TaxTMI 
TaxTMI 
2006 (7) TMI 248
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.... due' made by an assessee where the ultimate recipient of such 'interest accrued but not due' cannot be ascertained at the point of time when the provision is made. 3. The case before us also raises another important legal issue about the scope of section 221 per se, and whether a penalty under the said section can be imposed at all, as a consequence of non-deduction of tax at source, after the insertion of section 271C with effect from 1st April, 1989. That aspect of the matter, however, we will deal with a little later. 4. Coming back to the core issue, it is necessary to briefly explain the expression 'interest accrued but not due'. The expression 'interest accrued but not due' is essentially an accounting expression which refers to the interest liability which has arisen in respect of the interest payable by a person, but liability to pay such interest has not crystallised. This expression becomes particularly relevant when interest is payable on a date later than the date on which books of account of the assessee are closed annually, and, therefore, as at the time of closure of annual accounts, the assessee has incurred a liability in respect of interest but that liabili....
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....be made on the Bond by affixing his signature at the place indicated thereon. The transferee shall also affix his signature on the Bond at the appropriate place." 8. As regards the requirement of registration of the transfer of these bonds, the same offer document further observed as follows: "...For the purpose of registration, the transferee shall intimate his/her name, address, occupation, if any, and shall deliver the bond certificate(s) to IDBI at Bombay. In case of Regular Return Bonds, the transferees must get their names registered with the IDBI as aforesaid since the yearly interest thereon, is payable only to the registered bondholders. . . ." 9. The above terms and conditions, so far as material for the purposes of our adjudication, can be summarized as follows: (a) The assessee is liable to pay interest @ 1696 annually in respect of regular return bondholders. (b) The interest is payable on 9th June of each calendar year, except in the year of maturity, when interest is payable on maturity. (c) The interest, except at the time of maturity, is paid to the person whose name is registered in the records of the assessee-company as o....
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.... on the amount of interest payable. Provided .. (As it is not relevant for our purposes, we are not reproducing the same) Explanation - For the purposes of this section, where any income by way of interest on securities is credited to any account, whether called 'interest payable account' or 'suspense account' or by any other name, in the books of account of person liable to 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." 12. Very briefly, the case of the revenue is that in the light of Explanation to section 193, tax is required to be deducted at source in respect of all provisions for 'interest accrued but not due' because crediting of such interest to any account, by whatever name called, is to be treated as 'credit of such income to the account of the payee'. The assessee, on the other hand, contends that unless the payee can be ascertained, there is no question of deduction of tax at source. It is contended that when the payee cannot be ascertained at the point of time when provision is made, as is the case before us, the machinery of deduct....
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.... interest under section 201(1A) but also levy of maximum penalty under section 221 read with section 201. Accordingly, ITO's order levying the penalty is upheld. Learned CIT(A) nonetheless modified the order of the Assessing Officer so far as quantum of penalty was concerned, as the correct interest provision was Rs. 44,85,97,164/- and not Rs. 55,31,68,800/- as stated in the Assessing Officer's order. Based on CIT(A)'s direction to verify the facts and reduce the penalty accordingly, the penalty was finally reduced to Rs. 1,21,34,589/-. 15. Not satisfied with the order of the CIT(A), the assessee is in second appeal before us. 16. Shri Dinesh Vyas, learned Senior Advocate, assisted by Shri P.C. Tripathi, Advocate, appeared for the assessee, and Shri N.N. Mishra, learned Commissioner (DR) appeared for the revenue. During the course of hearing and finding that the grounds of appeal did not succinctly set out the controversy actually requiring our adjudication, we asked the parties to address us on the two legal issues that we have identified earlier in this order. Rival contentions are conscientiously heard, material on record is carefully perused and factual matrix of the c....
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....ecurity or the shareholder, as the case may be, and credit shall be given to him for the amount so deducted on the production of certificate furnished under section 203 in the assessment made under this Act for the assessment year for which such income is assessable. Provided......(As it is not relevant for our purposes, we are not reproducing the same) 202. Deduction only one mode of recovery.-The power to recover tax by deduction under the foregoing provisions of this chapter shall be without prejudice to any other mode of recovery. 203. Certificate for tax deducted.-(1) Every person deducting tax at source in accordance with the foregoing provisions of this chapter shall within such period as may be prescribed from the time of credit or payment of the sum, or, as the case may be, from the time of issue of a cheque or warrant for payment of any dividend to a shareholder, furnish to the person to whose account such credit is given or to whom such payment is made or the cheque or warrant is issued, a certificate to the effect that tax has been deducted, and specifying the amount so deducted, the rate at which tax is deducted and such other particulars as ....
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.... person whose liability is to pay an income knows the identity of the beneficiary or the recipient of the income. It is a sine qua non for a vicarious tax deduction liability that there has to be a principal tax liability in respect of the relevant income first, and a principal tax liability can come into existence when it can be ascertained as to who will receive or earn that income because the tax on the income and in the hands of the person who earns that income. In this view of the matter, tax deduction at source mechanism cannot be put into practice until identity of the person in whose hands it is includible as income can be ascertained. 18. It is indeed correct that Explanation to section 193 lays down that even when an income is credited to any account in the books of account of the person liable to 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, but the fact that the credit to any account is to be deemed to be credit to the payee's account also presupposes that payee can be ascertained. Therefore, this deeming fiction can only be activated when the identit....
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....accepted by the CBDT as evident from its letter dated 5th July, 1996 addressed to the Tata Iron & Steel Co. Ltd. [Letter No. 275/126/96 IT (B)], which, inter alia, states as follows:- "1 am directed to refer to your letter ref. 3A 13-21/1460 dated 23rd May, 1996, on the above subject, and to say that difference between the issue price of Rs. 5,000/- and face value of Rs. 25,500 is in the nature of interest subject to provisions of section 193/193A. Although the company would be making provisions for interest on year to year basis in their books of account, there will be no deduction of tax at source in each such year as the payee is not known. (Emphasis, italicised in print, supplied by us now) We agree with the merits of the stand so taken by the Central Board of Direct Taxes. The deduction of tax at source can only be effected when payee is known. As far as the situation before us is concerned, the regular return bonds being transferable on simple endorsement and delivery and the relevant registration date being a date subsequent to the closure of books of account, the assessee could not have ascertained the payees at the point of time when the provision for intere....
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....ect Taxes, vide Circular No. 551, dated 23-1-1990, explained the insertion of this section in following words: "16.5 Under the old provisions of Chapter XXI of the Income-tax Act, no penalty was provided for failure to deduct tax at source. This default, however, attracted prosecution under the provisions of section 276B, which prescribed punishment for failure to deduct tax at source or after deducting, failure to pay the same to the Government. It was decided that the first part of default, i.e., failure to deduct the tax at source should be made liable to levy of penalty, while the second part of default i.e., failure to pay the tax deducted to the Government, which is a more serious offence, should continue to attract prosecution. The Amending Act, 1987 has accordingly inserted a new section 271 C to provide for imposition of penalty on any person who fails to deduct tax at source as required under the provisions of Chapter XVII-B of the Act. The penalty is a sum equal to the amount of tax which would have been deducted at source." 8. It was only at the time of insertion of section 271C that rigours of section 276B were relaxed and non-deductions and short ded....
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....ion 221(1), on the facts of this case, was unsustainable in law since the short deduction of tax at source took place in the financial year 1990-91, i.e. much after insertion of section 271C with effect from 1st April, 1989. The levy of penalty under section 221(1) was thus quashed on the ground of jurisdiction. As a matter of fact, the CBDT itself has, in Circular No. 551, dated 23-1-1990, accepted that until section 271C was inserted in the Act, 'no penalty was provided for failure to deduct tax at source'. It is not only merely a question of mentioning a wrong section, which could perhaps be covered up by recourse to section 292B, it also important to bear in mind that the impugned penalty is levied by an officer of the rank of the Income-tax Officer, whereas, penalty under section 271C could only have been levied by an officer of the rank of the Deputy (now Joint) Commissioner of Income- tax. The Income-tax Officer was from this point of view, not even competent to impose the impugned penalty. Learned Departmental Representative points out that penalty under section 221 has been upheld by the Hon'ble Calcutta High Court in the case of Jubilee Investments & Industries Ltd. v.....