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No penalty & Interest for non deduction of TDS if Deductee-payee having no tax liability

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ITAT COCHIN BENCH

Thomas Muthoot

Versus

Deputy Commissioner of Income-tax

IT APPEAL NOS. 383, 384, 386, 387-389, 390 & 392 TO 394 (COCH.) OF 2011

[ASSESSMENT YEARS 2005-06 TO 2008-09]

OCTOBER 12, 2012

ORDER

B.R. Baskaran, Accountant Member

In all these appeals filed by the respective assessees, identical issues are urged, viz., whether the ld CIT(A) is justified in upholding the penalty and interest levied u/s 201(1) and 201(1A) of the Act respectively. Hence these appeals were heard together and are being disposed of by this common order, for the sake of convenience.

2. The facts surrounding the said issues are also identical in nature in all the appeals. These assessees are assessed to tax in the status of ‘Individual’. They are also partners in various partnership firms. The gross receipts in the hands of each of the assessees have exceeded the monetary limits prescribed u/s 44AB of the Act and hence their account books have been subjected to tax audit as per that provision. Hence 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 DCIT(TDS) in all the years by filing appeals before Ld CIT(A), who confirmed the penalties levied in all the cases by placing reliance on the decision of Hon’ble Madras High Court, referred supra. The observations made by Ld CIT(A) in the case of Shri Thomas Muthoot is extracted below:-

“I, therefore, hold the view that the obligation to deduct tax is imposed with a view to ensure that on an interest payment made in respect of which tax is required to be deducted at source, the State promptly receives the amount so required to be deducted and therefore the appellant’s contention that the firm has shown income and paid tax on such income does not absolve the appellant from the responsibility of deducting and depositing the tax immediately to the Government Account. In this case the appellant failed to discharge the obligation cast upon him by the Income tax Act.”

The Ld CIT(A) confirmed the interest levied u/s 201(1A) of the Act by placing reliance on the following case law:-

(a)  Hindustan Coca Cola Beverage (P.) Ltd. v. CIT [2007] 293 ITR 226

(bCIT v. Dhanalakshmy Weaving Works [2000] 245 ITR 13

(c)  CIT v. Prem Nath Motors (P.) Ltd. [2002] 253 ITR 705

(d)  Pentagon Engg. (P.) Ltd. v. CIT [1995] 212 ITR 92 (Bom.)

(e)  Jubilee Investments & Industries Ltd. v. Asstt. CIT [1999] 238 ITR 648

Aggrieved by the orders passed by Ld CIT(A), all these assessees are in appeal before us for the years mentioned in the caption, supra.

5. The Ld. Counsel for the assessee Shri R. Sreenivasan, Chartered Accountant submitted that these assessees have borrowed only from the partnership firms in which they are partners, by way of making over drawings from their respective capital accounts. Hence, these assessees have paid interest on the debit balance of their respective capital. He further submitted that the partners and the firm are one and same ‘person’ under the Partnership Act, i.e., under the said Act, the firm is described as compendium of partners. They are individually known as ‘Partner’ and collectively known as “Firm”. Hence the transaction between the partnership firm and the partners should be considered as transaction with self. Under the Income tax Act, a partnership firm is considered as a separate entity for the limited purposes of collection of tax. The provisions of Income tax Act cannot alter the legal relationship between 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 hold that the provisions of sec. 194A shall not be attracted to the interest paid by a partner to his partnership firm also. Accordingly he contended that the assessees are not liable to deduct tax at source u/s 194A of the Act on the interest paid by them to the partnership firms in which they are partners.

7. The Ld A.R further submitted that all the partnership firms to whom the interest were paid by these assessees have duly accounted for the interest receipts in their income statement and all the partnership firms have also filed their respective returns of income for the years under consideration. The Ld A.R submitted that the penalty u/s 201(1) is not levieble, if the payee has accounted for interest receipts and paid tax thereon. In this regard, he placed reliance on the instruction No. 275/201/95-IT(B) dated 29-01-1997 issued by CBDT, where in it is stated that no demand visualized under section 201(1) of the Income tax Act should be enforced after the tax deductor has satisfied the officer in charge of TDS that taxes due have been paid by the deductee-assessee. The Ld A.R further submitted that the partnership firms have incurred losses in some of the years even after including the interest paid by the partners and hence there was no tax liability on account of losses. However, by considering the fact that the interest paid by the partners has already been included in their income, it should be deemed that the taxes due on the said interest receipts have been paid. The Ld A.R further submitted that the above said circular issued by the CBDT was considered by the Hon’ble Supreme Court in the case of Hindustan Cocacola Beverage (P.) Ltd. (supra) and the Hon’ble Apex Court has approved the said circular. Accordingly the Ld A.R submitted that the penalties levied by the AO u/s 201(1) of the Act in all these cases are liable to be deleted.

8. With regard to the interest levied u/s 201(1A) of the Act, the Ld A.R submitted that the same is not chargeable if the relationship between the partners and the partnership firms under the Partnership Act is taken into account. He further submitted that the DCIT (TDS) has charged interest for a period beginning from the closure of the relevant financial year to 31.5.2009 in all the cases, which goes against the ratio of the decision rendered by the Hon’ble Supreme Court in the case of Hindustan Cocacola Beverage (P.) 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 these assessees. Even if tax had been deducted from the impugned interest payments, the Government has to refund the entire amount of TDS along with interest to the partnership firms, since they have incurred losses. Hence, in this kind of situations, the question of compensation shall not arise and in that case, the question of payment of interest u/s 201(1A) shall also not arise”.

10. In the alternative, the Ld A.R submitted that it is a settled principle that tax cannot be levied if the computation provision fails. In the case of Munak Investment (P.) Ltd. v. ITO [1995] 55 ITD 429 (Chd.) it was held that the interest u/s 201(1A) is not leviable, since it is incapable of computation in the absence of the date of payment of TDS. The said decision was followed in the case of K.V.S Caterers (ITA No.7514 & 7515/M/2004) by the Mumbai bench of ITAT. The interest u/s 201(1A) is chargeable for the period from the date on which such tax was deductible to the date on which such tax is actually paid. The Ld A.R submitted that the date of deduction/payment of TDS is not known in the instant cases, as the assessees have failed to deduct TDS assessees and hence the computation provision fails.

11. On the other hand, the Ld Jr. D.R Shri Sreenivasu Kollipaka strongly defended the orders passed by Ld CIT(A). He submitted the deduction of tax at source is one of the modes of recoveries under the Income tax Act and hence the TDS provisions cannot be considered as leading to double taxation. He submitted that the Income tax Act provides exemption from TDS provisions only in respect of interest paid or credited by firm to its partners. However, such an exemption is not given to the interest paid/credited by a partner to his firm. He submitted that the Income tax Act, being a taxing statute, should be subjected to strict interpretation and hence one cannot assume or supply some thing which was not provided in the Act. He further submitted that the Income tax Act recognizes a partnership firm as a separate entity and further, the Act considers a partner and a firm as a different ‘Person’, by disregarding the nature of relationship between them under the Partnership Act. Since the nature of relationship has been disregarded under the Income tax Act, it would not be correct to apply it in part that too only for TDS provisions, to suit the convenience of tax payer and to disregard the 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 dispute that the Income tax Act recognizes a partner and a partnership firm as different ‘Person’, despite the legal position of relationship between them as prevailing under the Partnership Act. Further sec. 194A provides exemption from the obligation imposed under that section only in respect of interest paid/credited by a firm to its partner. The Act does not provide such exemption to the interest paid/credited by a partner to his firm. In the absence of any provision to provide for such exemption and further by considering the fact that the Act treats a partner and a firm as different ‘Person’, we are of the view that the position of legal relationship between a partner and his firm looses its importance/significance under the Income tax Act. Accordingly, we are of the view that the said position of legal relationship as prevailing under the Partnership Act should not be applied in abstract, only to the provisions of sec. 194A of the Act. Accordingly, we reject all the contentions raised by the assessee in this regard.

13. Now we shall take up the issue relating to the levy of penalty u/s 201(1) of the Act. The tax authorities have placed reliance on the decision of Hon’ble Madras High Court in the case of Ramesh Enterprises (supra), in imposing penalty u/s 201(1) of the Act. In the instant cases, the partnership firms have filed loss return in some of the years. The tax authorities have taken support of the above said decision for the reason that the Hon’ble High Court held that even if recipient filed loss return, the same cannot be taken as a reasonable consideration for non-deduction of TDS as per applicable section.

14. However, the question of levying penalty u/s 201(1) of the Act was considered by Hon’ble Supreme Court in the case of Hindustan Coca Cola Beverages (P.) Ltd. (supra), wherein the Hon’ble Apex Court has observed as under:-

“Be that as it may, Circular No.275/201/95 IT(B) dated January 29, 1997 issued by the Central Board of Direct Taxes, in our considered opinion, should put an end to the controversy. The circular declares “no demand visualized u/s 201(1) of the Income tax Act should be enforced after the tax deductor has satisfied the officer in charge of TDS, that the taxes due have been paid by the deductee-assessee. However, this will not alter the liability to charge interest u/s 201(1A) of the Act till the date of payment of taxes 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 compliance with the ratio laid down by the Hon’ble Supreme Court in the case of Hindustan Coca cola Beverage (P.) Ltd. (supra), if the impugned interest receipts by the firms are duly included in their respective return of income. Accordingly, in our view, the ratio of decision in the case of Hindustan Coca-cola Beverage (P.) Ltd. (supra), can be applied to the facts of the instant cases also. However, subject to verification of the fact of filing return of income by the partnership firms by duly including the interest paid by the assesses herein, in our view, the penalty levied u/s 201(1) of the Act in their hands is liable to be deleted. Since the above said facts require verification, we set aside the orders of Ld CIT(A) on this issue and restore the same in all the cases to the file of DCIT(TDS) with the direction to verify the claim of the assessee and delete the penalty levied u/s 201(1) of the Act in all the cases after satisfying himself that the concerned partnership firms have filed their respective returns of income by duly including the impugned interest payments and the tax due, if any, has been paid. If the assessed income in the hands of the concerned partnership firms is “loss”, then the date of filing of return is to be considered as the date of deemed payment of tax due.

16. With regard to the interest charged u/s 201(1A) of the Act, the assessee has argued against that levy on two different points viz.,

(a)  Since the date of deduction/payment of TDS is not known, the computation provision fails and hence interest could not be charged.

(b)  Since the deductee-assessees (Partnership firms) have declared losses, there is no tax liability, in which case it cannot be held that the assessees have with held the tax due to the Government. Since interest is a compensatory payment for withholding the tax due to the Government, there is no necessity to compensate the Government in the cases where no tax is payable.

With regard to the first point, we find it to be contradictory to the stand taken on the issue relating to levy of penalty u/s 201(1) of the Act. As per the provisions of sec. 201(1A) of the Act, an assessee is liable to pay simple interest at the prescribed rate on the amount of such tax (TDS amount) from the date on which such tax was deductible to the date on which such tax is actually paid. The date on which such tax is “deductible” 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 interest charged under the Income tax Act, i.e., whether interest is penal or compensatory in nature?. This question came to the consideration of Hon’ble Supreme Court in the context of interest chargeable under sec. 215/139(8) that were in force at the relevant point of time in the Act, which are akin to interest chargeable u/s 234B/234A under the present provisions. The Hon’ble Supreme Court considered the nature of levy of interest u/s 215/139(8) in the case of Central Provinces Manganese Ore Co. Ltd. v. CIT [1986] 160 ITR 961 and observed as under:-

“it is not correct to refer to the levy of such interest as a penalty. The expression “penal interest” has acquired usage, but is, in fact, an inaccurate description of the levy. Having regard to the reason for the levy and the circumstances in which it is imposed, it is clear that interest is levied by way of compensation and not by way of penalty. The income-tax Act makes a clear distinction between the levy of a penalty and other levies under that statute. Interest is levied under Sub Section (8) of Section 139 and under Section 215 because, by reason of the omission or default mentioned in the relevant provision, the Revenue is deprived of the benefit of the tax for the period during which it has remained unpaid.”

Similar view was expressed by Hon’ble Supreme Court in the case of Ganesh Das Sreeram v. ITO [1988] 169 ITR 221. The said view was again reiterated by the Hon’ble Supreme Court in the case of CIT v. Eli Lilly & Co. (India) (P.) Ltd. [2009] 312 ITR 225in the context of interest chargeable u/s 201(1A) of the Act. The Hon’ble Supreme Court further clarified that interest u/s 201(1A) is mandatory even if there is no tax liability u/s 201(1) of the Act, i.e., the view expressed in the case of Hindustan Cocacola Beverage (P.) Ltd. (supra), by the Apex court is again reiterated here.

19. The Hon’ble High Court of Delhi also considered an identical question in the case of CIT v. Anand Prakash [2009] 316 ITR 141 and the relevant observations made by the Hon’ble Delhi High Court are extracted below:-

“11. We have examined the decisions cited by the counsel on both sides and after considering the submissions made by them, we agree with the learned counsel for the Revenue that the levy under Section 234B of the said Act is compensatory in nature and is not in the nature of penalty. We may also note 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 decision dated 17.09.2008 in CIT v. Prannov Roy /Civil ‘Appeal No. 448/2003L the Supreme Court noted that**:

“the High Court, while accepting the writ petition and setting aside the interest charged under section 234A of the Act, has come to the conclusion that interest is not a penalty and that the interest is levied by way of compensation to compensate the revenue in order to avoid it from being deprived of the payment of tax on the due date. Having heard counsel on both the sides we entirely agree with the finding recorded by the High Court as also the interpretation of Section 234A of the Act as it stood at the relevant time.”

(** reported in 309 ITR 231)

“12. Coming back to the present appeals, we are of the view that Section 234A, Section 234B and Section 234C are of the same class. On going through these provisions, it is clear that interest’ is sought to be charged on account of the fact that the Government is deprived of its revenue. Under Section 234A, interest is charged if tax whichever to be paid at the time of filing of the return is not paid at that point of time, Section 234B provides for levy of interest for default in payment of advance tax and Section 234C stipulates the charging of interest for default in the payments of advance tax on the appointed dates of payment. It is clear that under the said Act tax is payable at different dates and, through different modes. Where specific dates of payment of tax are not adhered to, it can be said that the Government is deprived of tax on those dates. Interest is chargeable under the provisions of the Act such a Sections 234A, 234B and 234C in order to compensate the Government for such deprivation. It is clear from the scheme of the Act and the nature of these provisions that they are compensatory and not penal. We, therefore, conclude that the levy of interest under Section 234B of the Income Tax Act is compensatory in nature. The Tribunal, having taken a contrary view has clearly erred.

20. In the case of Dr. Pronnoy Roy v. CIT [2002] 121 Taxman 314, referred to by Hon’ble Delhi High Court, the assessee therein paid the tax due on his income for the assessment year 1995-96 before the due date for filing return of income, i.e., before 31-10-1995, but after 31.3.1995. However, he filed his return of income belatedly, i.e., there was a delay of 11 months. The question that arose before the Hon’ble Delhi Court was whether interest 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 [ITA No.288/Vizag/2007, dated 29-3-2010].

21. Now we shall turn to the facts of the instant cases before us, wherein interest u/s 201(1A) was levied upon the assessees. It may be noted that interest u/s 201(1A) is levied if there is any failure on the part of any assessee to deduct tax at source (TDS)/remit the same at the right point of time on the income paid by him. The TDS amount to be so deducted/remitted belongs to the revenue/Government. Hence, interest u/s 201(1A) is charged; since the assessee is considered to be enjoying the TDS amount, which belongs to the Government, till the time he deducts and remits the same to the account of the Government. It is pertinent to note that the Tax so deducted at source is given credit in the account of deductee- assessee. If the assessment of the deductee assessee results in refund of TDS amount, the Government shall refund the amount along with interest u/s 244A of the Act. The reason for paying interest u/s 244A is that the Government is considered to have enjoyed the amount, which it is not entitled to. Thus the interest is charged/paid as compensation for withholding/enjoying funds not belonging to the assessee/revenue.

22. Let us consider about exigibility of interest u/s 201(1A) of the Act under the peculiar conditions prevailing in the instant cases, wherein the recipient of interest viz., the partnership firms have declared losses even after accounting for the interest paid by the assessees herein. Even if the assessees herein deduct and remit the TDS amount on the interest paid to the partnership firms, the same is liable to be refunded to the said partnership firms, as there is no tax liability in their respective hands. Under this situation, can it be said that the Government is deprived of the funds due to it or any loss is caused to the Government.

23. We shall now examine the said question with an example. Let us assume that ‘Mr. A’ pays an interest of Rs.1.00 lakh to ‘Mr. B’ on 31.3.2007. Mr. A is liable to deduct tax at source on the said payment u/s 194A of the Act. Mr. B includes the said interest receipt in his income statement, but his total income turns into loss. Hence Mr. B is not liable to pay income tax, as he has declared loss in his return of income. Let us analyse the above said facts under two situations, viz., (a) if TDS was deducted by Mr. A and (b) if TDS was not deducted.

(A) 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? The answer would be yes, only if Mr. B is liable to pay tax. In this example, Mr. B is not liable to pay any tax and hence question of ‘withholding any tax money’ belonging to revenue does not arise. Accordingly, it cannot be said that Mr. A has withheld/enjoyed the tax amount belonging to the Government. Even if he is compelled to deduct TDS, ultimately, the same is liable to refunded to Mr. B. Hence, under this kind of situation, it cannot be said that the Government is deprived of its fund or any loss was caused to the Government.

24. The facts analysed in Situation B is applicable to the facts prevailing in the instant cases. On the basis of analysis made in situation B, we are of the view that the assessees herein are not liable to pay interest u/s 201(1A) of the Act, if the recipient of interest, viz., the partnership firms, are not liable to pay tax on the impugned interest income. However, in the paper book filed before us, only copies of the returns of income filed by the partnership firms have been furnished. It is not known whether the said returns of income were accepted as it is by the revenue or not, since copies of the assessment orders for relevant years, if any, were not filed before us. Hence, we are unable to examine, whether the said partnership firms were liable to pay tax on the impugned interest income or not, in the absence of the assessment orders. Hence these facts require verification at the end of the DCIT (TDS). If they are not liable to pay tax on the impugned interest income, then as per the discussions made in the foregoing paragraphs, these assessees are not liable to pay interest u/s 201(1A) of the Act.

25. It may be noted that the prevailing rate of interest chargeable/payable u/s 201(1A)/244A are different, i.e., the rate of interest payable u/s 244A is lesser than the interest chargeable u/s 201(1A) of the Act. Due to this disparity, a question may arise as to the correctness of the view taken by us in the preceding paragraphs. In our view, the rate of interest is prescribed by the Government on the basis of various factors. The main principle considered by us is that pronounced by the Hon’ble Courts, viz., that, interest is compensatory in nature for depriving funds belonging to the revenue/assessee. Hence the disparity in the rate of interest shall not have any effect on the said principle.

26. In view of the foregoing discussions, we set aside the orders passed by Ld CIT(A) on the issue of levy of interest u/s 201(1A) in all cases before us and restore the same to the file of the DCIT (TDS) with the direction to verify whether or not the recipients of the interest income, viz., the partnership firms were liable to pay tax on that income and then take appropriate decision about the chargeability of interest u/s 201(1A) of the Act in the hands of the assessees herein in accordance with the principles discussed by us in the preceding paragraphs.

27. In the result, all the appeals of the assessees are treated as allowed for statistical purposes.


One Response to “No penalty & Interest for non deduction of TDS if Deductee-payee having no tax liability”

  1. CA. L. R. SHERAL says:

    Thank you so much for this facilities available

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