2005 (9) TMI 215 - AT - Income Tax

Summary

Issues Involved:
1. Levy of penalty under section 201 read with section 221 of the Income-tax Act.
2. Failure to deduct tax at source under section 194A from interest provided and claimed as a deduction.
3. Impact of the Special (Trial of Offences Relating to Prosecutions in Securities) Ordinance, 1992 and the subsequent Act on the liability to deduct tax.
4. The applicability of the Special Court's orders and Supreme Court's directions on the liability to deduct tax at source.
5. The interpretation of section 194A and its Explanation regarding crediting interest to any account.
6. The conflict between provisions of the Special Act and the Income-tax Act.
7. The liability of the assessees to deduct and pay tax at source in light of the Special Court and Supreme Court orders.
8. The applicability of the penalty provisions under section 201 read with section 221.

Issue-wise Detailed Analysis:

1. Levy of penalty under section 201 read with section 221 of the Income-tax Act:
The appeals addressed the levy of penalty on the assessees for failing to deduct tax at source as required under section 194A. The Income-tax Officer (TDS) initiated proceedings based on the assessees' provision for interest payable to FFSL and their failure to deduct tax at source. The penalty was upheld by the Assessing Officer and the Commissioner of Income-tax (Appeals) (CIT(A)), leading to the assessees' appeals to the Tribunal.

2. Failure to deduct tax at source under section 194A from interest provided and claimed as a deduction:
The assessees had made provisions for interest payable to FFSL in their books of account and claimed it as a deduction. However, they did not deduct tax at source on this interest, leading to the contention that they were in default under section 201(1) read with section 221(1) of the Income-tax Act. The CIT(A) and the Assessing Officer held that the assessees were liable to deduct tax at source on the interest credited to FFSL's account.

3. Impact of the Special (Trial of Offences Relating to Prosecutions in Securities) Ordinance, 1992 and the subsequent Act on the liability to deduct tax:
The Special Act provided for the attachment of assets of notified parties and the distribution of such assets by the Custodian under the direction of the Special Court. The assessees argued that the provisions of the Special Act, which override other laws, including the Income-tax Act, exempted them from the obligation to deduct tax at source. The CIT(A) and the Tribunal considered the provisions of the Special Act and the orders of the Special Court in determining the assessees' liability.

4. The applicability of the Special Court's orders and Supreme Court's directions on the liability to deduct tax at source:
The Special Court had issued various orders regarding the repayment of loans and the treatment of interest payable to FFSL. The Supreme Court had also directed the parties to maintain the status quo. The assessees contended that these orders and directions impacted their liability to deduct tax at source. The Tribunal examined the orders of the Special Court and the Supreme Court to determine their effect on the assessees' obligations under the Income-tax Act.

5. The interpretation of section 194A and its Explanation regarding crediting interest to any account:
Section 194A requires the deduction of tax at source on interest payable to a resident. The Explanation to section 194A deems interest credited to any account, whether called "interest payable account" or "suspense account," as credited to the account of the payee. The Tribunal analyzed whether the assessees' provision for interest payable to FFSL constituted a credit to the account of the payee, triggering the obligation to deduct tax at source.

6. The conflict between provisions of the Special Act and the Income-tax Act:
The Tribunal considered the overriding effect of the Special Act over other laws, including the Income-tax Act. It examined whether the Special Act's provisions, which required the attachment and distribution of assets of notified parties, conflicted with the assessees' obligation to deduct tax at source under the Income-tax Act. The Tribunal referred to various judicial decisions to resolve this conflict.

7. The liability of the assessees to deduct and pay tax at source in light of the Special Court and Supreme Court orders:
The Tribunal evaluated the assessees' liability to deduct and pay tax at source in the context of the Special Court's orders and the Supreme Court's directions. It considered whether the assessees' failure to deduct tax at source was justified based on these judicial orders and whether the assessees could be held in default under section 201.

8. The applicability of the penalty provisions under section 201 read with section 221:
The Tribunal examined the conditions under which penalties could be levied on the assessees for failure to deduct and pay tax at source. It considered whether the assessees had reasonable and bona fide reasons for their inaction and whether the penalties imposed were justified. The Tribunal also assessed whether the penalties were excessive and whether a token penalty would meet the ends of justice.

Conclusion:
The Tribunal concluded that the assessees were liable to deduct tax at source on the interest payable to FFSL for the assessment years 1995-96 and 1996-97. However, it found that the penalties imposed were excessive and reduced them to a token penalty of Rs. 1 lakh for each assessment year. For the assessment years 1997-98 to 1999-2000, the Tribunal held that the assessees were not liable for penalties due to the specific directions of the Special Court to deposit the tax deducted in a separate account. The appeals for these years were allowed.