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1990 (2) TMI 78

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..... penalty to the extent of 10% levied u/s 221 of the Act instead of deleting the entire penalty. 2. That the explanation of the appellant ought to have been accepted in toto and the reasoning in para 3 of the order under appeal are unwarranted of facts and bad in law. 3. That on facts, evidence material on record, the penalty ought to have been deleted in toto especially in absence of any proof against the appellant. " 2. We will first consider the appeal No. 2528 relating to the order of the CIT(A) confirming the levy of interest u/s 201(1-A). The learned counsel for the assessee explained the facts of the case. The appellant company is engaged in the business of holding investments and financing industrial enterprises. Its previous year relevant to A.Y. 1982-83 is the financial year ended on 31st March, 1982. The appellant company follows the mercantile system of accounting whereby at the end of the year all the known liabilities are provided in the accounts. During the course of its business of financing and holding of investments, the appellant company borrows money from various parties and pays interest to them. During the year ended on 31st March, 1982, the company borr .....

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..... dit. As such, the appellant-company could not have passed an entry for providing for interest in any event before 15th August, 1982 and in no case on 31st March, 1982. Therefore, the appellant-company could not have deducted tax at source on 31st March, 1982 in respect of a liability for which provision was made by it somewhere in August, 1982. 3.1 THe learned counsel further contended that the provisions of section 194A as it existed during the relevant period are very clear and do not require any other interpretation or clarification. It is apparent from the aforesaid entry that the amount of interest was neither credited in the accounts of the payees nor was paid to them and hence the provisions of section 194A are clearly inapplicable at the time when provisions for interest was made and the amount was credited in interest payable account. It was pointed out that a plain reading of the provisions of sec. 194A thus clearly supports the assessee's contention that it was not liable to deduct any tax at source at the time when provision for such interest liability was made and credit was made in the account of interest payable account as such amount of interest payable to various .....

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..... iability for Expenses 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. " 3.2 The learned counsel further contended that the reliance placed by the department on subsequent clarification vide circular No. 288 dated 22nd Dec. 80 is incorrect as it contains interpretation of sec. 194A which is contrary to the clear interpretation of the provisions of that section which specifically provides that tax at source will be deductible at the time when interest is credited in the account of the payee or when the same is paid to them, whichever is earlier. In the said circular dated 22nd December, 1980, it has been mentioned that what is important is that the interest payable to a creditor has constructively been credited to the account of the payee. The apparent nomenclature of the particular account in which the credit is made is not conclusive in the .....

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..... ent (assessee) therefore cannot get credit of the estimated T.D.S. On the presumption only by taking advantage of the definition of term deductible and deducted in a particular context in the scheme of the Act. It is relevant to consider the instructions issued by the Board instruction No. 1215 dated 8-11-1978 reproduced below : 'Tax deduction at source - Sec. 194A - From interest other than interest on securities - only at the time of payment or crediting to payees' account, tax has to be deducted. Where, under mercantile system " interest payable account " or " liability for expenses account " is credited, tax need not be deducted at this stage.' The words " tax need not be deducted at the stage " in the instruction above has to be understood as tax at source is not deductible at that stage and as such the ITO had rightly come to the conclusion that the tax was not deductible during the financial year and therefore the assessee cannot be given the credit for T.D.S. for the purposes of interest u/s 215 of the Act. " In view of the aforesaid stand taken by the department in the aforesaid reference application it was contended that the department itself is of the opinion that .....

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..... rongly objected to the findings given by the assessing authority while charging interest u/s 201 and while imposing penalty u/s 221 in respect of alleged liability of the assessee to deduct tax at source on the aforesaid provision of interest made by the appellant-company. He submitted that the authorities below have grossly erred in holding that the appellant-company, in collusion with the associated creditor-companies resorted to a colourable device under the camouflage of provision for interest account to enable the assessee-company not to deduct tax from the interest amount which has, in fact, been credited to the accounts of various payees. The ITO has further erred in observing that the appellant-company with a dishonest intention to contravene its tax obligation and to perpetuate fraud by tax evasion had resorted to such collusive entries. He submitted that such serious allegations have been made without properly appreciating the judgment of Hon'ble Supreme Court in the case of McDowell Co. Ltd. v. ITO [1985] 154 ITR 148. The observations made by the Hon'ble Supreme Court in the said judgment are not relevant or applicable in relation to the aforesaid facts of the assessee .....

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..... m till the end of the accounting year. There can conceivably no colourable device in postponing the payment of tax nor can there be any evasion of tax by adopting such method of accounting which has been regularly followed by the appellant-company with regard to provision of interest. The learned counsel further submitted that levy of such interest u/s 201 and penalty u/s 221 in apparent disregard of the clear provisions of section 194A and contrary to specific instructions of the Board issued in November 1978 by wrongly taking the shelter of the judgment of the Hon'ble Supreme Court in McDowell Co. Ltd.'s case amounts to public mischief. He further contended that chosing and picking only few parties like the Sarabhai group while such practice was prevailing in almost all the places throughout the country is indeed most unjustified. He, therefore, urged that the interest charged u/s 201 and the penalty imposed u/s 221 deserves to be cancelled. 4. The learned departmental representative vehemently supported the orders passed by the ITO and the CIT(A). He contended that the ITO has given detailed and valid reasons in the order passed by him u/s 201. He submitted that the contenti .....

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..... ting such income to the account of the payee. Since interest has been debited as an expenditure in the profit and loss account on 31st March, 1982 with a corresponding amount credited to interest accrued but not paid account, calculated with reference to interest payable to each creditor company, the assessee was liable to deduct tax at source on 31st March, 1982 and the same ought to have been deposited within the time prescribed under Rule 30. In case where accounts are maintained on cash basis the deduction of tax at source is required to be made at the time of payment. In this case the assessee is maintaining the accounts on mercantile basis but deducted tax at source on such interest at the time when it was paid in the month of January 1983. The assessee is not entitled to postpone the deduction of tax at source and payment thereof as and when the payment of interest was made in the month of January 1983 as against such deduction at source required to be made on 31-3-1982 as per sec. 194A. 4.3 The learned D.R. contended that the ITO was fully justified in relying upon the circular No. 288 dated 22nd Dec. 1980 which was well known to the Sarabhai group of companies including .....

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..... on 194A by the Finance Act, 1987 w.e.f. 1st June, 1987 is a procedural and clarificatory provision which merely explains and clarifies the pre-existing law and such explanation of clarificatory nature applies retrospectively. The aforesaid explanation clearly supports the department's contention that where specific and determined amount calculated with reference to agreed rate of interest is provided for in respect of each creditor, the mere nomenclature of the interest an interest payable account will not absolve the assessee from the responsibility of deducting tax at source at the time of debiting such interest account and the assessee is not entitled to postpone the deduction of tax at source to the date of payment of interest, as has been done by the assessee in the present case. The learned D.R. relied upon the judgments in the case of N.T.R. Estate v. CIT [1985] 22 Taxman 194/[1986] 157 ITR 285 (AP) and CIT v. Chitra Kalpana [1988] 169 ITR 678/40 Taxman 43 (AP) to support his contention that explanations are clarificatory and procedural in nature and they apply to all pending proceedings. 4.6 As regards the contention of the learned counsel that the department has taken in .....

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..... upreme Court in the case of McDowell Co. Ltd. is fully applicable in the facts of the assessee's case. He also relied upon the decision of I.T.A.T., Ahmedabad Bench 'A' in the case of Atman Trust v. IAC [1989] 31 ITD 315 to support his contention that the judgment of Hon'ble Supreme Court in the case of McDowell Co. Ltd. fully applies to the facts of this case. He, therefore, strongly urged that the orders passed by the ITO u/ss. 201 and 221 deserves to be confirmed. 5. In the rejoinder the learned counsel for the assessee also submitted that the reliance placed by the learned D.R. on the judgments in N.T.R.Estate's case and Chitra Kalpana's case for supporting his contention that the Explanation added in section 194A is procedural and applies retrospectively is incorrect. He submitted that the aforesaid two judgments related to the three Explanations added in section 40(b) which are beneficial to the assessee. However, it is well settled law that no new liability can be fastened upon the assessee by inserting an Explanation and those Explanations which created new liability upon the assessees will always be prospective unless it is specifically made retrospective. He further .....

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..... ooks of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly. " The I.T.A.T., Madras Bench, in the case of Arundathi Investment Ltd., inter alia, held as under : " 10. Now it is worthy of note that whereas the circular, dated 22-12-1980, mentions the circumstances under which the crediting of interest to the 'suspense account' would absolve an assessee from his obligation to deduct tax, the circular letter dated 25-1-1979, is absolutely silent in this behalf. The circular letter, dated 25-1-1979, merely states that when an assessee credits the interest to the 'Suspense Account' and not to the 'Payee's Account', there is no obligation on his part to deduct tax at the time of making provision in the accounts in respect of interest payable by him. Since it is the circular letter, dated 25-1-1979, which applies to the present case, the question of finding out any justification (like paucity of funds, etc.), for taking advantage of the concession under the circular letter, dated 25-1-1979, does not arise. In the case of Sivakami Finance (P.) L .....

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..... of adequate liquid funds at its disposal, wanted to defer the payment of interest to which the respective creditors had agreed and, therefore, the appellant company was entitled to credit such amount in the interest payable account instead of crediting the account of the respective payees. According to the clear interpretation, from a plain reading of the aforesaid section 194A, the liability for deduction of tax at source did not arise at the time when such provision for interest was made by debiting the interest account with a corresponding credit in the account of the interest payable account or the account styled as 'interest accrued but not paid'. The ITO in his order u/s 201 has observed that the payee-companies have also offered the respective amount of interest in their returns of income on due basis and have also taken into account the amount of T.D.S. deductible from the said income while estimating the advance tax during the financial year. But the ITO has not brought any material on record that the creditor companies have debited the amount of interest in the account of the assessee-company as on 31st March, 1982. In the petition u/s 256(2) in the case of the sister co .....

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..... deducted at source thereof was paid on 31st January, 1983. Thus, according to the clarification issued by the Board vide aforesaid instruction, there was no violation of section 194A on the part of the assessee in not deducting tax at source at the time when the provision of interest amounting to Rs. 1,52,971 was credited in the interest payable account. 6.3 The reliance placed by the authorities below and the learned D.R. on Board's circular No. 288 dated 22-12-1980 is not valid as the clarification issued by the Board are not in consonance with the clear interpretation based on the plain language of section 194A. If the interpretation as clarified by the Board in the aforesaid circular would have been possible on the basis of interpretation of sec. 194A as it existed prior to insertion of Explanation in section 194A, there would have been no need to insert the aforesaid Explanation in sec. 194A by the Finance Act, 1987. The provisions of sec. 194A clearly prescribes that the liability for deduction of tax at source will arise only when the amount of interest is credited to the account of the payee or when the same is paid to them, whichever is earlier. The Board in the aforesa .....

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..... ax deduction at source. It is thus evident that for the first time, by the aforesaid amendment, the liability for deduction of tax at source was made applicable in relation to accrual of interest at the end of the accounting year in addition to the earlier two events, namely, at the time of credit to the account of the payee or at the time of payment. It was also for the first time provided that any amount of interest credited to suspense account or interest payable account shall be deemed to be credits for the purpose of tax deduction at source. Prior to aforesaid amendment these words were not appearing in the language of section 194A. It has been further specifically mentioned that this amendment will take effect from 1st June, 1987. Reliance placed by the learned D.R. on the two High Court judgments in N.T.R. Estate's case and Chitra Kalpana's case does not support the revenue's contention as those judgments relate to interpretation of Explanations inserted in sec. 40(b) and those Explanations were beneficial to the taxpayers and did not create any new liability upon the taxpayers. Further more those Explanations were inserted by the Taxation Laws (Amendment) Act, 1984 with eff .....

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..... 987 and cannot be made applicable in relation to action earlier to that date. It is further noteworthy to refer some other explanations added in provisions like sec. 35B. At the time when Explanation 2 was inserted in section 35B it was clearly mentioned that such Explanation has been inserted for the removal of doubts and that explanation was specifically made a declaratory amendment. No such words like " for removal of doubts " or " it is hereby declared " etc. have been used in the language of the aforesaid Explanation inserted in section 194A specifically made effective from 1st June, 1987. We are, therefore, of the considered opinion that the aforesaid Explanation inserted in section 194A by the Finance Act, 1987 with specific reference to a cut off date effective from 1st June, 1987 cannot be made effective with retrospective effect. In view of this also the assessee deserves to succeed. This view is fortified by a recent decision of the I.T.A.T. Bombay Bench in the case of V.I.P. Industries Ltd. v. IAC [1990] 32 ITD 331 where explanation appended to sub-sec. (i) of section 263 was the subject matter of consideration which was substituted by the Finance Act, 1988 and was made .....

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..... in the facts and circumstances of the present case. In the intant case the credit of interest income was made or interest was paid to the creditor companies on 24th January, 1983 and tax was deducted thereon on that day and the same was duly paid on 31st January, 1983. These facts further prove the absence of any guilty intention and such an arrangement made with the consent of the creditor companies appears to be a bonafide business arrangement based on commercial considerations which according to the assessee was necessary for want of availability of liquid funds. The course of action chosen by the assessee-company is clearly permissible according to the clear interpretation of section 194A as it stood prior to insertion of the above referred explanation with effect from 1st June, 1987. The aforesaid interpretation based on plain reading of section 194A is further supported by the instruction No. 1215 dated 8th Nov. 1978 issued by the Board. In this context it will be further pertinent to mention that the department itself in the above referred R.A. No. 696 for A.Y. 1982-83 submitted before the Hon'ble Gujarat High Court in the case of Kanchanjunga Investments (P.) Ltd. relying .....

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