Interest on TDS deduction default not sustainable, where tax liability of deductor is NIL
Citation of the Case: M/s. Anusha Investments Ltd. vs. ITO (Madras High Court), T.C.A. No: 398 of 2007, AY 2002-03, Date of Judgment: 14/07/2015
Brief of the Case
Madras High Court held In the case of M/s. Anusha Investments Ltd. vs. ITO that in the present transaction, admittedly there is no tax liability on the purchase of shares. As a result, the question of deducting tax at source and the assessee violating the provisions of Section 195 does not arise and therefore, the assessee cannot be treated as an assessee in default and interest on default cannot be imposed. The Supreme Court in the case of GE India Technology Centre P. Ltd. vs. Commissioner of Income Tax and another, 2010 (327) I.T.R. 456 (S.C.) has clearly held that the provisions relating to TDS would apply only to those sums which are chargeable to tax under the Income Tax Act. Hence, the liability to interest does not arise at all, in case there is NIL tax liability.
Facts of the Case
The assessee purchased the shares from M/s. Suzuki Motor Corporation, Japan, who sold the same in dollar terms in a sum of US $ 18,83,239 equivalent to Rs. 9 crores. M/s. Suzuki Motor Corporation, Japan, invested in the shares of M/s. TVS Suzuki Ltd., an Indian Company, in the years 1983 and 1987, for a value of US $ 50,21,054 equivalent to Rs. 6 crores. Due to the sale by M/s. Suzuki Motor Corporation, Japan, in favor of the assessee appellant, the Japanese Company incurred a Capital Loss in US $ 31,37,815 equivalent to Rs. 14.99 crores. This transaction, according to the Department, would attract the provisions of Section 195, and, therefore, the assessment order was passed by the Assessing Authority.
Held by CIT (A)
CIT (A) set aside the order of AO issued u/s 201 (1) and 201 (1A) and held that the assessing officer should re-compute the liability of the appellant under Sec. 201 (1A) by treating Rs.9,00,00,000/- as the amount on which the appellant was required to deduct tax at source at the rate of 20%. The interest under Sec. 201 (1A) would be charged from the date the appellant was required to deduct tax at source to the date the assessing officer would be giving effect to this order. Further held that the assessing officer should re-compute the liability of the appellant under sec. 201 (1) by computing tax liability of the deductee and ignoring the return of income filed on behalf of the deductee unless the decision of the concerned assessing officer is reversed by a competent authority. In the result, the appeal of the appellant is partly allowed.
Held by ITAT
ITAT held that irrespective of the fact whether the Japan Company suffered a loss or gain on the sale of shares, a duty is cast on the assessee to deduct the tax whenever it made payment to the non-resident. Further held that not only is the assessee liable to deduct the tax at source, but it also has to pay the tax to the exchequer so collected. The Tribunal held that the assessee neither deducted the tax, nor paid the tax to the Government and therefore, the assessee is in default in respect of the tax not deducted or paid to the exchequer and once, it is found that the assessee is in default, the interest under Section 201 (1A) is mandatory.
Held by High Court
High Court held that in the case of GE India Technology Centre P. Ltd. vs. Commissioner of Income Tax and another, 2010 (327) I.T.R. 456 (S.C.), the provisions of sec. 195 were explained by the apex court. The apex court held that the provisions relating to TDS applies only to those sums which are chargeable to tax under the Income tax Act. If the contention of the Department that any person making payment to a non-resident is necessarily required to deduct TAS then the consequence would be that the Department would be entitled to appropriate the moneys deposited by the payer even if the sum paid is not chargeable to tax because there is no provision in the Income-tax Act by which a payer can obtain refund. The payer becomes an assessee-in-default only when he fails to fulfill the statutory obligation under section 195(1). If the payment does not contain the element of income the payer cannot be made liable. He cannot be declared to be an assessee-in-default.
In the present transaction, admittedly there is no liability to tax. As a result, the question of deducting tax at source and the assessee violating the provisions of Section 195 does not arise and therefore, the assessee cannot be treated as an assessee in default. The Supreme Court has clearly held that the provisions relating to TDS would apply only to those sums which are chargeable to tax under the Income Tax Act and also has clearly held that in a transaction of this nature, the assessee was entitled to take a plea that there arises no tax liability and therefore, the provisions of Sec. 195 do not get attracted. Once we hold that there is no tax liability, the question of deduction of tax at source, terming the assessee as ”assessee in default” will not also arise and the resultant question of levy of interest becomes purely academic and the demand unsustainable in law.
Accordingly appeal of the assessee allowed.