Statutory Basis – Section 201(1A)
Interest on delayed deduction or payment of TDS is governed by Section 201(1A) of the Income-tax Act, 1961.
It creates a compulsory liability for the deductor in two situations:
| Situation | Nature of Default | Rate of Interest | Period of Interest |
|---|---|---|---|
| (a) Delay in Deduction | TDS not deducted or deducted late | 1% per month or part thereof | From the date tax was deductible to the date actually deducted |
| (b) Delay in Deposit | TDS deducted but not deposited on time | 1.5% per month or part thereof | From the date of deduction to the date of actual payment |
Even a one-day delay counts as a full month, and the interest must be paid before filing the TDS return (Form 26Q/24Q etc.) using Challan ITNS 281.
Nature and Deductibility under Income Tax
Though the Supreme Court in Eli Lilly & Co. (India) Pvt. Ltd. (312 ITR 225) held that interest under Section 201(1A) is compensatory, its deductibility depends on the purpose and nature of such payment.
| Aspect | Explanation |
|---|---|
| Nature | Interest under 201(1A) is not a penalty but a compensatory charge for delayed remittance of Government dues. |
| Allowability | Despite being compensatory, it does not qualify as an allowable business expenditure under Section 37(1) because it arises from non-compliance with a statutory obligation, not from carrying on business. |
| Judicial Support | 1. Bharat Commerce & Industries Ltd. v. CIT (1998) 230 ITR 733 (SC) – Interest on taxes is not deductible. 2. CIT v. Chennai Properties & Investments Ltd. (239 ITR 435, Mad.) – Interest u/s 201(1A) is not an allowable expense. 3. Oriental Insurance Co. Ltd. v. CIT (206 ITR 988, Delhi) – Even compensatory interest linked to tax default is disallowable. |
| CBDT View | Circular No. 9/2007 confirms that such interest, though compensatory, cannot be claimed as business expenditure. |
Therefore:
Interest paid under Section 201(1A) is disallowed u/s 37(1) and must be added back while computing business income.
Tax Audit Disclosure Requirements (Form 3CD)
The tax auditor must ensure complete and accurate disclosure of this item under the following clauses of Form 3CD:
| Clause | Disclosure Requirement | Remarks |
|---|---|---|
| Clause 21(a) | Report amounts inadmissible under Section 37(1) — including those for breach of law or non-compliance with statutory obligations. | Report interest on TDS defaults here as disallowable expenditure. |
| Clause 34(c) | Report details of TDS compliance — whether tax was deducted and paid on time and whether interest u/s 201(1A) was payable. | Mention the quantum of interest payable and date of deposit. |
Example Disclosure in Clause 21(a):
“Interest on late deposit of TDS under Section 201(1A) amounting to ₹____, being not allowable under Section 37(1).”
Example Disclosure in Clause 34(c):
“Tax deducted but deposited after due date. Interest under Section 201(1A) of ₹____ paid on ____.”
Accounting and Practical Handling
| Step | Treatment |
|---|---|
| Books of Account | Record under “Interest on Statutory Liabilities” or “Interest on TDS Payable.” |
| Tax Computation | Add back in computation of income as disallowable expense u/s 37(1). |
| Tax Audit Report | Mention under Clause 21(a) (disallowance) and Clause 34(c) (TDS interest compliance). |
| Timing of Payment | Should be remitted before filing TDS return to avoid further interest. |
Key Judicial and Conceptual Insights
| Principle | Source / Case Law |
|---|---|
| Interest u/s 201(1A) is compensatory, not penal | Eli Lilly & Co. (India) Pvt. Ltd. (SC) |
| Interest relating to income-tax delay is not business expense | Bharat Commerce & Industries Ltd. (SC) |
| Such interest is not incurred wholly and exclusively for business | Chennai Properties & Investments Ltd. (Madras HC) |
| Auditor must ensure dual reporting — disallowance & compliance | Form 3CD, Clauses 21(a) and 34(c) |
Consolidated Summary Table
| Particular | Legal Reference | Allowability | Audit Disclosure | Accounting Note |
|---|---|---|---|---|
| Interest for delay in TDS deduction / payment | Sec. 201(1A) | ❌ Not allowable u/s 37(1) | Clause 21(a) (disallowance) Clause 34(c) (TDS compliance) | To be booked as statutory interest, added back in computation |
| Nature | Compensatory but non-deductible | — | — | — |
| Judicial Position | Bharat Commerce, Eli Lilly, Chennai Properties | — | — | — |
Final Takeaway
Interest under Section 201(1A) represents the cost of non-compliance, not a business cost.
It is mandatory, compensatory, but not deductible.
Tax auditors must ensure dual disclosure — one under Clause 21(a) for disallowance and another under Clause 34(c) for TDS compliance verification.
