1998 (3) TMI 96 - HC - Income Tax

Court rules tax deductible at source should be deducted before calculating interest, giving credit under section 215.

The court upheld the view that tax deductible at source should be deducted before calculating interest, giving credit for tax deducted at source when ... Definition of 'assessed tax' in section 215(5) - tax deductible at source as distinct from tax actually deducted - computation of interest under section 215 of the Incometax Act - treatment of amounts in advance tax computation under section 209(1)(a)(iii) - liability of payer for failure to deduct and section 201(1A) interestDefinition of 'assessed tax' in section 215(5) - tax deductible at source as distinct from tax actually deducted - computation of interest under section 215 of the Incometax Act - treatment of amounts in advance tax computation under section 209(1)(a)(iii) - Whether 'assessed tax' for the purposes of section 215 is to be reduced by the amount of tax 'deductible' at source (as envisaged in section 215(5) and section 209(1)(a)(iii)) rather than by the amount of tax actually deducted at source, and the consequence for computation of interest under section 215. - HELD THAT: - The Court held that the expression 'assessed tax' in section 215(5) must be read with the specific meaning given in that subsection and in the context of advance tax computation under section 209(1)(a)(iii). The phrase 'tax deductible in accordance with the provisions of ... section 194A' refers to the tax required to be deducted at the time of credit or payment (whichever is earlier) and not merely the tax actually deducted later. If the Legislature had intended to restrict the deduction to tax actually deducted it would have used the expression 'tax deducted', which it uses elsewhere. When computing advance tax an assessee is entitled to reduce the tax by the amount which, in law, was deductible at source in the relevant financial year; consequently, for determining whether the advance tax paid falls short of the assessed tax under section 215(1), the assessed tax must be reduced by the tax deductible at source. Applying this construction, the Tribunal was right to direct recomputation of interest under section 215 after giving credit for tax deductible at source.The Court answered in favour of the assessee that assessed tax under section 215(5) is to be reduced by the amount of tax deductible at source (and not only by tax actually deducted), and interest under section 215 is to be computed accordingly.Tax deductible at source as distinct from tax actually deducted - liability of payer for failure to deduct and section 201(1A) interest - effect of belated deduction and credit in regular assessment - Whether a belated deduction made by the payer after the credit of interest to the assessee's account can be treated as 'tax deducted at source' for the purpose of excluding that amount from assessed tax under section 215(5), and the respective liabilities of payer and assessee. - HELD THAT: - The Court reasoned that where credit of interest is given to the payee earlier than payment, the obligation to deduct arises at that time; a subsequent belated deduction by the payer is not 'tax deducted at source' properly socalled for the purpose of section 215(5). The liability to pay interest for failure to deduct devolves on the payer under section 201(1A) (an absolute liability running from the date the tax was deductible until payment), whereas the tax not deducted becomes directly payable by the assessee under section 191 and may be adjusted in assessment. These distinct liabilities demonstrate that giving credit in the assessment for amounts later deducted does not convert a belated deduction into tax deductible at source at the earlier time; accordingly the assessee is entitled to have the assessed tax reduced by the tax which was legally deductible at the time of credit, and interest under section 215 must be computed on that basis.Belated deductions made after credit cannot be treated as tax deducted at source for the purpose of section 215(5); the payer remains liable under section 201(1A) while the assessee's assessed tax is to be reduced by the tax that was deductible at the time of credit.Final Conclusion: The references are answered in the affirmative in favour of the assessees: assessed tax for computation of interest under section 215 must be reduced by the tax deductible at source (as envisaged in section 215(5) and section 209(1)(a)(iii)) and not limited to tax actually deducted later; belated deductions do not convert into tax deductible at source at the earlier time, and the Tribunal's direction to recompute interest accordingly is upheld. Each reference is disposed of in favour of the assessee with no order as to costs. Issues Involved:1. Whether tax deductible at source should be deducted before calculating interest.2. Whether interest u/s 215 should be levied without giving credit for tax deducted at source.3. Whether interest u/s 215 should be charged after giving credit for tax deducted at source, even if deducted and paid in the next year.4. Whether it is the tax deductible at source or the tax actually deducted at source that should be considered while computing interest u/s 215.5. Whether credit has to be given for tax deducted at source for the purpose of charging interest u/s 215.6. Whether assessed tax should be reduced by the amount of tax deductible u/s 192 to 195 and not the tax actually deducted at source.7. Whether the Assessing Officer should work out the amount of tax deductible at source on interest income and give due credit for the same for the purpose of working out the assessed tax u/s 215(5).8. Whether charging of interest u/s 215 is to be computed after giving credit for tax deducted at source.9. Whether interest u/s 215 should be levied after giving credit for tax deducted at source which was not actually deducted during the year but deducted and paid in the next year.Summary:1. Tax Deductible at Source Before Calculating Interest:The court addressed whether the Appellate Tribunal was correct in holding that tax deductible at source should be deducted before calculating interest. The Tribunal's decision in Kanchanjunga Investments Pvt. Ltd. v. ITO was followed, which held that credit for tax deducted at source should be given when computing interest u/s 215.2. Credit for Tax Deducted at Source:In multiple references, the court examined whether interest u/s 215 should be levied without giving credit for tax deducted at source. It was held that credit must be given for tax deductible at source before calculating interest.3. Interest Charged After Giving Credit for Tax Deducted at Source:The court considered whether interest u/s 215 should be charged after giving credit for tax deducted at source, even if deducted and paid in the next year. The Tribunal's decision was upheld, confirming that credit must be given for tax deductible at source when computing interest.4. Tax Deductible vs. Tax Actually Deducted:The court deliberated whether it is the tax deductible at source or the tax actually deducted at source that should be considered while computing interest u/s 215. It was concluded that the tax deductible at source should be considered.5. Credit for Tax Deducted at Source for Charging Interest:The court affirmed that credit has to be given for tax deducted at source for the purpose of charging interest u/s 215.6. Assessed Tax Reduction:The court examined whether assessed tax should be reduced by the amount of tax deductible u/s 192 to 195 and not the tax actually deducted at source. It was held that the assessed tax should be reduced by the amount of tax deductible.7. Working Out Tax Deductible at Source:The court addressed whether the Assessing Officer should work out the amount of tax deductible at source on interest income and give due credit for the same for the purpose of working out the assessed tax u/s 215(5). It was affirmed that this approach should be followed.8. Charging Interest After Giving Credit for Tax Deducted at Source:The court confirmed that charging of interest u/s 215 is to be computed after giving credit for tax deducted at source.9. Interest After Credit for Tax Deducted and Paid in Next Year:The court concluded that interest u/s 215 should be levied after giving credit for tax deducted at source which was not actually deducted during the year but deducted and paid in the next year.Final Decision:The court upheld the Tribunal's view that the tax deductible at source should be reduced from the tax determined on the basis of the regular assessment, and thereafter, the liability to pay interest should be calculated u/s 215. The references were disposed of in favor of the assessee and against the Revenue.