2010 (3) TMI 885 - AT - Income Tax

Summary

Issues Involved:
1. Confirmation of TDS recovery and interest u/s 201 read with section 194A.
2. Applicability of section 194A to proforma entries.
3. Treatment of interest accrued but not due.
4. Consideration of CBDT opinion on proforma entries.

Issue-wise Summary:

1. Confirmation of TDS recovery and interest u/s 201 read with section 194A:
The assessee challenged the CIT(A)'s confirmation of the Assessing Officer's order u/s 201 read with section 194A of the Income-tax Act, 1961, which demanded TDS of Rs. 3,24,890 and interest of Rs. 1,21,834. The assessee argued that the provisions of section 194A were not applicable as TDS was already deducted and paid on a yearly basis.

2. Applicability of section 194A to proforma entries:
The assessee contended that the proforma entry for "provision of interest accrued" made on 30-9-2001 was for ascertaining the bank's profit and loss and was reversed the next day. The CIT(A) and Assessing Officer treated this entry as covered by section 194A, which the assessee disputed, citing that no actual interest was due and payable.

3. Treatment of interest accrued but not due:
The CIT(A) held that the interest accrued but not due was credited to a suspense account and was identifiable to individual accounts, thus attracting TDS provisions. The CIT(A) referenced the Finance Act, 1987, which mandates TDS on accrual of interest at the end of the accounting year or at the time of payment, whichever is earlier.

4. Consideration of CBDT opinion on proforma entries:
The assessee referred to a CBDT letter and Circular No. 3 of 2010, which clarified that TDS is not obligatory on proforma entries made for management information systems where no actual credit to the depositor's account occurs. The Tribunal found that the notional provision made on 29-9-2001 was reversed the next day and did not constitute actual credit or payment of interest, thus TDS was not applicable.

Conclusion:
The Tribunal concluded that the lower authorities had misunderstood the nature of the proforma entries and allowed the assessee's appeal, ruling that the TDS provisions were not applicable to the notional entries reversed the next day. The assessee's appeal was allowed.