2019 (4) TMI 1233 - HC - Income Tax

TDS u/s 193 - non deduction of tax on the interest paid to debenture holders - default u/s 201(1) - assessee was a sick company and was before BIFR - HELD THAT - The assessee had issued convertible debentures to Banks and Financial Institutions, however, soon thereafter the assessee -company went sick and was before BIFR. No interest was paid on such debentures under such circumstances.The assessee to comply with the legal requirements, had credited such interest in the accounts of the debenture holders. Revenue may be correct in pointing out that the requirement of deducting TDS may arise even in a case where such interest is credited in the accounts of the creditor. However, in the peculiar facts of the present case such requirement cannot be stretched to unreasonable levels. The debenture holders never claimed interest. The assessee could never pay the interest. The assessee was a sick industrial unit. Its case was before BIFR. The entries crediting the interest had to be made to comply with the mandatory requirements of law. On the principle of real income theory also the order of Commissioner (Appeals) and the Tribunal can be supported. Appeal dismissed.

Summary

Issues involved:
- Correctness of Assessing Officer's action regarding non-deduction of tax at source under Section 193 of the Income Tax Act and resulting liabilities under sections 201(1) and 201(1A).

Analysis:
1. The appeals in this case stem from a common judgment of the Income Tax Appellate Tribunal filed by the revenue, raising questions regarding the non-deduction of tax at source in relation to interest on debentures. The primary issue revolves around whether the Tribunal was justified in allowing relief to the assessee for non-deduction of tax at source, considering the insertion of the words 'at the time of credit' in Section 193 of the Income Tax Act. The Tribunal's decision to delete the addition based on the assessee not claiming any deduction for interest on debentures was also challenged.

2. The crux of the matter lies in the Assessing Officer's stance that the assessee failed to deduct tax at source as required by Section 193 of the Act, leading to liabilities under sections 201(1) and 201(1A). The assessee had issued convertible debentures to Banks and Financial Institutions but did not pay interest on them due to financial distress, although the interest was credited in the debenture holders' accounts for legal compliance. The CIT (Appeals) and the Tribunal both acknowledged the unique circumstances of the case, emphasizing that the entries were made solely to meet legal obligations and that the debenture holders did not claim the interest.

3. Despite the general obligation to deduct tax at source when income is credited to the payee's account, the peculiar circumstances of the case, including the assessee's financial difficulties and non-payment of interest, led to a different interpretation. The Tribunal's decision to dismiss the Income Tax Appeals was based on the understanding that the entries crediting interest were made to comply with legal requirements, and the real income theory supported the assessee's position. Ultimately, the Tribunal found that the assessee's actions were justifiable given the situation, leading to the dismissal of the appeals.

In conclusion, the judgment delves into the intricacies of tax deduction at source under Section 193 of the Income Tax Act, highlighting the importance of considering the specific circumstances of each case in determining liability. The decision underscores the need to balance legal requirements with practical realities, especially in cases involving financial distress and compliance obligations.