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Before implementing CBS software, banks were deducting TDS on interest paid on FDs on quarterly basis or payment basis whichever was earlier but after implementation of CBS software and because of CBDT circular 3/2010, banks have option to pay TDS on effective credit of interest or accrual whicherver is earlier. The circular clarified that no TDS is requried to be deducted in case of macro provisioning only.

One of my client which is a PSB was surveyed by Income Tax (TDS) department and they have taken the stand that TDS must be deducted on quarterly basis. The illogical reason they have given is the quarterly statements of the bank. For matching principle and quarterly reporting of statements, banks show interest on FDs in Profit and Loss Statement and department says the bank has debited the interest account and credit can be to any account as per S. 194A and hence TDS is deductible and they have raised demand for interest for late payment. Due to delay the interest amount also runs into lacs.

Also, as per sub-section (4) of section 194A, adjustment is allowed during the year for any short/excess deduction of TDS. Favourable decision on this is 330 ITR 496 (Uttrakhand High Court).

Can department charge Interest in above case or can the bank be held liable for default under section 201(1)/(1A)? Pls advice.

It is a natural justice principle. you will number of judgments on this. Moreover, addition on basis of just a 'chit' found can be quotioned anytime. 'Chit' found will not be any primary or even any secondary evidence. Department has to prove actual flow of money.