Penalty can not be imposed for non deduction of TDS if assessee was prohibited by reasonable cause

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3. We have duly considered the rival contentions and gone through the records carefully. Learned Assessing Officer as well as learned CIT(Appeals) have given much emphasis on the point whether assessee has committed a default within the meaning of sec. 194-A by not deducting the TDS when interest was credited to the interest provision account, In their opinions, assessee was following mercantile system of accounting, therefore, on an accrual basis, it should have been deducted the TDS when interest was transferred to such interest provision account. The stand of the assessee on the other hand was that even if it is assumed that assessee has committed a default then also there was a reasonable cause for not deducting the TDS at that point of time. As far as quantification of the tax and its payment on such interest income is concerned, there is no dispute that tax was determined on actual payment of interest and paid to the government exchequer. The ITAT in the case of M/s. Sahara India Mutual Benefit Co. Ltd(supra) has examined this aspect in detail and found that the assessee was prohibited by reasonable cause for not deducting the TDS, more so, according to the ITAT, there was no default on the part of the assessee, relevant observations of the order of the ITAT are as under:

“We have duly considered the submissions of the learned counsel to the effect that unless the payment forms income of the payee, it cannot be said that income has accrued to the payee. As mentioned earlier, Chapter XVII is a mode of recovery/collection of taxes. Deducting tax at source is one of the modes for recovery/collection of taxes. In some cases, the tax has to be deducted at source irrespective of the fact whether paid amount was the income of the payee whereas in other cases, the taxes have to be deducted at source for paying the amount as income. Both the circumstances may be explained by following examples.”

27, Section 192 of the Act provides that any person responsible for paying any income chargeable under the head “salary” shall, at the time of payment, deduct income tax on the amount payable. This section has used the words “for paying any income chargeable under the head “salaries”. But sec. 194 which is applicable to the dividends provides that the Principal Officer of the company which has made the prescribed arrangement for the declaration and payment of dividends within India shall, before making any payment, deduct from the amount such dividend, income tax at the rates in force. Similarly, certain sections provided for the deduction of tax at source at the time of actual payment whereas some sections have provided for deduction of tax at source if the amount is credited to the accounts of the payees. For example, in respect of payment of salary, the tax is to be deducted at source at the time of payment the sections 193, 194-A, 194-C provided for deduction of tax at source when the accounts of the payee is credited, In respect of payments covered u/s. 193, 194-A,194-C, the Explanations have also been added providing that if an amount is credited to an assessee’s account or interest payable accounts or any similar accounts, it will be deemed that the account of the payee has been credited.

28. Section 194-A includes all these concepts namely, an income by way of interest was being paid credited and also the Explanation attached to this section. If the provisions of sec. 194-A are read carefully, it is clear that this section only speaks that the payment should be in the nature of income of the payee. In other words, if such income was beyond the scope of income then no tax has to be deducted at source. But if such income was an income though below taxable limit, the provisions of this section will still be applicable Thus, the use of the word “income” in this section has been made to indicate that the payment should form part of the income of the payee, may be such income was exempt under any provisions of law or the same was below taxable limit Thus, much significance cannot be attached to the arguments of the learned counsel in this regard.

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