Karnataka H.C : No interest need be paid by the assessee for non-deduction of TDS (being consequential) after having held that the assessee was liable to deduct TDS on the interest component paid by having remanded to verify certain facts and recompute the interest

High Court Of Karnataka

CCIT & ANR. vs. United Insurance Co. Ltd.

Section 194A(3)(ix), 201(1A)

K. Sreedhar Rao & C.R. Kumaraswamy, JJ.

IT Appeal No. 342 of 2008

21st October, 2008

Counsel appeared :

M.V. Seshachala, for the Appellant

JUDGMENT

K. Sreedhar Rao, J. :

The respondent (insurance company), pursuant to the award made under the Motor Vehicles Act, has paid compensation to the victim of motor vehicle accident. The award amount consisted of the compensation and interest liability.

The provisions of s. 194A(3)(ix) mandates that when the respondent pays interest liability more than Rs. 50,000, it should deduct tax at source to an extent of 10.3 per cent of the interest component. In default, the respondent becomes liable to pay the said amount to the Revenue under s. 201 of the IT Act with interest and penalty.

The respondent failed to deduct and remit the tax deducted at source amount to the Revenue. The AO issued notice to the respondent, after enquiry found that the respondent has violated the mandate of s. 194A. Hence, he directed the company to deposit the tax deducted at source amount with interest on the TDS amount.

The CIT in appeal confirmed the order of the AO. The Tribunal in appeal at the instance of the respondent partly allowed the appeal. The direction to pay interest under s. 201(1A) was set aside, the rest of the order was confirmed. The respondent was permitted under the order to split and spread over the interest liability for each of the assessment years. The Revenue aggrieved by the order of the Tribunal in denying the interest has filed the appeal. The respondent has not preferred any appeal against the order to the extent adverse to its interest.

In the above appeal, the following substantial questions of law are formulated for consideration :

“(i) Whether the Tribunal was correct in holding that no interest need be paid by the assessee for non-deduction of TDS (being consequential) after having held that the assessee was liable to deduct TDS on the interest component paid by having remanded to verify certain facts and recompute the interest ?

(ii) Whether the Tribunal was correct in holding that there was no specific provision to deduct TDS before insertion of cl. (ix) to s. 194A(3) of the Act and therefore, the assessee under a bona fide and reasonable cause had not deducted tax and hence, no interest under s.201(1A) was leviable when such a plea was not raised ?”

The Tribunal held that the respondents are not liable to pay interest on the undeducted TDS amount since the said liability is in the nature of penalty. In this regard, the Tribunal relied upon the decision of this Court in Mittal Steel Ltd. vs. Asstt. CIT (2000) 158 CTR (Kar) 193 : (1999) 240 ITR 707 (Kar). In Mittal Steel Ltd’s case (supra), the proviso to s. 201 was under consideration. The said proviso empowers the levy of penalty if the TDS deduction is not effected for any valid reason. However, s. 201(1A) is a distinct provision to levy interest for delayed remittance. It is in the practice of the Revenue that for belated payment of tax for any reasonable cause, the assessee is liable to pay interest at the rate of 12 per cent per annum. Similarly, for refunds, the Revenue pays interest to the assessee. Therefore, the levy of interest under s. 201(1A) cannot at any rate be construed as a penalty. In that view, the contra finding of the Tribunal is set aside. The questions of law are answered in favour of the Revenue.

It is pertinent to note that most of the victims in the motor vehicle accident who get compensation belong to the poorer strata of the society. They may not incur any tax liability. The Tribunal has rightly directed that the interest paid above Rs. 50,000 is to be split and spread over the period from the date interest is directed to be paid till its payment. If the spread over is given in majority of cases, the respondent may not incur liability to pay any TDS. In the event, the respondent remits the TDS amount as directed by the Tribunal, the Revenue is directed to hold suo motu enquiry by issuing notice to the persons who have received compensation to find out their tax liability on the interest received. If it is found that there is a tax liability on the person concerned, the Revenue should collect the tax from the person concerned and refund the amount to the respondent. So also, if there is no tax liability on the person concerned, the TDS collected should be refunded to the respondent, of course with interest in either case.

With the above observations, the appeal is allowed.

[Citation : 325 ITR 231]

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