2005 (1) TMI 52 - HC - Income Tax

Insurance company - obligation to deduct tax at source petitions for quashing the recovery notice issued under section 226(3) to the banker of the petitioner-company with which the accounts of the petitioner are maintained - petitioner was under an obligation to deduct tax at source on payment of interest in terms of sub-section (1) of section 194A - submission on the same on behalf of the petitioner that the petitioner was not obliged to deduct tax at source on the payment of amount by way of interest does not merit consideration. Whether the non-deduction also warranted levy of penalty or the circumstances did not call for levy of penalty is a question which is sought to be agitated by the petitioner before the appellate authority. There is neither any need nor the occasion to examine this aspect by the court in this writ petition - No occasion to interfere particularly for quashing recovery notice under section 226(3) when the subject matter is not before this court nor can be agitated before this court in these writ petitions petition dismissed

Issues:
1. Quashing of notice issued under section 226(3) of the Income-tax Act, 1961 to the banker of the petitioner-company.
2. Legality of levy of penalty on the petitioner for not deducting tax at source.
3. Granting of stay by the Tribunal during the pendency of appeal.
4. Interpretation of section 194A of the Income-tax Act.

Analysis:

1. The insurance company filed writ petitions seeking to quash the notice issued under section 226(3) of the Income-tax Act to the petitioner's banker for payment of the amount demanded by the Income-tax Department. The petitioner claimed that the amount in question was under appeal before the Income-tax Appellate Tribunal, challenging the levy of penalty for failure to deduct tax at source on interest payments made to claimants. The petitioner argued that since the legality of this penalty was in question, a stay should have been granted by the Tribunal to prevent coercive recovery proceedings by the Income-tax Department.

2. The petitioner contended that the issue of whether tax should have been deducted at source on interest payments was a matter of legal uncertainty, citing a decision by the Gujarat High Court in a similar case favoring the petitioner. The petitioner relied on legal principles established in various cases to support the claim that in situations of disputed legal questions, a stay on recovery should be granted. However, the court noted that the petitioner's obligation to deduct tax at source was clear under section 194A of the Income-tax Act, and the question of penalty imposition was to be decided by the appellate authority, not the court in the writ petition.

3. The court examined the provisions of section 194A of the Income-tax Act, particularly clause (ix) inserted by the Finance Act, 2003, which exempted certain interest payments from tax deduction if they did not exceed a specified amount. The court clarified that the petitioner, as an insurance company making interest payments to claimants, fell under this exemption if the total interest payments did not exceed a certain limit. The court emphasized that the obligation to deduct tax at source was applicable before the amendment and that the petitioner's argument of non-obligation was not valid. The court concluded that the issue of penalty imposition should be addressed by the appellate authority, not the court in the writ petition.

4. Ultimately, the court dismissed the writ petitions, stating that there was no basis for interference in the quashing of the recovery notice under section 226(3) of the Income-tax Act. The court clarified that the subject matter of the appeal was not within its jurisdiction and should be dealt with by the appellate authority. The court upheld the obligation of the petitioner to deduct tax at source and left the decision on penalty imposition to the appropriate appellate body.

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