1991 (4) TMI 176 - AT - Income Tax

Court rules interest not taxable under sec 194-A, emphasizing legislative intent.

The judgment focused on the obligation to deduct tax under section 194-A in relation to interest payable to a creditor and the retrospective effect of the ... Accounting Year, Interest On Securities, Tax At Source Issues:Charging of interest under section 201(1A) in relation to interest payable to a creditor and the obligation to deduct tax under section 194-A.Analysis:The judgment addressed the issue of charging interest under section 201(1A) concerning interest payable to a creditor. The interest amount in question was neither paid to the creditor nor credited to the creditor's account but was accounted for in an 'Interest payable account' and claimed as a deduction in the assessee's income calculation. The assessing officer imposed interest under section 201(1A) due to the failure of the assessee to deduct tax in accordance with section 194-A. The assessee argued that since the interest was neither paid nor credited to the creditor's account, there was no obligation to deduct tax under section 194-A. However, the authorities below rejected this contention.The judgment delved into the provisions of section 194-A, which require a debtor to deduct income tax from interest payable to a creditor when the interest amount is either credited to the creditor's account or paid in cash or through other modes. In this case, the assessee neither credited the interest amount to the creditor's account nor paid it in cash or by check. Instead, the amount was recorded in the 'Interest payable account' and charged to the profit & loss account. The judgment highlighted the Explanation to section 194-A inserted by the Finance Act, 1987, which states that crediting income of interest to any account in the books of the person liable to pay such income deems it as credited to the payee's account. The debate arose regarding the retrospective effect of this Explanation.The judgment analyzed the retrospective effect of the Explanation to section 194-A. The Departmental Representative argued that the Explanation should apply even to periods before its insertion in 1987. However, the assessee contended that the Explanation should not have retrospective effect based on the explanatory notes issued by the Central Board of Direct Taxes. The judgment emphasized that the Explanation was intended to broaden the scope of section 194-A and plug a loophole, thus enlarging the taxpayer's obligation. As the Legislature specified the effective date of the Explanation, the judgment concluded that the assessee was not obliged to deduct tax under section 194-A due to not paying or crediting the interest amount, thereby canceling the levy of interest under section 201(1A).In conclusion, the judgment provided a detailed analysis of the obligation to deduct tax under section 194-A concerning interest payable to a creditor and the retrospective effect of the Explanation to the section, ultimately ruling in favor of the assessee based on the specific circumstances and legislative intent.