Facts of the CAse
The assessee, a Branch of Canara Bank, made interest payment of Rs.201,000,000/- to New Okhla Industrial Development Authority (herewith ‘NOIDA’), a creation of the UP Industrial Area Development Act, 1976, without withholding any tax at source. NOIDA claimed before the assessee bank that it was a local authority and, hence, its income was exempt from tax and, as such, no withholding of tax at source was required.
The matter was taken up to Hon’ble Allahabad High Court by way of writ petitions as many banks were against the NOIDA’s claim of its eligibility for exemption as local authority u/s 10(20) of the Income-tax Act, 1961 (herewith “the Act”). The Hon’ble Allahabad High Court decided the issue against NOIDA, thereby denying the benefit of exemption u/s 10(20) of the Act. Pursuant to this order, the Addl. Commissioner, Ghaziabad declared the Assessee as “Assessee in default” u/s 201( and 201(1A) for not withholding tax u/s 194A of the Act on the amount of interest paid by it to NOIDA.
Held by CIT (A):
The CIT(A) accepted the Assessee’s contention that there was no obligation on Assessee’s part to withhold any tax on payment made towards Interest and rejected Addl. CIT’s order.
Question of Law:
Whether the assessee was liable to withhold tax at source u/s 194A on interest paid to NOIDA?
Contention of the Revenue:
The Revenue contented that as per clause 39 of the Notification No. 3489 on which the Assessee relied; only a corporation established by a State Act can claim exemption. NOIDA to whom the interest payment is made is not a corporation established by a State Act. If the corporation is established ‘under’ the State Act and not ‘by” the State Act, then, the exemption to the payer bank from withholding tax on the interest income is not available. Since NOIDA has been constituted as a corporation established `under’ the State Act and not ‘by’ the State Act, the Assessee is rightly held as “Assessee in default” for not withholding taxes on such interest payments made to NOIDA.
Contention of the Assessee:
The Assessee contented that that no deduction of tax at source on interest payment made to NOIDA was warranted in view of the applicability of the provisions of section 194A(3)(iii)(f). It was argued that payment made to NOIDA was covered by clause 39 of the Notification No. 3489 dated 22.10.1970 as the establishment was a creation of UP Industrial Area Development Act, 1976 and there was no requirement to withhold any tax on the Interest amount paid to NOIDA.
Held by the ITAT:
