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2015 (1) TMI 568 - HC - Income TaxLiability to deduct tax at source as required u/s. 194A - loan against pledge of shares - Special Court conclusively held that the provisions of TDS do not apply to the alleged liability to pay interest to the Custodian by order dated 14.08.1993, 20.2.1995 and 9.9.1996 and 3.5.199 - Held that - In the present case, we find that the Tribunal has committed serious error in interpreting the provisions of law. It goes without saying that Special Court was created for fast tracking the economy. The purpose for which the Special Court was enacted will prevail over the other law. Hence, we are of the opinion that the Tribunal has committed grave error in holding that the order of the Special Court will not prevail and that the TDS is required to be deducted by interpreting that it will apply only from the date of the order of the Supreme Court i.e. 9th September, 1996. In our view, the Tribunal has committed an error of law in restraining / prohibiting / constraining. Apart from that the appellants-assessees have not made any payment to the Department but have so simply made provision for it. The interpretation put forward by the Tribunal that TDS is income of the Department is misconceived. Therefore, in our view, restrained TDS could not have been deducted. Tribunal was not right in holding that appellants-assessees were liable to deduct tax at source as required under under Section 194A of the Act, in spite of the order of the Special Court. - Decided in favour of assessee.
Issues Involved:
1. Whether the appellant-assessees were liable to deduct tax at source (TDS) under Section 194A of the Income Tax Act despite the directions of the Special Court. 2. The applicability of the Special Court Act over the provisions of the Income Tax Act. 3. The interpretation and application of TDS provisions in light of the orders passed by the Special Court and the Supreme Court. Detailed Analysis: 1. Liability to Deduct TDS under Section 194A: The appellant-assessees challenged the Income Tax Appellate Tribunal's decision that they were required to deduct TDS for the Assessment Years 1995-96 and 1996-97. The Tribunal's decision was based on the interpretation that the appellant-assessees were liable to deduct tax at source despite the Special Court's directions. The High Court formulated the question of whether the ITAT was correct in holding that the appellant was liable to deduct TDS under Section 194A of the Income Tax Act despite the Special Court's direction. 2. Applicability of the Special Court Act: The appellants entered into a loan agreement with Fairgrowth Financial Services Ltd (FFSL) and pledged shares as security. The Special Court Ordinance, promulgated in June 1992 and later replaced by the Special Court Act, 1992, led to the appointment of a custodian for FFSL. The Special Court issued several orders, including one on 20th February 1995, stating that the provisions of TDS do not apply to payments made pursuant to the Court's orders and directions. The Special Court Act was intended to prevail over other laws in case of conflict, as established by the Supreme Court's judgment. 3. Interpretation of TDS Provisions: The appellants argued that the Special Court had conclusively held that TDS provisions did not apply to their liability to pay interest to the Custodian. They cited several orders from the Special Court and the Supreme Court, including the Supreme Court's direction to maintain the status quo, which led them to believe there was no obligation to deduct TDS. The appellants also referenced the Bombay High Court's decision in Sir Joseph Kay, K.B.E. v. Commissioner Income Tax, which clarified that TDS is not considered the income of the department but rather a part of the income of the assessee. Court's Findings: The High Court found that the Tribunal had committed a serious error in interpreting the provisions of law. The Special Court was created to fast-track economic matters, and its provisions were intended to prevail over other laws. The Tribunal's interpretation that the Special Court's order would not prohibit the appellants from deducting TDS was incorrect. The High Court emphasized that the Special Court's orders had a retrospective effect from the date the Special Court Act came into force. The High Court also noted that the Tribunal's observation that TDS is the income of the department was contrary to the Bombay High Court's decision in Sir Joseph Kay, K.B.E. The High Court concluded that the Tribunal had erred in holding that the appellants were liable to deduct TDS under Section 194A of the Income Tax Act despite the Special Court's orders. Conclusion: The High Court allowed the appeals, quashing the orders of the Tribunal, the Assessing Officer, and the CIT(A). It held that the Tribunal was not correct in law in holding that the appellants were liable to deduct TDS under Section 194A of the Income Tax Act. The Special Court's orders, which restrained the deduction of TDS, were to be upheld, and the provisions of the Special Court Act prevailed over the conflicting provisions of the Income Tax Act.
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