1989 (5) TMI 86 - AT - Income Tax

Summary

Issues:
1. Whether non-deduction of tax at source attracts penal interest u/s. 201(1A) or not.

Detailed Analysis:
The judgment involves five appeals filed by the assessee against the orders of the CIT (Appeals) for the assessment years 1972-73 to 1976-77. The consolidated order of the CIT (Appeals) was challenged, raising grounds that the order was bad in law and facts, particularly regarding the confirmation of the order levying interest u/s. 201(1A) of the Income-tax Act, 1961. The assessee, a limited company, had received loans with payable interest but failed to deduct tax at source. The ITO imposed penal interest for non-deduction, which was upheld by the CIT (Appeals), leading to the appeals before the Tribunal. The central issue in all appeals was whether non-deduction of tax at source attracts penal interest u/s. 201(1A).

The assessee contended that as per section 194A, tax deduction is required only when interest is paid or credited to the payee's account. The assessee argued that since no payment or credit occurred, tax deduction was not mandatory. The assessee also cited a CBDT circular specifying that tax deduction is not required if interest payable has not been paid or credited to the payee. The circular emphasized that crediting the interest in the account of the payee is essential for tax deduction obligation to arise.

The Tribunal analyzed the provisions of section 194A and the CBDT circular in detail. It concluded that tax deduction is mandated only when interest is paid, credited, or otherwise transferred to the payee. Mere provision for interest liability in the accounts does not trigger tax deduction obligations. The Tribunal highlighted that the CBDT circular specifically stated that posting an entry in the interest payable account does not constitute crediting the payee's account, necessitating tax deduction. The Tribunal emphasized that the law requires actual payment or credit of interest for tax deduction obligations to arise.

In light of the above analysis, the Tribunal found the order of the CIT (Appeals) to be based on a misinterpretation of section 194A. It held that the CIT (Appeals) erred in upholding the penal interest imposed by the ITO for non-deduction of tax at source. The Tribunal, guided by the CBDT circular and statutory provisions, set aside the order of the CIT (Appeals) and deleted the penal interest imposed by the ITO. Consequently, the appeals filed by the assessee were allowed, ruling in favor of the assessee on the issue of tax deduction obligations for interest payments.