Scope of the provisions relating
to interest payable for default in TDS
Constitutional validity
The first aspect that we would need to look at is whether
the provisions for deeming an assessee in default for non-deduction
of tax at source or non-payment after deduction, are constitutionally
valid. The constitutional validity of these provisions was challenged
before the Karnataka High Court in Mittal Steel Ltd vs. ACIT
[1999] 240 ITR 707 (Kar.) The Karnataka High Court upheld
the validity of section 201 observing that section 201 is a penal
provision to treat a person as an assessee in default if there
is a failure to deduct tax or after deduction, the tax is not
paid. The proviso to the section makes it clear that the Assessing
Officer (AO) must be satisfied that the failure was without good
and sufficient reason. This contemplates adjudication by the AO,
to provide an opportunity to the person who is deemed to be an
assessee in default for which an order is to be passed which is
appealable under section 246 (now under section 246A). The AO
therefore, is to fix the liability and compute the amount of tax
which was liable to be deducted or liable to be paid and has not
been paid and thereafter has to serve a notice of demand calling
upon the assessee to make such payment. Sufficient safeguards
have been provided in the section itself and as such, it cannot
be considered that the provisions are ultra vires the Constitution.
Thus, the following key
points emerge from the said decision:
-
Section 201 is constitutionally
valid.
-
An AO cannot treat
a tax-payer as an assessee in default if the tax-payer proves
that he had sufficient and reasonable cause for not deducting
tax at source or not paying the same to the Government after
deduction.
-
The order under section
201 is appealable.
Law prevailing on the date
of default will apply
In CIT vs. Bennett Coleman and Co Ltd vs. Mrs V.P. Damle,
Third ITO and Ors., [1986] 157 ITR 812 (Bom.), an interesting
issue arose before the Bombay High Court. The issue was, which
would be the law applicable for proceedings under section 201(1)
and section 201(1A), the law as on the date of default or the
law as on the date of adjudication of the tax-payer as an assessee
in default. The facts of the case were that the tax-payers deducted
tax from salaries paid to their employees but deposited the same
to the credit of the Government slightly beyond the stipulated
time limit. The AO, levied interest under section 201(1A) but
did not round of the tax to the nearest hundred rupees or ignore
the delay for part of a month, as laid down under rule 119A of
the Income-tax Rules, 1962 (the Rules), which the AO contended,
did not apply as the default was committed prior to 1st January,
1975, the date of introduction of the said rule. The tax-payer
contended that the rule was procedural in nature and should apply
to all pending proceedings as on 1st January, 1975. The Bombay
High Court did not accept the tax-payer’s contention and held
that the liability to pay interest under section 201(1A) arose
immediately on the commission of the default under section 201(1)
and could be computed only with reference to the law as it then
stood. Rule 1119A, introduced subsequent to the date of default
had no application.
This decision of the Bombay
High Court makes it clear that the law applicable, to proceedings
under sections 201(1) and 201 (1A) will be the law prevailing
as on the date when the tax-payer committed the default envisaged
under section 201(1).
Payment of interest is mandatory
and cannot be waived
Another important aspect that needs to be noted is that the
levy of interest under section 201(1A) is mandatory. The AO has
a discretion as to whether to treat as tax-payer as being an assessee
in default and if he finds that the tax-payer had sufficient and
reasonable cause for the default, he may not treat the tax-payer
as being in default, but once he treats the tax-payer as being
in default, his discretion ceases and he compulsorily has to levy
interest under section 201(1A) for the said default. He cannot
waive the interest even if the default on the part of the tax-payer
was not intentional or because ultimately, it is found that the
payee is not required to pay any tax. This is because, the levy
of interest under section 201(1A) is compensatory in nature and
not penal. This has been held in the following decisions:
CIT vs. Bennett Coleman
and Co Ltd vs. Mrs V.P. Damle, Third ITO and Ors., [1986] 157
ITR 812 (Bom.)
CIT vs. Dhanlakshmy Weaving Works [2000] 245 ITR 13 (Ker.)
CIT vs. Assam Small Industries Development Corporation Ltd [1996]
219 ITR 324 (Gau.)
CIT vs. Prem Nath Motors (P.) Ltd [2002] 253 ITR 705 (Del.)
Is interest payable if the
payee has paid the tax on his own?
Another interesting issue is what would be the situation if the
payee has paid tax on the income paid to him by the payer, on
his own. Does interest still continue to be payable in such a
case? We have seen above that the levy of interest under section
201(1A) is compensatory in nature and is not penal. This issue
came up before the Gujarat High Court in CIT vs. Rishikesh Apartments
Cooperative Housing Society Ltd. [2002] 253 ITR 310 (Guj.) In
that case, the tax-payer, a cooperative society, did not deduct
tax under section 194C from certain payments to a contractor.
It was found that the contractor had paid advance tax in excess
of his total income-tax liability for the year in question. The
tax-payer contended that since the levy of interest under section
201(1A) was compensatory in nature, interest should not be charged,
as the Revenue was not put to a loss. The Gujarat High Court held
that the liability of a payer to deduct tax at source and pay
the same to the Government is not independent of the liability
of the payee to pay income tax on the income that he earns. If
after the final determination of the payee’s liability, it is
found that no further tax is due, then no interest under section
201(1A) is to be paid by the payer of income. This decision is
a landmark decision in favour of tax-payers and takes the theory
that the levy of interest under section 201(1A) is compensatory
in nature to its logical conclusion. However, the Gujarat High
Court should have considered that the obligation of the payee
to pay advance tax and / or self-assessment tax is separate and
distinct from the obligation of the payer of income to deduct
tax at source. If the ratio of the decision of the Gujarat High
Court were to be applied to each and every situation, it would
effectively obviate the need to have provisions for deduction
of tax on the statute book. It would therefore be very risky to
plan one’s affairs in accordance with this decision and avoid
the obligation to deduct tax at source merely because the payee
has paid a certain amount of advance tax. However, in situations
where tax-payers are already in a corner and facing huge interest
liability, particularly in cases where there are two views possible
on whether tax should at all be deducted from a particular payment,
the ratio of this decision would help in the tax-payer’s alternative
contention that interest under section 201(1A) should not be levied
as there is no loss of revenue to the Government. This view is
also supported by the following Tribunal decisions.
Crescent Housing P. Ltd
vs. ITO [2002] 80 ITD 317 (Mad.)
ITO vs. Manav Greys Exim (P.) Ltd [2002] 75 TTJ 115 (Mum.)
Interest under section 201(1A)
– Amount, rate and period for which interest is chargeable
As per section 201 (1A), interest is charged for non-deduction
of tax or a part thereof at source or non-payment of such tax
or any part thereof to the credit of the Central Government if
it is deducted but not paid. The interest is payable on the amount
of tax not deducted or not paid as the case may be, be it on the
whole or any part of the tax. The interest is simple interest
payable at the rate of twelve per cent per annum from the date
on which the tax was deductible to the date on which the tax was
actually paid. It is interesting to note that even in case of
non-payment of tax already deducted, the interest commences from
the date on which such tax or part thereof was deductible and
not from the due date of its payment to the credit of the Central
Government. This is laid down by the Central Board of Direct Taxes
in their Circular No. 232 dated 26 November 1977. However, the
Madras Bench of the Income-tax Appellate Tribunal in Shriram Industrial
Holdings (P.) Ltd vs. Dy. CIT [2003] 84 ITD 62 (Mad.) has given
a contrary view. The provisions of Rule 119A will apply and the
amount of tax for computation of interest will now have to be
rounded off to the nearest hundred rupees and also the delay for
the part of the month will have to be ignored since the interest
is payable on an annual basis.
An illustration will make
this clear. For example, a company pays interest to its fixed
deposit holders annually on 31st December every year. The annual
interest payment is say Rs. 10 lakhs. The company does not deduct
tax on the interest at all on 31st December, 2003 as its accountant
is new and is not aware of the liability of deducting tax at source
from interest. The Company would in this case, be liable to pay
simple interest at twelve per cent per annum from 1st January,
2004 to the actual date of payment of the tax. If the tax is paid
on 5th March, 2004 the company would be liable to pay interest
of Rs. 20,000 as the part of the month would have to be ignored
as per rule 119A(1). To take this a little further, suppose the
company deducted the sum of Rs. 10 lakhs from the interest payable
but paid it to the credit of the Central Government only on 4th
April, 2004. In such an event also, even though the due date of
payment of tax is 28th February 2004 (assuming the company’s statutory
accounts are closed on 31st December of every year), the interest
will be payable from 1st January 2004 to 31st March, 2004 at twelve
per cent per annum, i.e. Rs. 30,000.
Interest is a charge
on the assets
Section 201(2) provides that where the tax has not been paid after
it has been deducted, the amount of tax together with the amount
of simple interest thereon under section 201 (1A) will be a charge
upon the assets of the defaulter. In case the defaulter is a company,
the charge will be on the assets of the principal officer as well
as on the assets of the company.
Manner and mode
of charge of interest under section 201(1A)
Although the Act does not lay down any specific procedure as regards
the levy of interest under section 201(1A), it appears that a
written order would have to be passed treating the tax-payer as
an assessee in default and raising a demand of the tax and interest
payable. This has been laid down by the Madras High Court in Mettur
Chemicals and Industrial Corporation Ltd vs. IAC [1984] 150 ITR
341 (Mad.). In Vidarbha Liquor Corporation vs. ACIT [ } 64 TTJ
255, it has been held that the order charging interest under section
201(1A) should be a separate order and that interest under section
201 (1A) cannot be charged as part of the assessment order. It
has also been held that although the levy of interest can be done
without giving the tax-payer an opportunity of being heard, the
levy cannot be mechanical. Please refer to the decision of the
Ahmedabad Bench of the Tribunal in ITO vs. Cadilla Laboratories
(P.) Ltd [1996] 56 TTJ 156 (Ahd.). As seen earlier, rule 119A
will have to be applied while calculating the interest.
Time limit for levy
of interest
The Act does not provide for a time limit for passing of the order
levying interestr under section 201 (1A). However, in the case
of Laxmi Ganeswara Enterprises and Financiers vs. ITO [2000] 72
ITD 295 (Hyd.), the Hyderabad Bench of the Tribunal has held that
even if no limitation is prescribed by the statute for initiating
and concluding the proceedings under section 201, those proceedings
must be initiated and concluded within a reasonable period. A
subsequent decision of the Delhi Bench of the Tribunal in Sahara
Airlines Ltd. vs. Dy. CIT [2002} 83 ITRD 111 (Del.) has held that
the order under section 201 must be passed within four years from
the end of the relevant assessment year.
Recovery of interest
under section 201(1A)
As seen earlier, interest under section 201(1A) is a charge on
the assets of the defaulter. The interest, once levied, will be
recoverable like any other tax due from such defaulter.
