1984 (8) TMI 173 - AT - Income Tax

Tribunal rules no tax deduction on interest under Section 194A, CBDT Circulars upheld

The case involved the applicability of Section 194A of the Income-tax Act, 1961, and the validity of CBDT Circulars regarding tax deduction at source. The ... Assessment Year, Interest Payable, Interest Payments, Tax At Source Issues Involved:1. Applicability of Section 194A of the Income-tax Act, 1961.2. Validity of the CBDT Circulars.3. Liability to deduct tax at source and levy of interest under Section 201.Issue-wise Detailed Analysis:1. Applicability of Section 194A of the Income-tax Act, 1961:The primary issue revolves around whether the assessee was liable to deduct tax under Section 194A on the interest credited to the 'Interest Payable Account' and not to the 'Payee's Account'. The ITO held that the assessee was liable to deduct tax under Section 194A, as the interest was constructively credited to the payee's account, and levied interest under Section 201 for non-compliance. The Commissioner (Appeals) upheld this view. The assessee contended that since the interest was not credited to the payee's account but to a suspense account, the provisions of Section 194A did not apply.2. Validity of the CBDT Circulars:The assessee relied on CBDT Circular No. 276/72/77-IT(B), dated 25-1-1979, which stated that there was no obligation to deduct tax at the time of crediting interest to the 'Interest Payable Account'. The ITO and the Commissioner (Appeals) did not accept this circular, relying instead on CBDT Circular No. 288, dated 22-12-1980, which emphasized that crediting interest to any account other than the payee's account did not absolve the assessee from the obligation to deduct tax. The Tribunal had to decide which circular was applicable for the assessment year 1980-81.3. Liability to Deduct Tax at Source and Levy of Interest under Section 201:The Tribunal examined whether the assessee's action of crediting interest to the 'Interest Payable Account' instead of the payee's account justified the levy of interest under Section 201. The Judicial Member held that the assessee was liable to deduct tax and upheld the levy of interest, dismissing the appeal. The Accountant Member disagreed, citing the Tribunal's earlier decision in Sivakami Finance (P.) Ltd. and the Supreme Court's decision in K.P. Varghese, which held that CBDT circulars granting administrative relief were binding on the department.Separate Judgments:Judgment by Judicial Member:The Judicial Member rejected the assessee's reliance on the CBDT Circular No. 276/72/77-IT(B), dated 25-1-1979, and upheld the ITO's action of levying interest under Section 201. He emphasized that the assessee did not demonstrate unavoidable circumstances, such as a financial crisis, to justify non-deduction of tax. He held that the circulars could not interfere with the interpretation of law or judicial functions and that the assessee's claim was not supported by the Madras High Court's decision in A.L.A. Firm v. CIT.Judgment by Accountant Member:The Accountant Member disagreed, holding that the assessee was not liable to deduct tax under Section 194A based on the CBDT Circular No. 276/72/77-IT(B), dated 25-1-1979. He referenced the Tribunal's decision in Sivakami Finance (P.) Ltd., which supported the assessee's position. He also cited the Supreme Court decision in K.P. Varghese, asserting that CBDT circulars were binding on the revenue authorities. He concluded that the levy of interest under Section 201 was not justified and allowed the appeal.Third Member Decision:The Third Member agreed with the Accountant Member, holding that the CBDT Circular No. 276/72/77-IT(B), dated 25-1-1979, applied to the assessment year 1980-81 and was binding on the department. He emphasized that the subsequent circular, dated 22-12-1980, could not retrospectively impose a new burden. He concluded that the assessee was not liable to deduct tax under Section 194A and that the levy of interest under Section 201 was not justified. The appeal was allowed.Conclusion:The final decision was in favor of the assessee, holding that there was no liability to deduct tax from the 'interest payable' under Section 194A, and consequently, the levy of interest under Section 201 was not justified. The appeal was allowed based on the binding nature of the earlier CBDT circular.