2004 (3) TMI 8 - HC - Income Tax

Deduction of tax at source - AO contended that once the interest was paid to the lenders by cheques issued by the assessee the obligation to deduct tax on such interest u/s 194A arose on the part of assessee - Held that AO contention was not sustained

Summary

Issues Involved:
1. Obligation of the company to deduct tax on interest payments under section 194A of the Income-tax Act, 1961.
2. Justification of the Tribunal's decision that section 194A was not applicable since the loans were availed and repaid by the directors through the company.

Issue-wise Detailed Analysis:

1. Obligation of the company to deduct tax on interest payments under section 194A of the Income-tax Act, 1961:

The primary issue revolves around whether the company was required to deduct tax at source on interest payments made on loans routed through it by the directors. The Assessing Officer, upon examining the company's books, found that loans taken by the directors and managing director in their individual capacities were routed through the company's bank account. The interest payments on these loans were made by the company without reflecting these transactions in its books as loans or interest payments by the company. Consequently, the Assessing Officer applied the provisions of sections 201(1) and 201(1A) of the Act, deeming the company as an assessee in default for not deducting tax at source and levied penalties under section 271C.

2. Justification of the Tribunal's decision that section 194A was not applicable since the loans were availed and repaid by the directors through the company:

The Tribunal, however, held that section 194A was not attracted because the loans were not taken by the company but by the directors in their individual capacities. The Tribunal observed that the company merely acted as an agent for the directors, facilitating the receipt and repayment of loans and interest. The interest payments were not debited in the company's books but were reflected in the directors' accounts. Therefore, the Tribunal concluded that the company was not responsible for paying the interest and thus had no obligation to deduct tax under section 194A.

Conclusion:

The High Court upheld the Tribunal's decision, agreeing that section 194A requires the person responsible for paying interest to deduct tax at source. Since the company was not responsible for paying the interest but merely acted as an intermediary, it was not liable to deduct tax. The court emphasized that the company's role was limited to facilitating the transactions for the directors, and the interest payments were not reflected in its books as its liabilities. Consequently, the appeals were dismissed, and the Tribunal's view that the company had no obligation under section 194A was affirmed. The court also noted that any irregularities in the company's use as a conduit by the directors could be addressed under other relevant laws but were not pertinent to the sections 194A and 201 of the Income-tax Act.