2001 (7) TMI 300 - AT - Income Tax

Summary

Issues Involved:
1. Whether the appellant was liable to deduct tax at source on interest payments to GIC Housing Finance Ltd. under section 194A of the Income-tax Act, 1961.
2. Whether the ITO (TDS) had the authority to treat the appellant as a defaulter under section 201(1) of the Income-tax Act, 1961.
3. Whether the appellant could be held liable to pay interest under section 201(1A) of the Income-tax Act, 1961.

Detailed Analysis:

1. Liability to Deduct Tax at Source under Section 194A:
The appellant, a Private Limited Company engaged in promoting housing activity, did not deduct tax at source on interest payments made to GIC Housing Finance Ltd. for the assessment years 1996-97 and 1997-98. The ITO (TDS) asserted that the appellant should have deducted tax at source under section 194A, which mandates tax deduction on interest payments. The appellant contended that GIC Housing Finance Ltd. was a financial institution promoted by the Government of India and thus exempt under section 194A(3). However, the Tribunal found no evidence that GIC Housing Finance Ltd. was established by or under a Central, State, or Provincial Act, or that it was notified as exempt by the Central Government. Therefore, the appellant was obligated to deduct tax at source on the interest payments.

2. Authority to Treat the Appellant as a Defaulter under Section 201(1):
The ITO (TDS) treated the appellant as an assessee in default under section 201(1) for failing to deduct tax at source. The appellant argued that the ITO (TDS) lacked the authority to raise a demand under section 201(1). The Tribunal referred to section 201(1), which deems a person who fails to deduct or pay tax as required to be an assessee in default. The Tribunal upheld that the ITO (TDS) had the authority to quantify the tax amount and treat the appellant as a defaulter, as the liability arises from the statute itself, not from the order of the ITO (TDS).

3. Liability to Pay Interest under Section 201(1A):
The ITO (TDS) levied interest under section 201(1A) for the delayed deduction and payment of tax. The appellant contended that since the tax was ultimately paid by GIC Housing Finance Ltd., there should be no liability to pay interest. The Tribunal noted that sections 194A, 201, and related provisions aim to ensure tax recovery from the recipient of interest income. The Tribunal referred to the CBDT Circular, which states that no demand under section 201(1) should be enforced if the deductee-assessee has paid the taxes. However, the Tribunal clarified that the liability to pay interest under section 201(1A) remains until the date of payment of tax by the deductee-assessee, as interest is compensatory for the delay in tax payment. The Tribunal directed the ITO (TDS) to recompute the interest only up to the date of tax payment by GIC Housing Finance Ltd.

Conclusion:
The Tribunal partly allowed the appeals, setting aside the orders under section 201(1) and remitting the matter to the ITO (TDS) for fresh disposal after verifying if GIC Housing Finance Ltd. had paid the tax on the interest income. The Tribunal upheld the levy of interest under section 201(1A) but directed the ITO (TDS) to recompute the interest based on the actual dates of tax payment by GIC Housing Finance Ltd.