2012 (12) TMI 641 - AT - Income Tax

TDS u/s 194A - payment of interest by the partner to the partnership firm - held that - The Act does not provide exemption to the interest paid/credited by a partner to his firm. - the Act treats a partner and a firm as different Person , - the position of legal relationship between a partner and his firm loses its importance/significance under the Income tax Act. - the position of legal relationship as prevailing under the Partnership Act should not be applied in abstract, only to the provisions of sec. 194A of the Act. - Decided against the assessee. Assessee in default - interest and penalty u/s 201(1) and 201(1A) - held that - Let us consider about exigibility of interest u/s 201(1A) of the Act under the peculiar conditions prevailing in the instant cases, wherein the recipient of interest viz., the partnership firms have declared losses even after accounting for the interest paid by the assessees herein. Even if the assessees herein deduct and remit the TDS amount on the interest paid to the partnership firms, the same is liable to be refunded to the said partnership firms, as there is no tax liability in their respective hands. Under this situation, can it be said that the Government is deprived of the funds due to it or any loss is caused to the Government. It may be noted that the prevailing rate of interest chargeable/payable u/s 201(1A)/244A are different, i.e., the rate of interest payable u/s 244A is lesser than the interest chargeable u/s 201(1A) of the Act. Due to this disparity, a question may arise as to the correctness of the view taken by us in the preceding paragraphs. In our view, the rate of interest is prescribed by the Government on the basis of various factors. The main principle considered by us is that pronounced by the Hon ble Courts, viz., that, interest is compensatory in nature for depriving funds belonging to the revenue/assessee. Hence the disparity in the rate of interest shall not have any effect on the said principle. On the issue of levy of interest u/s 201(1A) matter restored to DCIT(TDS) to verify whether or not the recipients of the interest income, viz., the partnership firms were liable to pay tax on that income and then take appropriate decision about the chargeability of interest u/s 201(1A) of the Act in the hands of the assessees herein in accordance with the principles discussed by us in the preceding paragraphs.

Issues Involved:
1. Justification of penalty and interest levied under sections 201(1) and 201(1A) of the Income Tax Act.
2. Applicability of TDS provisions under section 194A on interest payments made by partners to their partnership firms.
3. Nature and computation of interest under section 201(1A) of the Income Tax Act.

Detailed Analysis:

1. Justification of Penalty and Interest Levied Under Sections 201(1) and 201(1A):

The primary issue in these appeals is whether the CIT(A) is justified in upholding the penalty and interest levied under sections 201(1) and 201(1A) of the Income Tax Act. The Deputy Commissioner of Income Tax (TDS) noticed that the assessees did not deduct tax at source on interest payments made to their partnership firms, which they were liable to do under section 194A. Consequently, penalties equivalent to the TDS liability and interest for the period from the closing of the relevant financial year to 31.5.2009 were levied.

The CIT(A) confirmed these penalties, relying on the decision of the Hon'ble Madras High Court in CIT v. Ramesh Enterprises [2001] 250 ITR 464, which held that the obligation to deduct tax is to ensure prompt receipt by the state, and the firm's payment of tax on such income does not absolve the appellant from this responsibility.

2. Applicability of TDS Provisions Under Section 194A:

The assessees argued that since they borrowed money from their partnership firms and paid interest on their respective capital account debit balances, the partners and the firm should be considered as the same 'person' under the Partnership Act. Thus, the transaction should be viewed as a transaction with self, and the provisions of section 194A should not apply.

However, the tribunal held that the Income Tax Act recognizes a partner and a partnership firm as separate 'persons', despite their legal relationship under the Partnership Act. The Act provides exemption from TDS only for interest paid by a firm to its partners, not the other way around. Therefore, the tribunal rejected the assessees' contention that section 194A should not apply to interest paid by partners to their firms.

3. Nature and Computation of Interest Under Section 201(1A):

The assessees contended that the penalty under section 201(1) should not be levied if the payee has accounted for interest receipts and paid tax thereon, as per CBDT Circular No. 275/201/95-IT(B) dated 29-01-1997, which was upheld by the Supreme Court in Hindustan Coca-Cola Beverage (P.) Ltd. v. CIT [2007] 293 ITR 226. The tribunal agreed, noting that if the partnership firms included the interest receipts in their returns and declared losses, there would be no tax liability, and thus no penalty should be levied. The tribunal directed the DCIT (TDS) to verify this and delete the penalty if the firms had filed their returns including the interest payments.

Regarding interest under section 201(1A), the tribunal noted that it is compensatory in nature, intended to compensate the government for the period during which it was deprived of the tax due. However, if the partnership firms declared losses and had no tax liability, it could not be said that the government was deprived of its funds. Consequently, the tribunal held that interest under section 201(1A) should not be charged if the firms were not liable to pay tax on the interest income. The tribunal directed the DCIT (TDS) to verify the tax liability of the firms and decide on the chargeability of interest accordingly.

Conclusion:
The tribunal allowed the appeals for statistical purposes, directing the DCIT (TDS) to verify the returns filed by the partnership firms and their tax liabilities before deciding on the deletion of penalties and interest levied under sections 201(1) and 201(1A) of the Income Tax Act.

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