2002 (3) TMI 3 - HC - Income Tax

TDS section 195 - there is no doubt that if the amount is paid as interest to a non-resident in the usual course of business then at the time of credit of such amount to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft the payer would be bound to deduct income-tax at the rate in force. However when such amount becomes part of a judgment-debt it loses its original character and assumes the character of a judgment debt. Once such an amount assumes the character of a judgment-debt the decree passed by the civil court must be executed subject only to the deductions and adjustments permissible under the Code of Civil Procedure Thus judgement-debtor is not entitled to withdraw the amount towards tax to be deducted at source from decreetal amount

Issues Involved:
1. Entitlement to withdraw tax deducted at source (TDS) on interest paid towards satisfaction of a decree.
2. Characterization of the decretal amount as interest or judgment debt.
3. Applicability of Section 195 of the Income-tax Act, 1961.
4. Execution of the decree in accordance with the Code of Civil Procedure.

Issue-wise Detailed Analysis:

1. Entitlement to Withdraw TDS on Interest Paid Towards Satisfaction of a Decree:
The Food Corporation of India (FCI) sought to withdraw Rs. 2,06,269, which it claimed as TDS on the interest paid towards the satisfaction of the decree. The FCI argued that under Section 195 of the Income-tax Act, 1961, it was liable to deduct tax at source on the interest paid to a non-resident. The court, however, rejected this claim, stating that once the amount becomes part of a judgment debt, it loses its original character as interest and assumes the character of a judgment debt. Therefore, the FCI's request to withdraw the TDS amount was not tenable.

2. Characterization of the Decretal Amount as Interest or Judgment Debt:
The court examined whether the decretal amount retained its character as interest or became a judgment debt. It referred to the Supreme Court's observation in All India Reporter Ltd. v. Ramchandra D. Datar, which stated that once a claim is merged in the decree of the court, it assumes the character of a judgment debt. The court concluded that the amount paid as interest under the decree lost its character as interest and became a judgment debt, which must be executed according to the Code of Civil Procedure.

3. Applicability of Section 195 of the Income-tax Act, 1961:
Section 195 mandates that any person responsible for paying interest to a non-resident must deduct income tax at the rates in force unless a certificate under sub-section (3) is granted by the Assessing Officer. The court noted that the FCI did not apply for such a provision in the decree for TDS when the award was made a rule of the court. Therefore, the court held that Section 195 did not apply to the interest component once it became part of the judgment debt.

4. Execution of the Decree in Accordance with the Code of Civil Procedure:
The court emphasized that the decree must be executed subject to the deductions and adjustments permissible under the Code of Civil Procedure. The FCI could not point out any provision under the Income-tax Act or the Code of Civil Procedure that allowed the deduction of TDS from the decretal amount on the ground that it included an interest component.

Conclusion:
The court rejected the FCI's request to withdraw the TDS amount of Rs. 2,06,269. It directed the petitioner/decree-holder to provide security for the same amount before withdrawing any sum from the Sheriff of Bombay. The decree-holder was granted liberty to apply for release from the security if it obtained a certificate or adjudication from the income-tax authority stating that it was not liable to pay tax in India on the decretal amount. The chamber summons was disposed of with no order as to costs, and all authorities were directed to act on a copy of the order authenticated by the Chamber Registrar of the court.

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