Case Law Details

Case Name : ACIT vs. Shri Dilip Ranjrekar (ITAT Bangalore)
Appeal Number : ITA No. 858/Bang/2016 and CO No.28/Bang/2017
Date of Judgement/Order : 10.11.2017
Related Assessment Year : 2012-13
Courts : All ITAT (5330) ITAT Bangalore (264)

WHETHER TDS IS REQUIRED TO BE DEDUCTED ON INTEREST EARNED ON ACCUMULATED BALANCE IN RECOGNISED PROVIDENT FUND FROM THE DATE OF CESSATION OF EMPLOYMENT TILL WITHDRAWAL?

In a recent decision of the Bengaluru ITAT, in the case of “The ACIT, Circle-1(2)(1) Bengaluru vs. Shri Dilip Ranjrekar, in ITA No. 858/Bang/2016, dated 10.11.2017, the assessee, an employee in Wipro Ltd., had retired from the company on 1.4.2002. As on the date of retirement, his accumulated provident fund balance, in the recognised provident fund, of contributions plus interest was Rs. 37,93,588/-. The assessee didn’t withdraw the same immediately, after retirement, but withdrew the accumulated balance of Rs. 82,00,783/-, from the recognised provident fund a/c on 11.4.2011, which comprised of an interest amount of Rs. 44,07,195/-, earned by him on the accumulated provident fund balance from the date of his retirement i.e. 1.4.2002 till the date of withdrawal by him i.e. 11.4.2011. The assessee claimed that the entire accumulated balance in the recognised provident fund account, as withdrawn by him on 11.4.2011, including the said interest amount, earned by him, after his retirement till the date of withdrawal, was exempt u/s 10(12) of the Income Tax Act.

However, the Hon’ble ITAT Bengaluru, held that the exemption u/s 10(12) of the Income Tax Act is available only to a person, who being an employee, after rendering a continuous service of five years, withdraws the accumulated balance in a recognised provident fund, on the date of retirement/cessation/termination of his employment, and any interest earned on the said accumulated balance after the date of retirement/cessation/termination of employment, till the date of withdrawal, is not exempt u/s 10(12) of the Act, and is taxable in the hands of such person, as income from other sources.

In the wake of the above decision of the Bengaluru ITAT, an intriguing question has arisen, as to whether TDS is required to be deducted by the employer company, in the case of an erstwhile employee, who has otherwise rendered a continuous service of five years, on the interest amount earned by such employee, from the date of his cessation of employment, till the date of withdrawal of the accumulated provident fund balance.

In order to answer this question, it needs to be understood that the liability to deduct TDS, doesn’t arise automatically, on a certain payment becoming taxable in the hands of the recipient. The applicability or otherwise of deduction of TDS, on any payment including accumulated balance in recognised provident fund, depends upon the respective governing section in the Income Tax Act, 1961.

At present there is only one section in the Income Tax Act, 1961, which specifically contains the provisions concerning deduction of TDS on accumulated balance in a recognised provident fund & that is section 192A. Section 192A has been introduced by the Finance Act 2015 w.e.f. 1.6.2015. Currently this section provides as under:

192A. “Payment of accumulated balance due to an employee.

Notwithstanding anything contained in this Act, the trustees of the Employees’ Provident Fund Scheme, 1952, framed under section 5 of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (19 of 1952) or any person authorised under the scheme to make payment of accumulated balance due to employees, shall, in a case where the accumulated balance due to an employee participating in a recognised provident fund is includible in his total income owing to the provisions of rule 8 of Part A of the Fourth Schedule not being applicable, at the time of payment of the accumulated balance due to the employee, deduct income-tax thereon at the rate of ten per cent :

Provided that no deduction under this section shall be made where the amount of such payment or, as the case may be, the aggregate amount of such payment to the payee is less than fifty thousand rupees:

Provided further that any person entitled to receive any amount on which tax is deductible under this section shall furnish his Permanent Account Number to the person responsible for deducting such tax, failing which tax shall be deducted at the maximum marginal rate.”

A plain reading of the above section 192A of the Income Tax Act, makes it amply clear that the liability to deduct TDS, on the accumulated balance of a recognised provident fund arises u/s 192A, only if the provisions of rule 8 of Part A of the Fourth Schedule of the Income Tax Act, are not applicable.

Rule 8 of Part A of the Fourth Schedule of the Income Tax Act, reads as under:

“The accumulated balance due and becoming payable to an employee participating in a Recognised Provident Fund shall be excluded from the computation of his total income-

(i) If he has rendered continuous service with his employer for a period of 5 years or more or,

(ii) If, though he has not rendered such continuous service, the service has been terminated for reason of the employees’ ill health or by the contraction or discontinuance of the employers’ business or other cause beyond the control of the employee.”

Therefore, primarily, the liability of deduction of TDS u/s 192A, arises at the time of withdrawal of accumulated balance in a recognised provident fund before the rendition of continuous service of 5 years with the employer.

Thus, section 192A, requiring the deduction of TDS, on accumulated balance in a recognised provident fund, envisages only the condition of withdrawal of accumulated balance in a recognised provident fund before the rendition of continuous service of 5 years with the employer.

Clearly, the incidence of withdrawal of accumulated balance in a recognised provident fund, by an erstwhile employee, who has already rendered continuous service of five years with the employer, beyond the cessation of his employment with the employer, which is the subject matter of consideration, presently, is not at all covered by the said Rule 8 of Part A of the Fourth Schedule and as such by section 192A of the Income Tax Act. Therefore, no liability for deduction of TDS arises, under this section for such incidence.

Whether TDS is required to be deducted on such Interest u/s 194A of the Income Tax Act?

It will also be worthwhile to discuss the applicability or otherwise of deduction of TDS on interest earned on accumulated balance in a recognised provident fund, after the cessation of employment, till the date of withdrawal, u/s 194A of the Income Tax Act 1961, which contains the provisions concerning the deduction of TDS on interest income other than interest on securities.

This issue was the subject matter of consideration in the judgement of the Hon’ble Delhi Court in the case of “CIT XVII vs. Food Corporation of India in ITA Nos. 781/2008. 782/2008, 783/2008 & 808/2008, dated 28.7.2008, wherein the Hon’ble Delhi High Court has held that the status of the recognised provident fund is that of an individual & as the provisions u/s 194A of the Act, requiring the deduction of TDS on Interest other than Interest on securities, are not applicable to individuals, therefore, the liability to deduct TDS u/s 194A, can’t be pressed into service on the recognised provident fund, in respect of payment of the interest earned on the accumulated balance in recognised provident fund, after the cessation of employment, till the date of withdrawal.

The relevant extract of the aforesaid judgement of the Hon’ble Delhi High Court, having a direct bearing on the subject matter, presently under consideration, is being reproduced below, for ready reference:

“2…..The trust is recognised and exempted both under the IVth Schedule of the said Act by the Commissioner of Income Tax, Delhi, as well as, by the Provident Fund Commissioner under the EPF Act.

3. In the course of survey proceedings conducted in the premises of the assessee it was found that the amounts being credited to the account of the ex-employees after cessation of employment, had the character of interest and as such, according to the Assessing Officer, the assessee was required to deduct tax at source under Section 194A of the said Act. The assessee having failed to do so was treated as being default and, hence, demands under Section 201 (1) and 201 (1A) for the said financial years were raised against the assessee by the Assessing Officer.

4. Being aggrieved by the said order of the Assessing Officer, appeals were filed before the CIT (Appeals), who confirmed the orders passed by the Assessing Officer. The matter was taken in appeal by the assessee before the Tribunal. Before the Tribunal, the issue that required consideration was, whether the assessee trust was an individual and, therefore, was outside the purview of Section 194 A of the said Act. The Tribunal considered the definition of person given in Section 2 (31), as well as, the provisions of Section 194A of the said Act and came to the conclusion that a conjoint reading of the two sections would make it clear that before holding an assessee in default under Section 194 A, it has to be first determined and adjudicated as to what is the status of the assessee. This is so because any person who is an individual or a Hindu Undivided Family, is not liable to deduct tax at source under Section 194 A of the said Act in respect of the payments with regard to interest. The Tribunal noted that neither the Assessing Officer nor CIT (Appeals) had determined the status of the assessee trust before holding the assessee to be in default for non-deduction of tax at source as provided under Section 194 A of the said Act. The tribunal also referred to various decisions of High Courts including :- i. CIT v. SEA Head Office Monthly Paid Employees Welfare Trust : (2004) 141 Taxman 364(Del); ii. CIT v. Showroom Krishan Bandar Trust: 201 ITR 984; iii. CIT v. Deepak Family Trust: 72 Taxman 406; iv. M L Family Trust &Others v. State of Gujarat: 213 ITR 152; v. ITO v. Arihant Trust & Others : 214 ITR 306 (Mad);& vi. CIT v. TSR Enterprises: 274 ITR 41 (2004) (Mad).

5. After considering all these decisions, the Tribunal concluded (a) that it is necessary to determine the status of an assessee before the liability of deducting tax at source under Section 194A of the said Act can be foisted upon such assessee; (b) on the basis of the decisions rendered by the various High Courts, as mentioned above, the status of the assessee trust in this case, would be that of an individual.

6. In coming to the latter conclusion, the tribunal, as did other decisions of several High Courts referred to above, placed reliance on the provisions of Section 161 of the said Act. We are of the view that the objects for which the trust was constituted by the trust deed dated 28.04.1968 needs to be kept in mind. A perusal of the objects, the relevant extract of which is referred to hereinafter, would show that the aggregate of sums, which are contributed or subscribed to the fund by the members as defined in the Regulations and by the Corporation in accordance with the Food Corporation of India (Contributory Provident Fund) Regulations, 1967, together with the income which accrues or investment held by the trustees, constitute assets of the fund which, the trustees are required to hold and apply in accordance with the regulations which are binding on the members to the fund. The relevant object clause of the respondent trust reads as follows:- “It is hereby agreed and declared that the aggregate of the sums to be contributed and subscribed to the fund by the members as hereinafter defined and by the Corporation in accordance with the Food Corporation of India (Contributory Provident Fund) Regulations 1967 shall be paid and together with the Income accruing from the use of or investments thereof held by the Trustees and shall in their hands constitute the assets of the fund and the Trustees shall hold and apply the assets of the said fund according to the said regulations which shall be binding on the members as herein after defined and the Corporation.” Under Section 160 & 161 of the Act, the trustees are the representative assessees in respect of the income accruing to trust. The trustees thus, in accordance with provisions of Section 161 of the Act are amenable to tax, as well as, eligible to all exemptions, deductions and benefits which would be available to the beneficiaries, i.e., members who are individuals as per their entitlements, if they were to individually hold the said assets. It is, thus, clear that the trustees bears the same status under the Act as that of the beneficiaries whom they represent. It is in this context that the various High Courts, in the judgments referred to above, accepted the status of the trust to be of like nature as that of individual beneficiaries.

7. Therefore, in our view, the Tribunal came to a correct conclusion, firstly that before it could be determined as to whether the respondent assessee was required to deduct tax at source under Section 194A of the Act, its status had to be determined, and secondly, if its status was that of an individual then, the provisions of Section 194A of the Act could not be applicable to the respondent / assessee.

8. In the instant case, the Tribunal came to the conclusion that the respondent / assessee had the status of an individual and it was thus axiomatic that it was not required to deduct tax at source in respect of the payments made by it in view of provisions of Section 194A of the Act.

9. The impugned order does not call for any interference. We find that no substantial question of law arises for consideration. These appeals are dismissed.”

Order pronounced on July 28, 2008.

Therefore, reliance can be placed upon the aforesaid judgement of the Hon’ble Delhi High Court, in reaching to a conclusion that a recognised provident fund assumes the status of an individual & as the provisions of section 194A of the Act are not applicable on individuals, therefore, no liability arises for deduction of TDS on interest earned on accumulated balance in a recognised provident fund, after the cessation of employment, till the date of withdrawal, u/s 194A of the Act, as well.

In light of the above, it can be inferred, that an employer company, can’t be considered as an assessee in default u/s 201/ 201(1A) of the Act, for non-deduction of TDS, on the interest income earned by an erstwhile employee, who has rendered continuous service of 5 years, on his accumulated balance in a recognised provident fund, from the date of cessation of his employment, till the date of withdrawal of the accumulated balance of the recognised provident fund, by such person.

SO FRIENDS, NEXT TIME YOU RECEIVE ANY NOTICE U/S 201/201(1A) OF THE INCOME TAX ACT, TREATING YOU AS AN ASSESSEE IN DEFAULT, FOR NON DEDUCTION OF TDS ON INTEREST INCOME, EARNED BY AN ERSTWHILE EMPLOYEE, ON HIS ACCUMULATED BALANCE IN A RECOGNISED PROVIDENT FUND, FROM THE DATE OF CESSATION OF HIS EMPLOYMENT, TILL THE DATE OF WITHDRAWAL OF SUCH ACCUMULATED BALANCE, DON’T SUCCUMB TO SUCH NOTICE & CONFRONT THE CONCERNED AUTHORITIES WITH THE ABOVE STATED LEGAL & FACTUAL PROPOSITIONS….  

Download Judgment/Order

Author Bio

Qualification: CA in Practice
Company: Sushil Jeetpuria & Co.
Location: New Delhi, New Delhi, IN
Member Since: 28 Jan 2018 | Total Posts: 11
Hi there!! I am Mayank Mohanka, FCA, a Tax Practitioner based at New Delhi. Philosophy of Life: There is one thing which is more powerful than your Nav Grahas & that is Your Will Power.. I can be reached at mayankmohanka@gmail.com or at 9999981515. View Full Profile

My Published Posts

More Under Income Tax

Posted Under

Category : Income Tax (27930)
Type : Judiciary (12115)
Tags : ITAT Judgments (5511) Section 192 (34) Section 194A (29) TDS (1074)

Leave a Reply

Your email address will not be published. Required fields are marked *