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2012 (4) TMI 210 - AT - Income TaxNon deduction of TDS on the interest paid by the assessee bank to Rajasthan Rural Road Development Agency (RRRDA)- proceedings under section 201(1) and 201(1A) - AO levied interest and penalty - CIT (A) allowed the appeal on merit and was not liable to deduct tax - further appeal Department is challenging that assessee was not liable to deduct tax whereas assessee has challenged the legal ground raised that Additional CIT was not empowered to direct TDS ITO to pass order under section 201(1) and 201(1A) as rejected by ld. CIT (A) - assessee contented that the interest accrued on the funds was not liable to be taxed in the hands of the society as the interest was accrued on account of Ministry of Rural Development and a Notification under section 194A( 3)(iii)(f) was also issued by the Central Government by which various Agencies/Societies were exempted from deducting tax - Held that - the interest income under consideration is belonging to the Ministry of Road Development / Central Government only, as clearly stipulated in the accounts manual making all arguments of the AO irrelevant, unwarranted and insignificant - provision of TDS sections are not applicable on project funds released by the central government and ownership of interest income belongs to Ministry of Road Development/ Central Government and therefore TDS is not required to be deducted u/s 196 - u/s 194A(3)(iii)(f) any income credited or paid to an institution, association or body which the Central Government notify in the Official Gazette is not liable of deduction of tax at source - rejected the grounds of appeal of the department.
Issues Involved:
1. Non-deduction of TDS on interest paid by the assessee bank to Rajasthan Rural Road Development Agency (RRRDA). 2. Validity of the Additional CIT's direction to the TDS ITO to initiate proceedings under section 201(1) and 201(1A). 3. Applicability of section 194A and section 196 of the IT Act, 1961. 4. Ownership of the interest income accrued on funds deposited by RRRDA. 5. Exemption under section 194A(3)(iii)(f) and the requirement of Form No. 15G. Detailed Analysis: 1. Non-deduction of TDS on Interest Paid to RRRDA: The department initiated proceedings under sections 201(1) and 201(1A) for assessment years 2004-05 to 2011-12 due to the non-deduction of TDS on interest paid by the assessee bank to RRRDA. The AO held that the assessee violated section 194A and levied interest and penalty. The assessee contested this, arguing that the interest accrued on the funds was not taxable in the hands of RRRDA as it belonged to the Ministry of Rural Development (MORD). The CIT (A) upheld this view, stating that the interest income was not the income of RRRDA but belonged to MORD, thus exempting it from TDS under section 196. 2. Validity of Additional CIT's Direction: The assessee raised a legal ground that the Additional CIT was not empowered to direct the TDS ITO to pass orders under sections 201(1) and 201(1A). However, this legal ground was rejected by the CIT (A), who focused on the merits of the case. 3. Applicability of Section 194A and Section 196: The CIT (A) concluded that section 194A was not applicable because the interest income accrued on the funds deposited by RRRDA belonged to MORD. The CIT (A) also referred to a notification under section 194A(3)(iii)(f) exempting various agencies/societies from TDS and section 196, which exempts sums receivable by the government from TDS. 4. Ownership of Interest Income: The CIT (A) found that the interest income belonged to MORD, as stipulated in the PMGSY Accounts Manual. The interest was credited to MORD's account, and RRRDA had no rights over it. The CIT (A) emphasized that the legal and factual position regarding the ownership of the interest income was clear, and any contradictory provisions in the internal manual did not override this statutory position. 5. Exemption under Section 194A(3)(iii)(f) and Form No. 15G: The CIT (A) noted that RRRDA, being a society registered under the Societies Registration Act and wholly financed by the government, was exempt from TDS under section 194A(3)(iii)(f). The CIT (A) dismissed the AO's contention that a declaration in Form No. 15G was necessary, stating that such a declaration was not required when there was no liability to deduct TDS. Conclusion: The Tribunal upheld the CIT (A)'s order, confirming that the assessee was not liable to deduct TDS on the interest credited to RRRDA's account. The Tribunal agreed that the interest income belonged to MORD and was exempt from TDS under section 196. The Tribunal also noted that RRRDA was covered under the exemption provided by section 194A(3)(iii)(f). Consequently, the appeals of the department were dismissed, and the cross objections of the assessee were treated as not pressed.
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