Compensatory interest and TDS penalty fail where tax is timely deposited and bona fide reliance shows reasonable cause.

Interest under section 201(1A) is compensatory and was treated as unwarranted where the tax had already been deposited within the time available to the deductor, so the Revenue suffered no compensable delay. Penalty under section 271C was also treated as unsustainable where the failure to deduct tax arose from bona fide reliance on a promised section 197(1) certificate and the tax was subsequently made good within time, bringing section 273B into play through reasonable cause. The article thus states that timely deposit and genuine good-faith conduct can defeat both compensatory interest and penal consequences in a TDS default.

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Issues: (i) whether interest under section 201(1A) of the Income-tax Act, 1961 was leviable when the deductee had paid the tax within the time available to the deductor for deposit; (ii) whether penalty under section 271C of the Income-tax Act, 1961 was exigible when the assessee failed to deduct tax at source on the footing of a promised certificate under section 197(1) and the tax was subsequently made good within time.

Issue (i): whether interest under section 201(1A) of the Income-tax Act, 1961 was leviable when the deductee had paid the tax within the time available to the deductor for deposit.

Analysis: Interest under section 201(1A) is compensatory and is intended to make good loss to the Revenue for delayed receipt of tax. On the facts, the tax relatable to the impugned interest income had been deposited with the Government within the period available for the deductor to make payment. Since the exchequer had not been deprived of the tax beyond the permitted time, the basis for compensation under section 201(1A) was absent. The authorities below were therefore not justified in sustaining interest merely because the assessee itself had not remitted the tax.

Conclusion: Interest under section 201(1A) was not leviable, and the assessee succeeded on this issue.

Issue (ii): whether penalty under section 271C of the Income-tax Act, 1961 was exigible when the assessee failed to deduct tax at source on the footing of a promised certificate under section 197(1) and the tax was subsequently made good within time.

Analysis: Penalty under section 271C is subject to the protection of section 273B, under which no penalty is imposable where reasonable cause for the failure is proved. The assessee acted on the bona fide assurance of its holding company that a certificate under section 197(1) would be furnished, and the tax was thereafter paid within the time available for deposit, thereby showing absence of revenue loss and voluntary compliance. In these circumstances, the failure was held to be backed by reasonable cause and the separate penal consequence under section 271C could not be sustained.

Conclusion: Penalty under section 271C was not exigible, and the assessee succeeded on this issue.

Final Conclusion: The assessee was held entitled to relief on both the interest and penalty disputes arising from the same TDS default, and both appeals were allowed.

Ratio Decidendi: Interest under section 201(1A) is not chargeable where the tax is deposited within the time available to the deductor and the Revenue suffers no compensable deprivation, and penalty under section 271C is not leviable where the assessee establishes reasonable cause under section 273B through bona fide reliance and timely good-faith compliance.

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