2017 (2) TMI 1515 - HC - Income Tax

Penalty u/s 271C - treated the appellant as defaulter u/s.194A/201(1) - HELD THAT - Issue decided in favour of assessee as interest is awarded by the court for loss suffered on account of deprivation of property or paid for breach of contract by means of damages or were not paid in respect of any debt incurred or money borrowed, shall not attract the provisions of Section 2(28A) read with Section 194A(1). See SAHIB CHITS (DELHI) (PVT.) LTD. 2009 (7) TMI 75 - DELHI HIGH COURT , CHIRANJI LAL MULTANI MAL RAI BAHADUR PVT. LIMITED 1988 (12) TMI 62 - PUNJAB AND HARYANA HIGH COURT Also in case of New India Assurance Co. Ltd 2016 (9) TMI 451 - GUJARAT HIGH COURT insurance company was not justified in deducting tax at source while depositing the compensation in favour of the claimants. It therefore, cannot avoid liability of depositing such amount with the Claims Tribunal. The Claims Tribunal had committed no error in insisting on the insurance company in making good the shortfall - Decided in favour of assessee.

Summary

Issues involved:
1. Challenge to the Tribunal's judgment and order by the appellant.
2. Substantial question of law regarding penalty under Income Tax Act 1961.
3. Interpretation of provisions related to deduction of tax at source on interest payment.
4. Applicability of previous court decisions on similar issues.

Analysis:
1. The appellant challenged the Tribunal's decision, which confirmed the order of the CIT(A). The substantial question of law raised was whether the Tribunal was justified in imposing a penalty under section 217C of the Income Tax Act and treating the appellant as a defaulter under sections 194A/201(1) of the Act. The appellant argued that a previous court decision supported their case, citing the Divisional Manager case where it was observed that the company was not liable to deduct tax at source on interest payments related to compensation claims awarded by the Motor Accidents Claims Tribunal.

2. The appellant relied on the Allahabad High Court decision in Commissioner of Income Tax Vs. the Oriental Insurance Co. Ltd., which stated that awards under the Motor Vehicle Act are akin to court decrees and do not fall under the definition of income for tax deduction purposes. The Gujarat High Court decision in New India Assurance Co. Ltd. Vs. Bhoyabhai Haribhai Bharvad further supported this argument by emphasizing that interest on compensation awarded by the Claims Tribunal should be excluded from tax deduction provisions. The appellant contended that the issue was covered by these judgments as it pertained to a period before relevant amendments.

3. The Department, represented by Mr. Mathur, argued against the appellant's position, citing a Division Bench judgment and a Karnataka High Court decision. However, the court found in favor of the appellant, referencing the Divisional Manager case and holding that compensation should not be considered income for tax deduction purposes. Consequently, the appeal was allowed in favor of the appellant, overturning the Tribunal's decision and confirming the appellant's position on the issue.