Delayed TDS on ‘usance interest’ – Payment of interest u/s 201(1A) – effective date – liability from the date of payment and not from day Gujarat HC decision given : ITAT Third Member.

IN the present case which was referred to the Third Member of the Tribunal, the dispute revolves around the issue of, whether interest u/s 201(1A) is payable on the ”usance interest” from the date of payment or from the date of pronouncement of High Court decision in the Vijay Ship Breaking Corpn case  whereby it was held that the usance interest is nothing but interest payment and TDS is deductible.

Given that both the Members had unity in their views that the TDS is deductible on such a payment, a difference of opinion cropped up only on the limited issue of date of payment. Thus the issue went to the Third Member who has now held that the liability of the assessee to deduct tax at source was there right from the beginning. It cannot be said that it has been introduced by the decision of the Gujarat High Court in the case of Vijay Ship Breaking Corporation. It has been only clarified to be so in existence by the HC decision, and consequently, for non-deduction thereof or for delayed payment thereof, the assessee would be liable to pay tax u/s 201(1) and also interest u/s. 201(1 A) of the Act.

Brief facts of the case :

In a survey action carried out in cases of certain foreign banks, it was found that the assessee had remitted usance interest through these banks. This was paid for outstanding amount of purchase price of equipments. The assessee had not deducted tax at source on such payment of interest in terms of Sec.195 of the Act, by entertaining the belief that it was part of the cost of acquisition of the equipments in view of the decision of the Andhra Pradesh High Court in the case of CIT Vs. Vishakhapatnam Port Trust. By an order, the Assessing Officer held the assessee liable to deduct tax u/s. 195(1) on the payment of such usance interest and accordingly directed the assessee to pay the amount of tax deductible at source u/s.201(1) along with interest u/s.201(1A). The assessee made an application for rectification on various grounds, one of which was that the assessee was not liable to deduct tax on payment of such usance interest and also contended that the decision of the Gujarat High Court in the case of CIT Vs. Vijay Ship Breaking Corporation & Ors. was not applicable to it.

The Assessing Officer did not accept the contention of the assessee that the decision of Vijay Ship Breaking Corporation (supra) was not applicable. According to him, tax was deductible and therefore there was no mistake apparent from record. He however rectified the order for some computation and other mistakes and reworked the liability. A revised working demonstrated that in some cases the due date for deduction and payment of TDS was ranging between the period 7th May, 2002 and 7th April, 2003. Some of the dates fall before the date of the judgment of Vijay Ship Breaking Corporation i.e., 23.3.2003 and the others, after that date.

The matter then went to the CIT(A) who held that though the assessee was under genuine impression after the decision of the Andhra Pradesh High Court, but since the matter has been decided by the Gujarat High Court, he had no option but to confirm the liability of the assessee to deduct TDS . He, however, deleted the levy of interest u/s.201(1A) by stating that the liability of the assessee to deduct the tax as also to pay the interest starts from the day the decision has been delivered by the Gujarat High Court, and it being after the decision of the Andhra Pradesh High Court, the assessee was under the genuine impression that no TDS provisions were applicable to usance interest, and thus, in the natural course the assessee has not deducted the TDS amount and also not paid the interest thereon.

That is how the issue landed before the Tribunal who went by the Gujarat HC order and confirmed the levy of TDS. But the Members also differed on the date from which interest is to be paid.

The CIT (DR) submitted that interest u/s. 201(1A) of the I.T. Act is compensatory in nature and levy of interest is mandatory as held by courts in various decisions and therefore the interest under section 201(1A) can neither be waived nor reduced; that courts can not legislate and they interpret the law as it has been since the inception of the provision; that TDS was to be made as per the statute.

The counsel of the assessee argued that Section 201(1) is a levy on failure to deduct or to pay tax. The word failure has to be interpreted and has to be given its proper meaning. Whenever assessee has acted on the basis judicial interpretation (Vishakhapatnam case and Tribunal decision in Vijay Ship Breaking Corpn.) there is no question of any failure on the part of the assessee, and when there is no failure, section 201 and 201(1A) are not attracted. There is no failure on the part of the assessee. It is submitted that on this aspect useful guidance (albeit indirectly) can be had also from the Supreme Court decision in Star India Pvt. Ltd. in so far as it is laid down that under certain circumstances levy of interest may not be wholly compensatory and would be in the nature of quasi punishment. In that case, consequent upon amendment of law when liability was fastened for interest, it was held that the same was not justified. In the assessee’s case it is not the amendment of law but it is the reversal of prevailing understanding by a High Court decision.

Having heard both the parties the Third Member observed that

++ As to the effect of the Gujarat High Court order, the cardinal principal is that on pronouncement of the decision the High Court declares the law as to what it mean and what the law had always been. Salmond’s Jurisprudence in this connection may be usefully mentioned stating that a judge does not make law; he merely declares it; and the overruling of a previous decision is a declaration that the supposed rule never was law;

++ In 1959, the Bombay High Court when it had jurisdiction over Gujarat also held in the case of Bhagwandas Kevaldas that “When the Court decides a matter, it does not make the law in any sense but all it does is that it interprets the law and states what the law has always been and must be understood to have been.”

++ If the effect of the judgment of Vijays Ship Breaking Corporation is seen and understood in the light of the aforesaid decisions, then the liability of the assessee cannot be said to be arising only from the date of judgment of the High Court; it has to be right from inception as per the provisions of the Act, which were there on the statute. What the decision of Vijay Ship Breaking Corporation (supra) has decided is that the usance interest is a payment of interest within the meaning of Sec. 195(1) of the Act and is subject to deduction of tax at source;

++ The liability to interest is not a penal one but a compensatory in view of the decision of Supreme Court in Anjum Ghaswala case. The bonafide belief of the assessee, even if was there, would not of any help and on compensatory ground the assessee had to pay interest as the money due to Govt was utilized by the assessee until paid. Assessee’s contention that it was not wholly compensatory but quasi-punishment if viewed in the light of Star India Pvt.Ltd  has no force. The decision of the Supreme Court was rendered in the context of retrospective amendment, on account of which the liability to pay service tax has arisen and in that context the Supreme Court held that interest cannot be charged retrospectively.

Finally he held that as the assessee was liable to deduct tax at source in respect of usance interest, it would be liable to interest u/s. 201(1A).

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