2011 (9) TMI 637 - HC - Income Tax

TDS - Assessee borrowed money from the creditors however no interest was paid as he was running under loss, but for complying with provisions of Companies Act, a book entry was passed in his account and expenditure was claimed - Interest levied under Sec 201 read with Sec 201(A) - Held That - liability of paying tax is that of the creditor and a statutory duty is cast on the debtor to deduct tax and make payments. The revenue cannot collect tax on interest from both the principal and the agent. Exercise is possible only after verifying the records of both the assessee and the creditor of the assessee. Case remanded back. Levy of interest for failure to deduct and pay TDS - retrospective amendment - section 201 - held that - even though at the relevant years, as Section 194A read with Section 201 stood, there was no liability to pay interest on the assessee by virtue of retrospective operations, he is liable to pay interest. Therefore, the said finding recorded by the authorities concurrently cannot be found fault with. Hence, the first substantial question of law is answered in favour of the revenue and against the assessee.

Summary

Issues:
1. Challenge to order imposing interest under Section 201(1A) of the Income-tax Act, 1961 for delayed payments.
2. Interpretation of provisions regarding liability to deduct tax under Section 194(A) and implications of retrospective amendments.
3. Validity of interest levy from date of default till date of order.

Analysis:

Issue 1:
The appellant challenged the order imposing interest under Section 201(1A) for delayed payments. The appellant contended that as they were running under loss, they did not make interest payments to creditors, leading to a dispute on the liability to deduct tax. The appellant argued that the liability to deduct tax arises only when liable to pay interest income to a resident. The court examined the provisions of Section 194(A) and Section 201, noting that prior to amendment, only certain sections were deemed defaulters liable to pay interest. However, post-amendment, the liability was extended to all falling under Section 194(A), making them liable to pay interest retrospectively. The court upheld the lower authorities' decision to impose interest, stating that despite hardship, retrospective amendments are valid, and the appellant was liable to pay interest.

Issue 2:
Regarding the interpretation of provisions on liability to deduct tax under Section 194(A), the court clarified that the principal liability of paying tax lies with the creditor, with the debtor having a statutory duty to deduct tax on interest payable. The court emphasized that the creditor's tax payment relieves the debtor of vicarious liability. The court found the lower authorities' decision to levy interest from the date of default till the order erroneous, as it could lead to double taxation. The court directed the authorities to verify whether the creditor had paid tax, and if so, the appellant's liability ceases from the date of the creditor's tax payment.

Conclusion:
The court upheld the imposition of interest under Section 201(1A) on the appellant for delayed payments, considering the retrospective amendment extending liability to all falling under Section 194(A). However, the court set aside the decision to levy interest from the date of default till the order, directing authorities to verify the creditor's tax payment status to determine the appellant's liability accurately. The appeal was partly allowed, and the matter was remitted back to the Assessing Authority for further examination.