Levy of interest under section 201(1A) not valid in respect of any tax deduction brought in by means of retrospective amendment

In Canara Bank v. ITO (2009) 24 DTR (Nag.) (Trib) 476 consequent to amendment of section 17(2)(ii) and insertion of sections 192(1A) and 192(1B) by the Finance Act, 2007 and amendment of rule 3 to the Income-tax rules w.e.f. 01.04.2002, the validity of treating the employer as assessee in default under sections 201(1) and 201(1A) came up before the tribunal.

It was held that section 192 required the assessee - employer to deduct tax at source at the time of making payment and at the time of making payment tax was deducted at source in accordance with the provisions of law. Rule 3 amended subsequently with retrospective effect could not make the employer as assessee in default. At the time of tax deduction and at the time of filing TDS return the assessee had not violated the provisions of law nor deviated from the legal requirements. A change of law with retrospective effect cannot be applied to treat the assessee as assessee in default for charging penal interest for no fault committed therein.

The tribunal also placed reliance on the decision in the case of P.V.Rajagopal v. Union of India (1998) 233 ITR 678 (AP) wherein it was held that the revenue cannot force the employer to deduct tax on an amount which was in dispute as a perquisite by the employer.

A retrospective amendment would not bring responsibility for deduction of tax at source on retrospective basis when the impugned expenditure has been disbursed and has gone out of the control of the paying employer.

Article 20 of the Constitution imposes two limitations on retrospective application of penal laws. They are (i) the making of an act an offence for the first time and making the law retrospective - is prohibited; and (ii) in the infliction of penalty greater than what was in force when the act was committed - is not permitted.

Thus the decision was rendered in favour of the assessee.