2005 (6) TMI 219 - AT - Income Tax

Issues Involved:
1. Liability to deduct tax from interest paid on enhanced compensation for land acquisition.
2. Application of Section 194A and Section 201/201(1A) of the Income Tax Act.
3. Validity of the Assessing Officer's (AO) demand for non-deduction of tax.
4. Consideration of bona fide belief and legal precedents.
5. The role of affidavits/statements from recipients regarding non-taxable income.
6. The impact of recipients already paying tax on the interest received.

Detailed Analysis:

1. Liability to Deduct Tax from Interest Paid on Enhanced Compensation:
The central issue was whether the appellant was liable to deduct tax from the interest paid on enhanced compensation for land compulsorily acquired by the Municipal Committee, Sirsa. The AO held the appellant as a defaulter for failing to deduct tax under Section 194A, invoking Section 201 read with Section 201(1A).

2. Application of Section 194A and Section 201/201(1A) of the Income Tax Act:
The CIT(A) referenced the Supreme Court decision in *Rama Bai vs. CIT*, which held that interest on enhanced compensation is taxable as a revenue receipt. The CIT(A) also cited the Punjab & Haryana High Court's decision in *Tuhi Ram vs. Land Acquisition Collector* and the CBDT Circular No. 526, which clarified that tax must be deducted at source from compensation/interest payments for compulsory land acquisition.

3. Validity of the Assessing Officer's Demand for Non-Deduction of Tax:
The learned counsel for the assessee argued that based on the Allahabad High Court decision in *Bihari Lal vs. ITO* and legal opinions obtained, no tax was to be deducted from the interest on enhanced compensation. The counsel also pointed out that most payments were made before the CBDT Circular No. 526 dated 5th Dec 1988, and relied on various High Court decisions which held that if the payee had already paid tax, the AO should not create a demand under Section 201.

4. Consideration of Bona Fide Belief and Legal Precedents:
The Tribunal considered the bona fide belief of the Municipal Committee that no tax was to be deducted, supported by legal opinions and the timing of payments relative to the CBDT circular. The Tribunal noted that the AO's demand might not be justified if the payees had already paid the tax, referencing decisions from the Madhya Pradesh High Court and other cases, which supported this view.

5. The Role of Affidavits/Statements from Recipients Regarding Non-Taxable Income:
The Tribunal emphasized that the Municipal Committee should have obtained affidavits or statements from recipients declaring that their income did not exceed the non-taxable limit. The Tribunal restored the issue to the AO to allow the Municipal Committee to obtain such affidavits/statements, which could absolve them from the responsibility of deducting tax.

6. The Impact of Recipients Already Paying Tax on the Interest Received:
The Tribunal acknowledged that in several cases, the recipients had already paid tax on the interest received. Citing various High Court decisions, the Tribunal held that if the tax had already been paid by the recipient, the Revenue should not demand the tax again from the person responsible for deducting it. The Tribunal directed the AO to verify the details of tax payments by recipients and reconsider the demand accordingly.

Conclusion:
The Tribunal set aside the orders of the CIT(A) and the AO, restoring the issue to the AO for fresh decision in accordance with law, considering the bona fide belief of the Municipal Committee, the possibility of obtaining affidavits/statements from recipients, and the verification of tax payments already made by the recipients. The appeals of the assessee were partly allowed for statistical purposes.

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