2014 (11) TMI 412 - HC - Income Tax

Requirement to deduct TDS Interest payable on FDRs - Whether the provisions of Chapter XVII of the Act would be applicable in respect of interest which is payable on the fixed deposits maintained by this Court with the petitioner bank, in the name of the Registrar General Held that - Although the collection of tax by deduction at source may precede the assessment, it is clear that it does not affect the basis of the levy of tax - The provisions for collection of tax, under Part B of Chapter XVII of the Act, by way of tax deduction at source are provisions for recovering tax payable by assessees and do not in any manner affect the levy or the charge of tax - in absence of an assessee, the machinery of provisions for deduction of tax to his credit are ineffective - The expression payee under Section 194A of the Act would mean the recipient of the income whose account is maintained by the person paying interest. Although the FD is made in the name of the Registrar General, the account represents funds and the Registrar General is neither the recipient of the amount credited to that account nor the interest accruing - the Registrar General cannot be considered as a payee for the purposes of Section 194A of the Act - The credit by the petitioner bank in the name of the Registrar General would, thus, not attract the provisions of Section 194A of the Act - Section 190(1) of the Act clarifies that deduction of tax can be made prior to the assessment year of regular assessment, nonetheless the same would not imply that deduction of tax is mandatory even where it is known that the payee is not the assessee and there is no other assessee. Deducting tax in the name of the litigant who deposits the funds with this Court would also create another anomaly because the amount deducted would necessarily lie to his credit with the income tax authorities - the tax deducted at source would reflect as a tax paid by that litigant/depositor He would be entitled to claim credit in his return of income thus, the notice is to be set aside Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the notice dated 25.04.2012 issued by the Assistant Commissioner of Income Tax (ACIT).
2. Validity of the circular no. 8/2011 dated 14.10.2011 issued by the Central Board of Direct Taxes (CBDT).
3. Validity of the order dated 10.03.2014 passed by the Deputy Commissioner of Income Tax.
4. Applicability of Chapter XVII of the Income Tax Act, 1961, particularly Section 194A, concerning tax deduction at source (TDS) on interest accrued on fixed deposits held by the Registrar General of the Court.

Detailed Analysis:

1. Validity of the Notice Dated 25.04.2012:
The petitioner bank challenged the notice dated 25.04.2012 issued by the ACIT, which directed the bank to submit details of deposits made in the name of the Registrar General of the Court during the financial years 2005-06 to 2010-11. The court stayed the notice on 01.06.2012 and ultimately set it aside, concluding that the bank had no obligation to deduct TDS on interest accrued on such deposits, as the Registrar General is not the recipient of the income.

2. Validity of the Circular No. 8/2011 Dated 14.10.2011:
The petitioner bank also contested the CBDT circular which clarified that banks were required to deduct TDS on interest accrued on deposits made as per court directions. The court found this circular to be based on the erroneous assumption that the litigant depositing the money is the account holder and recipient of the interest income. The court emphasized that the funds deposited are custodia legis (in the custody of the court) and not assets of the litigant or the court. Consequently, the circular was set aside.

3. Validity of the Order Dated 10.03.2014:
The Deputy Commissioner of Income Tax had passed an order declaring the petitioner bank as an assessee in default under Section 201(1) of the Income Tax Act for failing to deduct TDS on the interest accrued on the fixed deposits. The court invalidated this order, stating that since the Registrar General is not the recipient of the income and no specific beneficiary is ascertainable until the court's final orders, the bank had no obligation to deduct TDS.

4. Applicability of Chapter XVII of the Income Tax Act, 1961:
The core issue revolved around whether the provisions of Chapter XVII, particularly Section 194A, applied to the interest on fixed deposits maintained by the court in the name of the Registrar General. The court clarified that the Registrar General is not an assessee and the interest credited to the account is not income of any person liable to tax. The court held that the machinery provisions for TDS under Section 194A are ineffective in the absence of an identifiable assessee. The court also noted that deducting tax in the name of the litigant who deposited the funds would create anomalies and run contrary to judicial orders.

Conclusion:
The court allowed the writ petitions and set aside the impugned notice dated 25.04.2012, the circular bearing no. 8/2011, and the order dated 10.03.2014. The judgment emphasized that the funds and accrued interest held by the Registrar General are under the court's custody, and there is no obligation for the bank to deduct TDS until the final beneficiary is determined by the court.