1992 (4) TMI 16 - HC - Income Tax

Summary

Issues:
Interpretation of section 194A of the Income-tax Act, 1961 regarding the obligation to deduct tax at source on interest payments.
Applicability of penalty under section 201(1A) for non-deduction of tax at source.
Impact of maintaining accounts under the mercantile system on tax deduction obligations.

Analysis:
The judgment by the High Court of Rajasthan involved a dispute regarding the obligation of an assessee, Messrs. Oriental Power Cables Ltd., to deduct tax at source on interest payments under section 194A of the Income-tax Act, 1961. The Income-tax Officer had imposed a penalty under section 201(1A) for the failure to deduct tax on interest for the assessment year 1978-79. The assessee contended that since the interest amount was credited to a suspense account and not to individual parties, section 194A did not apply to them. The appellate authority upheld the penalty, leading the assessee to appeal to the Income-tax Appellate Tribunal (ITAT).

The ITAT allowed the appeal, ruling that the assessee was not obligated to deduct tax at source as they maintained accounts in accordance with the mercantile system of accounting. The ITAT noted that the interest income was credited to an "interest payable account" or a suspense account, rather than directly to the payee's account, which exempted them from the deduction requirement of section 194A. This decision was based on the principle that a credit balance alone does not constitute payment or accrual, as established in the Supreme Court case CIT v. Toshoku Ltd. [1980] 125 ITR 525, which was cited by the assessee's counsel.

The Revenue argued that the Explanation added to section 194A in 1987 clarified that tax should be deducted at source on accrual of interest or at the time of crediting it to the payee's account to prevent postponement of tax liability. However, the court rejected this argument, stating that the amendment was prospective and did not apply to the case at hand. The court held in favor of the assessee, concluding that there was no obligation to deduct tax at source under section 194A due to the specific accounting practices followed by the assessee. The court awarded costs of Rs. 500 to the assessee, ruling against the Revenue.