If you are stuck in such a situation, here is what to do.

Mr. Alok Verma, a resident of Jayanagar, recently finalized the purchase of his dream apartment in the ‘Harmony Heights’ residential complex. He bought the property from Mr. Ramesh Kapoor, who presented himself as a resident Indian. Following all standard procedures, Mr. Verma deducted the applicable Tax Deducted at Source (TDS) for a transaction with a resident and duly filed it. However, his relief was short-lived. A few months later, he received a notice from the Income Tax Department. The notice stated that the seller, Mr. Kapoor, was a Non-Resident Indian (NRI), and therefore, a higher rate of TDS was applicable. Mr. Verma was now held liable for the shortfall in TDS, along with significant interest and penalties, for a mistake that was not his own.

Advice in such cases

Facing a notice from the tax authorities can be daunting, especially when you believe you have followed all the rules. Here is some advice on how to proceed:

• Do not panic. Read the notice from the Income Tax Department carefully to understand the exact demand, including the shortfall amount, interest, and penalty calculations.
• Gather all transaction-related documents immediately. This includes the Agreement to Sell, Sale Deed, your bank statements showing the payment, the seller’s PAN card copy, and any communication you had with the seller.
• Avoid direct, unadvised communication with the tax department or the seller. Any communication should be strategic and preferably vetted by a legal professional.
• Consult with Lawyer: The very basic and important step to start is talk to Lawyer / advocate. You should not hesitate in paying his consultation fee i.e. might be in range of Rs. 10,000 to 50,000 depends case to case. He is helping you in this situation of come out. He is expert in the domain and can help you explain the procedure which you might have never explored. A good lawyer can get the issues resolved much faster than you think

Applicable Sections of Law

This situation is primarily governed by the Income Tax Act, 1961. The key legal provisions are:

• Section 195 of the Income Tax Act, 1961: This section mandates that any person responsible for paying any sum to a non-resident, which is chargeable to tax, must deduct income tax at the rates in force. For property sales, this rate is significantly higher than the rate for resident sellers.
• Section 201 of the Income Tax Act, 1961: If a person fails to deduct the whole or any part of the tax as required, they are deemed to be an “assessee in default.” This makes the buyer liable for the tax, interest, and penalties.
• Section 271C of the Income Tax Act, 1961: This section provides for the levy of a penalty equal to the amount of tax that the person failed to deduct or pay.
• Section 318 of the Bharatiya Nyaya Sanhita, 2023 (BNS): If it can be proven that the seller intentionally deceived the buyer about their residential status to cause wrongful gain for themselves and wrongful loss to the buyer, a criminal complaint for cheating could potentially be filed.

If you are the complainant

As the buyer, you are the complainant in a potential action against the seller and the party responding to the tax department. Your steps should be:

• Your first priority is to respond to the tax notice. Your lawyer will help you draft a reply, explaining the situation and stating that the seller’s NRI status was not disclosed.
• You may be advised to pay the differential TDS amount along with interest to stop further accumulation of interest and to show good faith to the department. You can then legally pursue the seller for reimbursement.
• Send a legal notice to the seller, Mr. Kapoor, demanding reimbursement for the differential TDS, interest, penalty, and legal costs incurred due to his misrepresentation.
• If the seller does not comply, you can file a civil suit for recovery of the amount and damages for the financial loss and harassment caused.
• Consult with Lawyer: The very basic and important step to start is talk to Lawyer / advocate. You should not hesitate in paying his consultation fee i.e. might be in range of Rs. 10,000 to 50,000 depends case to case. He is helping you in this situation of come out. He is expert in the domain and can help you explain the procedure which you might have never explored. A good lawyer can get the issues resolved much faster than you think

If you are the victim

You are indeed a victim of the seller’s non-disclosure. Your actions should focus on mitigating your losses and holding the seller accountable.

• Preserve all evidence of communication with the seller where their residential status might have been discussed or implied. Any documents like utility bills or addresses provided by them can be crucial.
• File a formal complaint with the appropriate authorities. This could be a civil court for recovery of money or, in some cases, a criminal complaint if fraudulent intent is clear.
• The law places the onus of deducting the correct TDS on the buyer. While you can argue that the information was withheld, your primary recourse is against the seller, not a waiver from the tax department.
• Consult with Lawyer: The very basic and important step to start is talk to Lawyer / advocate. You should not hesitate in paying his consultation fee i.e. might be in range of Rs. 10,000 to 50,000 depends case to case. He is helping you in this situation of come out. He is expert in the domain and can help you explain the procedure which you might have never explored. A good lawyer can get the issues resolved much faster than you think

How the police behave in such cases

This issue is primarily a tax and civil dispute, not a criminal one in the first instance. The police will not typically get involved in matters related to TDS defaults. Your first point of contact should be the Income Tax Department and a civil court. However, if you file a private criminal complaint for cheating under the Bharatiya Nyaya Sanhita, 2023, and the Magistrate finds sufficient grounds, the court may direct the police to register an FIR and investigate the matter. But this is a secondary and more aggressive legal route that should be taken only after careful legal consultation.

FAQs people normally have

What evidence is required?

To build a strong case, both for the tax authorities and against the seller, you will need the following:

• The registered Sale Deed and the initial Agreement to Sell.
• Proof of all payments made to the seller (bank transfer records).
• The notice received from the Income Tax Department.
• Copies of the TDS returns you filed (Form 26QB).
• Any identity or address proof provided by the seller that indicated they were a resident.
• Records of communication (emails, text messages, letters) with the seller or their agent.

How long will the investigation take?

The timeline can vary. Responding to the tax notice and settling the matter with the Income Tax Department can take a few months. A civil suit filed against the seller to recover the money can be a longer process, potentially taking anywhere from a year to several years, depending on the court’s schedule and the complexity of the case.

Advocate Sudhir Rao, Supreme Court of India