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TMI Blog2012 (12) TMI 641X X X X Extracts X X X X X X X X Extracts X X X X ..... ence the provisions of sec. 194A relating to tax deduction at source on the interest payments are applicable to them, i.e., they are liable to deduct tax at source on interest payments made by them as per the provisions of sec. 194A of the Act during the years under consideration. There is no dispute with regard to this factual position. 3. These assessees borrowed money from the partnership firms in which they are partners and also paid interest to the said firms. The Deputy Commissioner of Income tax (TDS) noticed that the assessee did not deduct tax at source, as per the provisions of sec. 194A of the Act, on the interest so paid to the partnership firms. After hearing the assessees, the DCIT (TDS) levied penalty u/s 201(1) of the Act equivalent to the amount of TDS liability and also levied interest u/s 201(1A) of the Act for the period from the closing of the relevant financial year to 31.5.2009 for all the years. In support of his decision to levy penalty u/s 201(1) of the Act, the DCIT(TDS) placed reliance on the decision of Hon'ble Madras High Court in the case of CIT v. Ramesh Enterprises [2001] 250 ITR 464. 4. All these assessees challenged the said orders passed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een the partners and firm as prescribed in the Partnership Act. 6. The Ld A.R further submitted that the Income tax Act was amended by the Finance Act, 1992 by bringing drastic change in the method of taxation of partnership firms, which enabled a firm to claim the interest paid to its partners as expenditure. Prior to the said amendment, the interest payable by a partnership firm to the partners is not an allowable expenditure in the hands of the firm. Though, under the current provisions of the Act, the interest payable by a firm to its partners is allowable as expenditure; yet the partnership firm is not liable to deduct tax at source u/s 194A of the Act on such interest payment, in view of the exemption provided in clause (iv) of sub section (3) of section 194A of the Act. The legislature has provided the said exemption by considering the legal relationship between the partnership firm and the partners, i.e., they are one and the same. The Ld A.R contended that the said legal relationship does not undergo any change if a partner pays interest to his partnership firm. Hence, by considering the legal relationship between a partner and partnership firm, it is quite logical to hol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Ltd. (supra). In that case, the Hon'ble Supreme Court has held that the interest u/s 201(1A) of the Act is chargeable till the date of payment of taxes by the deductee-assessee. Without prejudice to his subsequent contentions, he submitted that the interest u/s 201(1A), if at all chargeable, should be charged only up to the date of filing return of income for respective years by the respective partnership firms. 9. The Ld A.R contended that the assessees herein are not liable to pay interest u/s 201(1A) of the Act in the cases where the concerned partnership firms have incurred losses and in support of the said contention, the Ld A.R advanced following arguments. "Interest chargeable u/s 201(1A) is compensatory in nature, i.e., the Government is entitled to interest for the period during which the tax, which is the money belonging to the Government, was withheld by the assessee. This logic/ratio is true if the deductee-assessee is liable to pay income tax. However, in the instant cases, the partnership firms have incurred losses and hence there is no liability to pay tax to the Government, in which case, it cannot be said that the taxes due to the Government was withheld by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same for other provisions of the Act. He further submitted that the assessees herein have failed to deduct tax at source on the interest paid by them to the partnership firms and hence they are liable to pay penalty u/s 201(1) of the Act as well as the interest u/s 201(1A) of the Act. He further submitted that the decision of Hon'ble Madras High Court aptly applies to the facts of the instant cases, since the partnership firms have not paid taxes. With regard to the period for which the interest is to be charged, the Ld D.R submitted the tax authorities are correct in computing interest up to 31.5.2009 as the default was noticed only by that date and the assessees have also not deducted tax at source by that time. 12. We have heard the rival contentions and carefully perused the record. The Ld A.R has contended that the position of legal relationship between the partners and the partnership firms as prevailing under the Partnership Act should be applied for the purposes of sec. 194A of the Act also. However, we are convinced with the contentions put forth by Ld D.R. that the Income tax Act, being taxing statute, should be subjected to strict interpretation. There cannot be any d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xes by the deductee assessee or the liability for penalty under section 271C of the Income tax Act". 15. In the instant cases, it is submitted by Ld A.R that all the partnership firms, which received interest from the assessees herein, have included those interest receipts in their respective income statement. However, since they have declared losses and accordingly filed the returns of income, there was no liability to pay taxes. There cannot be any dispute that an assessee who is having losses cannot be compelled to pay the income-tax, as the Income tax Act does not provide for such a situation, exception being the MAT provisions in the case of companies. What is required to be seen as per the circular issued by CBDT and which was approved by Hon'ble Supreme Court is that "Taxes due" have been paid by the deductee-assessee. Therefore, the question of payment of tax does not arise, if there is no tax liability at all. Accordingly, in the instant cases, the question of liability for tax or "tax due" in the hands of partnership firms does not arise, if they had declared losses in the returns of income. Under these peculiar circumstances, in our view, it would be sufficient complian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble" is known in every case in every year. The Hon'ble Supreme Court has held in the case of Hindustan Coca Cola Beverage (P.) Ltd. (supra), that the interest u/s 201(1A) is payable till the date of payment of taxes by the deductee-assessee. We have already held that the date of filing return of income is to be taken as the date of payment of tax in the facts and circumstances of the instant case. Hence the date of payment is also known. Hence, in our view, it cannot be said that the computation provision fails, since both the beginning date and ending date for the purpose of computation of interest u/s 201(1A) is ascertainable. 17. Since the date of filing of return of income is considered as the date of deemed payment in the instant cases, if assessed income has resulted in loss, the DCIT(TDS) should have calculated interest liability u/s. 201(1A) from the end of the relevant financial year to the date of filing of return of income of that year, instead of charging interest up to 31/05/2009, if the interest under that section is otherwise liable to be charged. 18. However, we find force in the second point. The question that requires consideration is about the nature of interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the decision of the Bombay High Court in the case of CIT v. Kotak Mahendra Finance Ltd. 265 ITR 119 (Bom.), wherein the Bombay High Court observed that it was well settled that interest under Section 234B was compensatory in character and that it was not penal in nature. Another decision which would be relevant is of a Division Bench of this Court in the case of Dr Prannov Roy v. Commissioner of Income-tax and Another : 254 ITR 755 (Del.). In that case, the provisions of Section 234A were in issue. The question before the court was whether interest could be charged under Section 234A when, though the return had not been filed in time, the tax had been paid. The argument raised on behalf of the Revenue that such payment of tax did not strictly comply with the meaning of advance tax and would therefore, have to be disregarded for the purposes of charging interest under Section 234A, was rejected. The Court also held that interest under section 234A was compensatory in nature and unless any loss was caused to the Revenue, the same could not be charged from the assessee. It may be relevant to point out that the matter was taken up in appeal before the Supreme Court and by its decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest u/s 234A is leviable or not in the said facts. Under section 234A, interest is chargeable if the return is not filed within the prescribed due date. The Hon'ble Delhi High Court held that interest is not leviable in the facts and circumstances of that case, mainly on the reason that interest is compensatory in nature and unless any loss is caused to revenue, the same could not be charged from the assessee. The said view was also accepted by the Hon'ble Supreme Court CIT v. Pranoy Roy [2009] 309 ITR 231, which was referred to by the Hon'ble Delhi High Court in the case of Anand Prakash (supra). Hence, it is well established principle now that the if any interest is liable to be charged under the Act, the same can be charged only if the Government is deprived of its funds or any loss is caused to the Government, since interest is compensatory in nature. It is pertinent to note that the ratio of the decision rendered in the case of Dr. Prannoy Roy (supra) was followed by the Mumbai J bench of the Tribunal in the case of Mrs. Sheela Jaisingh v. Asstt. CIT [2007] 13 SOT 617 and the Visakhapatnam bench of the Tribunal in the case of Sudha Agro Oil & Chemical Industries Ltd v. ACIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If TDS was deducted:- (a) In this situation, if Mr. A has deducted and remitted the TDS within the prescribed time, the provisions of sec. 201 of the Act shall not apply to him. However, if there is belated deduction/payment, Mr. A would be charged with interest u/s 201(1A) of the Act, since he is considered to have withheld/enjoyed the tax amount, which otherwise belongs to the Government. (b) In the hands of Mr. B, the revenue is liable to refund the TDS amount of Rs. 10,000/- to him, as he is not liable to pay any tax, in view of the loss return. Since the Government has withheld/enjoyed the funds belonging to Mr. B, which it is not entitled to, the revenue is liable to pay interest u/s 244A of the Act to Mr. B. (B) If TDS was not deducted:- If TDS was not deducted by Mr. A on the interest payment made to Mr. B, then Mr. B would not claim any refund from the revenue. In that case, the question of payment of interest u/s 244A by the revenue to Mr. B does not arise. Since Mr. B has declared loss in his return of income, he is also not liable to pay any tax. In this situation, can it be said that Mr. A has withheld/enjoyed the tax amount belonging to the Government ..... X X X X Extracts X X X X X X X X Extracts X X X X
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