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The liability for payment of interest stipulated in section 201(1A) accrues automatically on failure to pay the amount of tax by the due date. Has been a matter in debate recently. The Kerala High Court in the case of Commissioner of Income-tax Vs. K.K. Engineering Co. (249ITR447) and the Delhi High Court in the case of CIT v. Prem Nath Motors (p.) Ltd. (120TAX584) held that such levy of interest under section 201(1A) is justified. Even the Bombay High Court in Pentagon Engineering Pvt. Ltd. Vs. Commissioner of Income-tax (212ITR92) held the identical view. In the similar manner the Gauhati High Court in Commissioner of Income-tax Vs. Assam Small Industries Development Corporation Ltd. (219ITR324) held that section 201(1A) does not impose any restriction unlike penalty, which can only be imposed when the delay in payment of tax deducted at source was without good and sufficient reason. The Court further held that interest is levied by way of compensation and not by way of penalty. However, it is to be noted that such interest should be limited for the period for which tax is withheld, i.e., the period between the due date for deduction of tax and the date on which the tax was actually paid by the recipient of income

On the other hand the Gujarat High Court in the case of CIT v. Rishikesh Apartments Co-op. Housing Society Ltd. (119TAX239) held that if the revenue is permitted to levy interest u/s 201(1A) even in a case where the person liable to tax has paid tax on due date, the revenue would derive undue benefit by getting interest on the amount of tax which had already been paid on the due date. Such a position cannot be permitted. In this case it was found that the recipient contractor had paid his taxes before the due date of filing of return in his case.

From the available trend of the High Court decisions the issue is tilting in favour of the revenue, hence it is desired for the payer to take utmost care in making deductions at source as well as in depositing taxes. Further the Madras High Court in the case of Commissioner of Income-tax Vs. Chennai Properties and Investment Ltd. (239ITR435) held that such interest payable under section 201(1A) is not a deductible expenditure.

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