Exemption from TDS under Income Tax Law

CA Sathiavageeswaran

Various Charitable organizations, schools and colleges who obtain income tax exemption u/s. 10(23)(c) of the Income Tax act approach the banks with whom they have deposits to pay the interest without deduction of tax at source. Certain banks pay the interest without deduction of tax. Let us examine if this action is correct  on the basis of the Income Tax Provisions and in case it is incorrect what is the remedy to avoid the action of the Department in treating them as an assessee in default within the provisions of Section 201(1) of the Income Tax Act.

The Income Tax gives exemption from TDS in the following cases:

• For those who are not required to file the return of Income Under Section 139
• For those assessees who give a declaration under Section 15G/15H at the beginning of the Financial year and verified by the deductor according to the rules laid down in this regard.
• For those cases which are specifically exempted under sub  section 3 of Section 194A of the Income  Tax Act.
• For those cases who obtain certificate under Section 197 of the Income Tax Act from the assessing officer. This certificate instructs the deductor not to deduct tax on that specified assessee or to deduct tax at a lower rate or as per the conditions laid down in the certificate. The validity of the certificate will also be specified by the Income Tax Officer.

In all other cases tax has to be deducted as per the provisions of Section 194A of the Income Tax Act. These exempted institutions will have to file the return of Income and claim  refund of the tax deducted if any. In case they want to avoid TDS they have to apply to the concerned assessing officer and obtain a certificate under section 197 of the Income Tax Act.

 Let us examine the remedy available to the deductor if Interest has been paid without deduction of tax at source. The Proviso to Section 201(1)   states that the deductor will not be treated as an assessee in default if the following conditions are satisfied.

• The deductee has filed the return of Income including the interest paid in the total income
• The deductee has paid the tax theron
• The deductor obtains an audit certificate in Form 26A and upload the same in the TRACES.

This provison  is in tune with the  decision of the Supreme Court in Hindustan coco cola case. If the above conditiond are met the deductor will not be treated as an assessee in default. However Interest under Section 201(1) A of the Income Tax Act.