AMOUNT DEDUCTED AT SOURCE NOT CAPABLE OF BEING ADJUSTED OR COUNTED TOWARDS TAX PAYABLE

[Mr. M. GOVINDARAJAN]

The assessee has option to file returns by adopting either the cash system or the mercantile system. Under the cash system, the assessee would be under an obligation to pay tax only on such of the amount which has been actually received by him. In the mercantile system, mere entitlement to receive would bring about the obligation to pay tax. The assessee can choose one of them or both of them for different parts, after taking note of the advantages and disadvantages in adopting these methods.  If any system is adopted the assessee is to comply with the procedure meant for the same.

In ‘Y. Rathiesh V. Commissioner of Income Tax’ - 2014 (9) TMI 2 - ANDHRA PRADESH HIGH COURT  the appellant is the Managing Director of M/s A.P. Tanneries Limited.  This may be referred to as the ‘first company’. The appellant gave loan to the first company and also to another company viz., M/s Associated Tanneries Limited, which may be referred to as the ‘second company’.  The second company is paying interest to the appellant regularly and deducted tax at source and remitted the same to the credit of the Government.  The appellant also paid the difference of tax for the said interest while filing the return.  The first company was just showing the accumulated interest in its account books without making any payment.  However the first company deposited the tax as deducted at source for the interest payable to the appellant.

The appellant was adopting a hybrid procedure in filing the return. In respect of his transaction with the first company he adopted the cash system and for the second company he adopted the mercantile system. The result was that he did not pay the tax in the interest payable to him by the first company. But he enjoyed the benefit of tax deducted at source from his interest income by the company and adjusted the same against other interest.

The Revenue objected the procedure adopted by the appellant.  The Revenue treated  the interest payable by the first company on transfer basis as income and levied tax. The same result ensued for various financial years.  The appellant, aggrieved by this order, filed an appeal before the Commissioner (Appeals).  The Commissioner (Appeals) dismissed the appeal filed him.  The Tribunal also dismissed the appeal filed by the appellant against the order of Commissioner (Appeals).

As such he approached the High Court for redressal. He put forth the following arguments before the High Court:

• It is open for an assessee to adopt party the cash system and party the mercantile system and even while holding the same as permissible, the authorities under the Act have adopted the principles underlying the mercantile systems for the entire returns;
• When the first company did not pay the interest at all, the appellant ought not to have been levied tax on such amount;
• Once TDS is deducted even while withholding the payment of the corresponding amount, the applicant was entitled to claim the benefit thereof.

The Department contended the following:

• Though it is permissible for an assessee to adopt dual method for the same returns the appellant cannot claim the benefit of TDS in the entirety and at the same time, refuse to pay the tax on the corresponding interest;
• The appellant acquired a right to receive interest from the first company once it was shown in the account books of that organization;
• It is sufficient to levy tax upon the appellant, particularly when he is taking full advantage of the amount recovered in TDS.

The High Court observed that by adopting the cash system for this component of his returns, the appellant did not pay any tax on the interest payable to him by the first company on the ground that the amount has not been paid at all.  Under the cash system the liability to pay tax arises only when the concerned amount is received as income. The first company made TDS in respect of the amount payable to the appellant as interest and issued certificates for TDS.  The appellant wanted to use the certificate on its entirety i.e., the amount reflected in the TDS certificate was being shown as already paid. This would have devastating effect.  The amount covered by the certificates would take of the interest payable on other income of the appellant.  All the Authorities from the Adjudicating authority to the Tribunal did not approval the method adopted by the appellant.

The High Court held that the appellant cannot be permitted to blow hot and cold at one and the same time. If no TDS was effected and interest was not paid, he would not have been under an obligation to show the amount of interest in his returns, much less to pay tax thereon.  However, once TDS is effected, he cannot be permitted to use the certificate to cover other amounts even while refusing to show the amount of interest in his returns.  The High Court further held that the steps taken by the authorities in this behalf cannot be treated as applying the parameters for the mercantile system to a component of the returns filed under the cash system.  Once the appellant intends to treat the amount deducted as TDS as a component of tax paid, the corresponding to the TDS must form part of the returns and assessment. On the other hand, if he intends to pay the tax on the interest as and when he receives it, the amount covered by the TDS certificate can be treated as just income outstanding till the actual date of receipt.

The High Court further held that whenever an amount deducted as tax at source becomes incapable of being adjusted or counted towards tax payable, it acquires the character of income. In such an event, it partakes of the character of any other income and is liable to be dealt with accordingly, in the order of assessment.  Since the appellant has adopted the cash system and he did not receive the interest reading which the TDS was effect, the TDS amount deserves to be treated as income.  However, the attempt made by him to treat that amount as tax for the corresponding amount, cannot be permitted.