TaxTMI 
TaxTMI 
TaxTMI 
2005 (9) TMI 215
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....d of 180 days. The security by way of pledging of these shares were not to be redeemed in the market and the shares were not to be transferred unless there was a default in repayment. The assessee repaid loan of a sum of Rs. 6,32,00,000 within 60 days and this amount was more than the said 20 per cent. The balance was to be paid in September/October, 1992. It transpired that on 10-8-1992 out of the said 3.5 lakh shares. Syndicate Bank acquired 2.5 lakh shares from Fairgrowth Investments Ltd. with whom FFSL has made a forward transaction and National Housing Bank came in possession of the balance 1 lakh shares as sub-pledgee against advancing loan to FFSL. 3. Somewhere at that time a Special (Trial of Offences Relating to Prosecutions in Securities) Ordinance, 1992 came into force in June, 1992 with the object to deal with large scale irregularities and mal-practices came to the notices in the course of investigation by Reserve Bank of India in respect of transaction in both the Government and the other securities indulged in by some brokers in collusion with the employees of various banks and financial institutions, which led to the diversion of funds from banks and financial inst....
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....nt to Supreme Court against the Special Court order - Syndicate Bank for accepting the assessee's ownership and assessees for not granting unconditional and immediate return of 23.76 per cent on the security and against payment of interest at the rate of 24 per cent per annum from due date upto the date of payment. On 12-9-1994 on appeal by Syndicate Bank and on 7-10-1994 on appeal by the assessees the Supreme Court directed the parties by two different orders to maintain status quo. Syndicate Bank again filed a suit No. 5/1994 claiming ownership of the said 2,50,000 shares of United Phosphorous Ltd. or recovery of amount paid to Fairgrowth Investments Ltd. for transfer of these shares but the suit was adjourned by order dated 29-3-1995 till the appeal by the Supreme Court is finally disposed of. In this decision it was also observed that if the assessees were concerned about their liability for payment of interest on the loan amount, they could reply the loan and get back the shares redeemed or take the permission of the Supreme Court to deposit the money with the custodian. The assessees did neither. 5. The assessees made provision for interest payable to FFSL of Rs. 2,63,58,000....
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....oan amount; that the matter was not subjudice with the Supreme Court at all for consideration of payment of interest or for not deducting tax at source under section 194A; that the Special Court had held that the transactions relate to pledge transaction only, wherein element of interest payment arc always involved; that the assessees had not submitted notification, if any, which may suggest that the payee was a notified institution for the purpose of section l94A(iii)(I); that had also been verified from the list of notified institutions and bodies for the purpose of section 194A(3)(iii)(f) that the name of the FFSL was not covered in the said list and that from the attitude of the assessees for non-submission of the explanation of their explanation, if any for non deduction of tax at source under section 194A, as above, it was very much clear that they had made tacit admission of default and they had nothing to offer as their explanation for non deduction of tax under section 194A. 7. Similar orders were made against the assesses under section 201(1A) levying interest on the amount of tax allegedly not deducted at source. 8. The assessees preferred appeals against the aforesaid....
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.... when the assessees made the provision for payment of interest to FFSL it was liable to deduct tax at source or not. According to him, the provisions of section 194A were clear and the assessees were required to deduct the tax and as the assessees credited to the account of FFSL interest in different year and have debited the same to the profit and loss account claiming deduction for the same, the assessees were in default as per explanation to section 194A of the Act. According to him, the Supreme Court in the case of T.B. Ruto v. A.K. Menon [1977] 84 AIR 442 (sic) had recognised that Income tax Act is a code in itself and the Income-tax Department is free to determine the liability of the notified person under the provisions of the Income-tax Act and in these cases to pay the tax on the interest income is the liability of the notified person. As per the provisions of section 194A, the assessees were under an obligation to make deduction of tax at source so that the tax liability of the notified party could be realised. According to him, there is no provision under the Special Act nor there was any order of the Special Court or Supreme Court which prohibited the assessees from ded....
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....ct of any payment being made to or on behalf of the notified party. He further observed that there is nothing in this order which said that no TDS was to be made at the time of making payment of interest. On the contrary, the decision says that TDS has to be deposited in separate account and the intimation has to be given to the Custodian and the Income-tax authorities for having deposited the same. According to him, the assessees were thus under an obligation not only to make TDS but also pay the same to the government in assessment years 1995-96 and 1996-97. For other years namely, assessment years 1997-98 and 1999-2000, the assessees should have deposited the amount of TDS in a separate account under intimation to the Custodian and the Income-tax Department. The decision of the Special Court in the case of Custodian v. Chief CIT dated 3-5-1999 was after March, 1999 and, therefore, had no application to assessment years 1995-96 to 1999-2000. The observation of the Supreme Court to maintain status quo, according to him, did not mean non-deduction of tax at source or non-payment of TDS amount lo the Income-tax Department after making the provision for interest payment in their book....
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....x either from the notified party or from the appellant. It will be grave injustice to the department if the appellant does not pay the TDS due to the government as per the provisions of section 194A of the Income-tax Act by misinterpreting the provisions of the Special Court and the various decisions of the courts. Thus, in view of the above discussion, it is held that the appellant has violated the provisions of law contained in section 194A of the Act and is accordingly liable to make the payment as per the order of the ITO (TDS), Valsad passed under section 201(1) r.w.s. 221(1) of the Income-tax Act." 14. The ld. counsel of the assessee submitted that as provided by section 13, the Special Act has the overriding effect over any other law, that the said Act provides for the appointment of a Custodian who is to deal with 'attached assets' in accordance with the provisions of the said Act; that section 11 of the said Act provides for the manner in which the liabilities of a notified party have to be discharged in the following order - (a) All revenues, taxes, cesses and rates due to the Central or State Government for the notified period, (b) All amounts due to any bank, financial....
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....5 and 98 of the order of the Special Court, dated 21st March, 1995 and also referred to the decision of the Special Court, dated 9th September, 1996 where under the Special Court has directed all the banks, companies, etc. who have to make payments of interest or dividends in respect of the notified parties to the Custodian to deduct tax at source and then deposited the amount which they would have otherwise paid to the income-tax authorities in a separate account. It was submitted that such deposit in a separate account was to be made only at the time of payment of interest or dividend. In the case of the assessees, no payment has been made by them to the Custodian, which fact has also been confirmed by the Custodian and accepted by the ITO (TDS) and accordingly the question of depositing the amount in a separate account did not arise. 17. Referring to the decision of the Supreme Court in an appeal against the order of the Special Court, dated 20th February, 1995 and the later and consequent decision of the Special Court, dated 3rd May, 1999, the ld. Counsel reiterated that the banks, companies, financial institutions, etc. have been directed by the Special Court to pay the Custo....
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.... whose account was credited to claim payment. At this stage, neither FFSL nor Syndicate Bank would be entitled to the interest in view of the order of t he Special Court and the Supreme Court and hence for this reason also there would have been no requirement to deduct the tax at source. It was submitted that the Supreme Court order requiring the assessees to maintain status quo has been passed much prior to the order dated 9th September, 1996. In view of the above, the Id. Counsel of the assessees submitted that they cannot be held to be assessees in default in respect of non-deduction of tax at source. 20. Without prejudice to the above submission, the ld. Counsel of the assessees stated that the Supreme Court may decide the appeals filed by Syndicate Bank and the assessees in any one of the following manner: (i) In favour of the assessees i.e., the title of the shares remains with the assessees and the loan is to be repaid to: (a) The Custodian; if the Supreme Court decides that the loan along with interest is to be repaid to the Custodian then as per the order of the Special Court no tax is to be deducted since the Special Court Act overrides the Income-tax Act; or else the l....
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....iability of the assessees to deduct tax as required under the Income-tax Act or prohibited otherwise to deduct and pay tax at source. According to him there is no conflict between Special Act and Income-tax Act for this obligation and therefore the income-tax dues do not stand abrogated by the Special Act and in this connection he relied upon the decision of the Special Court in the case of T.B. Ruta referred to by the CIT(A) in his order. The decision in the case of A.K. Menon v. Sam Lease Co. Ltd. [M.A. No. 89 of 1993, dated, 14-9-1993] he submitted is of no help to the assessees because (i) firstly it was not an order in assessee's case, and (ii) secondly, the payment in that case was as per direction of the Special Court made to the Custodian; whereas in the present case the question of payment to anybody was not there as the assessees have made provision of interest payment and therefore by virtue of Explanation to section 194A, the assessees were liable to deduct tax at source and pay the same to the credit of Central Government. According to him, the use of the word "now" denotes that the decision of the Special Court was to apply only henceforward and not prior to the date ....
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.... pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly. (2) deleted (3) The provisions of sub-section (1) shall not apply- (i) Where the amount of such income or, as the case may be, the aggregate of the amount of such income credited or paid or likely to be credited or paid during the financial year by the person referred to in sub-section (1) to the account of, or to, the payee, does not exceed five thousand rupees: Provided that in respect of the income credited or paid in respect of- (a) time deposits with a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that Act); or (b) time deposits with a co-operative society engaged in carrying on the business of banking; (c) deposits with a public company which is formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes and which is eligible for deduction under clause (viii) of subsection (1) of se....
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....s Tax Act, 1963 (14 of 1963), or the Companies (Profits) Surtax Act, 1964 (7 of 1964), or the Interest-tax Act, 1974 (45 of 1974). (ix) To such income credited or paid by way of interest on the compensation amount awarded by the Motor Accidents Claims Tribunal where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid during the financial year does not exceed fifty thousand rupees. Explanation.- For the purposes of clauses (i), (vii) and (viia), "time deposit" means deposits (excluding recurring deposits) repayable on the expiry of fixed periods. (4) The person responsible for making the payment referred to in subsection (1) may, at the lime of making any deduction, increase or reduce the amount to be deducted under this section for the purpose of adjusting any excess or deficiency arising out of any previous deduction or failure to deduct during the financial year." 25. On a close reading of this section it is evident that this section cast a liability upon a person responsible for paying any income by way of interest other than interest on securities to deduct tax at source thereon. This liability is fastened at the ti....
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....de the net of section 3(3). In respect of such income the attachment under section 3(3) does not operate." 28. Similarly section 11(1) of the Act provides for the distribution of attached assets of the notified person. FFSL to whom the interest was to be paid was a notified person under the Special Act. Section 11(2) of this Act provides for distribution of the property of a notified person and for the purpose of which the Court has to collect money for distribution. It provides for payment of tax due in full by virtue of clause (a) payments due to banks, financial institutions, etc. as per clause (b) and any other liability by virtue of clause (c). Whereas under clause (a) no order of Special Court is required and it is the liability of the notified period, the liability other than this clause and clause (b) can be covered by only clause (c) which requires a specific order of the Special Court. 29. In order dated 7-2-2001 in the case of Solidaire India Ltd. v. Fairgrowth Financial Services Ltd. [2001] 104 Comp. Cas. 569 (SC). Their Lordships of the Supreme Court held as under: "Under section 3 of the 1922 Act, all property of notified persons is to stand attached. Under section....
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....d that 'undoubtedly there is great force in the submission that private rights cannot be abrogated or curtailed without compensation; that all private rights are preserved and that the said Act provides for distribution in a particular manner only'; that 'the Legislature has sought to provide (i) for a speedy trial of offences; (ii) immediate attachment and thus freezing of all assets of the parties suspected to be involved and thus preventing am further transfer or alienation; and (iii) a reasonable, rational and equitable distribution of property by this court as it would have the total picture; that whilst these were the objects, the Legislature has also kept in mind the fact that there may be contractual rights in favour of third parties. Financial Institutions and/or Banks. Undoubtedly, these rights were not to be affected. This is clear from section 4 which gives the custodian the power to set aside contracts under certain conditions'; that by section 11(2) of the said Act the legislature has provided for payment of liabilities towards tax and Government dues and of Financial Institutions and Banks and that the provision regarding distribution would be the only provision agai....
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....ction 11 of the said Act. Any provisions of the Income Tax Act which are contrary to the provisions of the said Act must give way to the provisions of the said Act. This is because the said Act is a Special Act and a later Act. 6. I, therefore, direct all Banks, Companies, Institutions and persons who have to make payments of interest or dividends to deduct tax at source and then deposit the amount which they would have otherwise paid to the Income Tax Authorities in a separate account to be maintained by them under intimation to the Custodian and Income Tax Authorities. Every time such deduction is made and amount deposited in the separate account, intimation to be given to the Custodian and Income Tax Authorities. Such intimation to contain all relevant particulars. The amounts to be thereafter invested in Fixed Deposits in Nationalized Banks. This is to be done within two weeks of deposit in separate account. The Fixed Deposits and interest earned thereon must be kept renewed until further Orders of this Court. These amounts or interest thereof must not be used in any manner whatsoever by the Bank, Company, Institution or person. It is clarified that any Bank, Company, Institut....
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....ial Court held that the term "tax, penalty and interest" are conceptually different and priority has been given only to tax and nothing else. As regards the third question, the Special Court held that a notified party may have enough assets to pay advance tax and/or the amount of the demand notice, yet the notified party is unable to do so as all his assets are attached and the time of distribution has not arisen. 38. In paragraph 98 of its order, the court observed as under:- "98. I have considered the rival submissions. There is no doubt that a Notification places a notified party at a disadvantage. He is no longer able to deal with his property, all profit making activities have come to an end. However, the law is clear. No rights can be abrogated unless the statute does so expressly or by necessary implication. At the same time law can't be such that it prevents a party or puts restraint on him but does not absolve him from adverse consequences of such restraint. In my view, the Court will have to make a distinction between different types of cases. The following are just by way of example. They are not exclusive. Each case would have to be decided on its own merit. Just by r....
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.... a Notified Party has been prevented from paying Advance Tax. Thus, under the Special Courts Act, there is a legal disability to pay Advance Tax. Yet under the Income Tax Act there is a compulsion to pay Advance tax. There is a conflict between the provisions of the Special Courts Act and the Income Tax Act. The provisions of the Special Courts Act must prevail Under the Income Tax Act if Advance tax is not paid, for such non-payment interest can be levied. This obviously on the footing that the assessee is in default. However, a Notified Party, has been prevented by law from paying Advance Tax. He is not a defaulting party. He has not paid Advance Tax because of legal restraint on him. The law has prevented him from paying Advance Tax. In my view, in such cases i.e. where there is a conflict between the provisions of the Special Courts Act and some other Act/contract, the contrary provision must necessarily give way. If there is this legal disability then there is no question of the notified party being foisted with the liability to pay interest and/or penalty. Similarly under section 220(2) of the Income Tax Act, a Demand Notice may have been served on a party. That Demand Notice....
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.... a Notified Party from doing a certain thing, then there can be no interest/penalty. If on the other hand, the Special Courts Act has not prevented or disabled a person nor abrogated any right, then the provisions of other Laws/contracts will continue to apply." 39. Supreme Court by its order dated 13-5-1998, in an appeal against this order of the Special Court dated 20-2-1995, enlarged the three questions to the following six questions:- "(1) What is meant by revenues, taxes, cesses and rates due? Does the word "due" refer merely to the liability to pay such taxes etc., or does it refer to a liability which has crystallized into a legally ascertained sum immediately payable? (2) Do the taxes [in clause (a) of section 11(2)] refer only lo taxes relating to a specific period or to all taxes due from the notified person? (3) At what point of time should the taxes have become due? (4) Does the Special Court have any discretion relating to the extent of payments to be made under section 11(2)(a) from out of the attached funds/property? (5) Whether taxes include penalty or interest? (6) Whether the Special Court has the power to absolve a notified person from payment of penalty o....
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....is so disproportionately high in relation to the funds in the hands of the Custodian as to require scaling down in the interest of and to further the purpose of the Act. The Special Court must have strong reason for doing so. In fact, the income-tax authorities have also accepted that exorbitant tax demand can be ignored applying the Wednesbury Principle. As regards question No. 5 Their Lordship upheld the decision of the Special Court that tax does not include penalty nor interest under section 11(2)(a). 42. As regards question No. 6 Their Lordships held in paragraph 38 of their order as under:- "38. The Special Court has, in the impugned judgment, also dwelt at some length on the question whether it can absolve a notified person from imposition of penalty or interest after the date of the notification. Since the liabilities covered under section 11(2)(a) are only liabilities arising during the period 1-4-1991 to 6-6-1992, and do not cover penalty and interest, this question does not really arise. In any case, interest or penalty for any action or default alter the date of the notification, are not covered by the Act. However, we must reiterate that a taxing statute is a code in....
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....r clarified that interest and dividend on attached assets also remain attached as they arc mere usufruct of attached assets. 6 ..... This Court has already held by the Order that any claim of the Tax Department which falls under section 11(2)(c) could not be paid in priority for the reasons set out in detail in the order dated 20-2-1995. This Court held that any payment of Advance Tax Deduction at Source in respect of attached assets would amount to making payment to Income Tax Department not contemplated by section 1 of the said Act. This Court has held that the provisions of the said Act This Court has held that this must be so as the said Act was a Special Act and also a later Act. 7. The law is now well settled by the Supreme Court judgment dated 13-5-1998 in Civil Appeal No. 5326 of 1995. The Income-tax Department can get no priority in respect of tax which is not for the statutory period i.e., 1st April, 1991 to 6-6-1992. As has been held by the Supreme Court tax for any subsequent or any other period can only be recovered by the Income-tax Authorities under section 11(2)(c) or from subsequently acquired property or income of the Notified Party which do not stand attached .....
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....pay the tax. 46. Section 4 is a charging section and it is reproduced below: "4(1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of this Act in respect of the total income of the previous year of every person: Provided where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly. (2) In respect of income chargeable under sub-section (1), income tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provisions of this Act." 47. Failure to deduct and pay entails liability for interest under section 201(1A) and penalty under section 201 read with section 221. Section 201(2) and also creates a charge on all assets of such person responsible for deduction and payment of tax, if after deduction, person does not pay the same. Section 205 then puts a bar for collection of the tax fr....
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....ndia. 50. In a later decision, the Calcutta High Court in the case of CIT v. Oriental Co. Ltd. [1982] 137 ITR 777 also examined the nature of TDS vis-à-vis debt accrued to the assessee. The contention of the Revenue was that 'the declaration of dividend brings into existence the debt owed by the company to the shareholder and therefore the entire amount of dividend accrued to the assessee'. The Court did not accept this contention of the assessee and observed at page 783 of the Report as under: "In this connection, it would be instructive, in our opinion, to refer to section 8 of the Income-tax Act, 1961, which deals with dividend income, and which provides that for the purpose of inclusion in the total income of an assessee any dividend declared by a company or distributed or paid by it within the meaning of sub-clause (a) or sub-clause (b) or sub-clause (c) or sub-clause (d) or sub-clause (e) of clause (22) of section 2 shall be "deemed to be the income of the previous year in which it is so declared, distributed or paid, as the case may be. In this connection, reference may be made to section 194 of the Act which obliges the principal officer of an Indian company or a c....
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....same, or the right to treat the same as income, arises on the declaration of dividends. So it is not possible to accept, on principle, the first argument urged on behalf of the Revenue that declaration of dividend creates a right so far as gross dividend is concerned in favour of the shareholder and as such a declaration would be taken to have caused accrual of income to a shareholder." 51. At page 787 of the Report, the following question was posed: "We come, therefore, to the basic question whether on a declaration of dividend as such the amount which is liable to be deducted under the relevant Finance Act accrues or arises to an assessee in India." 52. This question was answered by the High Court at page 791 of the Report as under: "In our opinion, in view of the scheme of section 194 read with section 198, in the case of the assessee who are liable to pay income-tax, the company is obliged by the statute to deduct that tax. In such cases, the assessee has no right to claim the deduction from the company even if the assessee is not liable to pay the taxes. The only right that the assessee gets is against the Revenue to claim refund if he is liable to pay a part or none at al....
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....ome of the assessee, for computing the income of the shareholders." 53. The Madhya Pradesh High Court in the case of CIT v. Yawar Rashid [1996] 218 ITR 699 also considered the provisions of section 5(1)(7) with regard to income from dividend and interest and it held as under: "According to section 5 of the Income-tax Act, 1961, the total income of the previous year of the assessee who is a resident in India includes all income from whatever source, i.e., which is received or deemed to be received in India in such year by or on behalf of such person, or accrues or arises or is deemed to accrue or arise to him in India during such year or accrues or arises to him outside India during such year. A distinction has to be made among the three clauses of section 5 of the Act. Clause (c) of section 5 is different from both clauses (a) and (b) of section 5. In clauses (a) and (b), the words used are "is received or is deemed to be received or accrues or arises or is deemed to accrue or arise India". Clause (c) is in the present tense and makes it clear that the actual income which accrues or arise to him from outside India shall be counted, i.e., the gross income in clause (c) is not to b....
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....der section 194A and a charge on the assessees themselves under section 4(2) of the Act. See also the answer given by the Supreme Court order dated 13-5-1998 to the question posed by the custodian regarding mortgaged property. The court stated that the property belonging to the notified person is the interest of the notified person in that mortgaged/pledged property and not the entire property. Similarly, when the interest payable to the notified person is subject to TDS under section 194A of the Act, the property in that interest recoverable is only for 'net of TDS' and not the whole amount of interest. 56. Further, the tax priority within the jurisdiction of the Special Court was of the tax for the period 1-6-1991 to 6-6-1992 and the TDS liability is for t he period much after that namely for the impugned assessment year 1995-96 onwards. Therefore, it was not automatic and required a specific order of the Special Court under section 11(2)(c) of the Act for the percentage of distribution and not otherwise. 57. With regard to penalty and interest the Supreme Court observed that the interest or penalty for any action or default after the date of notification are not covered by the....
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.... over of the company by the Government the enhanced amount of charge but not recovered at all and in that context it was held by the Supreme Court that no income resulted at all and the receipt was only a hypothetical income which really never accrued to the assessee. Similarly, in the case of CIT v. Bokaro Steel Ltd. [1999] 236 ITR 3 151 (SC) the original agreement ceased to be operative ab initio and the entries regarding income of interest shown by the assessee were reversed in the next year since the supplier had replace 8 locomotives lent by the assessee company to it by new ones. The entire nature of transaction was changed between the parties. There was resolution of the assessee company in this regard and the income from interest did not result at all as the original agreement ceased to be operative ab initio. The entry in the books which was made was about a hypothetical income which did not materalise and the entry was reversed in the next year. On the parity of reasoning, when income is not taxable because ultimately it did not result at all, the interest would also not be accrue or arise, consequently not allowable deduction, as ultimately it did not remain to be payabl....