2008 (5) TMI 300 - AT - Income Tax

Summary

Issues Involved:
1. Applicability of Section 194A vs. Section 192 for tax deduction at source on interest credited to ex-employees.
2. Consideration of Section 17(3)(ii) in determining the nature of the interest credited.

Summary:

Issue 1: Applicability of Section 194A vs. Section 192 for Tax Deduction at Source

The Tribunal initially held that the assessee fund was liable for deduction of tax at source u/s 194A of the IT Act for credits made to the accounts of members who ceased to be employees of ONGC, thus making the assessee in default u/s 201/201(1A) for the financial years under consideration. The assessee argued that the interest on the accumulated balance representing the employer's contribution should be taxed u/s 192 at the time of payment, not u/s 194A at the time of credit.

Issue 2: Consideration of Section 17(3)(ii)

The assessee contended that the Tribunal's order contained a mistake as it did not consider the provisions of Section 17(3)(ii), which defines "profits in lieu of salary" and includes payments from an employer or a provident fund. The assessee argued that the interest received by former employees on contributions made by ONGC should be considered as part of the salary, thus attracting Section 192 and not Section 194A.

Tribunal's Analysis and Conclusion:

The Tribunal acknowledged that Section 17(3)(ii) was not brought to its attention during the original hearing but agreed that it should have been considered. The Tribunal referred to various judgments, including the Supreme Court's decision in Honda Sid Power Products Ltd. vs. CIT, which emphasized rectifying manifest errors to avoid prejudice. The Tribunal also noted that the proceedings before it are not adversarial but aim to correctly adjust the taxpayer's liability.

The Tribunal concluded that the omission of Section 17(3)(ii) constituted a mistake apparent from the record, justifying rectification u/s 254(2). The Tribunal held that the interest credited to the accounts of ex-employees attributable to the employer's contribution should be taxed u/s 192 at the time of payment, not u/s 194A at the time of credit. The AO was directed to verify the figures and regulate the tax deduction accordingly.

Final Decision:

The miscellaneous applications were allowed, and the Tribunal's order was rectified to apply Section 17(3)(ii) r/w Section 192 for the interest credited to the accounts of ex-employees, thereby holding the assessee fund liable to deduct tax only at the time of payment of the interest.