Case Law Details
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:
- The ITAT explained that Sub-section (1) of section 194A casts an obligation on the person responsible for paying interest to a resident, to deduct tax at source at the time of credit of such income to the account of the payee or at the time of payment thereof, whichever is earlier. Clause (iii) mandates that the requirement of deduction of tax at source contemplated by sub-section (1) shall be waived where such interest is credited or paid to any banking company/financial corporation/LIC/UTI, etc. The beneficiaries as per clause (f) are ‘such other institution, association or body or class of institutions, associations or bodies which the Central Government may, for reasons to be recorded in writing, notify in this behalf in the official gazette.’ Notification under section 194A(3)(iii)(f) has been issued which is dated 22.10.1970. One such item notified is “Any Corporation established by a Central, State or Provincial Act”.
- The Assessee and the Revenue relied upon the judgement by Hon’ble Supreme Court in the case of Dalco Engineering Pvt. Ltd. vs. Satish Prabhakar Padhye and Ors, in which the said issue of “by” or “under” the Act, is clearly distinguished. The Hon’ble Apex Court held that a Corporation is established `by’ an Act, where the Act itself establishes the Corporation, such as, State Bank of India Act and Life Insurance Corporation of India Act. On the other hand, a Corporation is established `under’ an Act, when it is notified by the delegated authority, through under the Act. For e.g. a company is incorporated and registered under the Companies Act and not established by the Companies Act.
- The ITAT thus held that NOIDA is a statutory corporation established by means of the UP Industrial Area Development Act, 1976. Instead of enacting area-wise Industrial Area Development Acts, the UP Government enacted a common UP Industrial Area Development Act, 1976 to cover Authorities under different areas with its distinct name. Since NOIDA has been notified under the UP Industrial Area Development Act, the expression ‘any corporation established by a State Act’ shall include NOIDA. The ITAT also relied on judgement passed in various cases like Delhi Bench of Tribunal in Oriental Bank of Commerce vs. ITO, Amritsar Bench of the Tribunal in the case of ITO (TDS) vs. Branch Manager Jammu & Kashmir Bank Ltd.
- All these precedents support the proposition that the payment of interest by banks to NOIDA does not require any deduction of tax at source in terms of section 194A(3)(iii)(f) and, hence, the failure to deduct tax at source on such interest cannot lead to the banks being treated as “Assessee in default” u/s 201(1) and 201(1A).
Section 194A for reference:
194A. (1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of interest other than income by way of interest on securities, shall, at the time of credit of such income 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, deduct income-tax thereon at the rates in force :
……………..
(3) The provisions of sub-section (1) shall not apply—
(i) …
(iii) to such income credited or paid to—
(a) to (e) …..
(f) such other institution, association or body or class of institutions, associations or bodies which the Central Government may, for reasons to be recorded in writing, notify in this behalf in the Official Gazette;
(iv) ….”
Clause 39 of the Notification No. 3489 dated 22.10.1970 for reference:
In pursuance of sub-clause (f) of clause (iii) of sub-section (3) of section 194A of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby notify the following for the purposes of the said sub-clause:-
(i) Any corporation established by a Central, State or Provincial Act;
(ii) Any company in which all the shares are held (whether singly or taken together) by the Government or the Reserve Bank of India or a Corporation owned by that Bank; and
(iii) Any undertaking or body, including a society registered under the Societies Registration Act, 1860 (21 of 1860), financed wholly by the Government.
