2010 (4) TMI 722 - AT - Income Tax

Tribunal upholds CIT(A) decision on tax liability for interest accrued on loans

The Tribunal upheld the CIT(A)'s decision to cancel the AO's order, stating no tax liability existed for the assessee regarding interest accrued on loans ... Demand - The AO was of the opinion that when interest accrued on loan was credited in the creditor’s account, the assessee was supposed to deduct tax at source within the meaning of provisions contained in Section 194A of the Act - It is not in dispute that the assessee has made entry of interest accrued on loan taken from M/s Haryana State Agriculture Marketing Board in its books of accounts - Therefore, the CIT(A)’s observation that the entry was made only for notional interest accrued on loan and Section 194A in that case would not be applicable, is not justified Whether there is no tax liability payable by the payee or the creditor in whose account interest was credited, a demand can now be raised u/s 201(1) against the assessee for failure to deduct tax at source - In this connection, a reference may be made to a decision of Hon’ble Supreme Court in the case of Hindustan Coca Cola Beverages (P) Ltd. vs CIT, (2007 -TMI - 1676) (SC) – It was held that Haryana State Agriculture Marketing Board has already discharged its liability, no demand as raised by the AO u/s 201(1) can now be imposed against the present assessee – Hence present appeals are disposed of Issues:Appeal against order passed by CIT(A) under sections 201(1) and 201(1A) of the Income-tax Act, 1961 for Assessment Years 2006-07 and 2007-08.Analysis:1. The revenue appealed against the CIT(A)'s order deleting the demand raised by the AO under sections 201 and 201(1A) of the Income-tax Act for the mentioned assessment years. The grounds of appeal included contentions regarding tax deduction liability, application of TDS rate, and revenue loss due to non-taxable income of the deductee.2. The AO found that the assessee failed to deduct tax at source on interest accrued on loans from Haryana State Agriculture Marketing Board for the relevant years. Entries in the books showed interest accrued and repayment details. The AO held that tax should have been deducted when interest was credited to the creditor's account as per Section 194A.3. The CIT(A) canceled the AO's order citing exemption granted to the creditor, stating no tax liability existed, and the provision of notional interest didn't result in income to the tax-exempt creditor. The Department appealed this decision.4. The Tribunal noted that tax deduction under Section 194A is required when interest is credited to the payee's account, regardless of actual payment. Referring to a Supreme Court decision, it clarified that the deductor remains liable for interest under Section 201(1A) if tax was not deducted and paid by the recipient.5. The Tribunal agreed that no demand under Section 201(1) should be enforced if the deductee has paid the tax. However, the liability for interest under Section 201(1A) and penalty under Section 271C remains. The matter was referred back to the AO to verify if the deductee had discharged the tax liability, and necessary details were to be produced for examination.6. The AO was instructed to investigate the deductee's tax liability and exemption status, following the Supreme Court decision referred to. The decision pronounced on April 29, 2010, disposed of the appeals accordingly, allowing for further examination by the AO based on the provided instructions.