ISSUE FOR CONSIDERATION
Section 201(1) of the Income-tax Act, 1961
provides that where any person, who is required to deduct any sum in accordance
with the provisions of the Act, does not deduct, or does not pay, or after so
deducting fails to pay the whole or any part of the tax as required under the
Act, then he is deemed to be an assessee in default in respect of such tax. The
proviso to this section, inserted with effect from 1st July, 2012,
provides that such a person shall not be regarded as an assessee in default if
the payee has furnished his return of income u/s 139, has taken into account
the relevant sum (on which tax was deductible or was deducted) for computing
his income in such return of income, and has paid the tax due on the income
declared by him in such return of income and has furnished a certificate to
this effect from an accountant in form 26A prescribed under rule 31ACB. An
amendment by the Finance Act (No. 2) 2019, not relevant for our discussion, has
been made to apply the proviso to the case of a payee, irrespective of his
residential status.
Sub-section (1A) of section 201, without
prejudice to section 201(1), provides for payment of interest at the prescribed
rate for the prescribed period by the person who has been deemed to be in
default; however, in case of a person who has been saved under the proviso as
aforesaid with effect from 1st July, 2012 such interest shall be
paid from the date on which such tax was deductible by him to the date of
furnishing of the return of income by the payee.
A question has arisen before the High Courts
as to whether any interest u/s 201(1A) is payable by the payer on failure to
deduct tax at source, in a case where the payee has filed a return of income
declaring a loss. While the Madras, Gujarat and Punjab and Haryana High Courts
have taken the view that interest is payable even in such cases, the Allahabad
High Court has taken a contrary view, that no interest is payable in such a
case.
DECISION IN SAHARA INDIA COMMERCIAL CORPN.
LTD. CASE
The issue came up before the Allahabad High
Court in the cases of CIT (TDS) vs. Sahara India Commercial Corporation
Ltd. (ITA Nos. 58, 60, 63, 68 and 69 of 2015 dated 18th January,
2017).
In those cases pertaining to the period
prior to the amendment of 2012, the assessee had made payments to a sister
concern, Sahara Airlines Ltd., without deducting the tax at source, which had
suffered loss in all the relevant years. While interest u/s 201(1A) had been
levied by the AO, the Tribunal had held that if the recipient payee had filed
all its returns for those years declaring loss in all the relevant assessment
years, interest u/s 201(1A) could not be charged on the payer assessee.
According to the Tribunal, the fact that the loss declared by the recipient in
its return on assessment turned into a positive income, would not make a
difference inasmuch as the tax demand was on account of difference between the
returned income and assessed income and not because of non-deduction of tax by
the assessee payer, and hence it would not alter the situation and no interest
was payable by the payer.
Since no evidence was placed before the
Tribunal regarding the claim of incurring of losses by the recipient, it
restored the matter to the AO for verification that the recipient had filed all
its returns for those years declaring loss in all the relevant assessment years
and there was no tax liability on the receipts at any point of time. The
Tribunal had held that if it was established that the recipient had filed all
its returns for those years declaring loss in all the relevant assessment
years, interest u/s 201(1A) could not be charged on the assessee payer.
On an appeal by the Revenue, the Allahabad
High Court noted that the question about liability of interest u/s 201(1A) had
also been considered by the same court in Writ Tax No. 870 of 2006 in
Ghaziabad Development Authority vs. Union of India and others, wherein
it had been held that the nature of interest charged u/s 201(1) was
compensatory and if the recipient had already paid tax or was not liable to pay
any tax whatsoever, no interest u/s 201(1A) could have been recovered from the
assessee for the reason that interest could have been charged for the period
from when tax was due to be deducted till the date the actual amount of tax was
paid by the recipient; if there was no liability for payment of tax by the
recipient, the question of deduction of tax by the assessee payer would not
arise and the interest also could not have been charged.
The Allahabad High Court following its own
decision approved and confirmed the view taken by the Tribunal, that no
interest u/s 201(1A) was chargeable in a case where the payee had filed a
return of loss.
A similar view, that no interest was
chargeable u/s 201(1A) in cases where the recipient had returned losses, has
been taken by the Income Tax Appellate Tribunal in the cases of Allahabad
Bank vs. ITO 152 ITD 383 (Agra), National Highway Authority of India vs. ACIT
152 ITD 348 (Jab.), Haldia Petrochemicals Ltd. vs. DCIT 72 taxmann.com 338
(Kol.), and Reliance Communications Ltd. vs. ACIT 69 taxmann.com
307 (Mum.).
THE PUNJAB INFRASTRUCTURE DEVELOPMENT BOARD
DECISION
The issue had also come up before the Punjab
and Haryana High Court in CIT vs. Punjab Infrastructure Development Board 394
ITR 195.
In that case, the assessee entered into
contracts with concessionaires for achieving its objects under various models
such as the ‘Build Operate and Transfer’, ‘Design Build Operate and Transfer’
and ‘Operation and Management’ models. Under those contracts, payments were made
to various concessionaires without deduction of tax at source. The AO had held
that the assessee was liable to deduct tax at source on such payments u/s 194C
and, having failed to do so, levied interest u/s 201(1A).
The Commissioner (Appeals) allowed the
assessee’s appeals, holding that no tax was deductible u/s 194C. Since the
assessee was not liable to deduct tax at source at all, the Commissioner
(Appeals) deleted the interest charged u/s 201(1A).
The Income Tax Appellate Tribunal dismissed
the appeals of the Revenue, accepting the assessee’s alternative argument that
the assessee was not liable to interest u/s 201(1A) on account of the fact that
the payees had filed their returns, which were nil returns or returns showing a
loss, and the sums paid were included in such return of income. The Punjab and
Haryana High Court, on appeals by the Revenue, analysed the provisions of
section 201. Though these appeals pertained to assessment year 2007-08, the
High Court thought fit to analyse the amendment of 2012 by way of insertion of
the provisos to sub-section (1) and sub-section (1A), since it was contended
that these amendments were clarificatory in nature and therefore had
retrospective effect. The High Court observed that even if the proviso to
sub-section (1) was held to be not retrospective, it would make no difference
to the assessee’s case in view of the judgement of the Supreme Court in the
case of Hindustan Coca-Cola Beverage (P) Ltd. vs. CIT 293 ITR 226,
where the Supreme Court held as follows:
‘10. Be that as it may, circular No.
275/201/95-IT (B) dated 29.1.1997 issued by the Central Board of Direct Taxes,
in our considered opinion, should put an end to the controversy. The circular
declares “no demand visualised under section 201(1) of the Income Tax Act
should be enforced after the tax deductor has satisfied the officer in charge
of TDS, that taxes have been paid by the deductee assessee.” However, this
will not alter the liability to charge interest under section 201(1A) of the
Act till the date of payment of taxes by the deductee assessee or the liability
for penalty under section 271C of the Income Tax Act.’
According to the Punjab and Haryana High
Court, the last sentence made it clear that even if the deductee had paid the
tax dues, it would not alter the liability of the payer of the sum to pay
interest u/s 201(1A) till the date of payment of taxes by the deductee. Thus,
according to the High Court, even prior to the amendment on 1st
July, 2012, the liability to pay interest u/s 201(1A) was there even in cases
where the deductee had paid the tax dues.
The Court observed that the language of
section 201 was clear and unqualified; it did not permit an assessee to decide
for itself what the liability of the deductee was or was likely to be; that it
was a matter for the AO who assessed the returns of the deductee; and it was in
fact not even possible for him to do so inasmuch as he could not have
ascertained with any degree of certainty about the financial position of the
deductee. According to the High Court, a view to the contrary would enable an
assessee to prolong the matter indefinitely and, if accepted, it might even
entitle the assessee to contend that the adjudication of the issue be deferred
till the finalisation of the assessment of the deductee; that such could never
have been contemplated by the legislature; and that the language of section 201
did not even suggest such an intention.
The Punjab and Haryana High Court also
referred with approval to the decisions of the Madras High Court in the cases
of CIT vs. Ramesh Enterprises 250 ITR 464 and CIT vs.
Chennai Metropolitan Water Supply and Sewerage Board 348 ITR 530. The
Court agreed with the view that the terminal point for computation of interest
had to be taken as a date on which the deductee had paid taxes and filed
returns, even before the amendment. The Court also observed that section 197
militated against the deductor unilaterally not paying or paying an amount less
than the specified amount of TDS, by itself deciding the deductee’s liability
to pay tax or otherwise.
In conclusion the Court held that interest
u/s 201(1A) was chargeable even if the deductee had incurred a loss, though it
remanded the matter back to the Tribunal for deciding on the applicability of
section 194C.
The Gujarat High Court, in the case of CIT
vs. Labh Construction & Ind. Ltd. 235 Taxman 102, has taken a
similar view that interest was payable in such a case, though holding that the
liability to pay interest would end on the date on which the assessment of the
deductee was made.
OBSERVATIONS
The purpose of charging the interest in
question is to ensure that the Revenue is compensated for late payment of the
tax from the period when it was due till the time it was recovered. Where no
tax is due, the question of payment of any compensatory interest should not
arise at all unless it is penal in nature. In ascertaining the fact of payment
of taxes, due credit should be given for the taxes paid by the payee and also
to the fact that the payee was otherwise not liable to tax. The Gujarat High
Court, in the case of CIT vs. Rishikesh Apartments Co-op. Housing Society
Ltd. 253 ITR 310, has observed:
‘From the legal provisions discussed
hereinabove, it is crystal clear that in the instant case, Ravi Builder, on
whose behalf the tax was to be paid by the assessee, had duly paid its tax and
was not required to pay any tax to the Revenue in respect of the income earned
by it from the assessee. If the tax was duly paid and that too at the time when
it had become due, it would not be proper on the part of the Revenue to levy
any interest under section 201(1A) of the Act, especially when the builder had
paid more amount of tax by way of advance tax than what was payable by it. As
the amount of tax payable by the contractor had already been paid by it and
that too in excess of the amount which was payable by way of advance tax, in
our opinion, the Tribunal was absolutely right in holding that the tax paid by
the contractor in its own case, by way of advance tax and self-assessment tax,
should be deducted from the gross tax that the assessee should have deducted
under section 194C while computing interest chargeable under section 201(1A) of
the Act. If the Revenue is permitted to levy interest under the provisions of
section 201(1A) of the Act, even in the case where the person liable to be
taxed has paid the tax on the due date for the payment of the tax, the Revenue
would derive undue benefit or advantage by getting interest on the amount of
tax which had already been paid on the due date. Such a position, in our
opinion, cannot be permitted.’
A similar view has been taken by the Bombay
High Court in the case of Bennett Coleman & Co. Ltd. vs. ITO 157 ITR
812, that interest is compensatory interest in nature and it seeks to
compensate the Revenue for delay in realisation of taxes. Interest should be
charged only where tax is due and if
found to be due, for the period ending with the payment of such tax. In a case
where the payee has a loss, there is no question of payment of any tax by the
payee, and therefore the question of payment of interest by the payer also
should not arise.
The deductor
cannot be held to be an assessee in default if tax has been paid by the
deductee. Once this non-payment of taxes by the recipient is held as a
condition precedent to invoking section 201(1), the onus is then on the AO to
demonstrate that the condition is satisfied. It is for the AO to ascertain
whether or not the taxes have been paid by the recipient of income – Hindustan
Coca-Cola Beverages (Supra).The question of making good the loss
of Revenue by way of charging of interest arises only when there is indeed a
loss of revenue, and loss of revenue can be there only when the recipient has a
liability to tax and has yet not paid the tax. It is also necessary for the AO
to find that the deductee has also failed to pay such tax directly before
treating the payer as an assessee in default. In Jagran Prakashan Ltd.
vs. Dy. CIT, 345 ITR 288:
‘…The issue on hand, of charge of
interest u/s 201(1A), cannot be adjudicated in cases where the payee has filed
a return of loss, by relying on the non-contextual observation or an obiter dicta of the decision in the case of Hindustan
Coca-Cola Beverage (P) Ltd. vs. CIT 293 ITR 226. In that case, the issue
was about the treatment of the assessee in default or not where the payee had
otherwise paid taxes and the apex court held that the payer was not to be
deemed to be an assessee in default. The issue of interest u/s 201(1A) was not
before the Court. The Court, applying the circular of 1997, held that the payer
was not an assessee in default and stated, though not being called to do so,
that the decision had no implication on the liability to pay interest u/s
201(1A) for the period up to the date of payment by the payee. It is
respectfully stated that a part of the observations of the decision should not
be used to apply to the facts that are materially different and not in the
context…’
The better view therefore seems to be that
of the Allahabad High Court that no interest is chargeable u/s 201(1A) in a
case where the deductee has incurred losses during the relevant assessment year
and has no income chargeable to tax and no tax was payable by the payee and
that there was no loss to the Revenue.
It is relevant
to note that the decisions referred to and analysed here are in respect of the
period before 1st July, 2012
with effect from which date provisos have been inserted in section
201(1) and (1A). The first amendment in section 201(1) provides that an
assessee shall not be deemed to be in default in cases where the conditions
prescribed are satisfied, the main condition being the payment of taxes by the
payee. It can therefore be safely stated that the amendment in sub-section (1)
is providing the legislative consent to the law laid down by the courts and
discussed here, and to that extent there is no disagreement between the
taxpayers and the tax gatherers.
Whether the same can be said of the second
amendment in section 201(1A) by way of insertion of the proviso therein which
has the effect of providing for payment of interest by the payer, for the
period up to the date of filing the return of income? Can it be said that
interest under sub-section (1A) shall be payable in cases governed by the
proviso to section 201(1A) for the period up to the date of filing of return by
the payee now that an express charge has been created for such payment? In our
considered opinion, no interest shall be payable by the payer in a case where
the payee has filed a return of loss or where he has paid taxes on its income
before the year-end, for the following reasons:
(i) Sub-section (1A) creates a charge for
payment of interest without prejudice to the fact that the payer is not treated
as an assessee in default. In other words, the charge is expected to
stick even where the payer is not treated as an assessee in default. It is
possible to seriously contend that an independent charge for levy of interest
is not sustainable where the assessee is not held to be in default and there
otherwise is no loss of revenue. In the circumstances, for the Revenue to
demand compensation may not hold water;
(ii) The courts, as noted above, without the
benefit of the amendments, have held that no interest u/s 201(1) was chargeable
in the facts and circumstances discussed here. The ratio of these decisions
should help the assessee to successfully plead that no interest is payable by
the payer where no tax is found to be payable by the payee even after the
amendment of section 201(1A);
(iii) With insertion of the proviso to
sub-section (1), it is clear that the legislature intends to exempt the payers
who ensure the compliance of the prescribed conditions. This intention should
be extended to interest under sub-section (1A) as well;
(iv) A proviso to the main section should be
applied only in cases where the main section is otherwise found to be
applicable; in cases where there is no ‘failure’ on the part of the payer, the
question of applying the proviso should not arise. The proviso here has the
effect of limiting the liability and not expanding it. In that view of the
matter, the insertion of the proviso should not be read to have created an
independent charge for levy of interest. In other words, the understanding
prevailing before the insertion w.e.f. 1st July, 2012 has not
changed at all qua the levy of interest;
(v) For the charge of interest under
sub-section (1A) to succeed, it is essential to establish the failure to deduct
tax or pay tax; such failure has to be determined w.r.t. the liability to
deduct and / or pay which in turn is linked to the liability of the payee to
taxation. In cases where the payee is not otherwise liable to pay any taxes, it
may be very difficult to establish failure on the part of the payer;
(vi) Cases where the payee has filed the
return of loss or where it has paid taxes before the year-end, have a much
better case for exemption from interest.
