Before buying property, you need to check the status of PAN-Aadhaar linkage of the property seller. This needs to be checked both at the time of paying token money and at the time of making the final payment for the property.
Chartered Accountant Mihir Tanna, associate director-direct tax, S.K. Patodia LLP, shares the experience of one of his clients who bought a property.
“In one of my client’s cases, the seller of the property was a senior citizen, and he was not aware that his PAN was inoperative. The buyer paid token money and deducted 1% TDS without checking the seller’s PAN status. Nonetheless, the Income Tax Department issued notice to the buyer for short deduction of TDS (20% for inoperative PAN less 1% deduction actually deducted) along with interest @1% per month for short deduction of TDS on token money. Although the seller made his PAN operative again by linking it with his Aadhaar and paying the fee, this happened after the token money date. So, when the buyer paid the token money and deducted TDS and filed Form 26QB, the date of transaction was recorded as the date when the token money was paid. And on this date the PAN of the seller was inoperative,” says Tanna.
Tanna further outlines the lesson property buyers must learn from this incident. He says, “Even at the time of payment of token money, the buyer should check if the PAN of the seller is active. The seller claimed to not have information about his PAN’s inoperative status, and our firm came to know about this at the time of registration of the property, hence we made him pay the applicable fee and link his PAN with Aadhaar, however by that time, the damage was already done.”
Also read: Does choosing old tax regime for TDS on salary lead to smoother ITR processing, income tax refund claims?
What will the income tax department do if you are found deducting a lower TDS than required?
Tax experts say that the income tax department would issue an intimation notice mentioning that they noticed a lower TDS amount was deducted though liable for higher deduction. To resolve this issue, you would need to pay the TDS shortfall along with a specified interest which is something that the seller of the property might not agree to reimburse. In the case cited above, the interest liability for TDS shortfall was borne by the buyer, the seller, however, agreed to pay the buyer 19% of the property price as TDS shortfall.
According to Suresh Surana, founder, RSM India, a tax and business consulting group, “Since the TDS deductor is responsible for verifying whether or not the deductee’s PAN is inoperative, he/she may receive an intimation notice under section 200A for short deduction in case the deductor fails to verify the deductee’s PAN and deducts TDS at a lower rate. It is pertinent to note that the interest liability arising on account of short deduction may need to be borne by the deductor himself. However, the difference of TDS (i.e., the TDS deducted and the higher rate of 20%) can be collected from the deductee. Further, the buyer may be subject to penal consequences under section 271C and accordingly a penalty equal to the amount of tax he failed to deduct or pay may be levied.”
What can you do if this happens to you?
Tax experts say that the buyer of a property would be required to deduct TDS at the enhanced rate of 20% in case the seller has an inoperative PAN post July 1, 2023.
Surana says, “The buyer may recover the difference of 19% from the payments to be made to the seller. Alternatively, it is pertinent to note that where there exists a reasonable cause for non-deduction/ short deduction for such TDS, the buyer may opt for filing application for condonation of delay.”
Surana says that the Central Board of Direct Taxes (CBDT) has been given wide authority under section 119(2)(b) with respect to admission of an application or claim for any relief after the expiry of the period as specified in the Act. “However, it is pertinent to note that condonation is discretionary, and the Assessing Officer (AO) may grant or reject the application based on the merits of the case and the reasons provided for the delay,” he says.
What if the buyer is unable to recover TDS shortfall from the seller?
According to Tanna, “The buyer has the legal right to recover the difference of 19% as TDS amount, however it is likely that he will not be able to recover any penal interest (if any) imposed by the income tax department as buyer was supposed to check PAN status of the seller on date of deduction.”
As per Surana, The tax provisions nowhere provides for any recovery of TDS amount from the seller under section 194-IA. “Thus, it depends on the terms of the agreement and the understanding between the Buyer and Seller specifically provides for liability of the seller for such TDS amount or recovery of such TDS from the seller,” he says.
Surana says that in such case of failure to recover the TDS amount, the buyer would be treated as a ‘assessee in default’ under section 201 . However, there is an exception wherein such buyer who has failed to deduct TDS would not be treated as ‘assessee in default’ provided the seller satisfies the following conditions:
- Seller has furnished his return of income under section 139; and
- Seller has taken into account such consideration for computing income in such return of income;
- Seller has paid the tax due on the income declared by him in such return of income, and
- The buyer furnishes a certificate to this effect from an accountant in Form 26A.
What will happen if you fail to respond to the tax department’s notice about TDS shortfall?
Surana says that in case the buyer fails to deposit the difference amount to the government, an intimation notice under section 200A shall be issued to the buyer and interest under section 201(1A) shall be charged. “Further, the buyer may be subject to penal consequences under section 271C and accordingly a penalty equal to the amount of tax he failed to deduct or pay may be levied,” adds Surana.
Property buyers facing PAN related issue could end up paying 20% TDS instead of the usual 1%
Before buying property, it is important to check the PAN-Aadhaar linkage status of the seller both when paying token money and when making the final payment for the property.
Chartered Accountant Mihir Tanna, associate director-direct tax, S.K. Patodia LLP, shared a client’s experience where the seller’s PAN was inoperative, resulting in a notice from the Income Tax Department for short deduction of TDS. This led to interest charges for the buyer, even though the seller rectified the PAN issue after the token money was paid.
Tanna emphasizes the importance of verifying the seller’s active PAN status before making any payments to avoid such situations.
Also read: Does choosing old tax regime for TDS on salary lead to smoother ITR processing, income tax refund claims?
What will the income tax department do if you are found deducting a lower TDS than required?
Tax experts highlight that the income tax department may issue an intimation notice for the shortfall in TDS deduction, requiring the buyer to pay the remaining amount along with interest. In some cases, the seller may agree to reimburse the buyer for the TDS shortfall.
According to Suresh Surana, founder of RSM India, the buyer may be penalized for failing to verify the seller’s PAN status and deducting lower TDS. The buyer may face penalties under section 271C in such scenarios.
What can you do if this happens to you?
Tax experts suggest that in case of an inoperative PAN for the seller post July 1, 2023, the buyer must deduct TDS at a higher rate of 20%. The buyer can recover the difference from future payments to the seller or apply for condonation of delay for genuine reasons.
Surana explains the process and discretion of the Central Board of Direct Taxes (CBDT) in such cases.
What if the buyer is unable to recover TDS shortfall from the seller?
According to Tanna, the buyer has the right to recover the TDS shortfall from the seller, but recovering any punitive interest imposed by the income tax department may be challenging.
Surana adds that the contract terms and mutual understanding between the buyer and seller will determine the liability for the TDS amount.
In cases of failure to recover the TDS amount, the buyer may face consequences under section 201 but exceptions exist if the seller meets certain conditions and the buyer provides a certificate in Form 26A.
What will happen if you fail to respond to the tax department’s notice about TDS shortfall?
Surana warns that failure to deposit the difference amount to the government may result in interest charges and penalties under section 271C for the buyer.
