Income‑tax‑‑‑

‑‑‑‑Deduction of tax at source‑‑‑Interest‑‑‑Scope of S.194‑A‑‑‑Crediting of interest‑‑‑Deduction of tax to be made from gross interest and not on net interest payable after mutual set off between parties‑‑‑Indian Income Tax Act, 1961, S.194A.

Section 194A of the Income Tax, Act, 1961, postulates deduction of the tax at source on the gross amount of interest at the time of credit of the interest amount. The expression "interest" can only be gross interest, and it cannot refer to the net interest in the context of crediting of the interest by the person responsible for deducting the tax. Further, a person responsible for paying interest would credit in the account of the payee only the gross interest, and even under the commercial principles or accountancy principles the credit is only of the gross interest and not the net interest. Therefore, when he credits the gross interest in the account of the payee, a statutory obligation to deduct tax is imposed on him at the time of credit of the interest. It is not possible for him to cast off the, liability or shirk the liability imposed by the statute and deduct tax on the net interest that may be payable by him after mutual set off between the parties. Clause (i) of subsection (3) of section 194A of the Act providing for aggregation of the amount and subsection (4) of section 194A of the Act providing for adjustment in the payment of tax clearly indicate that it is only on the gross amount of interest that tax has to be deducted at source. The expression "income by way of interest" in section 194A would refer to the category of the income, viz., interest income and not the amount of income ultimately to be assessed in the hands of the payee. The expression "any income by way of interest" in section 194A of the Act would also seem to indicate that section 194A of the Act takes in all "interest income" except those which are specifically excluded from the scope of section 194A of the Act. Unintended hardships are likely to arise. But, that hardship is not peculiar to interest income, but common to all income on which tax is liable to be deducted at source. However, the hardship is minimised in the sense that it is only a provisional payment and the payee will get the credit for the tax deducted at source after the determination of his correct tax liability in the regular assessment proceedings. Secondly, if the recipient is of the view that no deduction should be made from the interest payment, it is open to him to file necessary declaration and file the necessary statement contemplated under the proviso to subsection (1) of section 194A of the Act. Further, section 194A of the Act contemplates the case of a person who pays interest and it is not the case of a person in receipt of the interest. Moreover, the hardships cannot be taken into consideration in considering the scope of section 194A of the Act. In other words, the words of the section‑must be given effect to, and if there are hardships it is for the Legislature to intervene or for the Central Board of Direct Taxes to issue necessary circulars.

By the Court: "It is made clear that we have dealt with a case of the liability to deduct tax at source arising at the credit of the interest, and we have not expressed any opinion on the question of payment of interest without prior credit of the interest and our answer to the question referred to us should be read in the light of the facts of the instant case of the credit of the interest and not to a case of payment".

Aggarwal Chamber of Commerce Ltd. v. Ganpat Rai Hira Lal (1958) 33 ITR 245 (SC); CIT v. Superintending Engineer (1985) 152 ITR 753 (AP); Hyderabad Industries Ltd. v. ITO (1991) 188 ITR 749 (Kar.); ITO. v. Anil Kumar Gupta (1992) 197 ITR 266 (P&H) and Southern Brick Works Ltd. v. CIT (1984) 146 ITR 479 (Mad.) ref.

C.V. Rajan for the Commissioner.

Ms. Maya J. Niclanui for the Assessee.

JUDGMENT

N.V. BALASUBRAMANIAN, J.‑‑‑The assessee in this case is a partnership firm having its head office at Madras and branches at Madurai and Coimbatore. During the accounting year ended on April 12, 1975, relevant to the assessment year 1975‑76, the assessee had credited the interest amounting to Rs. 1,19,711 to the account of Dhanalakshmi Corporation. The said Dhanalakshmi Corporation had to pay interests to the assessee‑firm both at its Madurai‑branch, a sum of Rs. 96,033 and at its Coimbatore branch, a sum of Rs. 16,798 totalling a sum of Rs. 1,12,831. According to the Income‑tax Officer, the assessee‑firm should have deducted the income‑tax at source on the sum of Rs. 1,19,711 credited in favour of Dhanalakshmi Corporation and since this was not done by the assessee, the assessee has not complied with the provisions of section 194A of the Income Tax Act, 1961 (hereinafter to be referred to as "the Act"). But, according to the assessee, it should have deducted the tax at source on the net amount of the interest payable to Dhanalakshmi Corporation amounting to Rs. 6,818 and it was not liable to deduct tax at source on the gross sum of Rs.1,19,711. The Income-?tax Officer, however, in his order held that section 194A of the Act did not speak of any net payment.

On appeal, the Appellate Assistant Commissioner also did not accept the plea of the assessee‑firm that the tax was liable to be deducted on the net amount, as there is no provision in the Act to set off the credit entry against the debit entry. The Appellate Assistant Commissioner held that at the time of crediting the amount of Rs. 1,19,711 to Dhanalakshmi Corporation the assessee should have deducted the tax at source under section 194A of the Act. On appeal by the assessee, the Income‑tax Appellate Tribunal held that in the computation of the income, the set off is necessary and section 194A of the Act contemplates the payment of income by way of interest. According to the Tribunal, the emphasis given by section 194A of the Act is on income, and not on the amount of interest paid because whatever may be the amount of interest paid, if the recipient states that he is not assessable to income‑tax, then, the question of deduction of tax at source does not arise at all. The Appellate Tribunal, therefore, held that the deduction of tax should be on the net amount of the interest paid and the order of the Income‑tax Officer that it should be on the gross amount and levying interest under section 201(lA) of the Act was erroneous in law. The Tribunal in this view of the matter allowed the appeal preferred by the assessee. The Revenue has come before us challenging the order of the Appellate Tribunal, arid the Tribunal has stated a case and referred the following question of law under section 256(1) of the Income Tax Act, 1961, for our opinion:

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in holding that the assessee was justified in deducting tax at source under section 194A on the net amount of interest paid by the assessee to Dhanalakshmi Corporation?"

Mr. C.V. Rajan, learned counsel for the Revenue, submitted that under section 194A of the Act, the tax has to be deducted at source on the interest credited or paid and the liability to deduct tax arises at the point of time when the interest is credited or at the time of payment, whichever is earlier. He, therefore, submitted that when there is an obligation to deduct tax at the time of credit of the interest, the person paying the interest should deduct tax on the gross amount to the interest credited and it is not open to him to set off any interest that may be due to him from the recipient of the interest. He, therefore, submitted that the view of the Appellate Tribunal that section 194A of the Act deals with net interest is erroneous in law. In support of his submission, he placed strong reliance on a decision of the Supreme Court in the case of Aggarwal Chamber of Commerce Ltd. v. Ganpat Rai Hira Lal (1958) 33 ITR 245, a decision of this Court in the case of Southern Brick Works Ltd. v. CIT (1984) 146 ITR 479, a decision of the Punjab and Haryana High Court in the case of ITO v. Anil Kumar Gupta (1992) 197 ITR 266, and a decision of the Andhra Pradesh High Court in the case of CIT v. Superintending Engineer (1985) 152 ITR 753.

Ms. Maya, J. Nichani, learned counsel for the assessee, on the other hand, submitted that the case has to be seen in the light of the facts of the case and the assessee has branches at Coimbatore and Madurai and the recipient of the interest has to pay interest to the assessee and after mutual set off of the interest due to the assessee and the interest due by the assessee, it is only on the net interest, the tax has to be deducted under section 194A of the Act. Learned counsel for the assessee strongly placed reliance on a decision of the Karnataka High Court in the case of Hyderabad Industries Ltd. v. ITO (1991) 188 ITR 749, and submitted that the purpose of deduction of tax at source is not to collect a sum which is not a tax levied under the Act and it is only to facilitate the collection of the tax lawfully leviable under the Act, She further submitted that if this Court construes section 194A empowering the assessee to deduct tax on the gross amount of interest, it will cause great hardship to the commercial community as a whole and whenever the interest is credited, the assessee would have to deduct tax on the gross amount and pay the same to the Income‑tax Department and according to her, it, would cause great hardship and inconvenience to the trading community and viewed in that angle, she submitted, the view of the Tribunal that the tax should be deducted on the net interest is acceptable.

We have carefully considered the rival submissions of learned counsel for the parties. The short question that arises in the tax case reference is whether the person responsible for paying interest should deduct tax at source on the gross amount of the interest or on the net amount of the interest under section 194A of the Act, at the time of credit of the interest to the account of the payee. Section 194A of the Act, in so far as it is material for the purpose of this case, reads as under:

"Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of interest other than income chargeable under the head 'Interest on securities', shall at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier deduct income‑tax thereon at the rate in force.

Provided that no such deduction shall be made in case where the person (not being a company or a registered firm) entitled to receive such income furnishes to the person responsible for making the payment‑‑‑

(a) an affidavit, or

(b) a statement in writing, declaring hat this estimated total income assessable for the assessment year next following the financial year in which the income is credited or paid will be less than the minimum liable to income‑tax. "

There is a subsequent Explanation introduced by the Finance Act, 1987, with effect from June 1, 1987, deeming certain interest as deemed to have been credited to the account of the payee. Since we are concerned with the assessment year 1975‑76, we are not taking note of the Explanation to section 194A of the Act.

Section 194A of the Act, in our opinion, postulates deduction of the tax at source on the gross amount of interest at the time of credit of the interest amount. The expression, "interest" can only be gross interest, and it cannot refer to 'the net interest in the context of crediting of the interest by the person responsible for deducting the tax. Further, a person responsible for paying interest would credit in the account of the payee, only the gross interest, and even under the commercial principles or accountancy principles the credit is only the gross interest and not the net interest. Therefore, when he credits the gross interest in the account of the payee, a statutory obligation to deduct tax is imposed on him at the time of credit of the interest. As stated earlier, as the statutory liability is imposed at the time of the credit of the interest, it is not possible for him to cast off the liability or shirk the liability imposed by the statute and deduct tax on the net interest that may be payable by him after mutual set off between the parties.

Next, if the construction placed by learned counsel for the assessee that the person responsible for paying interest is liable to deduct tax on the net interest is accepted, it will lead to a situation wherein the person responsible for paying interest would be left in a position to determine the income and the tax of the person‑receiving the interest. In our view, such a construction is unwarranted on the plain interpretation of the provision of section 194A of the Act. Further, there is internal evidence in section 194A of the Act itself which gives a clue that tax has to be deducted only on the gross interest. Suppose the payee is of the opinion that he will not be liable to pay tax or it will be less than tile minimum amount of tax that may be liable under the Income‑tax. Act, he has to furnish an affidavit or a statement in the prescribed form and there is no provision in section 194A of the Act for the person responsible for paying the interest to determine the tax that may be payable by the recipient or to furnish such a certificate. Similarly, clause (i) of subsection (3) of section 194A of the Act providing for aggregation of the amount and subsection (4) of section 194A of the Act providing for adjustment in the payment of tax clearly indicate that it is only on the gross amount of interest that tax has to be deducted at source. If it is otherwise and if it is only on the net amount of interest the, tax has to be deducted at source, there will be no scope either for the aggregation of any interest or for adjustment of tax in the future payment. Therefore, the principle of netting the interest has no application to section 194A of the Act. We, therefore, hold that even when there are two or more transactions, in which interest is paid, or interest is received from, it is only on the gross amount of interest credited, the tax has to be deducted at source under section 194A of the Act. As already held, the statutory liability cannot be defeated by the principle of mutual set off by the parties adjusting between themselves the interest that was credited and the interest that may be receivable from the other person. The interpretation we have placed on section 194A of the Act to the effect that the tax to be deducted at source is on the gross interest credited finds support from some of the decisions of the apex Court as well as of this Court.

In Aggrawal Chamber of Commerce Ltd. v. Ganpat Rai Hira Lal (1958) 33 ITR 245, the Supreme Court has held that persons who are bound under the Income‑tax Act to deduct income‑tax at the tune of making payment of any income, profits or gains are not concerned with the ultimate result of the assessment of the person to whom the payment is made. The above decision of the Supreme Court clearly establishes the proposition that whatever might be the ultimate tax liability in so far as the recipient is concerned, that is not the concern of the person paying interest and the ultimate result of the payee would not affect the liability of the person responsible for paying the interest under section 194A of the Act. Therefore, the person responsible for crediting interest is not concerned with the effect of his act of deducting tax at source at the time of credit of the amount and the ultimate tax liability that may be borne by the payee. In other words, the tax liability of the payee is a matter that has to be adjudicated by the Income‑tax Officer in assessing the income of the payee when the officer makes the assessment of the said person. Therefore, in our view, the person responsible for crediting interest under section 194A of the Act is not really concerned with the ultimate tax liability

This Court in Southern Brick Works Ltd. v. CIT (1984) 146 ITR 479, when construing the provision of section 194A of the Act, held that the liability to deduct the tax arises at the time of credit of interest to the account of the payee. This Court also held that the liability is not postponed to the actual payment of interest. This Court further held that though the actual payment of cash may be at a later point of time, when there is a credit entry in favour of the creditor in the account of the assessee, the occasion for deduction of the tax would arise. Similar view is also taken by the Punjab and Haryana High Court in the case. of ITO v. Anil Kumar Gupta (1992) 197 ITR 266, wherein the Punjab and Haryana High Court held that the tax has to be deducted by the person responsible for paying interest at the time when the interest is credited to the account of the payee. The above decisions lead to the conclusion that once the amount of interest is credited in the account in favour of the payee, the liability to deduct tax arises and the question of set off of the income does not arise at that moment. Hence, it is not open to the assessee to claim that it is likely to receive certain interest from the payee or certain interest is already due to it from the payee and those amounts should be taken note of and must be given set off for deducting the tax at source.

In CIT v. Superintending Engineer (1985) 152 ITR 753, the Andhra Pradesh High Court has taken a similar view that the scheme of tax deduction at source applies not only to amounts paid which wholly bear "income" character, such as salaries, dividends, interest on securities, etc., but also to gross sums. The Andhra Pradesh High Court has considered the provisions of section 194D of the Act and after considering the scheme of the Act, the Court held that the provisions contained in section 195 of the Act would take in any sum paid to a non‑resident which does not wholly represent the income or profit chargeable under the Act. Applying the same analogy, we are of the view that section 194A for the Act deals with the gross interest amount that is credited and section 194A is not concerned with the net amount that may be paid by the person responsible for deducting the tax.

The Appellate Tribunal has proceeded on the basis that section 194A of the Act contemplates the income by way of interest and therefore, it should be only net interest. The view of the Appellate , Tribunal is erroneous as the interest contemplated under section 194A of the Act is the income for the purpose, of the Act.' The expression, "income by way of interest" in section 194A of the Act in our view, would refer to the category of the income, viz., interest income and not the amount of income ultimately to be assessed in the hands of the payee. The expression, "any income by way of interest" in section 194A of the Act would also seem to indicate that section 194 of the Act takes in all "interest income" except those which are specifically excluded from the scope of section 194A of the Act. The Appellate Tribunal is, therefore, not correct in holding that section 194A of the Act contemplates only the net interest income that may be paid by the payer to the payee.

The decision of the Karnataka High Court relied upon by learned counsel Ms. Maya, J. Nichani in the case of Hyderabad Industries Ltd. v. ITO (1991) 188 ITR 749, has no application to the facts of the case. The Karnataka High Court was dealing with the case of interest income falling under section 10 of the Act, and since such an amount was not liable to be included in the total income of the person, the Court held that amount cannot be considered as "income" for the purpose of deduction of tax at source. On the other hand, the instant case deals with the case of interest amount which is chargeable to income‑tax. Therefore, the decision of the Karnataka High Court, cited supra, has no application to the facts of the case.

It is now necessary to consider the other contention of Ms. Maya J. Nichani that hardship would be caused to the commercial circle, if the tax is required to be deducted at source even at the time of credit of the interest. No doubt, unintended hardships are likely to arise. But, that hardship is not peculiar to interest income, but common to all income on which tax is liable to be deducted at source. However, the hardship is minimised in the sense that it is only a provisional payment and the payee will get the credit for the tax deducted at source after the determination of his correct tax liability in the regular assessment proceedings. Secondly, if the recipient is of the view that no deduction should be made from the interest payment, it is open to him to file necessary declaration and file the necessary statement contemplated under the proviso to subsection (1) of section 194A of the Act. Further, section 194A contemplates the case of a person who pays interest and it is not the case of a person in receipt of the interest. Therefore, it is possible for the person paying interest to deduct tax at source from the interest due and pay the balance to the recipient if, according to the recipient, the tax deducted at source is in excess of the sum that is liable to be paid, it is always open to him to claim refund at the time of finalisation of his own assessment. There may be still cases where even after the mutual set off the person paying interest would not be able to realise the interest amount that may be payable by the payee. But, in those cases, adjustment would have been done even with reference to the tax deduced at source even at the time of making adjustment between the payer and the payee. Therefore, the difficulty that is projected by Ms. Maya, J. Nichani, learned counsel for the assessee, is not of much significance and those hardships cannot be taken into consideration in considering the scope of section 194A of the Act. In other words, the words of the section must be given effect to, and if there are hardships it is for the Legislature to intervene or for the Central Board of Direct Taxes to issue the necessary circulars. Therefore, we are not able to accept the contention of Ms. Maya J. Nichani that because certain hardships may be caused to the trading circle, the provisions of section 194A for the Act should be considered in such a manner that the tax need not be deducted at source or it should be only on the net interest that may be payable by the person required to deduct tax, at source at the time of credit of the interest amount. It is made clear that we have dealt with a case of the tax liability to deduct tax at source arising at the credit of the interest, and we have not expressed any opinion on the question of payment of interest without prior credit of the interest and our answer to the question referred to us should be read in the light of the facts of the instant case of the credit of the interest and not to a case of payment. In this view of the matter, we are of the opinion that the Tribunal was not correct in holding that the assessee was justified in deducting tax at source on the net amount of interest paid to the recipient. Therefore, we answer the question of law referred to us in the negative and in favour of the Revenue. However, there will be no order as to costs.

M.B.A./371/FC??????????

Reference answered.