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Interest on Late depsoit of TDS

Started by Vinay Surana, October 31, 2012, 06:26:16 PM

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subash agarwal,Adv kolkata

I think the issue of allowability of intt. paid u/s 201(1A) as deduction  is no more open. There is a direct judgement on the point from Madras High Court in the case of Commissioner Of Income-Tax vs Chennai Properties 239 ITR 435 .It was held as under-
"The liability for deduction of tax arises by reason of the provisions of the Act. Under Section 201, the consequence of failure to comply with the same renders that person liable to be deemed as an assessee in default with all the consequences attached thereto. The liability to pay interest on the amount not deducted or deducted but not paid is directly related to the failure to deduct or remit the amount. The amount required to be deducted is the amount payable as income-tax. The interest paid for the period of delay takes colour from the nature of the principal amount required to be paid, but not paid within time. The principal amount here would be the income-tax and the interest payable for delayed payment is the consequence of failure to pay the tax and in the circumstances, in the nature of a penalty though not described as such in Sub-section (1A) of Section 201 of the Act. The fact that the income-tax required to be remitted was not income-tax payable by the assessee, but is ultimately for the benefit of and to the credit of the recipient of the income on whose behalf that tax is payable does not in any manner alter the character of the payment, namely, its character as income tax."
I think this concludes the issue beyond doubt.


Whether the question of correctness of the decision and whether the same is to be followed in subsequent years are two different issues and therefore, cannot be clubbed to arrive at a reasonable conclusion. In the decision of Madras High Court reported above, it was  held that the interest assumed the character of principle and therefore, it becomes incometax and cannot be allowed. If this proposition is accepted, then regular TDS deducted is also to be characterised as incometax as per Court ruling and therefore, it is not allowable. But it is allowed as business expenditure. For Example if 1,00,000 is to be paid as professional charges, then Rs. 90,000/- will be paid to the deductee and the remaining Rs. 10,000/- will be paid to the government in the form of TDS. Then this amount of Rs. 10,000/-, if it is considered as incometax,  as held by the High Court , is not at all allowable. But it is allowed in all the cases and the immediate question that requires answer is under which section. Definitely u/s 37(1). Therefore, it cannot assumes the character of incometax by any stretch of imagination and what answer will we find to the above fallacy if we support the court decision.  It is the amount to be paid to the deductee and it was paid to the government on his behalf. Therefore, it becomes the expenditure under the same head. Further, if we go through the court decision also, its argument is also in one way and final conclusion is in other way. Further, the interest u/s 201(1A) is also not a penalty as there is one more section in Incomtax Act which prescribes for penalty i.e. 271C. As per General Clauses Act, there cannot be two penalties for one default. If the interest is characterised as penalty then the second penalty u/s 271C cannot be called as penalty. Therefore, the conclusion is interest u/s 201(1A) is not penalty and the actual penalty is u/s 271C and this penalty cannot be allowed. Further it cannot be characterized as income tax as discussed above. When the answer to the above two propositions is negative, there is no other section prescribed for disallowance. Just because the decision of an High Court is not assailed by a particular assessee, it cannot become law of the land. It is true if revenue has not contested an issue declared by a High Court before Supreme Court, then it has no right to contest the same issue before Supreme Court in other's case as per sec. 268A unless the first decision is not contested because of the monetary limits. But assessees are always free to contest incorrect decisions before Higher Appellate forums. As stated in the beginning itself until and unless supreme Court decision comes, the revenue will follow Madras High Court decision which is in their favour because it is beneficial to them. Can we now also say it is no more open just because that decision is not contested before Supreme Court by a particular assessee. Every body knows that litigation has become very costly and therefore, the assessee in that case might have taken a decision not to contest the same before Apex Court or there might be 101 reasons for not contesting the said decision. I, personally, feel the question is still open as many ITATs in recent times have held that interest u/s 201(1A) is compensatory in nature. Any other view against this is welcome.....................

subash agarwal,Adv kolkata

Dear Satyanveshiji,
In this forum already a judgement from ITAT Ahmedabad was cited holding that intt. u/s 201(1A) cannot be allowed as deduction. I have also cited a direct judgement on the point fm the Madras High Court. But not a single judgement which is in favour could be cited. I have also made diligent searches and could not find any favourable case law. The courts have also held that normally, more so in regard to the Income-tax Act, which is a piece of all India legislation, if any High Court has construed any section or rule, that interpretation should be followed by the other High Court.
Pl. see Peirce Leslie & Co.'s case 216 ITR 176 ; CIT v. Deepak Family Trust No. 1 [1994] 72 Taxman 406 (Guj.); CIT v. Alcock Ashdown & Co. Ltd. [1979] 119 ITR 164 (Bom.); and Sarupchand Hukamchand, In re [1945] 13 ITR 245 (Bom.).
I agree with your view that every body knows that litigation has become very costly and therefore, the assessee in that case might have taken a decision not to contest the same before Apex Court or there might be 101 reasons for not contesting the said decision. Same is likely to be the reason in other cases also since the intt. Amount is normally not a big amount. Further, even assuming somebody files SLP before the apex court, chances of admission are remote when there are no contrary judicial views.


Attention is invited to a speaking order of ITAT, Calcultta (Third Member decision) in the case of A.B.N.Amro Bank N.V. Versus Jt.CIT (97 ITD 1) wherein all the arguments and counter arguments were considered and a well reasoned conclusion was arrived at to the effect that interest under section 201(1A) was not an allowable deduction u/s 37(1) of the I.T.Act, 1961 while computing business income under the provisions of Income-tax Act, 1961.