Liability to deduct tax at source by individual and HUF: Scope enlarged by Finance Act 2020

Liability to deduct tax at source by individual and HUF: Scope enlarged by Finance Act, 2020

Liability to deduct tax at source under section 194A, 194C, 194H, 194I and 194J was first introduced by the Finance Act, 2002 by inserting various proviso to the respective sections.

Proviso to section 194A(1), Proviso to Section 194C(1), Second Proviso to 194H(1), Second Proviso to Section 194I(1), Second Proviso to 194J(1) were inserted by Finance Act, 2002 w.e.f. 01-06-2002

'Provided that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under section 44AB (a)/(b)during the financial year immediately preceding the financial year in which such sum is credited or paid, shall be liable to deduct income-tax under this section.'

Section 44AB as it stood at the time of amendment by Finance Act, 2002

'Every person,-

(a) carrying on business shall, if his total sales, turnover or gross receipts, as the case may be, in business exceed or exceeds forty lakh rupees in any previous year; or

(b) carrying on profession shall, if his gross receipts in profession exceed ten lakh rupees in any previous year; or

(c) carrying on the business shall, if the profits and gains from the business are deemed to be the profits and gains of such person under section 44AD or section 44AE or section 44AF, as the case may be, and he has claimed his income to be lower than the profits or gains so deemed to be the profits and gains of his business, as the case may be, in any previous year,

get his accounts of such previous year audited by an accountant before the specified date and furnish by that date the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed.'

CBDT vide Circular No. 8/2002 dated 27-08-2002 has explained the scope of this amendment in para 67 of Explanatory notes on provisions relating to Direct Taxes as under:

'67. Individuals and Hindu Undivided Families to deduct tax in cases where total turnover or gross receipts exceed the specified limit under section 44AB

67.1 Individuals and Hindu Undivided Families are not required to deduct tax at source under the existing provisions of sections 194A, 194C, 194H, 194 I and 194J.

67.2 Individuals and Hindu Undivided Families whose sales, turnover or gross receipts of the business or profession exceed rupees forty lakhs or rupees ten lakhs, as the case may be, are required to maintain books of account and other documents and get their accounts audited.

67.3 The Act has amended the provisions of the above sections to provide that individuals or Hindu Undivided Families, whose total sales, turnover or gross receipts from the business or profession carried on by them exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which the income is to be credited or paid, shall be liable to deduct income tax under the relevant provisions of the aforementioned sections.

67.4 These amendments will take effect from 1st June, 2002.'

On combined reading of the above referred section 44AB and the CBDT circular, individual or Hindu Undivided Family declaring lower income under section 44AD, 44AE and 44AF and required to get their accounts audited as per the requirement of clause(c) of section 44AB in preceding financial year are not liable to deduct tax at source under section 194A, 194C, 194H, 194I and 194J of the Act.

Finance Act, 2020 amended all the above sections w.e.f. 01-04-2020, and after amendment, above proviso reads as under:

Provided that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under section 44AB (a)/(b) one crore rupees in case of business or fifty lakh rupees in case of profession[Substituted by FA, 2020 w.e.f. 01.04.2020] during the financial year immediately preceding the financial year in which such sum is credited or paid, shall be liable to deduct income-tax under this section.

Impact of Amendment

The effect of above amendment is that individual or Hindu undivided family are required to deduct tax at source under section 194A, 194C, 194H, 194I and 194J if total sales, gross receipts or turnover exceed

(A) one crore rupees in case of business or

(B) fifty lakh rupees in case of profession

during the financial year immediately preceding the financial year in such sum is credited or paid.

As a result, the individual or HUF carrying on business and whose total sales, gross receipts or turnover exceeds Rs. 1 crore but does not exceed Rs. 2 crore in preceding financial year and opted for section 44AD of the Act are now liable to deduct tax at source under section 194A, 194C, 194H, 194I and 194J w.e.f. 01-04-2020.

Similarly, the individual or HUF engaged in plying, hiring and leasing of goods carriages and whose total sales, gross receipts or turnover exceeds Rs. 1 crore in preceding financial year and opted for section 44AE of the Act are now liable to deduct tax at source under section 194A, 194C, 194H, 194I and 194J w.e.f. 01-04-2020.

Controversy with regard to the timing of tax deduction

Now, the controversy that may arise with regard to the timing of tax deduction because liability to deduct tax at source under section 194A, 194C, 194 H, 194I and 194 J arise at the time of credit of an amount to the account of payee or at the time of payment thereof whichever is earlier. Unfortunately, the person opting for 44AD is not required to maintain books of accounts and therefore the question of credit of an amount to the account of payee does not arise. Therefore, in this situation two views may emerge:

View 1

No liability to deduct tax at source for the individual or HUF opting under section 44AD of the Act, reason being the machinery provisions of section 194A, 194C, 194 H, 194I and 194 J cannot be fully made applicable in the absence of books of account

View 2

The individual or HUF opting under section 44AD of the Act are liable to deduct tax at source under the provisions of section 194A, 194C, 194 H, 194I and 194 J at the time payment only.