Consequences of failure to deduct or pay or, collect or pay
[Section-398 as per the Income Tax Act, 2025 (this Act) w.e.f. 1st April, 2026.]
Section 398(1) of Income Tax Act 2025
398(1) If a person, including the principal officer of a company,––
- 398(1)(a) who is required to deduct or collect any amount under this Act; or
- 398(1)(b) referred to in section 392(2)(a), being an employer,—
- (i) does not deduct or pay; or
- (ii) does not collect or pay; or
- (iii) after deducting or collecting fails to pay,
the whole or any part of the tax, as required by or under this Act, he shall be deemed to be an assessee in default in respect of such tax in addition to any other consequences which that person may incur under this Act.
Section 398(2) of Income Tax Act 2025
398(2) Any person,—
- 398(2)(a) including the principal officer of a company, who fails to deduct; or
- 398(2)(b) responsible for collecting tax as per section 394(1) (Table: Sl. Nos. 1 to 5 and 9), who fails to collect,
the whole or any part of the tax, as required under this Chapter, shall not be deemed to be an assessee in default if the payee or buyer or licensee or lessee has —
- (i) furnished his return of income under section 263;
- (ii) taken into account the amount for computing income in that return of income; and
- (iii) paid the tax due on the income declared by him in such return of income,
and the person furnishes a certificate to this effect from an accountant in the prescribed form.
Section 398(3) of Income Tax Act 2025
398(3)(a) Without prejudice to sub-section (1), if any person, as referred to in that sub-section does not deduct or collect the whole or any part of the tax or after deducting or collecting fails to pay the tax as required under this Act, he shall be liable to pay simple interest—
- (i) at 1% for every month or part of a month on the amount of such tax from the date on which such tax was deductible or collectible to the date on which such tax is deducted or collected; and
- (ii) at 1.5% for every month or part of a month on the amount of such tax from the date on which such tax was deducted or collected to the date on which such tax is actually paid;
398(3)(b) the interest referred to in clause (a) shall be paid before furnishing the statement as per the provisions of section 397(3)(b).
398(3)(c) if the person referred to in sub-section (1) is not deemed to be an assessee in default under sub-section (2), then the interest as per clause (a)(i) is payable from the date on which that tax was deductible or collectible to the date of furnishing of return of income by the concerned payee or buyer or licensee or lessee, as the case may be;
398(3)(d) when an order is made by the Assessing Officer for the default under sub-section (1), the interest shall be paid by the person as per such order.
Section 398(4) of Income Tax Act 2025
398(4) Where the tax has not been paid after it is deducted or collected, the amount of the tax together with the amount of simple interest on it as referred to in sub-section (3)(a) shall be a charge upon all the assets of the person referred to in sub-section (1).
Section 398(5) of Income Tax Act 2025
398(5) The order shall not be made under sub-section (1) deeming a person to be an assessee in default for failure to deduct or collect the whole or any part of the tax from any person––
- 398(5)(a) after six years from the end of the tax year in which tax was deductible or collectible; or
- 398(5)(b) after two years from the end of the tax year in which the correction statement is delivered under section 393(3)(f),
whichever is later.
Section 398(6) of Income Tax Act 2025
398(6) The provisions of sections 286(1) and 286(3) shall apply to the time limit prescribed in sub-section (5).
Section 398(7) of Income Tax Act 2025
398(7) No penalty shall be charged under section 412 from the person mentioned in sub-section (1), unless the Assessing Officer is satisfied that such person, without good and sufficient reasons, has failed to deduct and pay such tax.
FAQs on Section 398 of Income Tax Act 2025
Who is deemed to be an assessee in default under Section 398(1) of the Income Tax Act, 2025?
Any person, including the principal officer of a company, who fails to deduct, pay, collect, or after deduction or collection, fails to pay the whole or any part of the tax as required under the Act is deemed to be an assessee in default.
What are the exceptions to being deemed an assessee in default under Section 398(2)?
A person will not be deemed to be an assessee in default if the payee or buyer/licensee/lessee has furnished their return under section 263, included the amount in computing income, paid tax on such income, and the deductor or collector furnishes a certificate from an accountant in the prescribed form.
What interest is payable under Section 398(3)(a) for failure to deduct or collect tax?
Simple interest is payable at 1% per month or part thereof from the date the tax was deductible/collectible to the date it is deducted/collected, and 1.5% per month or part thereof from the date of deduction/collection to the date of actual payment.
When must the interest under Section 398(3)(a) be paid?
Interest must be paid before furnishing the statement as per the provisions of section 397(3)(b).
If a person is not deemed to be an assessee in default under Section 398(2), is any interest still payable?
Yes, under Section 398(3)(c), interest under clause (a)(i) is payable from the date the tax was deductible or collectible to the date of furnishing of return of income by the payee or buyer/licensee/lessee.
When does the Assessing Officer issue an order for interest under Section 398(3)(d)?
When an order is made under Section 398(1) for default, the person must pay interest as specified in that order.
What happens if deducted or collected tax is not paid as per Section 398(4)?
The amount of tax and interest becomes a charge on all the assets of the defaulter.
Is there a time limit for making an order deeming a person as assessee in default under Section 398(5)?
Yes, the order cannot be made after six years from the end of the tax year in which the tax was deductible or collectible, or after two years from the end of the tax year in which the correction statement under section 393(3)(f) is filed, whichever is later.
What sections apply to extend or determine the limitation period under Section 398(6)?
Sections 286(1) and 286(3) apply to the time limit prescribed in Section 398(5).
Can a penalty under Section 412 be levied for failure to deduct or collect tax under Section 398(7)?
No penalty shall be imposed unless the Assessing Officer is satisfied that the failure to deduct and pay tax was without good and sufficient reasons.
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