1999 (11) TMI 17 - HC - Income Tax

High Court upholds interest levy under Income-tax Act for failure to deduct tax at source.

Commissioner Of Income-Tax Versus Dhanalakshmy Weaving Works

Commissioner Of Income-Tax Versus Dhanalakshmy Weaving Works - [2000] 245 ITR 13, 160 CTR 374, 109 TAXMANN 395 Issues Involved:The judgment addresses the issue of whether interest levied under section 201(1A) of the Income-tax Act should be deleted when ultimately no tax was payable. The case involves interpretation of sections 201(1) and 201(1A) of the Act, and the applicability of a previous court decision in a similar context.Summary:The case involved a partnership firm in the business of manufacturing handloom cloth that failed to deduct tax at source on interest paid to another entity. The Assessing Officer levied interest under section 201(1A) for this default, which was later canceled by the Commissioner of Income-tax (Appeals) based on a court decision. The Tribunal upheld this decision, leading to the reference to the High Court.The High Court analyzed sections 201(1) and 201(1A) of the Act, emphasizing the mandatory nature of the levy of interest as a compensatory measure for withholding tax. The Court considered the real intention of the Legislature and the purpose of the enactment in determining whether the provision is imperative or directory.The Court explained that interest is a form of compensation for delayed payment of tax and is distinct from a penalty. It clarified that the liability to pay interest arises automatically by operation of law and is compensatory in nature. The Court highlighted that the absence of ultimate tax liability does not negate the requirement for interest under section 201(1A).In conclusion, the High Court held that the levy of interest was justified, and the Tribunal erred in deleting it. The Court ruled in favor of the Revenue and against the assessee, answering the reframed question in the negative.