2006 (1) TMI 470 - AT - Income Tax

Deduction of tax at source - Payment made to TAB was for performing the work of dubbing in various languages and for making beta copies - Liable to deduction of TDS u/s 194C or 194J - assessee in default u/s 201(1) - HELD THAT - The Explanation to section 191 was inserted by the Finance Act of 2003 w.e.f. 1-6-2003. A plain reading of the aforesaid Explanation would show that it is clarificatory in nature and, therefore, would apply for the financial year involved in these appeal also. In the case of Crescent Housing (P.) Ltd. v. ITO 2001 (7) TMI 300 - ITAT MADRAS-C , held that in the event of payment of tax by the recipient (i.e., the payee from the appellant) no further demand could be raised on the person responsible for deducting tax at source. The aforesaid decision related to the financial years 1996-97 and 1997-98. In the said decision even in respect of interest under section 201(1A) it was held that it could be levied only till the date of payment of tax by the payee from the appellant. Even prior to inserting of Explanation to section 191 Courts have taken a view that in a case where the payee pays the tax the payer i.e., the person responsible for deduction of tax at source cannot be held to be an assessee in default u/s 201. The Hon ble Gujarat High Court in the case of CIT v. Rashikesh Apartments Co-operative Housing Society Ltd. 2001 (6) TMI 17 - GUJARAT HIGH COURT and the Hon ble M.P. High Court in the case of CIT v. M.P. Agro Morarji Fertilizers Ltd. 1988 (9) TMI 30 - MADHYA PRADESH HIGH COURT have taken a similar view. The appellant cannot, therefore, be treated as an appellant in default, if it is found that the payee has made payment on tax of the amounts received from the appellant. Consequently the appellant cannot be considered as an assessee in default . As far as charge of interest is concerned it cannot be from the date of deductibility of tax till the payment by the appellant. On the other hand it could be only put to the date of payment of tax by the payee i.e., M/s. TAB. This is because interest is compensatory in nature and the revenue cannot claim payment of interest for the period when the payee has already paid the taxes to the exchequer. This issue will be academic if it is found that the payee had paid the taxes on due date. For the reasons stated above the appeal of the revenue is dismissed. Ground No. 1 of the grounds of appeal of the appellant is allowed to the extent indicated above. In the result TDS is dismissed, while TDS 209 is partly allowed.

Summary

Issues:
1. Interpretation of sections 194C and 194J for tax deduction on payments for dubbing services.
2. Liability of the appellant as an "assessee in default" under section 201(1) of the Income-tax Act.
3. Charging of interest under section 201(1A) from the date of payment by the appellant to the payee till the payment of tax by the payee.

Analysis:
1. The appellant, a partnership firm engaged in media production, deducted TDS at 2% on payments made for dubbing services. The Assessing Officer contended that the correct rate should be 5.1% under section 194J, considering dubbing as professional services. The CIT(A) upheld this view, stating that dubbing falls under professional services covered by section 194J, not section 194C, citing CBDT Circular No. 714. The appellant's belief was deemed not bona fide, and tax was short deducted, leading to interest levied under sections 201 and 201A.

2. The CIT(A) addressed the appellant's plea regarding the payee's tax payment, referencing CBDT Instruction and judicial precedents. The CIT(A) accepted the claim, directing verification of the actual payment by the payee to calculate the tax short deduction. The appellant's liability as an "assessee in default" was thus questioned, leading to the appeal.

3. The issue of charging interest under section 201(1A) was contested by the revenue, arguing for a different period for levying interest. However, the Tribunal referred to the Explanation to section 191 inserted by the Finance Act of 2003, clarifying that the payer cannot be an "assessee in default" if the payee has paid the tax. Precedents supported this view, limiting interest charge till the date of payment by the payee. The Tribunal dismissed the revenue's appeal, emphasizing interest as compensatory and not applicable if the payee paid taxes promptly.

In conclusion, the Tribunal dismissed one appeal and partly allowed another, considering the correct application of tax deduction provisions, the liability of the appellant, and the charging of interest under the Income-tax Act. The judgment clarified the responsibilities of the deductor, the impact of payee's tax payment, and the compensatory nature of interest charges.