Mandatory interest on TDS default and limited hearing requirement under section 201(1A) upheld on the facts.

Interest under section 201(1A) was treated as a compensatory consequence, distinct from penalty, and became mandatory once default in deducting or remitting tax at source was established; any good or sufficient reason for the default did not remove that liability. The tribunal also held that natural justice applies to the limited extent that the assessee must be given an opportunity to show that the ingredients of default are absent before interest is levied. On the facts, that opportunity had been afforded, so the levy of interest remained valid.

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Issues: (i) Whether interest under section 201(1A) of the Income-tax Act, 1961 is mandatory once the assessee is found to be in default for failure to deduct tax at source or failure to remit tax deducted at source. (ii) Whether an opportunity of being heard must be given before levying interest under section 201(1A).

Issue (i): Whether interest under section 201(1A) of the Income-tax Act, 1961 is mandatory once the assessee is found to be in default for failure to deduct tax at source or failure to remit tax deducted at source.

Analysis: Interest under section 201(1A) was treated as distinct from penalty and as compensatory in character. The statutory scheme of section 201 showed that once the conditions of default under section 194C were established and the person responsible was deemed to be an assessee in default, the levy of interest followed as a consequential liability. The existence of good or sufficient reasons for the default did not displace that liability once default was found.

Conclusion: Interest under section 201(1A) is mandatory once default is established and is leviable against the assessee.

Issue (ii): Whether an opportunity of being heard must be given before levying interest under section 201(1A).

Analysis: Although section 201(1A) does not expressly prescribe a hearing, the appellate nature of the levy and the linkage with section 201(1) indicated that the assessee must be given a chance to show that the ingredients of default were not present. The principles of natural justice were held to apply to that limited extent. On the facts, the assessee had been called upon to explain the default and had replied before the levy was made.

Conclusion: An opportunity of being heard is required before levy of interest, but the requirement was satisfied on the facts and the levy remained valid.

Final Conclusion: The appeals failed because the assessee was held to be in default, the interest levy was mandatory, and the pre-levy opportunity requirement was met.

Ratio Decidendi: Under section 201(1A), interest is a compensatory consequence that becomes payable once default in deduction or remittance of tax is established, and the assessee must at least be given an opportunity to show that no such default exists.

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