I failed to deduct TDS and the department has raised a demand on me for the tax itself plus surcharge under section 201. Can it do that?
No, not on this judgment. The Allahabad High Court held that section 201 by itself imposes only interest under sub-section (1A) and penalty under sub-section (1); it carries no provision letting an income-tax authority demand the amount of TDS, or the tax, from a person who failed to deduct, unless the case answers section 201(2), where tax was deducted but not paid over. Surcharge on a TDS amount was struck down as well, tax deductible at source being different from tax on total income. What survives is interest under section 201(1A), from the date the tax was deductible to the date the tax was actually paid.
Decided by the High Court (High Court of Allahabad, Court No. 34 - Sudhir Agarwal and Kaushal Jayendra Thaker, JJ.) on 2016-08-03, reported as [2017] 395 ITR 597 (Allahabad); Writ Tax Nos. 869 and 870 of 2006. It bears on section 201, section 201(1A), section 201(2), section 194A, section 221 of the Income Tax Act 1961, in TDS Defaults and Demand, Recovery & Stay matters.
Most section 201 orders bundle three things together - the tax not deducted, surcharge on it, and interest - and taxpayers usually fight only the first, on the Hindustan Coca-Cola ground that the payee has paid. This judgment gives you a prior and cleaner argument: the section simply does not confer the power to demand the tax at all where nothing was deducted, so the demand fails on jurisdiction before you ever reach proof of the payee's payment. It is also one of the few High Court holdings that deals expressly with surcharge on a TDS demand, and rejects it for want of a charging provision. The trade-off is that it confirms interest under section 201(1A) runs regardless of who ultimately paid the tax.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The Ghaziabad Development Authority, a statutory body, borrowed money from Punjab National Bank Housing Finance Limited and LIC Housing Finance Limited and paid them substantial interest in the assessment years 2001-02 and 2002-03. It deducted no tax at source on that interest. The Income-tax Officer (TDS) issued show-cause notices and, by orders dated 5 April 2006, treated the Authority as an assessee in default and raised demands made up of the tax that should have been deducted, surcharge on that amount, and interest under section 201(1A). The Authority filed two writ petitions. It argued that no deduction was called for on these payments and that, in any event, both housing finance companies had returned the interest as their income and paid tax on it, so nothing was owed to the revenue.
The Court held that the Authority was bound to deduct under section 194A(1), neither payee falling within any of the exclusions in section 194A(3). But it set aside the demands. Section 201 fastens only two consequences on a person who fails to deduct - interest under sub-section (1A), which is mandatory, and penalty under section 221, which needs the absence of good and sufficient reasons. There is no provision in section 201 permitting an income-tax authority to demand the amount of TDS or the tax itself, unless the situation in section 201(2) exists. Surcharge on the TDS amount could not be demanded for want of any specific provision. Both writ petitions were partly allowed, the orders of 5 April 2006 were set aside in their entirety, and the Income-tax Officer (TDS) was directed to pass fresh orders computing only the interest liability, from the date the amount was deductible to the date the tax was actually paid.
The Court separated the three things that follow from a failure to deduct. First, the defaulter is by a legal fiction declared an assessee in default; that is a status, not a charge. Second, section 221 penalty may follow, but only where the default was without good and sufficient reasons. Third, interest under section 201(1A) is automatic. Reading the section, the Court found that the power to demand the tax itself appears only in sub-section (2), which deals with a deductor who has deducted and not paid over - money that is already the government's. Where nothing was deducted, the tax remains the payee's liability and is collected from the payee. The Court then applied Hindustan Coca-Cola Beverage (P) Ltd. v. CIT [2007] 293 ITR 226 and CBDT Circular No. 275/201/95-IT(B) dated 29 January 1997: if the recipient has paid the tax, it is not to be realised again from the deductor, and any other reading would produce double taxation of the same transaction. On surcharge it drew the distinction between tax deductible at source, which is a mode of recovery, and tax on total income, on which surcharge is levied - absent a provision extending surcharge to a section 201(1) defaulter, none could be charged. Interest stood on a different footing, because the revenue was out of its money for the period between the date of deductibility and the date of actual payment.
There is no provision under Section 201 which permits any Income Tax Authority to demand amount of TDS or tax from such person unless and until a situation contemplated by sub-section (2) of Section 201 is found to exist
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Handle my notice → Ask a CA on WhatsAppNo, not on this judgment. The Allahabad High Court held that section 201 by itself imposes only interest under sub-section (1A) and penalty under sub-section (1); it carries no provision letting an income-tax authority demand the amount of TDS, or the tax, from a person who failed to deduct, unless the case answers section 201(2), where tax was deducted but not paid over. Surcharge on a TDS amount was struck down as well, tax deductible at source being different from tax on total income. What survives is interest under section 201(1A), from the date the tax was deductible to the date the tax was actually paid. This was decided by the High Court (High Court of Allahabad, Court No. 34 - Sudhir Agarwal and Kaushal Jayendra Thaker, JJ.) and bears on section 201, section 201(1A), section 201(2), section 194A, section 221 of the Income Tax Act 1961. It is reported as [2017] 395 ITR 597 (Allahabad); Writ Tax Nos. 869 and 870 of 2006. Most section 201 orders bundle three things together - the tax not deducted, surcharge on it, and interest - and taxpayers usually fight only the first, on the Hindustan Coca-Cola ground that the payee has paid. This judgment gives you a prior and cleaner argument: the section simply does not confer the power to demand the tax at all where nothing was deducted, so the demand fails on jurisdiction before you ever reach proof of the payee's payment. It is also one of the few High Court holdings that deals expressly with surcharge on a TDS demand, and rejects it for want of a charging provision. The trade-off is that it confirms interest under section 201(1A) runs regardless of who ultimately paid the tax. If it applies to you, the first step is this: Take the point of jurisdiction first - say that section 201(1) creates only interest and penalty consequences and that a demand for the tax itself needs section 201(2), which applies only where tax was deducted and withheld.
The Ghaziabad Development Authority, a statutory body, borrowed money from Punjab National Bank Housing Finance Limited and LIC Housing Finance Limited and paid them substantial interest in the assessment years 2001-02 and 2002-03. It deducted no tax at source on that interest. The Income-tax Officer (TDS) issued show-cause notices and, by orders dated 5 April 2006, treated the Authority as an assessee in default and raised demands made up of the tax that should have been deducted, surcharge on that amount, and interest under section 201(1A). The Authority filed two writ petitions. It argued that no deduction was called for on these payments and that, in any event, both housing finance companies had returned the interest as their income and paid tax on it, so nothing was owed to the revenue. The matter was decided on 2016-08-03 by the High Court (High Court of Allahabad, Court No. 34 - Sudhir Agarwal and Kaushal Jayendra Thaker, JJ.). On those facts the High Court held as follows. The Court held that the Authority was bound to deduct under section 194A(1), neither payee falling within any of the exclusions in section 194A(3). But it set aside the demands. Section 201 fastens only two consequences on a person who fails to deduct - interest under sub-section (1A), which is mandatory, and penalty under section 221, which needs the absence of good and sufficient reasons. There is no provision in section 201 permitting an income-tax authority to demand the amount of TDS or the tax itself, unless the situation in section 201(2) exists. Surcharge on the TDS amount could not be demanded for want of any specific provision. Both writ petitions were partly allowed, the orders of 5 April 2006 were set aside in their entirety, and the Income-tax Officer (TDS) was directed to pass fresh orders computing only the interest liability, from the date the amount was deductible to the date the tax was actually paid.
The Court separated the three things that follow from a failure to deduct. First, the defaulter is by a legal fiction declared an assessee in default; that is a status, not a charge. Second, section 221 penalty may follow, but only where the default was without good and sufficient reasons. Third, interest under section 201(1A) is automatic. Reading the section, the Court found that the power to demand the tax itself appears only in sub-section (2), which deals with a deductor who has deducted and not paid over - money that is already the government's. Where nothing was deducted, the tax remains the payee's liability and is collected from the payee. The Court then applied Hindustan Coca-Cola Beverage (P) Ltd. v. CIT [2007] 293 ITR 226 and CBDT Circular No. 275/201/95-IT(B) dated 29 January 1997: if the recipient has paid the tax, it is not to be realised again from the deductor, and any other reading would produce double taxation of the same transaction. On surcharge it drew the distinction between tax deductible at source, which is a mode of recovery, and tax on total income, on which surcharge is levied - absent a provision extending surcharge to a section 201(1) defaulter, none could be charged. Interest stood on a different footing, because the revenue was out of its money for the period between the date of deductibility and the date of actual payment. In the words reproduced by the source cited on this page: "There is no provision under Section 201 which permits any Income Tax Authority to demand amount of TDS or tax from such person unless and until a situation contemplated by sub-section (2) of Section 201 is found to exist"
It was decided by the High Court on 2016-08-03 and is reported as [2017] 395 ITR 597 (Allahabad); Writ Tax Nos. 869 and 870 of 2006. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 201, section 201(1A), section 201(2), section 194A, section 221, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. The Court held that the Authority was bound to deduct under section 194A(1), neither payee falling within any of the exclusions in section 194A(3). But it set aside the demands. Section 201 fastens only two consequences on a person who fails to deduct - interest under sub-section (1A), which is mandatory, and penalty under section 221, which needs the absence of good and sufficient reasons. There is no provision in section 201 permitting an income-tax authority to demand the amount of TDS or the tax itself, unless the situation in section 201(2) exists. Surcharge on the TDS amount could not be demanded for want of any specific provision. Both writ petitions were partly allowed, the orders of 5 April 2006 were set aside in their entirety, and the Income-tax Officer (TDS) was directed to pass fresh orders computing only the interest liability, from the date the amount was deductible to the date the tax was actually paid. It arises in TDS Defaults and Demand, Recovery & Stay matters, on section 201, section 201(1A), section 201(2), section 194A, section 221 of the Income Tax Act 1961, and was decided by High Court of Allahabad, Court No. 34 - Sudhir Agarwal and Kaushal Jayendra Thaker, JJ.. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Object separately to any surcharge component and ask the officer to show the provision under which surcharge is charged on a TDS amount. Collect the payees' returns, assessment orders and proof of tax paid, and file the certificate contemplated by CBDT Circular No. 275/201/95-IT(B), which the Court relied on. Concede interest under section 201(1A) and argue only about its start and end dates - the date the tax was deductible and the date the tax was actually paid, by whoever paid it.
Still good law. No appellate history against this judgment was traced. It is listed among the authorities on section 201 by the Delhi Bench of the Tribunal in ACIT v Fortis Hospitals Ltd. (27 June 2022). I did not find any Supreme Court decision dealing with it. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Read from the Allahabad High Court's own eLegalix copy of the original English judgment, which is the judgment in Writ Tax No. 870 of 2006 and covers Writ Tax No. 869 of 2006 as the connected matter. The reported citation at [2017] 395 ITR 597 was not independently checked against the law report. The Court did not decide what interest, if any, was in fact due - that was remitted to the Income-tax Officer (TDS). This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Court held that the Authority was bound to deduct under section 194A(1), neither payee falling within any of the exclusions in section 194A(3). But it set aside the demands. Section 201 fastens only two consequences on a person who fails to deduct - interest under sub-section (1A), which is mandatory, and penalty under section 221, which needs the absence of good and sufficient reasons. There is no provision in section 201 permitting an income-tax authority to demand the amount of TDS or the tax itself, unless the situation in section 201(2) exists. Surcharge on the TDS amount could not be demanded for want of any specific provision. Both writ petitions were partly allowed, the orders of 5 April 2006 were set aside in their entirety, and the Income-tax Officer (TDS) was directed to pass fresh orders computing only the interest liability, from the date the amount was deductible to the date the tax was actually paid.
TaxSphere, “Ghaziabad Development Authority v Union of India”, https://taxnotice.vittsphere.com/caselaw/case/ghaziabad-development-authority-v-uoi-201-no-power-to-demand-tax/ (validity last checked 2026-09-01)
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The TDS officer has passed an order under section 201 treating me as an assessee in default and has added interest under section 201(1A). Who exactly is in default, what gets me out of it, which interest rate runs for which period, and how far back can he go?
What proof do I need that my payee declared the income and paid tax, to get the disallowance deleted?
My deductee has returned the income and paid the tax, and I have filed Form 26A. I know the s.201(1) demand goes — but for how long does s.201(1A) interest run against me?
My bank has deducted tax on my fixed deposit interest and I was told the limit had gone up. My father is a senior citizen and his bank deducted too. There is also a loan I took from a friend on which I pay interest, and a co-operative society that pays me interest on a deposit. Who exactly has to deduct under section 194A, on what amount, and what are the limits as they stand now?
