2008 (8) TMI 432 - AT - Income Tax

TDS credit - CIT(A) confirmed the action of the AO in not granting the credit for TDS with regard to interest income which was deducted from the expenditure incurred on installation of machinery - business of co-generation of power - HELD THAT - We note that the deposit on interest earned by the assessee is mandatory as per statute required. Therefore, the interest income earned on the deposit is not out of surplus fund of the assessee but due to the statutory requirement under which the deposit was made for availing the credit facility of installation of machinery. In view of the decisions of the Supreme Court of CIT vs. Karnal Co-operative Sugar Mills Ltd 1999 (4) TMI 7 - SC ORDER and Toyo Engg. India Ltd. vs. Jt. CIT 2005 (9) TMI 237 - ITAT BOMBAY-J , it is clear position of law that when TDS is made on a particular income which is otherwise not liable for tax, the assessee is entitled for the said credit of the TDS. In the case in hand when the assessee has earned interest on deposit mandatory for acquisition on installation of machinery then the interest was earned by the assessee and is directly incidental to the acquisition in respect of machinery and therefore the same has been rightly reduced from the cost of the machinery. In this way the assessee has indirectly disclosed income and has offered for assessment. We are of the considered view that even if the income earned by the assessee has not been offered for tax being not liable for tax, the assessee is entitled for credit of TDS made in respect of that income. Accordingly, we set aside the orders of the lower authorities and hold that the assessee is entitled for credit of TDS relating to interest income. In the result, the appeal of the assessee is allowed.

Summary

Issues:
1. Denial of credit for TDS on interest income deducted from machinery installation expenditure.
2. Confirmation of interest levy under sections 234B and 234C of IT Act.

Analysis:
1. The appeal concerned the denial of TDS credit on interest income deducted from machinery installation expenditure. The assessee, a domestic power co-generation company, filed a return claiming a refund, including TDS on interest income. The AO did not credit the TDS, leading to a demand. The CIT(A) upheld this decision, prompting the appeal. The assessee argued that the interest income was linked to machinery installation and should be treated as taxable income, citing relevant case law. The Departmental Representative contended that since the income wasn't offered for tax, TDS credit was unjustified.

2. After considering arguments, the Tribunal noted that the interest earned was mandatory due to a statutory deposit for machinery installation. Citing the Supreme Court's decision, it concluded that such interest is a capital receipt, reducing the asset's cost. Therefore, even if not directly taxable, the interest was indirectly disclosed for assessment through cost reduction. Relying on precedents, the Tribunal held that TDS credit is due when income subject to TDS isn't directly taxable. Consequently, the Tribunal allowed the TDS credit and annulled the interest levied under sections 234B and 234C due to the TDS credit allowance.

3. The judgment emphasizes that when TDS is deducted on income not directly liable for tax but deposited with the Government, the assessee is entitled to TDS credit. By reducing interest income from machinery cost, the assessee indirectly disclosed the income for assessment, justifying TDS credit. The Tribunal's decision highlights the entitlement to TDS credit on income not directly taxable, aligning with legal principles and prior judgments.