By Geeta Jani, Dhishat B. Mehta Chartered Accountants
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Sections – 195, 201 of the Act – since at the time of payment, the taxpayer was aware about exemption of capital gain in the hands of the non-resident payee, he was not required to withhold tax from payment.
Facts: During the relevant tax year the taxpayer purchased a house property from a non-resident family member. The non-resident represented to the taxpayer that she had purchased residential house property about four months ago (i.e., within one year as required u/s. 54 of the Act) prior to the date of sale deed and that the consideration paid for the purchase was fully eligible for exemption u/s. 54 of the Act. Therefore, the taxpayer did not withhold tax from the payment.
Accordingly to the taxpayer, it was required to withhold tax u/s. 195(1) of the Act only if income chargeable to tax was embedded in the payment made by him and since no such income was embedded in the payment, he did not deduct tax.
The AO observed that the taxpayer had not followed the mechanism provided in section 195(2) and (3) for withholding lower or nil rate of tax. Accordingly, the AO held taxpayer as ‘assessee in default’ u/s. 201 and raised demand on him.
Held:
The ultimate levy of taxes is dependent upon exemption, deduction, etc. The seller was family member who had represented to the taxpayer at the time of payment of consideration that no tax was payable by her because of exemption u/s. 54.
These facts should be seen in the context of CBDT’s Instruction No. 02/2014, dated 26.02.2014 and particularly paragraph 3 thereof, which indicates that the AO is required to determine the appropriate proportion of sum chargeable to tax u/s. 195 (1) to ascertain the tax in respect of which the deductor should be deemed to be an ‘assessee in default’ u/s. 201.
Since, at the time of payment, the taxpayer was aware of the payment being not subject to tax because of exemption, he was not required to withhold tax.
