Sections 194I, 199 — Tax is not deductible at source on payment received as an obligation and not as an income — If the amount is paid by the payer to the payee, not directly but indirectly, through the medium of some other person, then such other person receives the amount as an obligation and not as income — Payment received as an obligation is not taxable as income and credit for TDS was allowable u/s.199 in the year in which the amount was received by such other person after deduction of ta<

 M/s. Guys & Gals, franchisees of the assessee, desired to take premises on rent. Since the landlords were not willing to let out their premises to M/s. Guys & Gals, the sister concern of the assessee took the premises on rent from the landlords, Sibals.

M/s. Guys & Gals paid to the assessee the amount of rent after deduction of tax at source u/s.194I. The assessee paid the gross amount of rent to its sister concern. The sister concern of the assessee paid the amount of rent to the landlords after deduction of tax at source. Thus, there was TDS on two occasions — first at the time of payment by Guys & Gals to the assessee and second at the time of payment by the sister concern of the assessee to the landlord.

Since the amount received by the assessee from Guys & Gals was for onward payment to its sister concern, it did not reflect any rental income in its accounts. However, the assessee claimed credit for TDS by Guys & Gals.

While assessing the total income of the assessee the Assessing Officer (AO) denied credit of TDS amounting to Rs.8,77,881 on the ground that the corresponding income has not been offered for tax. The AO, however, after considering the explanation of the assessee did not include the amount of rent as income of the assessee.

Aggrieved the assessee preferred an appeal to the CIT(A) who confirmed the action of the AO. Aggrieved the assessee preferred an appeal to the Tribunal.

Held:

The Tribunal considered the provisions of TDS contained in Chapter VII of the Act and held that the common thread running through these provisions is the chargeability of the amount as income. If the amount received by the payee is not in the nature of any income or does not contain some element of income, there cannot be any question of deduction of tax at source. In order to attract the provisions for withholding of tax, the amount must be received by the recipient in the nature of income and not as an obligation. When the amount of income is directly paid by the payer to the payee, such amount is liable for deduction of tax at source if it is of the nature as specified in the relevant provisions concerning with deduction of tax at source. If however the amount is paid by the payer to the payee not directly but indirectly, that is, through the medium of some other person, then such other person receives the amount as an obligation and not as income in his hands. Neither the amount received by such middleman can be considered as income in his hands, nor can there be any requirement under law fastening some sort of tax liability on him towards such transaction. The said middleman does not earn any income from the payer, nor incurs any expenditure by mediating in the transaction between the payer and receiver of income.

Section 199 only deals with allowing of the credit for tax deducted at source and not with the disallowing of such credit. It does not encompass within its purview the question for determination as to whether the credit for tax deducted at source should at all be allowed or disallowed. This enabling 298 (2012) 44-A BCAJ provision cannot be employed to disable the allowing of credit for tax deducted at source from the payment made to the assessee in the nature of income. The amount of tax deducted at source has to be necessarily allowed credit somewhere. It cannot be a case that the amount of such tax deducted and paid to the exchequer is not to be refunded, if the tax due on the amount of income received is either lower than the amount of tax deducted or there does not exist any liability to tax in respect of amount received.

The amount of tax deducted at source needs to be adjusted against some tax liability of the payee and in case there is no such liability, it has to be refunded to the payee because of the very mandate of section 199 as per which such amount is ‘treated as payment of tax on behalf of the person from whose income the deduction was made’ that is the payee.

As the amount on which tax was deducted at source is not at all chargeable to tax, then the command of section 199 will have to be harmoniously and pragmatically read as providing for allowing credit for the tax deducted at source in the year of receipt of the amount, on which such tax was deducted at source.

Since the assessee received the amount after deduction of tax at source from Guys & Gals and such amount was admittedly not chargeable to tax in its hands, the Tribunal held that the credit for tax deducted at source should be allowed in the instant year.