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TMI Blog1983 (8) TMI 148X X X X Extracts X X X X X X X X Extracts X X X X ..... er than income chargeable under the head ' interest on securities ', shall, at the time of credit of such 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, deduct income-tax thereon at the rates in force : Provided that no such deduction shall be made in a case where the person (not being a company or a registered firm) entitled to receive such income furnishes to the person responsible for making the payment--- (a) an affidavit, or (b) a statement in writing, declaring that his estimated total income assessable for the assessment year next following the financial year in which the income is credited or paid will be less than the minimum liable to income-tax." Under this section, which was introduced by the Finance (No. 2) Act, 1967, with effect from 1-4-1967, tax has to be deducted at source on interest income other than interest on securities at the time of credit of such income to the account of the payee or at the time of payment thereof by any mode whichever is earlier, at the rates in force. Certain exceptions are provided to the application of this section to obviate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the principal. 3. In the appeal filed against the levy of interest, to the Commissioner (Appeals), the assessee has taken two grounds. One was that the provisions of section 194A would not be attracted unless the interest was paid to the creditor or credited to his account. Since the interest was not credited to the account of the payee nor paid to him, the question of deduction of tax at source and resultant or consequent default for the incurring of the liability for the levy of interest, would not arise. Secondly, even though there is Circular No. 288, dated 22-12-1980, issued by the CBDT, earlier, in a circular issued by the Board under its No. 276/72/77 IT(B), dated 25-1-1979---[Taxmann's Direct Taxes Circulars, Vol. 1, 1980 edn., p. 734]----addressed to the Federation of Indian Chambers of Commerce and Industry, the Board had clarified that when interest was neither credited to the account of the payee nor paid to the creditor, no tax need be deducted. That circular governed the assessments in question and under that circular, the assessee could not be said to be an assessee in default for not deducting tax at source and no interest should have been levied. The Commissioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest payable account ', that the assessee had a very bona fide and genuine reason for adopting this procedure of crediting the interest and that there was no abuse and even on that ground the latter circular should have been held to be applicable. Shri Ramamani also submitted that under the circumstances of the case, neither an interest can be taken to have been paid to the account of the payee nor credited and the provisions of section 194A did not apply at all. He then explained to us the need for inserting section 194A and submitted that the need for insertion was to ensure proper recovery of tax without loss of revenue. By casting the obligation of deducting tax at source on the person responsible for paying the interest, that responsibility continues to lie on the shoulders of the assessee because when the payment of interest was made to the creditors concerned, tax will have to be deducted at source at that time. When the persons responsible for payment are confronted with this situation, when money was not available for payment of tax deducted at source, it cannot be presumed that the Parliament had intended to cast an unbearable burden on them which would be the result if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n a double advantage of claiming deduction for the interest paid without crediting the account of the creditors, at the same time not deducting the tax at source on such interest. The result of accepting the interpretation placed by the assessee on the provisions of section 194A would be to permit the assessee to defeat the very object of enacting section 194A and that should not be countenanced at any cost. 6. After carefully considering the arguments advanced to us and cogitating over the matter keeping in view the provisions of section 194A, the object of its insertion, the views expressed by the Board in its circulars, it appeared to us that the view taken by the revenue is perhaps too abridged to be held to be in conformity with the intentions of the Legislature. It is also be set with several practical problems and unintended hardships. When tax is sought to be deducted at source by the person responsible for paying the interest, it is not the tax liability of the assessee, it is the tax liability of the person on whose behalf the tax is sought to be deducted. The tax liability of the payee is shifted to the payer to a very large extent, only in order to see that the payees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be an assessee in default in respect of that tax. An assessee in default in respect of payment of tax is liable for imposition of penalty under section 221 of the Act. This section lays down that when an assessee is in default or is deemed to be in default in making a payment of tax, he shall be liable, by way of penalty, to pay such amount as the ITO may direct, and in the case of continuing default, such further amount or amounts as the ITO may, from time to time, direct. That section further provides that before levying such a penalty, the assessee shall be given a reasonable opportunity of being heard. That section also provides that when the ITO is satisfied that the default was for good and sufficient reasons, no penalty shall be levied under that section. This indicates that a person who is deemed to be an assessee in default and who incurred the liability to pay penalty under section 221 of the Act, and who is entitled to be given a reasonable opportunity of being heard before a penalty is levied can on his satisfying the ITO that the default was for good and sufficient reasons, claim that no penalty shall be levied under that section. This shows that the assessee can a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this section came up for consideration before the Supreme Court in J. Dalmia v. CIT [1964] 53 ITR 83. There, the Supreme Court held that the expression ' paid ' does not contemplate actual payment by the company or receipt of the dividend by the member and dividend may be said to have been paid within the meaning of section 16(2) when the company discharges its liability and makes the amount of dividend unconditionally available to the member entitled thereto. 9. In the later case in Ramesh R. Saraiya, the next expression ' credited ' used in section 16(2) came up for consideration before the Supreme Court. Adopting the interpretation given to the word ' paid ', the Supreme Court held in this case that the expression ' credited ' must also mean the same, namely, making the amount unconditionally available to the member, and the concerned observation of the Supreme Court is reproduced below : " We are unable to accept the contention. In J. Dalmia v. CIT [1964] 53 ITR 83, Shah, J., speaking for the Court, had observed : ' In general, dividend may be said to be paid within the meaning of section 16(2) when the company discharges its liability and makes the amount of dividend uncond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 194A. The requirements of section 194A can be said to have been satisfied only when the letter of the law as well as the spirit of the law is complied with, namely, crediting the account of the payee with the interest amount, the letter of the law being crediting the account of the payee, and not any other account, and the spirit of the law being giving a credit to the account of the payee only when the amount is available with the person responsible for paying the income. Thus, the view taken by the revenue does not commend itself to us as proper, legal and justified. 10. It is in this context we have got to see the circulars issued by the CBDT. In the first circular of 1978, the Board appears to have understood the meaning of the expression ' credit ' in the manner in which we have understood it, and also in accord with the meaning given to this expression by the Supreme Court in the cases referred to above, when it said that the crediting of interest to the account of the payee is not the same thing as crediting the interest to the ' interest payable account '. The Board also clarified in the circular that the section requires deduction of tax at source only at the time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion, crediting of interest to other account is permissible, without attracting the provisions of section 194A. We have to therefore see whether that burden of proof cast upon the assessees, has been discharged in these appeals. The valid justification given by the assessee for not crediting the amounts to the accounts of the payees, is lack of money. We have already expressed the view earlier that lack of money is very good and sufficient reason. If the assessee has no money, he cannot be called upon to pay the tax when he is not in a position to pay the creditor himself. Lack of money pleaded in these cases was not disputed. There is, therefore, a valid justification for crediting the interest to an account other than the account of the payee. When the Board has stated in the circular that there should be proof that there was a valid justification for crediting the interest to any account other than the account of the payee, as a reason for not levying penalty or interest, it meant it bears repetition to say, that in proper cases, valid justification for crediting interest to any account other than the account of the payee, is not only envisaged but also considered justified. The ..... X X X X Extracts X X X X X X X X Extracts X X X X
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