Tax deduction at source liability depends on payees' actual taxability before interest under section 201(1A) can be levied.

Liability to deduct tax at source and the consequential interest under section 201(1A) depends on the real taxability of the payees on the relevant receipts. An order under section 201, including one framed with reference to section 201(1A), is appealable where it concerns substantive default liability rather than mere clerical correction. Interest could not be sustained without first verifying whether the bidi munshis/contractors were actually taxable on the payments received under section 194C. The matter was remitted for fresh determination after examining the payees' tax liability.

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Issues: (i) whether an order passed under section 201(1A) read with section 201(1) of the Income-tax Act, 1961 was appealable and could be interfered with in appeal; (ii) whether interest under section 201(1A) could be levied in relation to payments made to bidi munshis/contractors without first ascertaining whether the payees were actually liable to tax on those receipts under section 194C.

Issue (i): whether an order passed under section 201(1A) read with section 201(1) of the Income-tax Act, 1961 was appealable and could be interfered with in appeal;

Analysis: The order of the Income-tax Officer, though framed with reference to section 201(1A), also proceeded on the footing that the assessee was in default and directed payment of the tax component, thereby attracting the consequences contemplated by section 201(1) as well. An order under section 201 is appealable under section 246(1)(b). The dispute was not one of clerical rectification but of substantive liability, namely, whether the assessee was bound to deduct tax at source at all. In those circumstances, the appellate remedy was held to be available.

Conclusion: The objection to the maintainability of the appeal failed, and no interference was called for on that ground.

Issue (ii): whether interest under section 201(1A) could be levied in relation to payments made to bidi munshis/contractors without first ascertaining whether the payees were actually liable to tax on those receipts under section 194C.

Analysis: Liability to deduct tax under section 194C was treated as co-extensive with the real tax liability arising in the hands of the payees. If the sums paid to the so-called contractors were in truth their taxable receipts, the assessee could be treated as a defaulter and interest could follow under section 201(1A). If, however, the payees had not been assessed to tax on those receipts, there would be no foundation for treating the assessee as liable to deduct tax from the payments made to them. The record had not been examined from that angle, and the tax position of the recipients had to be verified before any final levy could stand.

Conclusion: The matter was required to be sent back for verification of the tax liability of the payees, and interest could be levied only to the extent that such liability existed.

Final Conclusion: The appellate order was set aside to the limited extent indicated, and the matter was remitted to the Income-tax Officer for fresh orders after examining the tax liability of the persons to whom the payments were made.

Ratio Decidendi: Liability to deduct tax at source and the consequential interest under section 201(1A) depends on the real taxable liability arising from the relevant payments, and such levy cannot be sustained without first determining the taxability of the payees on those receipts.

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