2015 (2) TMI 353 - AT - Income Tax

Tribunal rules in favor of appellants on TDS issue, citing exemptions under Income Tax Act

The Tribunal ruled in favor of the appellants, determining that they were not in default for failing to deduct TDS while making payments to a ... Deduction of tax at source under Section 195 read with deemed assessee in default under Section 201 - element of income in remittance - determination of appropriate proportion of sum chargeable to tax - application of Board Instruction No.02/2014 - relevance of recipient's exemption under Section 54 - interest under Section 201(1A)Deduction of tax at source under Section 195 read with deemed assessee in default under Section 201 - element of income in remittance - application of Board Instruction No.02/2014 - relevance of recipient's exemption under Section 54 - Appellants cannot be treated as assessee in default under Section 201 for not deducting TDS under Section 195 on payments to the non-resident vendor - HELD THAT: - The Tribunal accepted that Section 195 casts an obligation to deduct tax where a payment includes a sum chargeable to tax, but applied Board Instruction No.02/2014 and the facts to hold that the appellants, on the date of payment, had been informed and were aware that the vendors had already made qualifying investment in a residential house and would claim exemption under Section 54. The Assessing Officer's position that the element of income in the remittance exists irrespective of subsequent exemptions was noted, but the Tribunal found that paragraph 3 of the Board Instruction requires determination of the appropriate proportion of the sum chargeable to tax in light of facts and circumstances. The vendors' contemporaneous representation and the assessment of the vendor (in which long term capital gain was declared and then exempted under Sections 54/54F) established that the payments would not be chargeable to tax, so the deductor could not be held in default on the whole sum. Applying the Board's guideline and the material before it, the Tribunal allowed the appeals and held there was no default. [Paras 8, 9, 10]Allow appeals; appellants are not assessee in default under Section 201 for non deduction of TDS on the payments in question.Interest under Section 201(1A) - deemed assessee in default under Section 201 - No interest under Section 201(1A) is imposable on the appellants in respect of the said non deduction - HELD THAT: - Having concluded that the appellants are not assessee in default under Section 201, the corollary consequence follows that no interest under Section 201(1A) can be charged. The Tribunal expressly recorded that, in view of its primary finding on default, interest under Section 201(1A) would not be imposable. [Paras 10]No interest under Section 201(1A) will be imposed on the appellants.Final Conclusion: In view of the vendors' contemporaneous representations and the vendor's assessment showing exemption under Section 54, and applying Board Instruction No.02/2014, the appeals are allowed: the appellants are not assessee in default under Section 201 for failing to deduct TDS on the payments and no interest under Section 201(1A) is leviable; the pending stay applications are accordingly rendered redundant and dismissed. Issues:Whether the appellants can be treated in default for not deducting TDS while making payments to a non-resident resulting in tax demand and interest under section 201(1A) of the Income Tax Act.Analysis:The Tribunal noted that the issue in all appeals was common, involving the non-deduction of TDS while making payments to a non-resident. The dispute arose due to the purchase of property jointly owned by a non-resident and another individual. The appellants argued that since the recipient was eligible for exemption under section 54 of the Income Tax Act, no TDS was required. However, the Assessing Officer held the assessees in default and raised a demand under section 201, along with interest under section 201(1A).The CIT (A) upheld the decision, leading to the appeals before the Tribunal. The appellants relied on a circular issued by the Board post the Supreme Court's decision in GE India Technology Cen. The circular emphasized determining the appropriate proportion of the sum chargeable to tax to ascertain the tax liability. The appellants contended that the payments did not involve any taxable sum, as the vendors had already made investments qualifying for exemption under section 54.The Tribunal considered the arguments and the circular, emphasizing that the ultimate tax liability of the recipient was not the sole criterion for TDS deduction. It noted that the vendors had informed the appellants about the exemption, and the payments were not taxable due to the investments made. Referring to the assessment order of the non-resident recipient, which confirmed the exemption under sections 54 and 54F, the Tribunal ruled in favor of the appellants. Consequently, the Tribunal allowed the appeals, holding that the appellants could not be treated as defaulters under section 201, thereby negating the imposition of interest under section 201(1A).As a result of allowing the appeals, the stay applications were deemed redundant and dismissed.