2015 (9) TMI 1674 - AT - Income Tax

TDS u/s 194A - considering the Board to be an institution, association or body falling within sub-clause (f) of clause (iii) of sub-section (3) of Section 194A - Whether the State Welfare Board constituted through the notification issued under / in consonance with Section 18(1) of the Building and Other Construction Workers (Regulation and Employment and Conditions of Service) Act, 1996 could be considering as a corporation established by a Central / State or Provincial Act, falling within the meaning of notification GO No.SO 3469, dt.22.10.1970 ? - HELD THAT - The common genus that runs through all the three clauses is that ownership is vested with the Government either by way of holding the shares or by way of financing. If a company whose shares are held by the government is considered as one falling within sub-clause (f) of clause (iii) of section 194A of the Act, there is no reason why a welfare board constituted in accordance with the Central enactment should be excluded from its ambit. Especially so since funds of the Board was nothing but only cess collected by contractors under a statutory edict. Apart from the above, what we find is that the Board has been established through a notification issued, under section 18 of Building and other Construction Workers (Regulation and Employment and Conditions of Service) Act, 1996. This Section has been reproduced by us above at para ten above. Clause (2) thereof states that the Board shall be a body corporate. To understand what is a body corporate, when a ready definition is not available in the relevant statutes, the best place to look is the Companies Act, 1956. A body corporate is considered equivalent to a corporation. The board can thus very well be construed as a corporation. It has been constituted to exercise the powers conferred on a State under the Building and other Construction Workers (Regulation and Employment and Conditions of Service) Act, 1996. Thus in our opinion the methodology in which and the purpose for which the board has been created, when seen along with the wording of SO No.3469, dt.22.10.1970, would show that it could claim itself to be falling within subclause (f) of clause (iii) to sub-section (3) of Section 194A of the Act. Assessee had a bonafide reason to believe that interest payment on deposits placed by the Board did not warrant deduction of tax at source. Assessee was justified in considering the Board to be an institution, association or body falling within sub-clause (f) of clause (iii) of sub-section (3) of Section 194A of the Act. It had every reason to hold a bonafide belief that it was not liable to deduct tax at source on the interest payments effected by it to the Board. Especially so since Board gave all details to the assessee as to how it was constituted and also explained why the interest paid to it was exempt. In the facts and circumstances of the case, we are therefore of the opinion that assessee could not be deemed to be one in default for not deducting tax at source on interest paid to the board. Accordingly we set aside the orders of the Ld. CIT (A) and that of ITO (TDS) treating the assessee as one in default u/s.201(1) and levying interest u/s.201(1A) of the Act. - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the assessee was liable to deduct tax at source under Section 194A of the Income-tax Act, 1961 on interest paid to the Karnataka Building and Construction Workers' Welfare Board.
2. Whether the assessee could be deemed as an assessee in default under Section 201(1) and liable for interest under Section 201(1A) of the Income-tax Act, 1961 for non-deduction of tax at source.
3. The applicability of the notification SO 3489 [No.170 F. No.12/164/68 - ITCC/ITJ], dated 22.10.1970, regarding exemption from TDS on interest paid to certain institutions.
4. The interpretation of the term "corporation established by a Central/State Act" in the context of Section 194A(3)(iii)(f) of the Income-tax Act, 1961.

Detailed Analysis:

1. Liability to Deduct Tax at Source under Section 194A:
The assessee bank did not deduct tax at source on interest payments made to the Karnataka Building and Construction Workers' Welfare Board, believing the Board was exempt under Section 194A(3)(iii)(f) of the Income-tax Act, 1961. The Board had provided Form 15H and claimed exemption under Section 12A of the Act. However, the Income Tax Officer (TDS) argued that registration under Section 12A did not automatically exempt the Board from TDS provisions and that the Board was not listed in Section 194A(3) entities.

2. Assessee in Default under Section 201(1) and Interest under Section 201(1A):
The ITO (TDS) held the assessee in default under Section 201(1) for not deducting tax at source and levied interest under Section 201(1A). The assessee contended that it acted on a bona fide belief based on the Board's declarations and the notification SO 3489, which they interpreted as exempting them from TDS obligations for interest paid to the Board.

3. Applicability of Notification SO 3489:
The assessee relied on Notification SO 3489, which exempts corporations established by Central/State Acts from TDS on interest payments. The CIT (A) rejected this argument, stating that the notification applied only to corporations explicitly established by such Acts, not to entities like the Board, which was constituted under a State Act.

4. Interpretation of "Corporation Established by a Central/State Act":
The Tribunal analyzed whether the Board, constituted under the Building and Other Construction Workers' (Regulation and Employment and Conditions of Service) Act, 1996, could be considered a "corporation established by a Central/State Act" under Section 194A(3)(iii)(f). The Tribunal noted that the Board was a body corporate as per Section 18 of the Act and that the funds were statutory cess collected by contractors. The Tribunal applied the principle of "Noscitur a sociis" to interpret the notification and concluded that a welfare board constituted under a Central enactment should be included within the ambit of the notification.

Conclusion:
The Tribunal found that the assessee had a bona fide belief that it was not required to deduct tax at source on interest payments to the Board. It held that the Board could be construed as a corporation under the relevant notification and thus fell within the exemption provided under Section 194A(3)(iii)(f). Consequently, the Tribunal set aside the orders of the CIT (A) and the ITO (TDS), ruling that the assessee was not in default under Section 201(1) and not liable for interest under Section 201(1A).

Result:
The appeals of the assessee were allowed, and the orders treating the assessee as in default and levying interest were set aside.