2021 (11) TMI 577 - HC - Income Tax

TDS u/s 194A - TDS Laibility in respect of hypothetical interest income arising on fixed deposits with the respondents 3 to 5 banks during the pendency of 6th respondent (CBI) attachment/freeze order on these banks - HELD THAT - As it is not in dispute that FD s lying with the respondent Nos.3 to 5/Banks have been frozen/attached pursuant to an order dated 11.09.2009 passed by the CBI and the said proceedings initiated against the petitioner are still pending adjudication. Tax deduction at source is permissible only if the income is credited to the account of the petitioner ; in the instant case, in view of the freezing/attachment of the said FDs of the petitioner, it cannot be said that the petitioner is receiving income by way of interest from the said FDs for the present and entitlement or otherwise of the petitioner qua the said FDs or interest will have to be decided only after conclusion of the proceedings initiated by the CBI against the petitioner. In otherwords, for the present, the interest on the FDs which is credited to the account of the petitioner is not income for the petitioner so as to attract the TDS under Section 194A of the IT Act, so as to enable deduction of TDS on the interest accruing on the FDs. Entitlement of interest accruing on the FDs to the petitioner would be dependant on the result of the pending Court/CBI proceedings and consequently, till conclusion of the said Court proceedings, the interest accruing on the FD cannot be construed or treated as income for the purpose of deduction of TDS under Section 194A - the necessary directions in this regard are to be issued against the respondent Nos.3 to 5; it is needless to state that the directions to be issued to the respondent Nos.3 to 5-Bank not to deduct TDS on the interest on the FDs, cannot be treated as absolving petitioner of its liability to pay tax on the interest accruing on the FD if the petitioner becomes entitled to the same after conclusion of the Court proceedings. ORDER - The respondent Nos.3 to 5/Banks are directed not to deduct the TDS in respect of the interest arising/accruing on FDs of the petitioner lying with the respondent Nos.3 to 5/Banks till conclusion of the proceedings initiated by the 6th respondent-CBI against the petitioner. As however made clear that the alleged liability of the petitioner, if any, to pay taxes in respect of the interest accruing on the said FDs shall arise after conclusion of the said proceedings. The present order passed will not affect any TDS already deducted by the respondent Nos.3 to 5/Banks prior to interim order dated 09.09.2019 passed by this Court.

Summary

Issues Involved:
1. Whether respondents 3 to 5 should be directed not to deduct TDS on hypothetical interest income from fixed deposits during the pendency of the CBI attachment order.
2. Whether respondents 1 and 2 should collect taxes on accumulated arrears of interest income from the respective bank accounts after the conclusion of the CBI proceedings.

Detailed Analysis:

Issue 1: TDS Deduction on Hypothetical Interest Income
The petitioner sought a writ of mandamus to prevent respondents 3 to 5 from deducting TDS on hypothetical interest income from fixed deposits during the pendency of the CBI attachment order. The court noted that the fixed deposits were frozen/attached by the CBI, and therefore, the petitioner was not receiving any actual income from these deposits. The court referenced Section 194A of the Income Tax Act, which mandates TDS deduction only when income is credited to the account of the payee. Since the fixed deposits were frozen, the petitioner was not receiving any income, and thus, TDS deduction was not applicable.

The court also relied on the Delhi High Court's decision in UCO Bank vs. Union of India, which held that TDS should not be deducted in situations where the recipient of the interest is not ascertainable, and the interest income is hypothetical. The Central Board of Direct Taxes (CBDT) had reiterated this principle in its circular dated 28.12.2015.

Issue 2: Collection of Taxes on Accumulated Arrears
The petitioner alternatively sought a direction for respondents 1 and 2 to collect taxes on accumulated arrears of interest income from the respective bank accounts after the conclusion of the CBI proceedings. The court held that the petitioner's liability to pay taxes on the interest income would arise only after the conclusion of the CBI proceedings. Until then, the interest income could not be treated as actual income for the purpose of TDS deduction.

Conclusion:
The court allowed the petition, directing respondents 3 to 5 not to deduct TDS on the interest accruing on the petitioner's fixed deposits until the conclusion of the CBI proceedings. It clarified that the petitioner's liability to pay taxes on the interest income would arise only after the proceedings concluded. The court also noted that any TDS already deducted prior to the interim order dated 09.09.2019 would not be affected by this judgment.

Order:
1. The petition is allowed.
2. Respondents 3 to 5 are directed not to deduct TDS on the interest accruing on the petitioner's fixed deposits until the conclusion of the CBI proceedings.
3. The petitioner's liability to pay taxes on the interest income will arise after the conclusion of the CBI proceedings.
4. The order does not affect any TDS already deducted by respondents 3 to 5 before the interim order dated 09.09.2019.