S. 195 Amount on which TDS to be deducted in case of composite amount

COMMON JUDGMENT (Judgment of the Court was delivered by CHITRA VENKATARAMAN,J.) The Revenue has filed these Tax Case (Appeals) as against the order of the Income Tax Appellate Tribunal raising the following substantial questions of law:

“1. Whether in the facts and circumstances of the case, the Tribunal was right in holding that Sec.201(1) and 201(1A) would not be applicable in cases where the payee was found to have suffered a loss?

2. Whether in the facts and circumstances of the case, the assessee was justified in deducting tax at a lower rate without getting an authorization or certificate for deduction of tax at a lower rate?”

2. The assessee herein is Chennai Metropolitan Water Supply and Sewerage Board, who had engaged the services of a Malaysian Company to carry out certain works. The assessee deducted tax at source at the rate of 2% while making payment to the Malaysian Company. As the rate at which tax was to be deducted was 40%, the Assessing Officer raised a demand on account of shortfall in TDS under Section 201 of the Income Tax Act as well as consequential demand of interest under Section 201(1A) of the Income Tax Act. Aggrieved by the same, the assessee filed an appeal before the Commissioner of Income-Tax (Appeals), who allowed the appeal holding that the demand under Section 201(1) of the Income Tax Act was not sustainable, as the recipient had no taxable income from this transaction who had also filed a return showing ‘nil’ income. However, he held that the interest under Section 201(1A) of the Income Tax Act was correctly levied.

3. As against the order of the Commissioner of Income-Tax (Appeals), the assessee as well as the Revenue went on appeal before the Income Tax Appellate Tribunal. Following the decision of the Gujarat High Court reported in (2002) 253 ITR 310(CIT V. Rishikesh Apartments Co-operative Housing Society Ltd.), the Tribunal held that interest was not leviable under Section 201(1A) of the Income Tax Act. Thus the Tribunal allowed the assessee’s appeal. Consequently, it dismissed the Revenue’s appeal. Aggrieved by the same, the Revenue has come before this Court.

4. A reading of the order of the Assessing Officer shows that on finding the shortfall in the deduction of tax at source under Section 195 of the Income Tax Act, the Assessing Officer levied interest at 15% on the amount of shortfall from the date on which tax was deductible to the date on which such tax is actually paid.

5. On the second question raised as to whether regards the assessee was justified in deducting tax at a lower rate without getting an authorization or certificate under Section 195(2) of the Income Tax Act, the same is no longer res integra, by reason of the decision of the Apex Court reported in (1999) 239 ITR 587 (Transmission Corporation of A.P. Ltd., and another V. Commissioner of Income-Tax), wherein, it was held that in the absence of any certificate obtained as given under Section 195(2) on the composite amount made by the assessee to the payee, TDS ought to have been made on the entire amount. Hence, the said question stands answered in favor of the Revenue.

6. Learned counsel appearing for the assessee submitted that TDS has to be done only on the income chargeable under the Act. The payee being a loss making company and that the payment made was a composite amount covered under the DTAA, the question of there being any shortfall did not arise. We do not agree. Going by the decision of the Apex Court on Section 195(2) of the Income Tax Act that even in a case of composite amount payment, unless the assessee had approached the Officer for a certificate under Section 195(2) for applying the doctrine of proportionality, the entire amount has to suffer for deduction under Section 195(1) of the Income Tax Act. Consequently, the second question is answered against the assessee and in favour of the Revenue.

7. As for as the first question regarding interest levy under Section 201(1A), it is seen that failure to deduct whole or any part of the tax or failure to pay the tax after deducting the tax is visited with penal consequences in the nature of levy of interest apart from levy of penalty under Section 271(C). A reading of the provisions of Section 201(1A) of the Income Tax Act shows that the levy of interest starts from the date on which T.D.S. is to be deducted to the actual payment date. Even though learned counsel appearing for the assessee relied on the decision reported in (2007) 293 ITR 226 (Hindustan Coca Cola beverage P. Ltd. V. Commissioner of Income-Tax), which refers to the circular No.275/201/95-IT(B) dated 29th January, 1997, yet, as far as the present case is concerned, the fact remains that the assessee, apart from deducting at 2% as against 40%, it did not make any further payment even after coming to know about the state of affairs. To this, learned counsel appearing for the assessee submitted that the recipient being a loss making company, the question of payment of interest does not arise.

8. We do not think such a contention could be accepted in the light of the decision of this Court reported in (2001) 250 ITR 464 (Commissioner of Income Tax V. Ramesh Enterprises) holding that the assessee has a duty to deduct tax at source, even in a case where the recipient was a loss making company. Hence, on the facts found, interest is leviable under Section 201(1A) of the Income Tax Act.

9. However, going by the facts herein that the assessee did not make up for a shortfall, the question as to the period upto which the extent needs to be calculated has to be considered.

10. Section 201(1A) of the Income Tax Act, reads as follows:

“201(1A) Without prejudice to the provisions of sub-section(1), if any such person, principal officer or company as is referred to in that sub-section does not deduct the whole or any part of the tax or after deducting fails to pay the tax as required by or under this Act, he or it shall be liable to pay simple interest at fifteen per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid.”

11. Going by the provisions under Section 201(1A) of the Income Tax Act, it is clear that interest at fifteen per cent per annum is leviable from the date on which tax was deductible to the date on which such tax is actually paid. Thus while there is no difficulty as for the applicability of Section 201(1A) and in applying the decision of the Apex Court reported in (1999) 239 ITR 587 (Transmission Corporation of A.P. Ltd., and another V. Commissioner of Income-Tax) to the case on hand, learned counsel appearing for the assessee pointed out that the period upto which interest could be calculated, poses a difficulty in invoking Section 201(1A) of the Income Tax Act. He pointed out that the payee being a loss making company and that it had also filed its return so, the question of further deduction on the shortfall does not arise on the facts of this case and the Assessing Officer cannot ignore this aspect while considering the levy of interest. In the circumstances, the Section not providing any answer, interest could not be levied on the assessee.

12. We do not think that such a contention could be entertained, having regard to the scheme of TDS. A reading of Section 195 of the Income Tax Act reveals that a person responsible for making payment to a non-resident has to deduct income tax at the time of credit of the said amount 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. The only condition insisted under Section 195 of the Income Tax Act is that the amount paid must be a sum chargeable under the provisions of the Act. Section 195(2) of the Income Tax Act enables an assessee to file an application before the Assessing Officer to determine the appropriate proportion of the sum chargeable under the Act and upon such determination, tax has to be deducted under sub-section (1) on that proportion of the sum which is so chargeable. The person deducting the tax at source has to furnish the statement as prescribed by the Board. The payment thus made is credited to the account of the payee. As regards the consequences of failure to pay tax, sub-section (3) of Section 195 of the Income Tax Act, reads as under:

“195(3) – Subject to rules made under sub-section (5), any person entitled to receive any interest or other sum on which income-tax has to be deducted under sub-section (1) may make an application in the prescribed form to the Assessing Officer for the grant of a certificate authorizing him to receive such interest or other sum without deduction of tax under that sub-section, and where any such certificate is granted, every person responsible for paying such interest or other sum to the person to whom such certificate is granted shall, so long as the certificate is in force, make payment of such interest or other sum without deducting tax thereon under sub-section (1).”

13. In the background of the said provisions, the decisions relied on by the learned counsel appearing for the assessee reported in (2007) 293 ITR 226 (Hindustan Coca Cola beverage P. Ltd. V. Commissioner of Income-Tax), needs to be seen.

14. The facts therein were that the assessee deducted tax at 2% on the warehousing charges paid, treating the payment as contractual payments. The Officer, however, treated the same as rent and called upon the assessee to pay the shortfall and interest. The assessee took a plea in a Miscellaneous Application filed before the Tribunal that as the payee remitted the tax, there could be no further liability for TDS at the hands of the assessee. The Appellate Tribunal recalled its earlier order for the limited purpose of deciding the ground raised by the assessee and held that there could be no recovery of tax, alleged to be in default, once again, when the payee had already remitted the tax. The Apex Court pointed out that in view of Circular No.275/201/95-IT(B) dated 29th January, 1997, since the payee had paid the tax, the same could not be once again recovered from the assessee. However, that would not alter the liability to charge interest under Section 201(1A) of the Income Tax Act till the date of payment of tax by the deductee assessee or the liability for penalty under Section 271(C) of the Income Tax Act. The Apex Court pointed out that since the assessee had paid tax under Section 201(1A) of the Income Tax Act and since tax had been paid by the deductee assessee, the Apex Court did not go into the question of correctness of rectification order passed by the Tribunal. It also pointed out that the liability to pay interest under Section 201(1A) and the applicability of the Circular to the facts therein was also not denied.

15. As far as the present case is concerned, while the assessee had short deducted the tax under Section 195 of the Income Tax Act, it did not make good the shortfall on the ground that the payee company was a loss making company and had filed a return so. In the circumstances, the question of it further making a deduction and remitting to the State did not arise. The Circular referred to recognises the fact that once the payee remits the differential tax, the question of further recovery of the self-same sum from the payer did not arise and till the payment made by the dedutee assessee, interest would be charged.

16. Applying the said circular herein, with no liability thus arisen at the hands of the payee, the terminal point as regards the calculation of interest necessarily has to be given a meaningful interpretation. Given the fact that the interest levy is an automatic one, the determination on the ultimate liability of the payee company to pay or not to make payment being a procedural exercise has nothing to do with the liability of the assessee to deduct tDS. As such, the loss return filed by the payee company cannot be treated as a circumstance to be taken in in favour of the assessee company from not applying the provisions of Section 201(1A) of the Income Tax Act. On the facts herein, the only reasonable interpretation one can give to the provision under Section 201(1A) as regards the terminal point upto which interest has to be calculated would be the date on which the return has to be filed by the payee, so that the calculation of interest under Section 201(1A) of the Income Tax Act in such case would really be meaningful.

17. In the circumstances, conforming to the object of the provisions regarding the levy of interest under Section 201(1A) of the Income Tax Act on the failure to deduct tax in accordance with Section 195 of the Income Tax Act, the starting point for the levy of interest thus to commence from the date on which the assessee should have deducted the tax, the terminal point herein has to be taken as the date on which the payee should have filed its return, so that the calculation of interest under the said provision does not suffer any illegality.

18. As already pointed out, the payee company is stated to have filed a loss return. Nevertheless, this fact needs to be verified by the Assessing Officer and if it is found to be so, the question of further recovery from the hands of the assessee company herein does not arise vide (2007) 293 ITR 226 (Hindustan Coca Cola beverage P. Ltd. V. Commissioner of Income-Tax). However, as far as levy of interest is concerned, it being an automatic one, the order of the Tribunal merits to be set aside as far as this aspect of the question is concerned. Accordingly, the assessment order regarding levy of interest has to undergo necessary modification to the effect that interest under Section 201(1A) of the Income Tax Act has to be calculated from the date on which tax should have been deducted to the date on which the payee should have filed its return under the provisions of the Income Tax Act. Accordingly, both the Tax Cases stand disposed of. No costs.