1998 (12) TMI 18 - HC - Income Tax

Summary

Issues involved: Assessment of penalty u/s 201(1A) for failure to deduct tax at source on interest payments made to sister concerns.

Summary:
The High Court of Madras addressed the case of a registered firm that borrowed monies from its sister concerns, Ramesh Enterprises (P.) Ltd. and Ramesh Exports (P.) Ltd., and failed to deduct tax at source on the interest payments made to them. The Income-tax Officer imposed penalties u/s 201(1A) for the assessment years 1983-84 and 1984-85. The firm's appeals to the Commissioner of Income tax were unsuccessful, but the Tribunal later ruled in favor of the firm, stating that there was no liability to deduct tax at source as the recipients had filed loss returns or claimed tax refunds. The Revenue challenged this decision, questioning the Tribunal's discretion in the matter of levy of interest u/s 201(1A).

During the hearing, it was revealed that the sister concerns had been assessed for income tax, with one of them securing a refund after filing an appeal. The firm argued that it was not obligated to deduct tax on the interest payments due to the recipients' tax situations. However, the Court emphasized that the duty to deduct tax at source on interest payments is not contingent upon the assessee's assessment of the recipient's tax liability. The obligation is imposed to ensure prompt tax collection by the State.

The Court clarified that the convenience or assessment of tax liability by the assessee does not determine the obligation to deduct tax at source. The provision aims to ensure compliance with tax deduction requirements and prompt remittance to the Government. The Tribunal erred in accepting the firm's plea that it had no duty to deduct tax at source based on the recipients' tax filings. The firm was obligated to deduct tax at source, regardless of the recipients' tax situations.

Ultimately, the Court ruled in favor of the Revenue, upholding the penalty imposed on the firm u/s 201(1A) for failure to deduct tax at source. The firm was directed to pay costs to the Revenue.