1989 (12) TMI 95 - AT - Income Tax

Summary

Issues:
Interpretation of Section 194A - Liability to deduct tax on interest income. Application of Section 201(1A) - Imposition of simple interest for failure to deduct tax at source. Justification for not crediting interest to the payee's account. Impact of amendments on the interpretation of relevant sections.

Analysis:
The judgment revolves around the interpretation of Section 194A concerning the liability to deduct tax on interest income. The case involved the assessee, a registered firm, who had raised a loan for constructing a cinema hall and failed to deduct tax on the interest amount as per Section 194A. The Income-tax Officer imposed simple interest under Section 201(1A) for the default in tax deduction. The primary contention of the assessee was the reasonable cause for not crediting the interest to the payee's account but maintaining it in the "Interest payable account."

Before the Appellate Asstt. Commissioner, the assessee argued that the liability to deduct tax arises only when the interest is actually paid or credited to the payee's account. However, the Commissioner upheld the Income-tax Officer's decision, noting that the assessee had credited the interest to the "Interest payable account" and claimed deductions for the same while computing profits.

During the appeal, the assessee reiterated their arguments, citing relevant case laws. The Departmental Representative contended that the entries in the books did not alter the nature of the amount, and failure to deduct tax would lead to tax evasion. The Tribunal analyzed the provisions of Section 194A and 201(1A) and pointed out that the penalty under 201(1A) did not explicitly refer to Section 194A. The crucial question was whether the interest income was credited to the payee's account, which the assessee disputed.

The Tribunal delved into the factual background, highlighting the family disputes and legal proceedings affecting the payment of interest to the payee. The Tribunal agreed with the assessee's explanation that the provision of interest in the "Interest payable account" did not constitute crediting to the payee's account as required by Section 194A. Referring to relevant circulars and case laws, the Tribunal concluded that the interest levied by the Income-tax Officer was not in accordance with the law.

The judgment also discussed the impact of subsequent amendments to Section 194A, which deemed crediting to any account as crediting to the payee's account. Since the assessment years in question were prior to the amendment, the Explanation did not aid the department's case. Consequently, the Tribunal allowed the appeals filed by the assessee, ruling in their favor for all the assessment years involved.