Section 201(1A) — Interest for Failure to Deduct or Pay Tax

Section 201(1A) of the Income-tax Act, 1961, deals with the interest payable by an entity that fails to deduct or pay the tax at source as required. When a person responsible for deducting tax at source does not do so or fails to remit the deducted tax to the government, they are liable to pay interest. The interest is calculated at the rate of 1% per month or part of a month on the amount of such tax from the date on which it was deductible to the date on which it is actually deducted. Additionally, if the tax is deducted but not paid, interest is charged at 1.5% per month or part thereof from the date of deduction to the date of payment. This provision ensures compliance with TDS obligations and compensates the government for the delay in tax collection. It is significant as it imposes a financial cost on non-compliance, thereby encouraging timely deduction and payment of taxes.

Common Litigation Flashpoints

1. Dispute over the calculation of interest period
2. Challenges regarding the applicability of interest rates
3. Contention on whether interest is applicable if the deductee has paid taxes
4. Dispute over the start date for interest calculation

Judgments on Section 201(1A) — Interest for Failure to Deduct or Pay Tax

• Engineering Analysis Centre of Excellence Private Limited vs The Commissioner of Income Tax & Anr. — SC,
  Payments for software do not constitute 'royalty' under Section 9(1)(vi) of the Income Tax Act, and thus, no tax is deductible at source under Section 195.
• Commissioner of Income Tax, Bangalore vs Infosys Technologies Ltd. — SC,
  A benefit must be made taxable by law before it can be regarded as income.