Controversial Working of Interest by TDS-CPC

[Sumit, FCA, Rjt.]

Now-a-days, TDS-CPC, through automation called TRACES, is showering notices on tax payers, calling them to pay interest and penalties for late deduction or payment of TDS and late filing of TDS quarterly statements.

This automation has yielded many benefits to department as well as the taxpayers, but what is unjustly pinching the taxpayers is "why to pay interest for 2 months for delay in payment for just 1 day (or a period less than 30 days) ?"

The software at TRACES is entrusted the task of computing interest payable by assessee u/s. 201(1A), and communicate it through automated notices. And this software, in many cases, computes interest for 2 months even in cases where delay of payment of tax or deduction of tax is just for less than 30 days (1 day in many cases)

On one hand we have plethora of decisions by almost every judicial forums including apex court saying, on and often, that "INTEREST IS COMPENSATORY IN NATURE" .... And therefore the question - when loss to the government is of interest for less than 30 days (ie. part of 'a' month), than why it should be COMPENSATED for 2 months ?, is very important

But, this incongruity has its roots in words "month or part of month" deployed in sec. 201(1A) as well as in Rule 119A, which directs method of computation of interest.

Before plunging into controversy, a look at bare provisions of sec 201(1A) and rule 119A would throw some light on the issue.


Consequences of failure to deduct or pay.
201. [(1) Where any person, including the principal officer of a company,—
    (a)   who is required to deduct any sum in accordance with the provisions of this Act; or
    (b)   referred to in sub-section (1A) of section 192, being an employer,
does not deduct, or does not pay, or after so deducting fails to pay, the whole or any part of the tax, as required by or under this Act, then, such person, shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default in respect of such tax:
Provided that no penalty shall be charged under section 221 from such person, unless the Assessing Officer is satisfied that such person, without good and sufficient reasons, has failed to deduct and pay such tax.]
[(1A) Without prejudice to the provisions of sub-section (1), if any such person, principal officer or company as is referred to in that sub-section does not deduct [the whole or any part of the tax] or after deducting fails to pay the tax as required by or under this Act, he or it shall be liable to pay simple interest at [one per cent for every month or part of a month] on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid [and such interest shall be paid before furnishing the quarterly statement for each quarter in accordance with the provisions of sub-section (3) of section 200].]
(2) Where the tax has not been paid as aforesaid after it is deducted, [the amount of the tax together with the amount of simple interest thereon referred to in sub-section (1A)] shall be a charge upon all the assets of the person, or the company, as the case may be, referred to in sub-section (1).

Procedure to be followed in calculating interest.
[119A.  In calculating the interest payable by the assessee or the interest payable by the Central Government to the assessee under any provision of the Act,—
    (a)   where interest is to be calculated on annual basis, the period for which such interest is to be calculated shall be rounded off to a whole month or months and for this purpose any fraction of a month shall be ignored; and the period so rounded off shall be deemed to be the period in respect of which the interest is to be calculated;
  (b)  where the interest is to be calculated for every month or part of a month comprised in a period, any fraction of a month shall be deemed to be a full month and the interest shall be so calculated;
     (c)   the amount of tax, penalty or other sum in respect of which such interest is to be calculated shall be rounded off to the nearest multiple of one hundred rupees and for this purpose any fraction of one hundred rupees shall be ignored and the amount so rounded off shall be deemed to be the amount in respect of which the interest is to be calculated.]


Sec. 201(1A) r.w.s. Rule 119A, requires the tax payer to pay the interest for delayed period of a month or part of month, where any fraction of a month shall be deemed to be a FULL Month.

Considering a hypothetical situation, where period of delay is comprising of 9 days say 31st January to 8th February.

Now, if the word "month" be given meaning of a British calendar month than the period comprises of "Part of January month" + "Part of February month".  And under mandate of rule 119A, both parts shall be deemed as full and thus period of delay for the purpose of computation of interest shall be full 2 months.

And, if the word "month" be given meaning of  a period comprising 30 days, than the total 9 days being part of  30 days, to be deemed as full month, the interest shall be computed for 1 month only.

The term "month" is not defined in the Income-tax Act, 1961, and hence one has to ordinarily resort to The General Clauses Act, 1897, where sec. 35 of section 3 defines the term "month" as –

(35) "month" shall mean a month reckoned according to the British calendar:

              But, the sec. 3 itself begins with following phraseology;

3 Definitions.- In this Act, and in all Central Acts and Regulations made after the commencement of this Act, unless there is anything repugnant in the subject or context,--:

Although sec. 3 of  The General Clauses Act, 1897 makes it mandatory to mean "month" as "month as per British Calender" for all Central Acts, but it also carves out a niche by words "unless there is anything repugnant in the subject or context,--:", so that no absurdity arises in interpretations.

Thus, the term "month" should be read in a manner which is in consonance with the purpose of its enactment u/s. 201(1A) which is COMPENSATING cost of time to the government. Any meaning which not only unjustly enriches the coffers of government but also acts as a penal provision would result into absurdity. And it would be more so, when we have multiple penal provisions already available at sec. 201(1) and sec. 40(a)(ia).

Even in absence of any penal provision, a compensatory interest provision can not be colored as a penal provision.

This controversy of interpreting term "month", anciently arose before, Hon'ble Allahabad HC in the case of Commissioner of IncomeTax, Kanpur v. Laxmi Rattan Cotton Mills Co. Ltd. [1974] 97 ITR 285, where in the context of sec. 271(1)(a), where similar phraseology for 'month or part of month' occurred, the Hon'ble HC opined that meaning of 'month' can not be given the meaning as assigned by sec. 3(35) of the General Clauses Act, 1897.

However, in 1977, Hon'ble Madras High Court in case of Commissioner of Income Tax, Madras (Central) v. Kadri Mills (Coimbatore) Ltd. [1977] 106 ITR 846 also had occasion to deal with same issue and in the context of same phraseology of sec. 271(1)(a). But, the Hon'ble Madras HC opined that the term 'month' would mean "month as per British Calendar" in view of Sec. 3(35) of General Clauses Act, 1897.

Not only the Hon'ble Madras HC, but also the Hon'ble Calcutta High Court in case of CIT v. Brijlal Lohia and Mahabir Prosad Khemka [1980] 124 ITR 485, took the same view that term 'month' in the said context would mean "month as per British Calendar".

Also, Hon'ble Karnataka HC, in 1985, in the case of B.V. Aswathaiah and Brothers vs. ITO [1985] 155 ITR 422, took the same view as taken by Hon'ble Madras HC & Hon'ble Calcutta HC.

In 2005, the Hon'ble Gujarat HC, in case of CIT v. S.L.M. Maneklal Industries Ltd. [2005] 274 ITR 485, asserted the view of 'month' as 'month as per British Calendar', in context of sec. 271(1)(a).

But, the noteworthy element in all above decisions rendering 'month' as 'month as per British Calendar', were in context of "penalty".

However, the same Hon'ble Gujarat High Court, while dealing with similar issue in case of CIT-I vs. ARVIND MILLS LIMITED [TAX APPEAL No. 2486 of 2009] in its decision dated 13/09/2011, brought out the distinction between interpreting the term in context of 'penalty' provisions and in context of 'interest' provisions, where emphasis is on words – "comprised in a period" and hence the term 'month' would not mean 'month as per British Calendar'

It is noteworthy that the words "comprised in a period" occurs in Rule 119A. And therefore also, the 'month' should be read to mean a period comprising of 30 days.

Another relief to the tax payers, comes from the decision of ITAT KOLKATA, in the case of DCIT vs I.O.L. Ltd. 1994 50 ITD 214 Kol, where the issue was of interest u/s. 139(8), the Tribunal has after considering the diverse views from different High courts, declared that in view of Supreme Court in the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 wherein it was held that if the Court finds that the language of taxing provision is ambiguous or capable of more meanings than one, then the Court has to adopt that interpretation which favours the assessee, more particularly so where the provision relates to the imposition of penalty.

In view of the above one may reasonably conclude that term 'month' should mean a period of 30 days and meaning of 'part of month' should be interpreted accordingly.