1997 (10) TMI 21 - HC - Income Tax

Court rules tax must be deducted on gross, not net, interest credited under section 194A.

The court held that tax should be deducted at source on the gross amount of interest credited, not on the net amount after mutual set-off. The assessee's ... Interest Issues Involved:1. Whether the assessee was justified in deducting tax at source on the net amount of interest paid under section 194A of the Income-tax Act, 1961.Detailed Analysis:1. Issue of Deducting Tax at Source on Net vs. Gross Interest:The primary issue in this case is whether the assessee should deduct tax at source on the gross amount of interest credited or on the net amount after mutual set-off of interest payable and receivable. The assessee, a partnership firm, credited interest amounting to Rs. 1,19,711 to Dhanalakshmi Corporation but argued that tax should be deducted only on the net interest of Rs. 6,818 after mutual set-off. The Income-tax Officer (ITO) and the Appellate Assistant Commissioner (AAC) held that tax should be deducted on the gross amount as per section 194A of the Income-tax Act, 1961.2. Tribunal's View:The Income-tax Appellate Tribunal (ITAT) ruled in favor of the assessee, stating that section 194A emphasizes income by way of interest, implying that tax should be deducted on the net interest. The Tribunal opined that the deduction of tax should be on the net amount of interest paid, not the gross amount.3. Revenue's Argument:The Revenue challenged the Tribunal's decision, arguing that under section 194A, tax must be deducted at source on the gross amount of interest credited or paid, not on the net amount. They cited various judicial precedents, including the Supreme Court's decision in Aggarwal Chamber of Commerce Ltd. v. Ganpat Rai Hira Lal and decisions from other High Courts, to support their stance that the statutory obligation is to deduct tax on the gross interest credited.4. Assessee's Argument:The assessee contended that considering the mutual set-off of interest payable and receivable, tax should be deducted on the net amount. They relied on the Karnataka High Court's decision in Hyderabad Industries Ltd. v. ITO, arguing that the purpose of tax deduction at source is to facilitate the collection of tax lawfully leviable under the Act, and deducting tax on the gross amount would cause undue hardship to the commercial community.5. Court's Analysis:The court analyzed section 194A, which mandates tax deduction at source on any income by way of interest at the time of credit or payment, whichever is earlier. The court emphasized that the term 'interest' refers to the gross interest and not the net interest. The statutory obligation to deduct tax arises at the time of crediting the gross interest amount, and mutual set-off between parties does not affect this liability.6. Judicial Precedents:The court referred to several judicial precedents supporting the view that tax must be deducted on the gross interest:- Aggarwal Chamber of Commerce Ltd. v. Ganpat Rai Hira Lal: The Supreme Court held that the person responsible for deducting tax is not concerned with the ultimate tax liability of the recipient.- Southern Brick Works Ltd. v. CIT: The Madras High Court held that the liability to deduct tax arises at the time of credit of interest.- ITO v. Anil Kumar Gupta: The Punjab and Haryana High Court held that tax must be deducted at the time of crediting interest.- CIT v. Superintending Engineer: The Andhra Pradesh High Court held that tax deduction at source applies to gross sums, not just amounts wholly bearing income character.7. Conclusion:The court concluded that section 194A mandates tax deduction at source on the gross amount of interest credited. The Tribunal's view that tax should be deducted on the net interest was erroneous. The court held that the assessee was not justified in deducting tax at source on the net amount of interest paid. Therefore, the question of law was answered in the negative, in favor of the Revenue, with no order as to costs.