2014 (1) TMI 1442 - AT - Income Tax

Tribunal remands tax case for further review, emphasizes adherence to guidelines

Uttar Pradesh Financial Corporation Versus ITO. (TDS) -5(2), Kanpur

The Tribunal set aside the CIT(A)'s order, remanding the case to the Assessing Officer for further examination. The Tribunal directed verification of ... Non-deduction of TDS u/s 193 of the Act - Default u/s 201 of the Act – Interest u/s 201(1A) of the Act – Held that:- The assessee Corporation could not calculate the actual interest, it could not deduct TDS as the amount of tax was itself undetermined - These arguments are not substantiated with any documentary evidence nor we find any observations of the lower authorities in this regard. However, the assessee has filed the bunch of papers relating to copy of Form No. 15A and copy of one time settlement offers along with the settled accounts. Relying upon ICICI Bank Limited vs. Dy. CIT [2014 (1) TMI 706 - ITAT LUCKNOW] - Recovery provisions under section 201(1) of the Act can be invoked only when loss to revenue is established, and that can only be established when it is demonstrated that the recipient of income has not paid due taxes - In the absence of the statutory powers to requisition any information from the recipient of income, the assessee is indeed not always able to obtain the same - Once assessee furnishes the requisite basic information, the Assessing Officer can very well ascertain the related facts about payment of taxes on income of the recipient directly from the recipients of income - once recipient has paid the taxes on the receipts, the payer cannot be held to be the assessee in default and so far the levy of interest u/s 201(1A) is concerned, the interest is compensatory in nature and it is applicable for the period of the date on which tax was required to be deducted till the date when tax was eventually paid. Levy of interest under section 201(1A) is a compensatory interest in nature and it seeks to compensate the revenue for delay in realization of taxes – The judgement in Bennett Coleman & Co Ltd Vs 1TO [1984 (11) TMI 58 - BOMBAY High Court] followed – thus, levy of interest under section 201(1A) is applicable whether or not the assessee was at fault - it is only compensatory in nature it is applicable for the period of the date on which tax was required to be deducted till the date when tax was eventually paid - unless and until it is established that the recipients have not paid any tax on the receipts on which they are liable to pay the tax, the assessee cannot be held to be in default - So far as the chargeability of interest is concerned, it is to be charged as per the guidelines laid down in the orders of the Tribunal i.e. from the date on which the tax was required to be deducted till the date of payment – thus, the matter is to be remanded to adjudicate the issue afresh – Decided in favour of Assessee. Issues Involved:1. Non-deduction of TDS on interest payable on SLR/non-SLR Bonds.2. Applicability of Section 193 of the Income Tax Act, 1961.3. Applicability of Section 194A(3)(iii) concerning banks exempted from TDS.4. Consideration of case laws and circulars regarding TDS exemption.5. Charging of interest under Section 201(1A) of the Income Tax Act.6. Verification of financial constraints and accounting methods of the assessee.Issue-wise Detailed Analysis:1. Non-deduction of TDS on Interest Payable on SLR/Non-SLR Bonds:The primary issue revolves around the assessee's failure to deduct tax at source (TDS) on interest payments made on SLR and non-SLR bonds. The assessee argued that the interest on these bonds is akin to interest on government securities, which is exempt from TDS under Section 193 of the Income Tax Act, 1961. However, the CIT(A) refuted this argument, stating that the assessee is a corporation established by the State Financial Corporations Act, 1951, and not a government body. Therefore, it does not qualify for the exemption under Section 193.2. Applicability of Section 193 of the Income Tax Act, 1961:The CIT(A) clarified that under Section 193, tax must be deducted on interest payments on securities, except for those specifically exempted, such as interest on securities of the Central or State Government. The CIT(A) concluded that the bonds issued by the assessee do not fall under the exempted category, and thus, TDS was required to be deducted.3. Applicability of Section 194A(3)(iii) Concerning Banks Exempted from TDS:The assessee contended that the recipients of the interest payments were Gramin Banks, which are exempt from TDS under Section 194A(3)(iii). However, the CIT(A) noted that Section 193 does not provide an exemption for interest payments to such banks. The only exemptions applicable are those where the recipient has a certificate under Section 197 or declarations in Form No. 15H/15G, which were not furnished in this case.4. Consideration of Case Laws and Circulars Regarding TDS Exemption:The assessee cited several case laws and a circular (Circular No. 319 dated 11/01/1982) to argue that the interest income of Gramin Banks is exempt under Section 80P, and thus, no TDS should be deducted. However, the CIT(A) held that the deduction under Section 80P is specific to the recipient's income and does not exempt the payer from deducting TDS unless a certificate under Section 197 is provided.5. Charging of Interest Under Section 201(1A) of the Income Tax Act:The Tribunal examined various judgments, including those from the Supreme Court and High Courts, which establish that the payer cannot be held in default if the recipient has paid the due taxes. The Tribunal emphasized that the recovery provisions under Section 201(1) can only be invoked when there is a loss to the revenue, demonstrated by the recipient's failure to pay taxes. Interest under Section 201(1A) is compensatory and applicable from the date the tax was required to be deducted until the date it is paid.6. Verification of Financial Constraints and Accounting Methods of the Assessee:The assessee introduced a new argument before the Tribunal, claiming financial constraints and pending agreements with bondholders for reduced interest rates as reasons for not deducting TDS. The Tribunal noted that these arguments were not substantiated with documentary evidence and were not raised before the lower authorities. The Tribunal remanded the case to the Assessing Officer for verification of these claims and to ascertain whether the recipients paid taxes on the interest income.Conclusion:The Tribunal set aside the order of the CIT(A) and remanded the matter to the Assessing Officer for fresh adjudication. The Assessing Officer is directed to verify the facts regarding the recipients' tax payments, the submission of Form No. 15A, and the financial constraints claimed by the assessee. The Tribunal emphasized that interest under Section 201(1A) should be charged as per the established guidelines, compensating for the delay in tax deduction. The appeal was allowed for statistical purposes.