Binding judicial restraint on TDS negates assessee-in-default treatment and related interest liability under the Income-tax Act.

Non-deduction of tax at source made in compliance with binding interim High Court directions could not be treated as default under section 201(1) of the Income-tax Act, 1961. The Tribunal applied the principle that the obligation to deduct tax under section 192 must yield to a judicial restraint order, so failure to deduct on leave travel concession payments did not attract assessee-in-default consequences. Once the foundation for default failed, the consequential interest charge under section 201(1A) also could not survive.

---

---

Issues: Whether the assessee could be treated as an assessee in default under section 201(1) of the Income-tax Act, 1961, and whether interest under section 201(1A) of the Income-tax Act, 1961 could survive, when non-deduction of tax at source was in compliance with binding interim judicial directions.

Analysis: The dispute arose from the assessee's non-deduction of tax at source on leave travel concession payments claimed to be covered by section 10(5) of the Income-tax Act, 1961. The record showed that during the relevant period the assessee was bound by interim directions of the High Court which restrained deduction of tax at source on such payments. The Tribunal applied the settled principle that the obligation to deduct tax under section 192 of the Income-tax Act, 1961 cannot be read in isolation and must yield to a binding judicial order. On that basis, failure to deduct tax in obedience to such directions could not be treated as default attracting section 201(1) of the Income-tax Act, 1961. Since the foundation for treating the assessee as in default failed, the consequential charge of interest under section 201(1A) of the Income-tax Act, 1961 also could not stand.

Conclusion: The assessee could not be treated as an assessee in default, and the demand under sections 201(1) and 201(1A) of the Income-tax Act, 1961 was not sustainable.

Ratio Decidendi: Where non-deduction of tax at source is undertaken in compliance with a binding judicial order restraining deduction, the person deducting tax cannot be fastened with default under section 201(1) of the Income-tax Act, 1961, and the related interest under section 201(1A) cannot survive.

---