A historical TDS default can trigger direct recovery action against your bank account under Section 416(5) of the Income-tax Act, 2025.
This is a serious development for companies, directors, CFOs and tax professionals.
The Income Tax Department can issue a written notice directly to a bank holding money on behalf of an assessee, requiring it to remit money towards outstanding tax arrears.
WHY SHOULD COMPANIES BE CONCERNED?
1️ BANK ACCOUNTS EXPOSED TO RECOVERY PROCEEDINGS
The Department can invoke the garnishee mechanism and direct the bank to remit amounts towards outstanding tax arrears. This can disrupt salaries, vendor payments and working capital.
2️ HISTORICAL DEFAULTS CAN CREATE CONTINUING COMPLIANCE PROBLEMS
Unresolved TDS defaults may prevent proper reconciliation and correction of earlier statements, increasing the risk of further demands.
3️ TDS CORRECTION DEADLINES HAVE BECOME CRITICAL
Section 397(3)(f) of the Income-tax Act, 2025 prescribes a two-year correction window.
The Income Tax Department has specifically advised that correction statements for:
FY 2018–19: Quarter 4
FY 2019–20 to FY 2022–23: All quarters
FY 2023–24: Quarters 1 to 3
were to be filed by 31 March 2026.
These specified periods are now time-barred for ordinary correction statement filing.
4️ DOCUMENTARY EVIDENCE BECOMES CRUCIAL
For historical demands, companies should preserve:
· TDS challan and payment proofs.
· Vendor confirmations and declarations.
· PAN and transaction records.
· Evidence that the recipient/payee has paid the applicable tax, wherever relevant.
5️ INTEREST CAN SUBSTANTIALLY INCREASE THE LIABILITY
Under Section 411(3), interest at 1% per month or part thereof may apply to unpaid demand amounts.
Section 411(7) provides a mechanism to seek reduction or waiver of interest, subject to prescribed conditions, including genuine hardship and circumstances beyond the assessee's control.
WHAT SHOULD COMPANIES DO IMMEDIATELY?
✅ Download year-wise TDS defaults from TRACES.
✅ Reconcile Form 26AS, challans and TDS returns.
✅ Identify short deduction, short payment and interest defaults.
✅ Obtain documentary evidence for disputed historical demands.
✅ Pay admitted liabilities and examine eligibility for interest waiver.
✅ If a bank attachment notice is received, immediately obtain the notice and verify the demand with the jurisdictional officer.
✅ Where an appeal has been filed, seek appropriate protection under Section 411(12), which permits the Assessing Officer, at their discretion, to treat the assessee as not being in default in respect of the disputed amount.
CORPORATE GOVERNANCE TAKEAWAY
TDS compliance is no longer merely a quarterly filing obligation.
It is a matter of financial discipline, internal controls, treasury management and board-level oversight.
An old TDS default can become a present-day cash-flow crisis. Prevention, reconciliation and documentary evidence are essential.
