2012 (3) TMI 194 - HC - Income Tax

Interpretation of Tax Act Section 194C: State Government Obligation & Interest Dispute Resolution

The court addressed the interpretation of Section 194C of the Income Tax Act, emphasizing the State Government's obligation to deposit deducted taxes ... Interest for delay in deposit of TDS – Rule 30 of the Income Tax Rules obliges such person, if it is the Government, to deposit the deducted amount on the same date of payment - appellant being state government contested that it can not be treated as person and as such has no obligation to pay such interest – Held that:- Since it is a dispute between two Governments, it would be appropriate to sort out the same by the Governments instead of sorting it through Courts. Accordingly, appellant is directed to place the dispute highlighted above before the Secretary Finance of the Central Government. ITO is directed to not to take any step to recover the assessed interest. Issues:1. Interpretation of Section 194C of the Income Tax Act regarding deduction of tax at source.2. Obligation of the State Government to deposit the deducted tax with the Income Tax Officer.3. Dispute regarding liability to pay interest on delayed tax deposit.4. Definition of 'person' under the Income Tax Act and its applicability to the State Government.5. Resolution of the dispute between two Governments through administrative channels.Analysis:1. The judgment addresses the interpretation of Section 194C of the Income Tax Act, which mandates the deduction of tax at source by any person responsible for paying a sum to a resident under a contract. The rule requires the deduction to be deposited with the Income Tax Officer, with no specific timeline mentioned in the Act. However, Rule 30 stipulates that the Government must deposit the deducted amount on the same date of payment.2. The case in question involves the State Government deducting tax at source from payments made to contractors but failing to deposit the deducted amount with the Income Tax Officer promptly. Consequently, the Income Tax Officer assessed the State Government's liability to pay interest on the delayed deposit. The State Government contested this liability, arguing that it should not be considered a 'person' under the Income Tax Act, thus absolving it from the obligation to pay interest for the delay.3. The court acknowledged that the dispute primarily involves two Governments and suggested resolving it through administrative channels rather than through judicial intervention. The judgment directs the State Government to present the dispute to the Central Government's Secretary of Finance for resolution. Both parties are instructed to sort out the dispute and report back to the court within nine months. In the interim, the Income Tax Officer is requested not to take any steps to recover the assessed interest.In conclusion, the judgment provides a nuanced analysis of the obligations of the State Government under the Income Tax Act, emphasizing the need for inter-governmental cooperation in resolving disputes. It highlights the importance of administrative channels in addressing such matters and temporarily stays the recovery of assessed interest pending the resolution of the dispute between the two Governments.