High Court Of Karnataka
CIT & Anr. vs. Century Building Industries (P) Ltd.
Section 194A, 201(1), 201(1A), 271C
Asst. Year 1992-93 to 1996-97
R.V. Raveendran & H. Billappa, JJ.
IT Appeal Nos. 191 to 205 of 2002
11th March, 2004
Counsel Appeared :
M.V. Seshachala, for the Appellants : A. Shankar & M. Lava, for the Respondent
JUDGMENT
By the court :
These appeals under s. 260A of the IT Act, 1961 (“the Act” for short), are filed against the common order dt. 31st Dec., 2001, passed by the Tribunal, Bangalore Bench, in three batches of appeals relating to orders under ss. 201(1), 201(1A) and 271C relating to the asst. yrs. 1992-93 to 1996-97.
2. The respondent assessee is a company incorporated under the Companies Act, 1956, engaged in the business of real estate and construction. A survey was conducted under s. 133A of the Act and certain cheque receipts registers and cheque payment registers were found in the business premises of the company. Examination of those books disclosed that loans were taken by the directors and managing director in their individual capacities from private lenders in the name of the assessee company. The loan amounts received by way of cheques in the name of the assessee were deposited in the bank account of the assessee and immediately transferred to the accounts of directors/managing director on the same day, by issuing corresponding cheques. When the directors/managing director repaid the loan amount or paid interest, such payments were also routed through the assessee. The director/managing director would issue cheques in favour of the assessee and the assessee in turn would issue cheques to the lenders/creditors of the director/managing director. Receipt of loan amounts by the directors/managing director, as also repayment of loans and payment of interest amount by the directors/managing director were all reflected as such in the books of account of the respective director/managing director. Further the receipts and outgoings were shown in the respective account of the directors/managing director with the assessee company. The books of account of the company did not reflect any of these amounts as loans borrowed by the assessee company. Nor were they shown as amounts due or outstanding by the company. When interest was paid, the payments were not shown as interest paid by the assessee company. When the loans were repaid, they were not shown as repayments by the assessee company. In short, neither the borrowing, nor repayment’ thereof, nor payment of interest on the borrowing, were reflected as transactions of the assessee company in its books of account, but were only reflected in the accounts of the actual borrowers (directors/managing director).
The AO found that when the interest was paid by cheques issued by the company to the creditor/lender, tax was not deducted at source by the assessee company on the interest payments, as required under sub-s. (1) of s. 194A of the Act. As a consequence, the provisions of ss. 201(1) and 201(1A) of the Act were applied. The AO passed five orders in regard to the five assessment years under s. 201(1) of the Act, deeming the company to be an assessee in default in respect of the tax and claiming the tax from the assessee. Five orders were also passed by the AO under s. 201(1A) of the Act making the assessee liable for payment of simple interest as specified (on the ground that tax which ought to have been deducted was not deducted) from the date on which such tax was actually paid. Five orders were also passed by the AO under s. 271C of the Act levying penalty in a sum equal to the amount of tax which the assessee had failed to deduct while paying interest to the creditors. The said orders passed under ss. 201(1), 201(1A) and 271C of the Act were challenged by the assessee in appeals filed before the CIT(A)-III, Bangalore. The appellate authority by a common order dt. 26th March, 1996, dismissed the ten appeals against the orders under ss. 201(1) and 201 (1A) of the Act. By another order dt. 20th May, 1998, the appellate authority also dismissed the five appeals relating to levy of penalty. Feeling aggrieved, the assessee filed fifteen appeals before the Tribunal, Bangalore Bench, challenging the said orders of the first appellate authority. The Tribunal, by common order dt. 31st Dec., 2001, allowed the said appeals and set aside the orders of the first appellate authority. The said common order of the Tribunal is challenged in these appeals. We have given below the particulars of the appeals, for purposes of convenience : SI. Appeal number Appeal number Assessment Appeal filed Amount (in No. (before High (before the ITAT) year under section Rs.) Court) (ITA No.) (ITA No.) 204/02 617/Bang/1996 1992-93 201(1) 23,134 202/02 619/Bang/1996 1993-94 201(1) 68,384 201/02 621/Bang/1996 1994-95 201(1) 19,467 203/02 623/Bang/1996 1995-96 201(1) 70,071 205/02 625/Bang/1996 1996-97 201(1) 63,215 197/02 618/Bang/1996 1992-93 201(1A) 14,285 196/02 620/Bang/1996 1993-94 201(1A) 32,747 198/02 622/Bang/1996 1994-95 201(1A) 7,130 199/02 624/Bang/1996 1995-96 201(1A) 14,332 200/02 626/Bang/1996 1996-97 201(1A) 4,344 195/02 588/Bang/1996 1992-93 271C 23,134 194/02 589/Bang/1996 1993-94 271C 68,384 193/02 590/Bang/1996 1994-95 271C 19,467 191/02 591/Bang/1996 1995-96 271C 70,071 192/02 592/Bang/1996 1996-97 271C 63,215
6. The questions that can be said to arise for consideration in these appeals are : (i) When the directors of a company route their borrowings through the company and repay the loans also with interest through the company, without the loans and interest being reflected in the books of account of the company as borrowings of the company, whether the company is bound to deduct income-tax on the interest, as required under s. 194A of the Act. (ii) Where both the borrowing of the loan and repayment of the loan with interest is through the company, whether the Tribunal was not justified in holding that s. 194A was not attracted because the loans were availed by the directors and repaid by the directors through the company. The order of the AO and the appellate authority make it clear that borrowings were not by the company. It was found that loans were taken by the directors and the managing director in their individual capacities. However, the loans were taken in the name of the company. As a result, as and when a director or managing director took a loan through the company, loan amount received was immediately transferred to the respective account of the director/managing director. Similarly when the director or managing director repaid their loans, they used to issue cheques in favour of the company and the company in turn issued cheques to the creditors of directors/managing director. Even in regard to interest payable on such loans, the same procedure was followed. The books of account of the assessee company did not reflect any of these transactions, as loans obtained by it or repaid by it. On the other hand, directors/managing director showed the respective loans as their loan transactions in their accounts. Even payment of interest on these loans were reflected only in the books of account of the directors/managing director and not in the books of account of the assessee company. It was also found that interest amount that was received by the assessee company from its directors/managing director was exactly same as the interest that was paid by the assessee company to the respective creditors.
The AO and the appellate authority held that once the interest was paid to the lenders, by cheques issued by the assessee company, the obligation to deduct income-tax on such interest under s. 194A of the Act arose on the part of the assessee irrespective of whether the loans were used by the assessee or its directors and the failure to deduct tax on the interest in accordance with s. 194A of the Act resulted in the consequences provided for in ss. 201(1) and 201(1A) and 271C. On the other hand, the Tribunal has held that the loans were not taken by the assessee company and interest was not paid by the assessee company and payments of interest were not debited in the books of account of the assessee company. Therefore, the Tribunal held that even though borrowings and repayment with interest were routed through the assessee company, it was not liable to deduct tax on interest as required by section 194A of the Act. The facts are not disputed. The findings of fact recorded by the Tribunal are the same as those recorded by the appellate authority. Only the inference is different. We are of the view that s. 194A is not attracted,as held by the Tribunal. Sec. 194A of the Act requires any person (not being an individual or HUF) who is responsible for paying to a resident any income by way of interest, to deduct income-tax thereon at the rates in force, at the time of payment (either by crediting such interest income to the account of the payee or at the time of payment of any such interest or cash or by cheque/draft or any other mode). What is significant is, s. 194A requires only a “person who is responsible for paying interest”, to deduct income-tax at the rates in force, when paying the interest. The finding of fact recorded by the appellate authority and the Tribunal makes it clear that the assessee company was not responsible for paying interest as the borrowing was not by it, nor had the assessee company paid interest from its funds. It merely acted as an agent of its directors/managing director in receiving the loan amount from the lender and forwarding it to the director/managing director and similarly where the loan was repaid, it received the amount from the director/managing director and paid it to the lender. The amounts repaid by the directors including interest, were not reflected in its books of account as loans or borrowings of the assessee company. It cannot therefore be stated that the company is a person responsible for paying interest to the lenders of the directors. Therefore the Tribunal was justified in its view that the assessee company had no obligation to deduct tax on the interest paid, as required by s. 194A of the Act. We hasten to add that our observations above are only with reference to the provisions of s. 194A of the Act. If the assessee company had committed any irregularity in permitting itself to be used as a tool or conduit for its directors/managing director to receive and repay loans, or if the managing director or directors have committed any irregularity in using the company for receiving the loans and repaying the loans, it is always open to the concerned authority under the Companies Act or other enactments to take action. What is relevant for the purpose of ss. 194A and 201 of the Act is not the validity or propriety of the acts of the directors/managing director in using the assessee company for their borrowings, but the question whether the assessee company, as person responsible for paying interest, has paid interest to the creditor. The answer is in the negative. We, therefore, agree with the Tribunal that there is no liability on the part of the assessee company for bearing the tax amount under s. 201(1) of the Act nor any liability for payment of interest on such tax amount under s. 201(1A) nor any penalty under s. 271C. We find no merit in these appeals and accordingly they are rejected.
[Citation : 293 ITR 80]
