2006 (6) TMI 104 - HC - Income Tax

Failure to deduct tax at source u/s 194A of the Income-tax Act, 1961 - Assessee in default in terms of section 201(1) of the Act for the financial years 1994-95 to 2001-02 - whether the payments made to TFCI towards interest were immune from any deduction at source in terms of section 194A(3)(iii)(b) of the Act? - HELD THAT - There is no escape from the liability arising from section 201(1A) in a case where the assessee does not deduct or does not pay after deduction the amount deducted. Interest at the stipulated rate is inevitable and can be legitimately recovered from the assessee in default. If tax has been paid by the deductee as is the position in the instant case, there is no question of the assessee paying the same over again either in full or part. Tax could be recovered from the assessee only once. If that be so, interest must stop accruing, the moment, the amount of tax is paid to the Revenue. It is immaterial whether the tax is paid by the deductee or the assessee who had made the deduction. What is significant is that the interest which is compensatory in character is paid to the Revenue till the date the amount of tax is actually deposited. That is precisely what has been done in the instant case. The question framed earlier is answered accordingly. Appeal allowed.

Issues Involved:
1. Failure to deduct tax at source under section 194A of the Income-tax Act, 1961.
2. Determination of the respondent-company as "an assessee in default" under section 201(1) of the Act.
3. Applicability and retrospective effect of a Central Government notification under section 194A(3)(iii)(b) of the Act.
4. Relevance of "bona fide belief" in non-deduction of tax at source.
5. Levy of interest under section 201(1A) of the Act.
6. Limitation period for passing the order by the Assessing Officer.
7. Recovery of tax and interest when tax is already paid by the deductee.

Detailed Analysis:

1. Failure to Deduct Tax at Source:
The respondent-company, running a five-star hotel, failed to deduct tax at source under section 194A of the Income-tax Act, 1961, while paying interest on a loan borrowed from the Tourism Finance Corporation of India Ltd. (TFCI). The Assessing Officer determined an aggregate tax liability of Rs. 3,41,46,984 and an additional interest of Rs. 2,13,89,341 under section 201(1A) of the Act.

2. Determination as "an Assessee in Default":
The Assessing Officer held the respondent-company as "an assessee in default" under section 201(1) for the financial years 1994-95 to 2001-02. The Commissioner of Income-tax upheld this determination, rejecting the respondent's arguments that payments to TFCI were exempt from tax deduction at source.

3. Applicability and Retrospective Effect of Notification:
The respondent argued that a Central Government notification exempting TFCI from tax deduction under section 194A(3)(iii)(b) applied retrospectively. The Commissioner rejected this, stating the notification was not retrospective and TFCI did not fall under the exempt category.

4. Relevance of "Bona Fide Belief":
The respondent claimed a bona fide belief that TFCI was exempt from tax deduction. The Tribunal initially accepted this, but the High Court found no material evidence supporting the bona fide belief. The High Court clarified that such belief was irrelevant to determining default under section 201, as it only mattered for penalty considerations under section 221.

5. Levy of Interest under Section 201(1A):
The Commissioner and the High Court emphasized that interest under section 201(1A) is mandatory and compensatory, not penal. The Tribunal's decision to absolve the respondent of interest liability was overturned, reinforcing that interest accrues until the tax is paid, regardless of who pays it.

6. Limitation Period for Passing the Order:
The Tribunal opined that the Assessing Officer's order was beyond the reasonable period of four years. However, this issue became secondary as the primary focus was on the liability and interest determination.

7. Recovery of Tax and Interest:
The High Court concluded that the respondent was liable for interest from the date tax was deductible until the deductee (TFCI) paid it. The court clarified that tax could not be recovered twice, and interest liability ceases once the tax is paid. The Assessing Officer had verified that TFCI paid the tax, and the respondent had paid the interest, satisfying the liability.

Conclusion:
The High Court allowed the appeals, set aside the Tribunal's orders, and restored the Commissioner's decision. The respondent was confirmed as an assessee in default, liable for interest under section 201(1A) until the tax was paid by TFCI. The court emphasized that interest is compensatory and mandatory, and bona fide belief is irrelevant to default determination under section 201.

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