Bank must refund TDS on interest income held by assessee as nodal agency for non-taxable state government entity

ITAT Jaipur held that TDS deducted by bank on interest income held by assessee in fiduciary capacity as nodal agency for Government of Rajasthan's Police Housing Scheme must be refunded. Since interest income was not taxable in hands of either assessee or state government, and state being non-taxable entity should not have attracted TDS initially, Revenue directed to refund TDS to assessee with undertaking to transfer amount to state government.

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Issues:
1. Withholding of TDS on interest income held in fiduciary capacity.
2. Applicability of Section 199 of the Income Tax Act on TDS amount.

Issue 1: Withholding of TDS on interest income held in fiduciary capacity:

The judgment involves two appeals filed by the assessee against separate orders passed by the CIT(A)-2, Jaipur for A.Y. 2011-12 & 2012-13. The assessee, acting as a nodal agency for the State Government, received funds from HUDCO on behalf of the government for disbursement. The funds were temporarily placed in FDRs with a bank, and TDS was deducted on the interest earned. The assessee contended that the interest income on these funds held in trust was exempt income of the State Government and not taxable. While the AO agreed that the interest income was not taxable, the credit of TDS on such income was not allowed to the assessee as per Section 199 of the Act. The CIT(A) upheld the AO's decision, citing a similar issue in a previous year. The assessee appealed this decision, referring to a previous decision in its favor by a Coordinate Bench for A.Y. 2009-10 and 2010-11.

Issue 2: Applicability of Section 199 of the Income Tax Act on TDS amount:

The Coordinate Bench's decision for A.Y. 2009-10 and 2010-11 favored the assessee, emphasizing that the interest income accrued on FDRs held in fiduciary capacity for the State of Rajasthan was not taxable. The Bench directed the refund of TDS to the assessee, who acted as the nodal agency, with an undertaking to return the amount to the State of Rajasthan. The judgment highlighted that since the State of Rajasthan is not a taxable entity, the TDS refund should be given to the assessee. The Tribunal in the current case found the facts similar to the previous case and directed the Revenue to refund the TDS amount to the assessee with the obligation to return it to the State of Rajasthan. Both appeals of the assessee were allowed based on the principles established in the previous decision by the Coordinate Bench.

In conclusion, the judgment addressed the withholding of TDS on interest income held in fiduciary capacity and the applicability of Section 199 of the Income Tax Act on the TDS amount. The decision favored the assessee, following the precedent set by a previous Coordinate Bench decision, and directed the Revenue to refund the TDS amount to the assessee with the obligation to return it to the State of Rajasthan.

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