Critical Analysis of Section 201(1A) of Income Tax Act

In section 201 of the Income-tax Act, for sub-section (1A), the following sub-section shall be substituted with effect from the 1st day of July, 2010, namely:—

“(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,—

(i) 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 deducted; and

(ii) at one and one-half per cent. for every month or part of a month on the amount of such tax from the date on which such tax was deducted to the date on which such tax is actually paid, and such interest shall be paid before furnishing the statement in accordance with the provisions of sub-section (3) of section 200.”.

After studying the provision of Sec 201 (1A) (i), It comes to know that Interest for non deduction of TDS will be paid from the date on which tax was deductible to the date of actual deduction. It means the period for charging the interest includes the month of actual deduction and the month on which it was deductible.

Further the  provision of Sec 201 (1A) (ii) reveals that Interest for non depositing the TDS will be paid from the date on which tax was deducted to the date of actual payment. It means the period for charging the interest includes the month of deduction and the month on which it was actually paid.

After studying both the sub section of Sec 201(1A), I have following observations--

1. What rate of interest should be charged for the month on which tax was actually deducted since both the sub section includes this month in the calculation of interest?

e.g. If tax which was to deducted in Apr’2011, is actually deducted in June’2011 and deposited in Aug 2011. Then,

Intt. For late deduction @1%-- From Apr 2011 to June 2011 i.e. 3 months

Intt. for late deposit @ 1.5%-- From June 2011 to Aug 2011 i.e. 2 months

In the above case, the month of June 2011 is included in both types of interest. Now my opinion is that since there is an ambiguity in this section, Assessee can take benefit of doubt and shall pay interest @1% for the month of June 2011.

2.  As we know that we have the liability to deposit the tax deducted on 7^th of the following month. If in the above example the tax was deposited before 7^th of Aug, then still the assessee is required to pay interest for non depositing the tax in time u/s 201(1A)(ii).

It means that when ever the tax has not been deducted in time, the interest for late depositing is also required to be paid in spite of depositing the tax before 7^th of the following month.

In my opinion, this provision has been inserted from 1^st july 2010 With a view to discourage the practice of non deduction of tax in time and delaying the deposit of tax after deduction.

Hence now the assessee have to take care of these provision since even non deduction of tax in time or short deduction of tax  will create an extra charge on the deductor for payment of interest of late depositing of tax.

Thanks a lot.