Section 206AB and 206CCA - Special Provision for Deduction/Collection of TDS/TCS for non-filers of ITR

Special provision for deduction of tax at source for non-filers of income-tax return

206AB. (1) Notwithstanding anything contained in any other provisions of this Act, where tax is required to be deducted at source under the provisions of Chapter XVIIB, other than section 192, 192A, 194B, 194BB, 194LBC or 194N on any sum or income or amount paid, or payable or credited, by a person (hereafter referred to as deductee) to a specified person, the tax shall be deducted at the higher of the following rates, namely:

(i) at twice the rate specified in the relevant provision of the Act; or

(ii) at twice the rate or rates in force; or

(iii) at the rate of five per cent.

(2) If the provisions of section 206AA is applicable to a specified person, in addition to the provision of this section, the tax shall be deducted at higher of the two rates provided in this section and in section 206AA.

(3) For the purposes of this section "specified person" means a person who has not filed the returns of income for both of the two assessment years relevant to the two previous years immediately prior to the previous year in which tax is required to be deducted, for which the time limit of filing return of income under sub-section (1) of section 139 has expired; and the aggregate of tax deducted at source and tax collected at source in his case is rupees fifty thousand or more in each of these two previous years:

Provided that the specified person shall not include a non-resident who does not have a permanent establishment in India.

Explanation.- For the purposes of this sub-section, the expression "permanent establishment" includes a fixed place of business through which the business of the enterprise is wholly or partly carried on.

Special provision for collection of tax at source for non-filers of income-tax return

206CCA. (1) Notwithstanding anything contained in any other provisions of this Act, where tax is required to be collected at source under the provisions of Chapter XVII-BB, on any sum or amount received by a person (hereafter referred to as collectee) from a specified person, the tax shall be collected at the higher of the following two rates, namely:-

(i) at twice the rate specified in the relevant provision of the Act; or

(ii) at the rate of five per cent.

(2) If the provisions of section 206CC is applicable to a specified person, in addition to the provisions of this section, the tax shall be collected at higher of the two rates provided in this section and in section 206CC.

(3) For the purposes of this section "specified person" means a person who has not filed the returns of income for both of the two assessment years relevant to the two previous years immediately prior to the previous year in which tax is required to be collected, for which the time limit of filing return of income under sub-section (1) of section 139 has expired; and the aggregate of tax deducted at source and tax collected at source in his case is rupees fifty thousand or more in each of these two previous years:

Provided that the specified person shall not include a non-resident who does not have a permanent establishment in India.

Explanation.- For the purposes of this sub-section, the expression "permanent establishment" includes a fixed place of business through which the business of the enterprise is wholly or partly carried on.

For the applicability of the section 206AB, the following all the conditions must be satisfied:

1. A person is required to deduct tax under any of the provision of chapter XVIIB
2. Transaction is with specified person. Specified Person means a person who has not filed his return of income of immediately two preceding previous years, for which due date u/s 139(1) has expired.
3. Aggregate of tax deducted at source AND Tax Collected at Source in his case is rupees

fifty thousand or more in EACH of these two previous years.

Non- Applicability of the Section 206AB

1. If specified person is non-resident who does not have permanent establishment in India.
2. The section has overriding effect on all provisions of Chapter XVIIB of the Income Tax Act, 1961 except the below mentioned sections

Applicable Tax Rate

The tax shall be deducted at the higher of the following rates, namely :--

1. at twice the rate specified in the relevant provision of the Act; or
2. at twice the rate or rates in force; or
3. at the rate of five percent

In case, if the provisions of section 206AA is applicable to a specified person, in addition to the provision of this section, the tax shall be deducted at higher of the two rates provided in this section and in section 206AA.

Table Representing Applicability of Section 206AB

Important Points

From the perusal of above section, the following points are to be noted:

• This punitive rate on the payee will be in addition to the interest, penalty, prosecution and other consequences of non-filing of ROI.
• Credit will be available to the payees for the higher taxes paid while filing his return of income Interpretation of the threshold condition:
• To compute threshold of INR 50,000 or more, both TDS and TCS of respective FY needs to be aggregated. For example: I Co is making FTS payment to Mr. A of Rs. 1 Lac on which TDS is required to be deducted u/s. 194J @10%. He had not filed ITR for last 2 PY and due date u/s. 139(1) has also expired. For each of the last 2 PY, tax deducted of Mr. A was Rs. 20,000 and Rs. 35,000 respectively and TCS collected was Rs. 30,000 and Rs. 40,000 respectively.
• Aggregate of TDS and TCS in year 1 – 20,000 + 30,000 = 50,000
• Aggregate of TDS and TCS for year 2 - 35,000 + 40,000 = 75,000
• The condition of having TDS & TCS of Rs. 50,000 or more in each of the 2 FY is satisfied in the given case.

Meaning of specified person

Specified person means a person who has not filed the returns of income for both of the two assessment years relevant to the two previous years immediately prior to the previous year in which tax is required to be deducted, for which the time limit of filing return of income under subsection (1) of section 139 has expired; and the aggregate of tax deducted at source and tax collected at source in his case is rupees fifty thousand or more in each of these two previous years.

Provisions of this section shall not apply to non-resident who does not have a permanent establishment in India. The expression permanent establishment includes a fixed place of business through which the business of the enterprise is wholly or partly carried on.

Which are the two previous years immediately prior to previous year 2021-22 for which the Return of Income filing status is required to be examined in case of the deductee?

The definition of the term “specified person” includes a person who has not filed the returns of income for both of the two assessment years relevant to the two previous years immediately prior to the previous year in which tax is required to be deducted, for which the time limit of filing return of income under sub-section (1) of section 139 has expired. If a person wants to deduct tax on 25.08.2021,then the returns to be considered for two previous years will be as under:

If tax is required to be deducted for transactions undertaken in the previous year 2021-22, which of the two previous years should the deductor consider for examining the return filing status of the deductee. The definition requires that the status should be examined for years immediately prior to the previous year in which tax is required to be deducted for which the time limit of filing return of income under section 139(1) has expired

Let's take the following previous years:

From the above table, it can be seen that though the two previous years immediately prior to the previous year 2021-22 are 2020-21 and 2019-20, the time limit for filing ROI has not expired for previous year 2020-21 and hence, previous year 2020-21 cannot be considered.

Consequently, the deductor will have to consider return filing status for previous years 2019-20 and 2018-19 to examine whether the deductee qualifies as “specified person” or not, This is also clarified in para 3 of Circular No. 11 dated 21 June 2021 issued by the CBDT.

For specified persons covered in the list as on the start of the financial year 2021-22 in the functionality of the income-tax department, the deductor will have to once again verify the Return filing status for previous year 2020-21 as mentioned in para 3 of the Circular to check whether his name has been removed from the list.

The method of examining the Return filing status for previous year 2020-21 only in the case of specified persons (as mentioned in the Circular) appearing in the list of the income-tax portal gives a major relief to the deductors and reduces their burden of checking the income tax portal for non-specified persons. Though technically such non-specified persons could fall in the definition of the term “specified persons”. This can be understood with the help of the following example:

The Return of Income filing status of Mr. B is as under:

Mr. B's name would not appear in the list as on 1 April 2021. If any amount is payable by XYZ Ltd. to Mr. B on 15th October 2021, though Mr. B falls in the definition of the term “specified persons”, Mr. B's name will not be added in the list of the defaulters. In para 4 of the Circular, it is assumed that Mr. B would remain outside the list of specified persons during that financial year. The rationale adopted for such an approach as discussed in para 3 of the Circular is that "this is a taxpayer friendly measure to reduce the burden on tax deductor and collector of checking PANs of non-specified persons more than once during the financial year”

Now a question arises that section 206AB(3) uses the words ‘specified person" means a person who has not filed the returns of income for both of the two assessment years relevant to the two previous years immediately prior to the previous year in which tax is required to be deducted, for which the time limit of filing return of income under sub-section (1) of section 139 has expired'. Whether these words require that only Return of Income filed under section 139(1) shall be considered and not Return of Income filed under section 139(4)? The answer to that is No. This is for the reason that the section nowhere states that the Return of Income for the previous years is to be filed under 139(1) of the Act. In this context, it is to be noted that the phrase ‘for which the time limit of filing return of income under sub-section (1) of section 139 has expired' is used to determine the two preceding previous years which should be considered to examine the Return filing status.

Implications of Sec 206AB when certificate u/s 197 has been obtained

The section starts with a non-obstante clause i.e. ‘Notwithstanding anything contained in any other provisions of this Act' which means that it will override all the other provisions of the Act.

The question that arises is whether it will also override the provisions of section 197 which enables the taxpayer to obtain a Nil/ lower withholding certificate.

Rule 28AA deals with certificate for deduction at lower rates or no deduction of tax from income other than dividends. One of the conditions to be tested by the AO for issuing the certificate is tax payable by the applicant on the assessed or returned or estimated income, as the case may be, for last four previous years. Further, para 2(xiii) and (xiv) of Form 13 requires the applicant to give the following details:

“(xiii) Where return of income for any of the four previous year preceding to the previous year referred to in (vii) has not been filed, please upload a computation of estimated total income of the previous year for which return of income has not been filed.

(xiv) Where return of income for any of the four previous year has been filed in paper form, please upload the copy of such returns”

It is pertinent to note that the section does not require that certificate should not be issued to applicant who has not furnished ROI for the past years. Hence, a lower/ Nil withholding certificate could still be issued in the case where no ROI is filed for the immediately two preceding previous years.

Hence, the implications of section 206AB will have to be kept in mind while applying the rate of tax given in the certificate issued under section 197. If the provisions of section 206AB are not complied with by the deductor, it can be argued that tax officer has authorised him to deduct tax at a particular rate and the same has been complied with by the deductor.

The provisions of Section 206AB overrides all other provisions of the Income-tax Act. It will apply even if the assessee has lower or nil TDS certificate or he has filed a declaration under Section 197A for non-deduction of tax or he is otherwise not liable to file the return of income. However, this provision will be attracted only if the tax is otherwise deductible under Chapter XVII-B.

Higher Rate of TCS as per Section 206CCA

As per sub-section (1) of the section 206CCA notwithstanding anything contained in any other provisions of this Act, where tax is required to be collected at source under the provisions of Chapter XVII-BB, on any sum or amount received by a person (hereafter referred to as collectee) from a specified person, the tax shall be collected at the higher of the following two rates, namely :--

(i) at twice the rate specified in the relevant provision of the Act; or

(ii) at the rate of five per cent.

Section 206CC provides for higher rate of TCS in case of non-furnishing of PAN. Sub-section (2) of the section 206CCA provides that if the provisions of section 206CC is applicable to a specified person, in addition to the provisions of this section, the tax shall be collected at higher of the two rates provided in this section and in section 206CC.

Sub-section (3) of section 206CCA provides that for the purposes of this section specified person means a person who has not filed the returns of income for both of the two assessment years relevant to the two previous years immediately prior to the previous year in which tax is required to be collected, for which the time limit of filing return of income under sub-section (1) of section 139 has expired; and the aggregate of tax deducted at source and tax collected at source in his case is rupees fifty thousand or more in each of these two previous years.

However, the specified person shall not include a non-resident who does not have a permanent establishment in India.

Now, let us try to understand the above with the help of an example.Let us assume M/S ABC Ltd, pays a monthly rent of INR 2 LaCS to Mr. B. Under normal circumstances TDS @ 10% would be deductible u/s 194-I. However, let us understand how the same may work out in different situations in the present year.

The tax is to be deducted in FY 2021-22 (Previous Year). Let us assume that the time limit for filing IT Return u/s 139(1) for Mr. B is 31st July 2021 only and there are no extensions. In such a case, let us see how Mr. B may become a specified assessee in various cases.

Steps to identify Specified Assessee as provided by Circular No. 11/2021 dated 21/06/2021

Section 206AB and 206CCA requiring a higher rate of TDS & TCS are applicable from 1st July 2021 requiring deduction of TDS (other than salary, horse racing, etc) or TCS at twice the normal rates or 5% whichever is higher, in case, deductee or collectee are specified persons i.e. not filed ITRs for 2 years, total of TDS and TCS is Rs 50,000 or more.

Considering the fact that it is practically impossible for the deduction or collector to identify the specified persons, the new functionality has been issued by CBDT ‘Compliance check for 206AB and 206CCA'.

As per the functionality, Single or multiple search of PAN can be made to identify the specified persons and bulk data can in fact be downloaded in pdf format.

A list of specified persons would be prepared at the start of the FY and no new specified person would be added during the FY. If a specified person fulfils the conditions specified above, he would be removed from the list during the FY.

So as a rule, new specified persons list on the portal would be drawn at the start of the FY and no new person would be added during the year even if he becomes a specified person. So we just have to check at the start of the FY for specified persons. Only while adding a new vendor during the year, we might have to look if he is a specified person. Also, if the status of specified person gets converted into a non-specified person, we might have to update in our records.