TDS on interest credit and Special Court directions: deduction obligation remained, while penalty was reduced or deleted depending on the year.

Credit of interest in the books, including to an interest payable or suspense account, triggers TDS under section 194A. The Special Court Act and related orders did not extinguish the underlying deduction obligation, but for later years they regulated how tax was to be remitted in respect of notified parties. Penalty under sections 201 and 221 was sustained only in token form for earlier years where the default persisted, and was deleted for later years where Special Court directions required deposit into a separate account rather than remittance to the Revenue.

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Issues: (i) Whether the assessees were liable to deduct tax at source under section 194A on the interest provision made in their books notwithstanding the Special Court Act and the orders passed under it; (ii) Whether the levy of penalty under sections 201 and 221 was sustainable in full for all the years under appeal.

Issue (i): Whether the assessees were liable to deduct tax at source under section 194A on the interest provision made in their books notwithstanding the Special Court Act and the orders passed under it.

Analysis: Section 194A fastens TDS liability at the time of credit of interest to the payee's account or payment, whichever is earlier, and the Explanation treats credit to an interest payable or suspense account as credit to the payee. The provision made by the assessees for interest, coupled with claim of deduction, constituted a credit attracting the TDS obligation. The Special Court Act created an overriding regime for attached assets and, in later orders, directed that TDS on interest/dividend payable to notified parties should not be remitted to the Income-tax Department but deposited in a separate account under intimation to the Custodian and the Department. For the earlier period, however, the statutory obligation to deduct remained; the Special Court directions did not extinguish the TDS liability itself, but regulated the manner of payment.

Conclusion: The assessees were liable to deduct tax at source; they were in default for non-deduction, though the manner of remittance was affected by the Special Court directions for the later years.

Issue (ii): Whether the levy of penalty under sections 201 and 221 was sustainable in full for all the years under appeal.

Analysis: For assessment years 1995-96 and 1996-97, the assessees had not complied with the TDS obligation, and the default was upheld, but the Tribunal considered the original penalty excessive and confined it to a token amount. For assessment years 1997-98 to 1999-2000, the Special Court had specifically directed that TDS on payments to be made to the Custodian was to be deposited in a separate account and not remitted to the Revenue; in that setting, while non-deduction was not fully excused, the assessees could not be treated as guilty of the remittance default required for penalty under the combined scheme of section 201 and section 221.

Conclusion: Penalty was sustained only in a reduced token form for assessment years 1995-96 and 1996-97, and deleted for the later years.

Final Conclusion: The appeals were partly allowed: the TDS obligation was upheld, but the penalty was substantially reduced for the earlier years and set aside for the later years in light of the Special Court directions.

Ratio Decidendi: Credit of interest in the books, including to an interest payable or suspense account, triggers TDS under section 194A; where a special statutory regime overrides the ordinary remittance route, it may regulate payment but does not necessarily extinguish the underlying deduction obligation.

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