The Hindu Business Line : The muddle over TDS interest

TO DEDUCT tax on payments made is an obligation placed on the payer under certain circumstances described in Chapter XVII-A of the Income-Tax Act, 1961.

The money so deducted as tax at source has to be remitted to the Government within the time stipulated in Rule 30 of the Income-Tax Rules (Rules). Failure to deduct and/or pay will attract Section 201 of the Act, where the defaulted payer will be deemed to be an `assessee in default'.

The mandatory interest under Section 201(1A) will come into play. He can also be subject to penalty under Section 271C and, in case of failure to remit the tax collected, to prosecution as well (Section 276BB).

Various Income-Tax Appellate Tribunals (ITATs) have studied Chapter XVII-A, which deals with tax deduction at source (TDS). A closer look at these studies throws up some interesting issues, especially with regard to interest under Section 201(1A).

Section 190 advances the obligation to deduct/collect tax notwithstanding the fact that a regular assessment in respect of any income is to be made in a latter year.

It however says that nothing in the section shall prejudice the charge of tax on such income under Section 4 which is the main charging section.

Section 191 places an obligation on the payee to pay the tax direct where the payer has not deducted or collected tax at source.

The provision does not state any time limit for such a direct payment by the payee, hence, one may presume it to be at his leisure, subject however to Sections 207 and 208 dealing with advance income-tax obligations.

Nowhere in the Act is there any punishment for violation of the payee's obligation under Section 191 and, hence, one may consider this as only a recommendatory, not mandatory, provision.

An explanation has been inserted by the Finance Act, 2003 w.e.f. June 1, 2003, to the effect that, any person referred to in Section 200, or, in case of payment of dividends under Section 194, the company and its principal officer, shall be "deemed to be an assessee in default" in case the payee has not met out his obligation under Section 191.

The explanation does not make the payee to be an `assessee in default' for his failure to pay tax under Section 191.

Now the whole of the Chapter dealing with TDS is a concern to the payer, as any failure to deduct/collect tax at source at the time of making the payment will attract interest under Section 201(1A).

Timeframe for interest calculation

The timeframe mandated under Section 201(1A) has two points.

The interest begins from the date tax was deductible. This is the beginning point.

Interest runs up to the date such tax is actually paid (to the Government, that is). The rate of interest is currently 12 per cent per annum (vide Rule 119A of the Rules), whenever the interest payable is at a rate per annum, any fraction of days in a month are to be ignored.

Thus, practically, there will be no interest if the delayed payment is made within the month it is due — for example, TDS payable on November 7, 2003, is paid on November 28, 2003.

Interest runs during the intervening period at 12 per cent per annum. These two points are important for interest computation, as the whole provision is accordingly framed.

What happens if any one point fails? This interesting issue came up before the Chandigarh Tribunal in the Munak Investments (P) Ltd vs ITO (55 ITD 429) case.

Here the company did not deduct TDS on interest payable to its managing director on the basis of Form 15A. The Revenue contended that the correct Form being 15H, there is a lapse on the part of the company to deduct tax at source.

It passed an order treating the company as an assessee in default.

The company contended that it had not deducted tax at all and, hence, has not remitted anything to the Government. Thus, there is no date of payment of tax to the Government. There being no upper timeframe for the computation, there can be no computation at all.

It was argued that Section 201(1A) is not similar to that of Section 220(2), the latter covers a situation where there is a continuing default. Section 201(1A), it was argued, does not warranty a continuing default and, hence, no tax having been paid there is no actual date of payment.

The Supreme Court, in the B. C. Srinivasa Setty (128 ITR 294), accepted the view that `once the computational provision fails, the charging section too fails; as they both form an integral code'.

Therefore, interest is not computable and, hence, there can be no interest levy.

Interestingly, the Tribunal accepted this contention, holding that the "date tax has been actually paid", as laid down in the charging section, has not been fulfilled.

Thus, for not deducting TDS, there was no interest leviable.

Meaning of "actually" paid

Later, the same Tribunal, in Punjab State Electricity Officer vs ITO (2002 121 Taxmman 0367), dwelt into the meaning of the expression "actually paid" used in Section 201(1A).

In this case, quite interestingly, the Tribunal concluded that since the question "by whom?" is not answered clearly in Section 201(1A), it can be read with Section 191, which will mean the date on which the assessee (that is, the payee) has paid the tax will become the date on which tax has been "actually paid" for computing interest under Section 201(1A).

Thus, a new dimension was brought in for the upper limit of the charging section. What must be noted here is, the Munak case was delivered before this ruling.

In many cases, we find assessing officers (AOs) computing interest till March 31 of that financial year in which there has been a default, as one normally finds that tax obligations are discharged by that time.

In case tax has been paid only during self-assessment under Section 140A, then the interest runs up to that date.

(To be concluded)

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