Read how ITAT interpreted definition of ‘Month’ for interest calculation under Section 201(1A) of the Income Tax Act, 1961.
Introduction
Tax Deducted at Source (TDS) is one of the modes of collecting income tax from the taxpayers in India. It is governed by the Income Tax Act, 1961 and the rules made thereunder. TDS is deducted by the payer of a certain income or payment to the payee at a prescribed rate and deposited with the government within a specified time limit. However, sometimes, the payer may fail to deduct or deposit the TDS on time, which may result in interest and penalty under section 201 of the Income Tax Act.
Let us discuss a recent case where the ITAT Jaipur held that the term ‘month’ for the purpose of interest calculation on delayed payment of TDS should be taken as 30 days period and not as per the British calendar month as defined under section 3 (35) of the General Clauses Act. This ruling may have a significant impact on the taxpayers who are liable to pay interest on TDS under section 201 (1A) of the Income Tax Act.
Background and relevant text of the Income Tax Act
Section 201(1) of the Income Tax Act provides that where any person, including the principal officer of a company, who is required to deduct any sum in accordance with the provisions of this Act; or referred to in sub-section (1A) of section 192, being an employer, does not deduct, or does not pay, or after so deducting fails to pay, the whole or any part of the tax, as required by or under this Act, then, such person, shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default in respect of such tax.
Section 201(1A) of the Income Tax Act provides that without prejudice to the provisions of sub-section (1), if any such person does not deduct the whole or any part of the tax or after deducting fails to pay the tax as required by or under this Act, he or it shall be liable to pay simple interest,— (i) at one per cent for every "month" or part of a "month" on the amount of such tax from the date on which such tax was deductible to the date on which such tax is deducted; and (ii) at one and one-half per cent for every month or part of a month on the amount of such tax from the date on which such tax was deducted to the date on which such tax is actually paid, and such interest shall be paid before furnishing the statement in accordance with the provisions of sub-section (3) of section 200.
The term ‘month’ is not defined in the Income Tax Act. However, section 3(35) of the General Clauses Act defines ‘month’ as follows: “month” shall mean a month reckoned according to British calendar.
According to British calendar, a month can have 28, 29, 30 or 31 days depending on whether it is February or a leap year or not.
Facts and details of this case
The case before the ITAT Jaipur was that of Ready Roti India Pvt Ltd vs DCIT (TDS), Jaipur. The assessee company had deducted TDS from various payments made to its vendors and employees during the financial year 2018-19. However, it had failed to deposit some of these TDS amounts with the government within due dates as prescribed under section 200(3).
The AO, TDS (CPC) issued notices to the assessee company under section 200A(1) read with rule 31A(4) for late payment default for various months during financial year 2018-19. The AO calculated interest for six months instead of five months as per British calendar month for each default month. For example, for TDS deducted in April 2018 and deposited in October 2018, interest was calculated from May 2018 to October 2018 i.e., six months instead of five months i.e., May to September.
The assessee company objected to this calculation and contended that interest should be calculated for five months only as per 30 days period and not as per British calendar month. The assessee company relied on various judicial precedents where it was held that ‘month’ for interest calculation should be taken as 30 days period and not as per British calendar month.
The AO rejected this contention and passed orders under section 200A confirming interest demand for six months for each default month. The assessee company appealed against these orders before the CIT (A), who also upheld the orders of the AO. The assessee company further appealed before the ITAT Jaipur.
Arguments of both sides
Before the ITAT Jaipur, the assessee company reiterated its arguments that interest should be calculated for five months only as per 30 days period and not as per British calendar month. The assessee company relied on the following past judicial precedents:
CIT vs. Arvind Mills Ltd [(2012) 204 Taxman 38 (Guj. HC)] where the Gujarat High Court held that ‘month’ for interest calculation under section 201(1A) should be taken as 30 days period and not as per British calendar month.
UTI Mutual Fund Vs. DCIT (2019) 56 CCH 0209 (Mum)(Trib): For purpose of computation of interest payable u/s. 201(1A)(ii) r/w Rule 119A(b) of the 1962 Rules, ‘month’ is to be interpreted as period of 30 days and not British Calendar Month.
The assessee company also cited various other decisions of ITATs and High Courts in support of its contention.
On the other hand, the department relied on the orders of the AO and the CIT(A) and argued that interest should be calculated as per British calendar month as defined under section 3 (35) of the General Clauses Act. The department contended that since the term ‘month’ is not defined in the Income Tax Act, it should be interpreted as per the General Clauses Act, which is applicable to all Central Acts unless there is anything repugnant in the subject or context. The department also cited some decisions of ITATs and High Courts in support of its contention.
Judgement of the ITAT
The ITAT Jaipur, after hearing both the parties and considering the relevant provisions and judicial precedents, decided the issue in favour of the assessee company. The ITAT held that ‘month’ for interest calculation under section 201(1A) should be taken as 30 days period and not as per British calendar month. The ITAT gave the following reasons for its decision:
The ITAT observed that section 201(1A) uses the expression ‘for every month or part of a month’ which implies that a fraction of a month is also to be considered for interest calculation. Therefore, it is logical to take a month as a uniform period of 30 days rather than varying from 28 to 31 days depending on British calendar.
The ITAT noted that section 201(1A) is a penal provision which imposes interest for default or delay in payment of TDS. Therefore, it should be interpreted strictly and in favour of the assessee. The ITAT relied on the principle of ‘no taxation without clear words’ and held that ambiguity or doubt in a taxing statute should be resolved in favour of the taxpayer.
The ITAT followed the decision of Gujarat High Court in Arvind Mills case and held that it is directly applicable to the present case. The ITAT also distinguished the decision cited by the department on various grounds.
The ITAT also referred to section 194A(3)(iii) which provides for deduction of tax at source on interest income at such rates in force as may be specified by the Central Government by notification in this behalf, subject to a maximum of twenty per cent per annum. The ITAT observed that this provision clearly indicates that interest is calculated on annual basis and not on monthly basis. Therefore, it is reasonable to take a month as one-twelfth of a year i.e., 30 days period.
Accordingly, the ITAT directed the AO, TDS(CPC) to re-compute interest for five months instead of six months for each default month and give consequential relief to the assessee company.
Impact of the judgement for future
The judgement of the ITAT Jaipur is a welcome relief for taxpayers who are liable to pay interest on delayed payment of TDS under section 201(1A). It will reduce their interest liability by one month for each default month. It will also bring uniformity and certainty in interest calculation and avoid unnecessary litigation.
However, it is possible that the department may challenge this judgement before a higher forum such as High Court or Supreme Court. Therefore, taxpayers should keep a watch on any further developments in this matter.
For any assistance or guidance on tax litigation matters, please feel free to contact us at Monik Advisors LLP. We have a dedicated and proficient team of tax experts who can provide you with tailor-made and effective solutions for your tax issues. You can visit our website or email us to get in touch with us. We are happy to serve you.
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