limitation periods, records should be preserved for at least six years (plus any periods under s.286 application). The clause itself does not prescribe retention periods beyond the limitation; retention advice is derived from the time-limits stated.
• Procedural timing: Interest must be paid before furnishing the statement per s.397(3)(b) - taxpayers must factor interest computation into compliance workflows. Where the payee files return and pays tax, interest liability for the first leg is curtailed up to the date of the payee's return (sub-s. (3)(c)).
• Limitation and litigation risk: The drafting discrepancy in the cross-reference to the correction statement provision may create disputes about the correct trigger for the two-year limb of limitation; practitioners should check the enacted cross-reference and any related procedural provisions.

Key Takeaways

• The provision makes non-deduction/non-collection/non-payment a deeming event creating assessee in default status with interest and asset-charge consequences.
• A narrow safe-harbour exists if the payee/buyer/licensee/lessee has declared and paid tax and an accountant furnishes the prescribed certificate.
• Interest is two-tiered: 1% per month for delay in deduction/collection; 1.5% per month for delay after deduction/collection until payment.
• Tax not paid after deduction/collection becomes a statutory charge on all assets of the person required to deduct/collect.
• Limitation: AO cannot make the deeming order after six years from end of the tax year or two years from end of the tax year in which the correction statement is delivered - whichever is later; sections 286(1) and (3) apply.
• Penalty under s.412 requires AO satisfaction that there were no good and sufficient reasons for failure - wording differences between bill and enacted text concerning "collect" may affect penalty exposure for collectors.
• Drafting inconsistencies (notably the cross-reference to the correction statement section and omission of "collect" in the penalty clause in the bill) may give rise to interpretive issues; check enacted text and subordinate rules for clarification.

Full Text:

Section 398 Consequences of failure to deduct or pay or, collect or pay.