2004 (8) TMI 14 - HC - Income Tax

TDS - failure to deduct and pay tax as required under section 192 - levy of interest under section 201(1A) - ITO noted that no tax had been deducted or paid on the salary advance paid to the employees - levy of interest under section 201(1A) is of a compensatory measure for withholding tax which ought to have gone to the exchequer. The provision makes it clear that the levy is mandatory - held that the levy of interest under section 201(1A) is automatic assessee s appeal is dismissed

Summary

Issues:
- Failure to deduct and pay tax under section 192
- Levy of interest under section 201(1A)

Failure to deduct and pay tax under section 192:
The case involved an assessee, a cooperative bank, who deducted tax at source from regular salary payments to employees but failed to do so from salary advances. The Income-tax Officer initiated proceedings under section 201(1) for various assessment years, demanding tax on the salary advances. The assessee contended that the advances were not subject to tax deduction as they were not in the nature of adjustable advance and were recoverable under specific agreements with employees. Despite the explanation, the Income-tax Officer levied interest under section 201(1A) for failure to deduct tax. Appeals were filed, and the Commissioner of Income-tax (Appeals) initially canceled the interest levy, but the Tribunal reinstated it, leading to further appeals.

Levy of interest under section 201(1A):
The primary contention was whether the assessee acted bona fide in not deducting tax on salary advances, thereby challenging the imposition of interest under section 201(1A). The court analyzed relevant precedents, including Pentagon Engineering Pvt. Ltd. v. CIT and CIT v. Prem Nath Motors (Pvt.) Ltd., which emphasized the mandatory nature of interest levy under section 201(1A) in cases of failure to deduct or pay tax. The court held that the use of the word 'shall' in the provision made the levy mandatory, irrespective of the assessee's intent, emphasizing that the purpose of the levy was compensatory rather than punitive. Referring to earlier decisions like CIT v. Dhanalakshmy Weaving Works, the court affirmed that the liability to pay interest arises automatically by operation of law, making the interest levy under section 201(1A automatic and imperative. Consequently, the court upheld the Tribunal's order, dismissing all appeals against the interest levy.

In conclusion, the High Court of Kerala upheld the interest levy under section 201(1A, emphasizing its mandatory nature in cases of failure to deduct or pay tax, regardless of the assessee's intent or belief. The court relied on established precedents to affirm that the interest levy was compensatory and automatic, leading to the dismissal of all appeals against the interest imposition.