2025 (1) TMI 1165 - AT - Income Tax

TDS u/s 194A/193 - Assessee-in-Default for non-deduction of TDS - failure to deduct tax at source from accrued interest on ICDs and Term Loans in terms of Section 194A and accrued interest on NCD s in terms of Section 193 - order passed u/s 201(1)/201(1A) - HELD THAT - The provisions of Section 193/194A of the Act having already been triggered and complied with at the time of credit of interest income to the account of PEL in the books of accounts of the borrowers i.e. the person responsible for making payment of such interest income at the relevant time would not again get triggered on payment of the same interest income by the Appellant to PEL. In case the contention of the Revenue is accepted it would amount to subjecting same interest income to deduction of tax at source once at the time of credit and then again at the time of payment. Whereas Section 193/194A provide for deduction of tax at source at the time of credit or payment whichever is earlier. Therefore we hold that given the facts and circumstances of the present case the provisions contained in Section 193/194A of the Act were not attracted and therefore the question of Appellant committing default in complying with the same does not arise. It is also admitted position that when the interest income had accrued to PEL there existed lender-borrower relationship between PEL and the borrowers. Subsequently the Appellant stepped into the shoes of PEL and as a result lender- borrower relationship between the Appellant and the borrowers came into existence. The borrowers continued to be under contractual obligation to make payment of interest/accrued interest while the Appellant acquired the right to receive the same. There is no dispute as to the fact that no lender-borrower relationship existed between the Appellant and PEL at any point in time. Therefore in absence of any statutory/contractual obligation on the part of Appellant to discharge the borrowers obligation to make payment towards interest/accrued interest to PEL the Appellant cannot be regarding as person responsible for paying income by way of interest/interest on securities to PEL in terms of Section 194A/193 of the Act. We accept the contention of the Appellant that in absence of any moneys borrowed or debt incurred payments made by the Appellant to PEL in excess of the principle value of the ICDs/NCDs/Term Loans recorded in the books of accounts of PEL cannot be regarded as interest / interest on securities as defined in Section 2(28A)/2(28B) of the Act. As held in the case of State Bank of India 2024 (5) TMI 1176 - ITAT MUMBAI the nature of income in the hands of the recipient and the nature of expenditure of the said sum in the hands of the payer need not be the same. Accordingly delete the demand raised upon the Appellant vide order passed under Section 201(1)/201(1A). Assessee appeal allowed.

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

Whether the Appellant can be treated as an 'Assessee-in-Default' under Section 201 of the Income Tax Act, 1961, for non-deduction of tax at source on payments made to Piramal Enterprises Ltd. (PEL) in relation to Non-Convertible Debentures (NCDs), Inter Corporate Deposits (ICDs), and Term Loans.
Whether the payments made by the Appellant to PEL, which included accrued interest, fall within the definition of 'interest' or 'interest on securities' as per Section 2(28A) and 2(28B) of the Act, thereby attracting provisions of Section 193/194A for tax deduction at source.
Whether the Appellant was justified in not deducting tax at source, considering that PEL had already accounted for and paid taxes on the accrued interest.
Whether the CIT(A) erred in relying on the Bombay High Court's decision in American Express International Banking Corpn. v. CIT regarding the treatment of broken-period interest.
Whether the demand and interest levied by the Assessing Officer under Section 201(1)/201(1A) should be upheld or quashed.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Treatment as 'Assessee-in-Default'

Relevant legal framework and precedents: The primary legal provisions involved are Sections 193, 194A, and 201 of the Income Tax Act, 1961. The case also references Section 2(28A) and 2(28B) for definitions of 'interest'. Relevant precedents include decisions from the Mumbai Tribunal in State Bank of India Vs. DCIT and Idea Cellular Ltd. Vs. ADIT.
Court's interpretation and reasoning: The Tribunal found that the obligation to withhold tax under Sections 193/194A is triggered at the time of credit or payment, whichever is earlier. Since PEL had already accounted for the accrued interest and tax was deducted at source by the borrowers, the Tribunal held that the Appellant was not required to deduct tax again on payment to PEL.
Key evidence and findings: The Tribunal noted that PEL had already accounted for the interest income and the borrowers had deducted tax at source, complying with the provisions of the Act.
Application of law to facts: The Tribunal applied the legal provisions to the facts, concluding that the Appellant's payment to PEL did not constitute 'interest' or 'interest on securities' requiring further tax deduction.
Treatment of competing arguments: The Tribunal rejected the Revenue's argument that the Appellant should have deducted tax at source, emphasizing that doing so would result in double taxation of the same interest income.
Conclusions: The Tribunal concluded that the Appellant should not be treated as an 'Assessee-in-Default' under Section 201 for the payments made to PEL.

Issue 2: Definition of 'Interest'

Relevant legal framework and precedents: Sections 2(28A) and 2(28B) of the Act define 'interest' and 'interest on securities'. The Tribunal referenced its own decisions in State Bank of India Vs. DCIT and Idea Cellular Ltd. Vs. ADIT.
Court's interpretation and reasoning: The Tribunal held that the payments made by the Appellant to PEL did not qualify as 'interest' or 'interest on securities' as there was no borrower-lender relationship between the Appellant and PEL.
Key evidence and findings: The Tribunal found that the Appellant acquired the right to receive interest from the borrowers, not from PEL, and thus the payments were not in the nature of interest.
Application of law to facts: The Tribunal applied the definitions in Sections 2(28A) and 2(28B) to determine that the payments were not subject to tax deduction at source.
Treatment of competing arguments: The Tribunal rejected the CIT(A)'s reliance on the American Express case, noting that it dealt with the nature of payment in the hands of the buyer, not the seller.
Conclusions: The Tribunal concluded that the Appellant's payments to PEL did not constitute 'interest' or 'interest on securities', thus not attracting tax deduction obligations.

3. SIGNIFICANT HOLDINGS

The Tribunal held that the provisions of Sections 193/194A were not applicable to the payments made by the Appellant to PEL, as the interest had already been subjected to tax deduction at source by the borrowers.
The Tribunal emphasized that the nature of income in the hands of the recipient and the nature of expenditure in the hands of the payer need not be the same, referencing its decision in State Bank of India Vs. DCIT.
The Tribunal overturned the CIT(A)'s order and deleted the demand of INR.55,34,39,682/- raised upon the Appellant, allowing the Appellant's appeals for all assessment years in question.
The Tribunal clarified that the American Express case was not applicable to the facts of the present case, as it dealt with different circumstances.
The Tribunal's decision effectively established that double taxation on the same interest income should be avoided, and the correct interpretation of 'interest' under Sections 2(28A) and 2(28B) was crucial in determining tax deduction obligations.