By TIOL News Service

COCHIN, OCT 24, 2013: THE issue before the Bench is - Whether even if the assessee does not claim the expenditure of interest liable to tax deduction at source u/s 194A, it cannot escape the rigour of Sec 40(a)(ia). And the answer goes against the assessee.

Facts of the case

The assessee is a Private Limited company. The AO noticed that the assessee had credited interest to its sister concerns without deducting tax at source u/s 194A. The AO treated the assessee as an ‘assessee in default' and raised demand u/s 201 equal to the amount of tax deductible at source. The AO has also levied interest u/s 201(1A). The CIT(A) dismissed the assessee's Appeal.

On appeal before the Tribunal the AR submitted that all the persons to whom interest was payable were liable to pay tax. The AR further submitted that the assessee herein cannot be treated as an assessee in default, if the payees had directly paid tax on the above said interest income. The AR further submitted that the AO was not entitled to pass any order u/s 201/201(1A), if no action was initiated under the provisions of the Act in the hands of the payees, who were otherwise liable to pay tax and the time limit for making the assessment u/s 147 had already expired. The AR also submitted that the assessee had not claimed the above stated interest amount as expenditure in the return of income filed.

The DR submitted that the assessee had provided the interest amount in its books of account and hence the assessee was liable to deduct tax at source u/s 194A immediately upon crediting the interest amount to the account of either payee or Suspense Account, if any.

Having heard the parties, the Tribunal held that,

++ the accounting/tax treatment given by the payer in respect of interest paid by him may not be relevant at all for the purposes of sec. 194A. So long as the interest amount constitutes “income” in the hands of recipient, the payer shall be liable to deduct tax at source on the interest amount so paid. Accordingly, even if the payer has disallowed the expenditure u/s 40(a)(ia) or did not claim the same as expenditure at all, he shall still be liable to deduct tax at source u/s 194A on the interest amount so paid, if the said payment is liable for tax deduction at source. The provisions of sec. 40(a)(ia) does not override the provisions of sec. 201. The provisions of sec. 40(a)(ia) do not provide for absolute disallowance as in the case of say, sec. 40A(3). The amount disallowed u/s 40(a)(ia) in one year can be claimed as deduction in the year in which the TDS provisions are complied with. The provisions of sec. 40(a)(ia) provide only for deferment of the allowance and it does not provide for absolute disallowance;

++ it is a well settled proposition that the Government shall not be entitled to recover the said amount, if the recipient has declared the said amount as his income in the income tax return filed by him and paid the tax due thereon. Thus, it is seen that the objective of provisions of sec. 201 is only to compensate the Government for the failure of an assessee to deduct or pay the TDS amount;

++ the assessee has failed to adduce any evidence to show that the recipients of interest amounts have declared the same in their income tax returns and paid tax due thereon. No infirmity in the order passed by CIT(A).

(See 2013-TIOL-897-ITAT-COCHIN)