Assessee's Appeal Partially Allowed: Focus on Lender Knowledge

The Tribunal partly allowed the assessee's appeal, directing the Assessing Officer to re-examine the matter focusing on the assessee's knowledge of the lenders' identities at the time of payment. The Tribunal emphasized that if the assessee was unaware of the lenders' identities, it could not be held liable for tax deduction at source, as the provisions would be unworkable. The issue of whether the borrowing fee constituted interest was also remanded for fresh decision by the AO if necessary.

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Issues Involved:
1. Demand raised under section 201(1) and interest charged under section 201(1A) of the Income Tax Act, 1961, due to non-deduction of tax at source on borrowing fee paid through National Securities Clearing Corporation Ltd. (NSCCL).

Issue-wise Detailed Analysis:

1. Demand Raised and Interest Charged under Section 201(1) and 201(1A) for Non-Deduction of Tax at Source:

The assessee, a company engaged in capital market brokerage, was subject to a survey under section 133A of the Income Tax Act on 22nd July 2011. During this survey, discrepancies were found regarding non-deduction of tax at source on an amount of Rs. 7,23,21,065 debited under finance cost for the financial year 2011-12. The amount was paid to NSCCL under the Securities Lending and Borrowing Scheme, 1997 (SLB) of SEBI to settle short selling of securities. The assessee contended that the borrowing fee paid to NSCCL was not in the nature of income at NSCCL's hands as it was shown as a liability in NSCCL's books, and since the identity of the ultimate payees was unknown, TDS provisions could not be applied. The assessee also argued that the borrowing fee was not in the nature of interest, thus section 194A was not applicable.

The Assessing Officer (AO) rejected these arguments, stating that NSCCL was not exempt from TDS provisions and that the nature of receipts in the hands of the recipient was immaterial. The AO held that the borrowing fee constituted interest under section 2(28A) and raised a demand of Rs. 72,32,106 under section 201(1) and levied interest of Rs. 22,41,952 under section 201(1A), totaling Rs. 94,74,058.

The Commissioner (Appeals) upheld the AO's decision, agreeing that NSCCL acted as an intermediary and that the borrowing fee was in the nature of interest. The Commissioner (Appeals) noted that the identity of the lenders was known to NSCCL, and therefore, the assessee's argument that TDS provisions were unworkable was not acceptable.

On appeal, the assessee reiterated that the borrowing fee was paid through NSCCL, which acted as an intermediary, and the identity of the lenders was unknown to the assessee, making it impossible to deduct tax at source. The assessee also argued that the borrowing fee was not in the nature of interest.

The Tribunal considered the rival submissions and the materials on record. It noted that the SLB Scheme mandated transactions through an approved intermediary like NSCCL, with no direct agreement between lenders and borrowers. The Tribunal observed that the borrowing fee paid by the assessee was ultimately received by the lenders of the securities, with NSCCL acting as a pass-through entity. The Tribunal found that the Department did not adequately ascertain whether the assessee knew the identity of the lenders at the time of payment.

The Tribunal concluded that if the assessee was unaware of the identity of the lenders, it could not be held liable for deducting tax at source under section 194A, as the TDS provisions would become unworkable. The Tribunal restored the issue to the AO for re-adjudication after proper enquiry, emphasizing that the assessee could not be compelled to perform an impossible act. The Tribunal also restored the issue of whether the borrowing fee constituted interest for fresh decision by the AO, if necessary.

In conclusion, the Tribunal partly allowed the assessee's appeal for statistical purposes, directing the AO to re-examine the matter with a focus on the assessee's knowledge of the lenders' identities at the time of payment.

Order Pronounced:

Order pronounced in the open Court on 23.05.2018.

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