2013 (1) TMI 597 - AT - Income Tax

TDS u/s 194A Rate of TDS - Whether tax has to be deducted as the rate in force in quarterly basis where the interest is payable on 31st March every year and compounded with quarterly rest After amendment the deduction for interest payable u/s 194A at the rate of 10% w.e.f. 1/10/2009 as against 20% before the said date - Assessee company had moved application u/s 154 seeking rectification as the A.O. had computed the tax deductible in terms of the rates that were in force before 1/10/2010 and had not considered the rates in force as per the amendment made by Finance Act, 2009 Held that - Merely because the interest is compounded quarterly does not mean that the interest is payable on quarterly basis. The interest was accruing quarterly and therefore, the tax has to be deducted as the rate in force in quarterly basis, is not correct. The interest on ICD was payable on 31st March, although the interest was compounded with quarterly rests It can be seen from the ledger account that the assessee company had credited the interest payable on the ICD only on 31st March, 2010; thus the claim of the assessee company that it was liable to deduct tax at source at the rate of 10%, which was the rate in force on the date of credit to the account of the payee. The liability of the assessee to deduct tax at source with reference to the interest payment is only at the rate of 10%. In favour of assessee Delay in payment of TDS Interest u/s 201(1) Held that - Following the decision in case of Hindustan Coca Cola Beverage Pvt. Ltd (2007 (8) TMI 12 - SUPREME COURT OF INDIA) that assessee cannot be made liable u/s 201(1), since the payee had disclosed the interest income in its return of income - In favour of assessee

Summary

Issues Involved:
1. Justification of CIT(A) in refusing to rectify the order under sections 201(1) and 201(1A) of the Income Tax Act.
2. Application of the correct TDS rate (10% vs. 20%) under section 194A.
3. Validity of the subsequent amendment to the terms of the agreement regarding interest payment.
4. Liability of the appellant to interest under section 201(1A).

Issue-wise Detailed Analysis:

1. Justification of CIT(A) in Refusing to Rectify the Order under Sections 201(1) and 201(1A):
The appellant argued that the CIT(A) was not justified in holding that the refusal to rectify the order passed under sections 201(1) and 201(1A) by the Assessing Officer (AO) was justified. The appellant contended that the original order was passed in haste without considering all materials and explanations provided by the appellant. The CIT(A) held that the AO's action was justified because the appellant did not provide sufficient evidence to support their claim that the rate of TDS should have been 10% instead of 20%.

2. Application of the Correct TDS Rate (10% vs. 20%) under Section 194A:
The appellant claimed that the rate of TDS should be 10% as per the amendment made by the Finance Act, 2009, effective from 1/10/2009. The AO had applied a 20% rate, which was in force before the amendment. The CIT(A) partially accepted the appellant's claim, stating that for interest pertaining to the period after 1/10/2009, the TDS rate should be 10%. However, for interest pertaining to quarters before the amendment, the TDS rate should be 20%. The Tribunal agreed with the CIT(A) that the interest payable on 31/3/2010 should attract a 10% TDS rate, as per the amended agreement and the entries in the appellant's books of accounts.

3. Validity of the Subsequent Amendment to the Terms of the Agreement Regarding Interest Payment:
The appellant argued that the terms of the agreement regarding interest payment were modified by a letter dated 25/6/2009, making interest payable annually instead of quarterly. The CIT(A) rejected this claim, stating that the modified agreement was not ratified by the Board and appeared to be an afterthought. The Tribunal, however, found that the modification was valid as it was signed by an authorized director and accepted by the payee. The Tribunal noted that the interest was credited to the payee's account on 31/3/2010, supporting the appellant's claim for a 10% TDS rate.

4. Liability of the Appellant to Interest under Section 201(1A):
The appellant denied liability to interest under section 201(1A), arguing that the interest income was disclosed by the payee in its return of income. The Tribunal did not adjudicate this issue, as it had already decided that the correct TDS rate was 10%, making further consideration unnecessary.

Conclusion:
The Tribunal allowed the appeal, holding that the appellant was liable to deduct tax at source at the rate of 10% for the interest payment due on 31/3/2010, as per the amended agreement. The Tribunal found the modification of the interest payment terms valid and rejected the revenue authorities' reasoning that the interest should be calculated quarterly for TDS purposes. The appeal was allowed, and the AO was directed to recalculate the appellant's liability accordingly.