2006 (7) TMI 107 - HC - Income Tax

In case deductor fails to deduct tax at source, the deductee only would be liable to pay income tax on the amount received by him as income Hence revenue is not justified to seek to levy interest for any period after the date on which the tax is actually paid

Summary

Issues:
1. Interpretation of Sections 194-I and 194C of the Income Tax Act regarding deduction of tax at source for hire charges.
2. Liability of the deductor-assessee when the deductee has already paid the tax.
3. Applicability of Explanation to Section 191 inserted by Finance Act, 2003.
4. Computation of interest under Section 201(1A) of the Act.

Analysis:
1. The case involved appeals under Section 260A of the Income Tax Act against the order of the Income Tax Appellate Tribunal regarding the deduction of tax at source for hire charges under Sections 194-I and 194C. The Assessing Officer held the assessee liable to deduct tax at source on hire charges for furniture and fixtures at the rate of 20% under Section 194-I instead of 3.5% under Section 194C. The CIT (Appeals) affirmed this decision, directing the assessee to provide evidence of tax payment by the deductee. The Tribunal dismissed the appeals, emphasizing the existing legal position prior to the insertion of the Explanation to Section 191 in 2003.

2. The issue of liability of the deductor-assessee when the deductee has already paid the tax was raised before the CIT (Appeals) and the Tribunal. The CIT (Appeals) held that if tax had been paid by the deductee, it could not be recovered from the assessee as an "assessee in default." The Tribunal upheld this decision, stating that the liability to deduct tax at source and pay interest was settled, and the question of being an 'assessee in default' was academic unless penalty proceedings were initiated.

3. The Tribunal considered the applicability of the Explanation to Section 191 inserted by the Finance Act, 2003. The Tribunal rejected the argument that the Explanation changed the pre-existing legal position, emphasizing that even without the Explanation, the deductor's failure to deduct tax at source did not require the deductee to pay tax again on the same income. The Tribunal relied on Central Board Direct Taxes instructions and Supreme Court decisions to support this interpretation.

4. Regarding the computation of interest under Section 201(1A) of the Act, the Tribunal clarified that interest could only be claimed until the date on which the tax was actually paid, whether by the assessee or the deductee. The Tribunal dismissed the Revenue's vague grievance about interest payable after the tax payment date, noting that the issue was not raised before the Tribunal. The Tribunal upheld the decision of the CIT (Appeals) and concluded that no substantial question of law arose for consideration, affirming the Tribunal's well-reasoned decision.