'Interest on Securities' u/s 194 A of the Income.Tax.Act, 1961. - Income Tax - 1215/CBDT

INSTRUCTION NO. 1215/CBDT Dated : November 8, 1978 Section(s) Referred: 194A Statute: Income - Tax Act, 1961 Section 194 A of the I.T.Act, 1961 requires a person, other than an individual or a HUF who is responsible for paying to a resident any income by way of interest, other than 'Interest on Securities' to deduct Income-tax at source at the prescribed rates from such interest income of a resident at the time of credit of the income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier. 2. A question has arisen whether a person is liable to deduct tax at source from interest, where the accounts are being maintained in accordance with the mercantile system of accounting and instead of crediting the interest income to the account of the payee, the same is credited to the 'Interest Payable Account' or the 'Liability for Expense Account'. 3. The matter has been examined and the Board are advised that section 194 A indicates not only the circumstances in which the person responsible to deduct tax at source has to do so but also specifies the time at which the deduction has to be made. Thus, where payment has to be made in cash or by issue of a cheque or draft, the deduction is to be made at the time of payment. But if the payment is not made physically, but by way of book adjustment, was in the mercantile system of accounting, then, the income-tax at source is to be deducted at the time of credit of such income to the account of the payee. The question under consideration here rests on the exact meaning of the expression "credit of the income to the account of the payee". These words have to be taken to mean that the person should have credited the amount in the personal account of the payee or in some other manner to indicate his immediate intention to effect the transfer of the amount of the interest to the payee. The mere fact of posting the entry in the "Interest Payable Account" or the "Liability for Expense Account" does not amount to crediting the entry in the account of the payee, even though it would be indicative of an acknowledgement of the liability to the creditors with respect to that amount of interest. As such the obligation to deduct the tax could not arise at that time but would arise when subsequently, the payment of interest is made to the payee or it is credited to his account.