2017 (2) TMI 509 - AT - Income Tax

Deduction of tax at a lower rate - levy of interest u/s 201(1A) - submission of the Assessee that the certificate issued by the AO u/s 197(1) clearly specifies that the assessee was authorised to pay any sum by way of interest other than interest on securities as referred to in section 194A after deducting the tax at source @ 1% plus surcharge and education cess thereon - Held that - Provision of section 197(2) of the Act does not make any reference to any income specified in such certificate. A perusal of Rule 28AA(2) of the Rules also shows that the certificate issued u/s 197 of the Act will be valid for the assessment year specified in the certificate. Even in the rules there is no reference to the payment without TDS or at lesser rate should be on the sums specified as payable in the certificate. It is therefore clear in the statutory provision of deduction of tax at source at lower rate is person specific and cannot be extended to the amounts specified by the recipient of the payment while making an application for grant of certificate u/s 197 of the Act in Form No.13. AO has annexed the details in Schedule-II of Form No.13 to the certificate issued u/s.197 of the Act. By doing so, the AO cannot treat the assessee as a person who has not deducted tax at source to the extent of the payments made by the assessee over and above the sum specified in the certificate u/s 197 of the Act. We therefore agree with the arguments of assessee that certificate u/s 197 of the Act is with reference to the person to whom the income is paid and is not with reference to any sum as may be specified in the certificate. Assessee cannot be treated as a person who has not deducted tax at source on the difference between the amounts specified in the certificate issued u/s 197 of the Act and the amounts actually paid by the assessee. Consequently the levy of interest u/s 201(1A) of the Act cannot be sustained and the same is directed to be deleted. - Decided in favour of assessee

Summary

Issues Involved:
1. Whether the Assessing Officer (AO) was justified in interpreting the certificate issued under Section 197(1) of the Income Tax Act, 1961, to restrict the lower rate of tax deduction only to the amounts specified in the certificate.
2. Whether the AO was justified in levying interest under Section 201(1A) of the Income Tax Act, 1961, for short deduction of tax at source.

Detailed Analysis:

Issue 1: Interpretation of Section 197(1) Certificate
The Assessee had paid interest to two entities and deducted tax at a lower rate based on certificates issued under Section 197(1) of the Income Tax Act, 1961. The AO contended that the lower rate specified in the certificates was applicable only to the amounts mentioned therein and not to the entire interest paid. Consequently, the AO held that there was a short deduction of tax for the amounts exceeding the specified sums.

The Assessee argued that the certificate under Section 197(1) is "person specific" and not "amount specific," meaning the lower rate should apply to all payments made to the entities, irrespective of the amounts specified in the certificates. The Assessee also pointed out that the payees had filed their returns and paid taxes on the interest income, arguing there was no loss to the revenue.

The Tribunal agreed with the Assessee's interpretation, stating that Section 197(2) does not make any reference to specific amounts. The Tribunal emphasized that the statutory provision for deduction of tax at a lower rate is "person specific" and cannot be limited to the amounts specified in the certificate. Therefore, the Assessee was justified in deducting tax at the lower rate on the entire payment.

Issue 2: Levy of Interest under Section 201(1A)
The AO had levied interest under Section 201(1A) for the short deduction of tax at source. The Assessee contended that since the payees had paid the taxes on the interest income and filed their returns, there was no default or loss to the revenue, and hence, interest should not be levied.

The Tribunal noted that the AO had misinterpreted the certificate under Section 197(1) by treating the amounts specified as the maximum limit for the lower rate of tax deduction. Since the Tribunal found that the lower rate of tax deduction was applicable to the entire payment, the basis for levying interest under Section 201(1A) was invalid. Consequently, the Tribunal directed the deletion of the interest levied under Section 201(1A).

Conclusion
The Tribunal concluded that the certificates issued under Section 197(1) of the Income Tax Act, 1961, are "person specific" and not "amount specific." Therefore, the Assessee was correct in applying the lower rate of tax deduction to the entire interest payments. Consequently, the levy of interest under Section 201(1A) for short deduction of tax was not justified and was directed to be deleted. Both appeals by the Assessee were allowed.