1983 (8) TMI 148 - AT - Income Tax

Summary

Issues Involved:
1. Applicability of Section 194A of the Income-tax Act, 1961.
2. Interpretation of 'crediting' interest to the account of the payee.
3. Validity and applicability of CBDT Circulars dated 25-1-1979 and 22-12-1980.
4. Justification for not crediting interest to the payee's account.
5. Levy of interest under Section 201(1A) for non-deduction of tax at source.

Issue-wise Detailed Analysis:

1. Applicability of Section 194A of the Income-tax Act, 1961:
The core issue revolves around whether Section 194A, which mandates tax deduction at source on interest income, applies when interest is credited to an 'interest payable account' instead of the payee's account. Section 194A(1) specifies that tax must be deducted at the time of crediting the income to the account of the payee or at the time of payment, whichever is earlier. The Tribunal had to determine if crediting interest to an 'interest payable account' satisfies this requirement.

2. Interpretation of 'crediting' interest to the account of the payee:
The Tribunal considered the meaning of 'crediting' as interpreted by the Supreme Court in Ramesh R. Saraiya v. CIT, which held that 'crediting' means making the amount unconditionally available to the payee. The Tribunal concluded that merely acknowledging the liability by crediting an 'interest payable account' does not fulfill the requirement of making the amount unconditionally available to the payee. Therefore, crediting interest to the 'interest payable account' does not equate to crediting the payee's account as required by Section 194A.

3. Validity and applicability of CBDT Circulars dated 25-1-1979 and 22-12-1980:
The Tribunal examined two CBDT circulars that addressed the issue. The 1979 circular clarified that no tax need be deducted if interest is neither credited to the payee's account nor paid to the creditor. The 1980 circular, however, suggested that crediting interest to a nominal account like 'interest payable account' could be seen as an attempt to avoid tax deduction. The Tribunal held that the 1979 circular should govern the assessments in question, as it provided a clear distinction between making a provision for interest payable and crediting the payee's account.

4. Justification for not crediting interest to the payee's account:
The assessee argued that due to lack of financial viability, they credited interest to the 'interest payable account' instead of the payee's account. The Tribunal found this justification valid, noting that lack of funds can be a good and sufficient reason for not crediting the payee's account. The Tribunal emphasized that the intention behind Section 194A was to ensure proper tax collection without imposing undue hardship on the payer.

5. Levy of interest under Section 201(1A) for non-deduction of tax at source:
The ITO had levied interest under Section 201(1A) for the assessee's failure to deduct tax at source. The Tribunal, however, concluded that since the interest was not credited to the payee's account, the provisions of Section 194A were not violated. Consequently, the assessee could not be deemed in default, and the levy of interest was unwarranted.

Conclusion:
The Tribunal vacated the interest levied under Section 201(1A), holding that crediting interest to the 'interest payable account' did not amount to crediting the payee's account as required by Section 194A. The 1979 CBDT circular was deemed applicable, and the assessee's justification of lack of funds was accepted as a valid reason for not crediting the payee's account. The appeals were allowed, and the levy of interest was annulled.