2014 (4) TMI 1015 - HC - Income Tax

Waiver of penalty u/s 273B Cancellation of penalty u/s 271C of the Act TDS at the time of credit of interest or at the time of actual payment Held that - The Tribunal rightly held that the tax has been deducted at source at the time of actual payment - the amount has also not been credited of the account of the payee prior to its maturity - main provision of Section 194A is not attracted - the amount has been credited to a separate account - the deduction of tax at source is one of the modes of recovery of the collection of tax - In some cases the tax has to be deducted at source irrespective of the fact whether paid amount was the income of the payee whereas in other cases, the taxes have to be deducted at source for paying the amount as income - the tax was deducted but at the time of actual credit entry made of amount to the account of payee - there was no default on the part of assessee for which he could be made liable for payment of penalty u/s 271(C) of the Act. The account holder was given option to withdraw the interest half yearly but it is not the case of the revenue that any of the account holders exercised this option - the assessee credited the interest in its own account at the end of financial year and on the event of credit of amount of interest in in account of payee (the assessee) it deducted TDS - the AO has given finding that in the entire deposit scheme the interest was being credited on quarterly basis - there is no observation of the AO that in the balance sheet the entries of interest were made on quarterly basis rather the balance sheet shows the credit of interest on annual basis thus, the assessee cannot be said to be in default in deduction of TDS thus, the provisions of Section 271 C which make liable for payment of penalty on the event of failure of any deduction of tax are not attracted the order of the Tribunal upheld - Decided against Revenue.

Summary

Issues:
1. Interpretation of Section 194-A of the Income Tax Act regarding deduction of tax at source on interest payments.
2. Justification of penalty imposed under Section 271 C for failure to deduct tax at source.
3. Application of Supreme Court precedent in tax penalty cases.
4. Assessment of whether there was a default in non-deduction of tax at source.

Issue 1: Interpretation of Section 194-A
The case involved a dispute over the interpretation of Section 194-A of the Income Tax Act, specifically regarding the timing of deduction of tax at source on interest payments. The Assessing Officer contended that TDS should be deducted at the time of accrual of interest, whereas the appellant argued that TDS should be deducted at the time of actual payment of interest. The appellate authority upheld the Assessing Officer's view, emphasizing that TDS should be deducted at the time of making provisions for interest payable in the books of account at the end of the financial year. The Tribunal, however, noted that in this case, tax was deducted at the time of actual payment, not at the time of credit to the payee's account, as required by Section 194-A.

Issue 2: Justification of Penalty under Section 271 C
The Assessing Officer imposed a penalty under Section 271 C for the appellant's failure to deduct TDS at the time of accrual of interest, as mandated by Section 194-A. The appellate authority upheld this penalty, stating that TDS should have been deducted when making provisions for interest payable in the books of account. However, the Tribunal disagreed, noting that tax was deducted at the time of actual payment, and there was no default on the part of the assessee to warrant the penalty under Section 271 C.

Issue 3: Application of Supreme Court Precedent
The appellant argued that the Tribunal erred in relying on a Supreme Court precedent related to sales tax penalties, contending that the facts of the present case, involving non-deduction of tax at source, were different. The Tribunal, however, justified its decision based on the Supreme Court's ruling, emphasizing that in this case, the tax was deducted at the time of actual payment, and there was no default in non-deduction of tax at source.

Issue 4: Assessment of Default in Non-Deduction of Tax at Source
The Assessing Officer found that the appellant failed to deduct TDS at the time of accrual of interest, leading to the imposition of a penalty under Section 271 C. However, the Tribunal disagreed, noting that tax was deducted at the time of actual payment, not at the time of credit to the payee's account. The Tribunal concluded that there was no default on the part of the assessee for which a penalty under Section 271 C could be imposed.

In conclusion, the Tribunal dismissed all appeals, holding that the tax was deducted at the time of actual payment, not at the time of credit to the payee's account, as required by Section 194-A. Therefore, the penalty under Section 271 C was deemed unjustified, and the appellant was not found to be in default regarding the deduction of tax at source.