2010 (8) TMI 37 - HC - Income Tax

Revenue appeals dismissed on interest liability under sections 234B and 234D despite tax shortfalls

Delhi HC dismissed revenue's appeals regarding interest liability under sections 234B and 234D. The court held that despite short payment of advance tax ... Interest - Short payment of Advance Tax - Short deduction of TDS by the person making payment - Whether interest u/s 234B is mandatory? - Held that:- In view of AO it was for the assessee to show income from all the projects, compute the tax and take credit of taxes paid either prepaid or otherwise by enclosing the proof of such payment along with return of income. The TDS certificates were to be collected by the assessee even where taxes are borne by the payer. Since the assessee had not disclosed any certificates nor shown proof of payment of taxes, the Assessing Officer held that the assessee was liable to pay interest under Section 234B of the Act. - the assessee was not liable to pay any interest under Section 234B of the Act - judgments of the Uttaranchal and Bombay High Courts in the matters of CIT and Anr. vs. Sedco Forex International Drilling Co. Ltd.[2003 (10) TMI 40 - UTTARANCHAL HIGH COURT] and DIT (International Taxation) vs. NGC Network Asia LLC [2009 (1) TMI 174 - BOMBAY HIGH COURT] followed. Interest u/s 234D - Tribunal has held that the assessee was not liable to pay the interest under the aforesaid provision which was normally charged from the assessee for the assessment years 2002-03 and 2003-04. - Held that:- any provision made in a statute for charging or levying interest on delayed payment of tax must be construed as a substantive law and not adjectival law. So construed and applying the normal rule of interpretation of statutes if the Revenue's contention is accepted it leads to conflicts and creates certain anomalies which could never have been intended by the legislature. - therefore, of the opinion that the Tribunal was right in deleting the interest under Section 234D of the Act for the period prior to the assessment year 2004-05. As a result, these appeals of the Department are dismissed. The core legal question considered in this judgment is whether the levy of interest under Section 234B of the Income Tax Act, 1961, for short deduction of Tax Deducted at Source (TDS) is mandatory and automatically applicable to non-resident companies when the payer fails to deduct the tax at source. The judgment involves two non-resident companies, M/s. Jacabs Civil Incorporated and M/s. Mitsubishi Corporation, both of which were assessed for interest under Section 234B due to alleged short payment of taxes.In the detailed analysis of the issue, the relevant legal framework includes Section 234B of the Income Tax Act, which deals with the interest payable for default in payment of advance tax. The court also considered Sections 191, 195, 201, 208, and 209 of the Act, which outline the responsibilities for tax deduction at source and the computation of advance tax.The court's interpretation focused on the obligations of the payer to deduct tax at source, particularly under Section 195, which mandates that any person responsible for paying to a non-resident must deduct income tax at the applicable rates. The court reasoned that the liability to deduct tax at source is on the payer, and if the payer defaults, the non-resident payee cannot be held liable for interest under Section 234B. The court emphasized that the non-resident's role in deducting or collecting tax is nonexistent, and thus, the imposition of interest under Section 234B is not justified.Key evidence and findings included the Tribunal's reliance on judgments from the Uttaranchal High Court and the Bombay High Court, which held that the liability for interest does not arise when the payer fails to deduct tax at source. The court noted that the Revenue's remedy in such cases is against the payer under Section 201, which provides for recovery of the tax not deducted and interest thereon.The application of law to facts involved examining whether the non-resident companies had any role in the deduction of tax at source. Since the obligation was on the payer, the court concluded that the non-resident companies were not in default under Section 234B, as they were not responsible for the tax deduction.In addressing competing arguments, the court rejected the Revenue's contention that Section 234B is a standalone provision and that interest is automatically applicable upon default in advance tax payment. The court highlighted that the expression 'deductable or collectable at source' in Section 209(1)(d) supports the interpretation that the payer's failure to deduct tax absolves the non-resident payee from interest liability.Significant holdings include the affirmation that the Tribunal correctly held that the non-resident companies were not liable to pay interest under Section 234B. The court preserved the reasoning from the Uttaranchal and Bombay High Court judgments, emphasizing that the payer's failure to deduct tax does not transfer interest liability to the non-resident payee.The court also addressed an additional issue concerning interest under Section 234D, which pertains to interest on excess refunds. The Tribunal had held that Section 234D was applicable only from the assessment year 2004-05 onwards. The court agreed, citing the Supreme Court's decision in J.K. Synthetics Ltd. that provisions for charging interest are substantive and cannot be applied retrospectively unless explicitly stated by the Legislature.Ultimately, the court dismissed the Revenue's appeals, affirming that the non-resident companies were not liable for interest under Sections 234B and 234D for the periods in question. The judgment reinforces the principle that the obligation to deduct tax at source lies with the payer, and non-compliance by the payer does not impose interest liability on the non-resident payee under the discussed provisions of the Income Tax Act.