1986 (10) TMI 100 - AT - Income Tax

Summary

Issues Involved:
1. Liability to deduct tax under section 194A.
2. Liability to pay interest under section 201(1A).
3. Treatment of branch accounts versus head office accounts.
4. Interpretation of section 194A(1) and (4).

Detailed Analysis:

1. Liability to deduct tax under section 194A:
The primary issue is whether the assessee was liable to deduct tax under section 194A on the interest amounts credited to the accounts of certain parties. The Income Tax Officer (ITO) argued that tax should be deducted at source every time interest is credited to the account of the creditor, whether at the head office or branch office. The assessee contended that the obligation to deduct tax arose only upon the real payment of interest and that tax had been deducted on the net interest payable after consolidating accounts at the head office.

The Tribunal held that section 194A(1) imposes the obligation to deduct tax at the time of crediting interest to the account of the payee or at the time of payment, whichever is earlier. The Tribunal emphasized that the liability to deduct tax arises at the time of crediting interest in the accounts, not merely upon consolidation of accounts at the head office.

2. Liability to pay interest under section 201(1A):
The ITO raised a demand for interest under section 201(1A) due to the alleged short deduction of tax at source. The assessee argued that any interest payable should be calculated based on the net interest credited in the head office consolidated accounts at the end of the accounting year.

The Tribunal clarified that the liability to deduct tax under section 194A(1) arises at the time of crediting interest in the accounts. Consequently, the liability to pay interest under section 201(1A) also arises from the date of such credit entries. The Tribunal concluded that the Commissioner (Appeals) erred in accepting the assessee's contention that interest should be calculated based on the net interest payable after consolidation at the head office.

3. Treatment of branch accounts versus head office accounts:
The assessee argued that the accounts in various branches should not be treated as different entities and that the head office's consolidation of accounts should determine the liability to deduct tax. The Commissioner (Appeals) accepted this view, stating that the head office consolidates branch accounts and determines the net interest payable, which is when the tax should be deducted.

The Tribunal disagreed, stating that each branch's transactions are conducted on behalf of the company, and the liability to deduct tax arises at the time of crediting interest in the branch accounts. The Tribunal emphasized that the head office's role in consolidating accounts does not defer the obligation to deduct tax at source as per section 194A(1).

4. Interpretation of section 194A(1) and (4):
The Tribunal examined the relevant provisions of section 194A. Sub-section (1) clearly imposes the obligation to deduct tax at the time of crediting interest to the account of the payee or at the time of payment, whichever is earlier. Sub-section (4) allows for adjustments in case of excess or deficiency in previous deductions but does not permit short deductions.

The Tribunal cited the Madras High Court's decision in Southern Brick Works Ltd. v. CIT, which clarified that the liability to deduct tax arises at the time of crediting interest to the account of the payee. The Tribunal also referred to the Board's Circular No. 288, which states that the time for deduction of tax is when interest is credited in the accounts.

Conclusion:
The Tribunal concluded that the Commissioner (Appeals) erred in his interpretation and directions. The Tribunal reversed the orders of the Commissioner (Appeals) and restored the orders of the ITO, holding that the liability to deduct tax under section 194A arises at the time of crediting interest in the accounts and that interest under section 201(1A) is payable accordingly. The appeals by the revenue were allowed.