2011 (9) TMI 224 - HC - Income Tax

Non deduction of TDS - Whether the Tribunal was right in holding that Sec.201(1) and 201(1A) would not be applicable in cases where the payee was found to have suffered a loss - As such, the loss return filed by the payee company cannot be treated as a circumstance to be taken in favour of the assessee company from not applying the provisions of Section 201(1A) of the Income Tax Act - However, as far as levy of interest is concerned, it being an automatic one, the order of the Tribunal merits to be set aside as far as this aspect of the question is concerned - Accordingly, the assessment order regarding levy of interest has to undergo necessary modification to the effect that interest under Section 201(1A) of the Income Tax Act has to be calculated from the date on which tax should have been deducted to the date on which the payee should have filed its return under the provisions of the Income Tax Act. Whether assessee was justified in deducting tax at a lower rate without getting an authorisation or certificate for deduction of tax at a lower rate - As the same is no longer res integra, by reason of the decision of the Apex Court in the case of Transmission Corporation of A.P. Ltd., and another V. Commissioner of Income-Tax 1999 (8) TMI 2 - SUPREME Court , wherein, it was held that in the absence of any certificate obtained as given u/s 195(2) on the composite amount made by the assessee to the payee, TDS ought to have been made on the entire amount - Hence, the said question stands answered in favour of the Revenue.

Summary

Issues:
1. Applicability of Sec.201(1) and 201(1A) when payee suffers a loss.
2. Justification for deducting tax at a lower rate without authorization.
3. Levying interest under Sec.201(1A) for failure to deduct tax at source.

Detailed Analysis:
Issue 1:
The case involved the Chennai Metropolitan Water Supply and Sewerage Board deducting tax at 2% instead of 40% while making payments to a Malaysian Company. The Assessing Officer raised a demand for the shortfall in TDS under Sec.201 of the Income Tax Act. The Commissioner of Income-Tax (Appeals) held that the demand under Sec.201(1) was not sustainable as the recipient had no taxable income from the transaction. However, interest under Sec.201(1A) was upheld. The Tribunal, following precedent, ruled that interest was not leviable under Sec.201(1A), allowing the assessee's appeal.

Issue 2:
The question of deducting tax at a lower rate without authorization was addressed based on a Supreme Court decision. The Court held that in the absence of a certificate under Sec.195(2), TDS should have been made on the entire amount. The argument that TDS should only apply to income chargeable under the Act was dismissed, emphasizing the duty to deduct tax at source even from loss-making companies.

Issue 3:
Regarding the levy of interest under Sec.201(1A), the Court noted the penal consequences for failure to deduct or pay tax. The assessee's failure to rectify the shortfall and the recipient being a loss-making company were not accepted as valid reasons to avoid interest. The Court emphasized the automatic nature of interest levy and determined the terminal point for interest calculation as the date the payee should have filed its return, ensuring the calculation of interest is meaningful and in line with the law. The Tribunal's decision on interest levy was set aside, and the assessment order was modified accordingly.