2007 (8) TMI 395 - AT - Income Tax

Chargeability of interest u/s 201(1A) - Nature of interest charged - Non-deduction of tax (TDS) - Payments of contract and interest - HELD THAT - The interest to be charged u/s 201(1A) is not a penalty but a compensation of revenue loss for the delay in the payments of tax. Chapter XVII of the IT Act, 1961, lays down the manner in which tax has to be deducted at source from various payments and then deposited in the Government account. Sec. 192 to 196D deal with various payments on which TDS has to be deducted. Sec. 197 and 197A provide certain exceptions to the above mandatory provisions by allowing the payees/recipients to obtain certificate from the AO for non-deduction of tax or for deductions at lower rate(s) as per s. 199. All TDS deducted as above, shall be treated, as a payment of tax by the recipients and credit of the same shall be given in their respective assessments of the relevant year. In this case, as per law, the assessee was required to deduct tax at source and to pay the same to the Government upto 31st March, 1996. The recipient company did not either obtain or file the requisite certificates with the assessee. To be very straight this assessee was required to deduct tax at source at the time of payments in question, may be, by making actual payment or by passing an entry or by allowing credits, as the case may be. The assessee has clearly and admittedly not deducted the TDS in this case while making payments to all the three companies. The High Court in the case of CIT v. Rajasthan Rajya Vidyut Prasaran Nigam Ltd. 2005 (8) TMI 83 - RAJASTHAN HIGH COURT has held that the levy of interest is mandatory, which can be charged from the relevant date of deduction till the same is subsequently paid by the payee. We are in total agreement with the above proposition. But, when the recipient did not pay such a tax as they had nothing to pay, would it mean that it would be charged infinitely. No, this cannot be the intention of the legislature. The charging of interest is only compensatory in nature and when no tax is payable, no interest can be charged. This view, analogically, finds support from the decisions of Hon'ble Gujarat, High Court in CIT v. Rishikesh Apartments Co-operative Housing Society Ltd. 2001 (6) TMI 17 - GUJARAT HIGH COURT . Therefore, no interest u/s 201(1A) can be charged in this case. Thus, the appeal of the assessee is allowed and that of the Revenue is dismissed.

Issues Involved:
1. Non-deduction of Tax Deducted at Source (TDS) by the assessee.
2. Charging of interest under section 201(1A) of the Income Tax Act.
3. Determination of the period for which interest under section 201(1A) is chargeable.
4. Nature of interest under section 201(1A) - compensatory or penal.
5. Impact of payees having paid their taxes or being entitled to refunds.

Detailed Analysis:

1. Non-deduction of Tax Deducted at Source (TDS) by the Assessee:
The assessee company made payments to three entities without deducting TDS, which included contractual payments to M/s A.R. Enterprises and interest payments to M/s Mutual Finance (P.) and M/s Mewar Polytex Ltd. The Assessing Officer (AO) held that the assessee was liable to deduct TDS and pay it to the Central Government. The assessee argued that the payees had already paid sufficient taxes and were entitled to refunds, thus no revenue loss occurred.

2. Charging of Interest under Section 201(1A) of the Income Tax Act:
The AO levied interest under section 201(1A) for non-deduction of TDS. The CIT(A) upheld the AO's decision but limited the interest charge to the dates of the assessments completed for the payees. The assessee contested that no interest should be charged as there was no revenue loss.

3. Determination of the Period for Which Interest under Section 201(1A) is Chargeable:
The Tribunal examined whether interest under section 201(1A) should be charged until the date of the assessment order or until the tax was actually paid. It was noted that the law does not specify the end-point for charging interest, thus it should be decided based on the circumstances. The Tribunal concluded that interest should not be charged beyond the date when it was established that no tax was payable by the payees.

4. Nature of Interest under Section 201(1A) - Compensatory or Penal:
The Tribunal discussed that interest under section 201(1A) is compensatory and not penal. It compensates for the delay in tax payment. The Tribunal cited various High Court decisions, including the Hon'ble Supreme Court, which held that the interest is compensatory in nature.

5. Impact of Payees Having Paid Their Taxes or Being Entitled to Refunds:
The Tribunal noted that the payees had paid their taxes or were entitled to refunds, and therefore, there was no revenue loss. It was held that in such cases, charging interest under section 201(1A) is not justified. The Tribunal referred to the decision of the Hon'ble Gujarat High Court in CIT v. Rishikesh Apartments Co-operative Housing Society Ltd., which held that interest under section 201(1A) could not be levied when the payee had already paid the tax.

Conclusion:
The Tribunal concluded that no interest under section 201(1A) could be charged from the assessee as there was no revenue loss. The appeal of the assessee was allowed, and the appeal of the Revenue was dismissed. The Tribunal's decision was guided by the principle that interest is compensatory and should not be charged when no tax is payable by the payees.

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