Debenture Interest charged in Profit and Loss A/c but not paid would not attract TDS under Section 193

By | January 31, 2016

Held

Although the assessee has neither paid nor paid interest to these financial institutions in respect of debentures. However, the liability was provided for, in its account for purpose of compliance of applicable accounting standards and mandatory requirements of Companies Act, 1956. It was, thus, clear no income had accrue to debenture holders, financial institutions. They have also not recognized any such income in their accounts. The entire liability has been finally waived off by them. The debenture holders have considered the investment in the debentures of assessee’s companies and interest thereon as Non Performing Assets (NPA) and have not accounted for interest as there income of relevant order. Assessee has also not claimed interest provided in their account as deductable expenses.

Hence, assessee was rightly held not responsible for paying any income by way of interest on securities to debenture holders in such situation provisions of section 193 of the Act are not applicable. In this background CIT(A) was justified in holding that assessee has not committed any default in this regard. Thus, the assessing officer has rightly been directed not to treat as ‘assessee in default’

IN THE ITAT MUMBAI BENCH ‘B’

Income-tax Officer (TDS)-3(4), Mumbai

v.

Baroda Rayon Corpn. Ltd.

SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER
AND R.C. SHARMA, ACCOUNTANT MEMBER

IT APPEAL NOS. 6965 TO 6968 (MUM.) OF 2012
[ASSESSMENT YEARS 1999-2000 TO 2002-03]

NOVEMBER  4, 2015

Airiju Jaikaran, D.R. for the Appellant.

ORDER

Shailendra Kumar Yadav, Judicial Member – These four appeals have been filed by Revenue against the respective orders of Commissioner of Income-Tax (Appeals)-14, Mumbai, dated 29.04.2011 for (A.Y. 1999-2000, 2002-03). Since all the appeals by revenue pertain to same on similar issue. So these are being disposed of by assessee common order for sake of convenience. In I.T.A No. 6965/Mum/2012 revenue has filed appeal on following grounds:

“1. The Ld. CIT(A) has erred in law and on facts by allowing relief to the assessee relating to non deduction of tax at source in respect of interest on debenture without appreciating that w.e.f 01.06.1989 words ‘at the time of credit’ has been inserted in section 193 of the I.T. Act along with the explanation to section 193 w.e.f 01/06/1989 which casts an obligation on the assessee to deduct tax at source at the time of credit of such income.
2. The Ld. CIT(A) has erred in law and on facts by deleting the amount of tax determined on interest on debentures debited in P&L account of the assessee on the basis of his argument in para 4.20 of his order, by holding that the assessee has not claimed any deduction in respect of interest on debentures without appreciating that in the P&L account the same has been debited by the assessee.
3. The Ld. CIT(A) has erred in law and on facts by deleting the amount of non deduction of tax determined in respect of interest to debenture holders without appreciating that the assessee has disallowed the expenditure of interest on debentures u/s. 43B and not u/s. 40a(i)(a) and in subsequent year, if the same is allowed on payment basis without considering the issue of non deduction of tax on the interest paid to debenture holders, it will result in loss to the exchequer.
4. The Ld. CIT(A) has erred on facts and in law in deleting the tax by way of non deduction of tax U/s. 201 (1) of Rs. 65.66 lakhs & consequential interest U/s. 201 (1A) without properly appreciating the factual and legal matrix of the case as clearly brought out by the A.O. in order u/s. 201 (1 )/201 (1A) of the Income-tax Act, 1961.”

2. Assessee is engaged in the business of manufacturing of yarn, nylon, tyre cord etc. The assessee had issued Non Convertible Debentures bearing different rates of interest to various Insurance Companies, Banks and Financial Institutions. A Survey action u/s133 of the Act was carried out at the premises of the assessee. It was found that assessee had not deducted the tax at source on the interest debited to the Profit & Loss Account in respect of these debentures. The amount of such interest debited to Profit & Loss Account was Rs. 6,77,24,000/- as per the annexure to the Profit & Loss Account for the current year. As a result of Survey, proceedings u/s 201 were initiated against the assessee and the assessee was asked to submit the names and addresses of the parties to whom interest was paid, along with the details of interest credited to them and TDS thereon. In response the same, the assessee submitted following details:

Name of the Debenture Holders Interest debited to P&L a/c as on 31.03.2000 Total o/s principal Cl.Bal as on 31.03.2000 TDS made
IL & FS 60.28 280 None
LIC of India 163.97 768.47 None
GIC of India 13.97 65.99 None
Oriental Insurance Co. 13.24 61 None
United India Insurance Co. 14.02 64 None
The New India Assurance Co. 27.61 129 None
National Insurance Co. 12.31 57 None
Unit Trust of India 165.92 767.73 None
Canbank Financial Services 8.88 46.23 None
PNB Principal Trust 35.52 184.92 None
State Bank Of India 35.52 184.92 None
Sahara India Mutual Benefit Co. 4.80 25 None
Stock Holding Co. 11.38 51 None
Naval Group Insurance Co. 8.38 36 None
ICICI 2.79 12 None
Public 1.06 5.53 None
Int. on acc int 321.22 None
Misc. 0.46 1.97 None
Total 901.33 2740.80 None

3. From the above, Assessing Officer observed that no tax was deducted at source and paid to the Government Treasury in respect of the total amount of interest of Rs.9,01,33,000/-. Therefore, Assessing Officer passed order u/s 201(1)/201(1A) of the Act holding that assessee to be ‘an assessee in default’ for non reduction of tax at source. Therefore, he raised demand of tax and interest of Rs.2,92,49,251/-. Further Assessing Officer noticed that assessee had though deducted the tax at source in respect of other expenses incurred but did not deposited the same to the government revenue in time so he worked in tax liability of Rs.7,28,797/- that delayed payment of tax hence, total demand raised by him against by assessee was Rs.2,99,78,48/- u/s 201(1)/201(1A) of the Act.

4. The matter was carried before first appellate authority wherein various contentions were raised on behalf of assessee to oppose the order passed by Assessing Officer u/s 201/201 of the Act and having considered the same CIT(A) granted relief to the assessee same has been opposed on behalf of revenue inter alia submitting that CIT(A) erred on fact and law by allowing relief to the assessee. So the order of CIT(A) to be set aside and that of assessing officer be restored. On the other hand the Ld. Authorized Representative for assessee supported the order of CIT(A).

5. After going through rival submissions and material on record. We find that issue before us is of non – deduction of tax u/s 193 and consequently action u/s 201(1)/201(1A) of the Act. Assessing Officer was of the opinion that once interest liability is provided as per provisions of Section 193 of the Act, assessee under obligation to deduct the tax at source and pay the same to the Government Treasury. In this regard, the stand of assessee is that they have provided the said liability in their accounts only for the purpose of compliance of the applicable accounting standards and the mandatory requirements of the Companies Act. However, no real income has accrued to the Debenture holders and the fact was that entire liability has been finally waived-off by them. Hence, the assessee has not committed any default by not deducting the tax at source. As stated above, the assessee had issued Non Convertible Debentures bearing different rates of interest to various Insurance Companies, Banks and Financial Institutions to supplement its financial requirements. Later on the assessee became a Sick Industries Company and it was also declared under the provisions of Sick Industries Companies (Special Provisions) Act, 1958. The assessee was also granted the status of ‘Bombay Relief Undertaking’ by the Government of Gujarat under the Bombay Relief Undertaking (Special Provisions) Act, 1958 with a view to protect the industry. Although the assessee has neither paid nor paid interest to these financial institutions in respect of debentures. However, the liability was provided for, in its account for purpose of compliance of applicable accounting standards and mandatory requirements of Companies Act, 1956. It was, thus, clear no income had accrue to debenture holders, financial institutions. They have also not recognized any such income in their accounts. The entire liability has been finally waived off by them. The debenture holders have considered the investment in the debentures of assessee’s companies and interest thereon as Non Performing Assets (NPA) and have not accounted for interest as there income of relevant order. Assessee has also not claimed interest provided in their account as deductable expenses.

5.1 Undisputedly no income has accrued to or has been received by then debenture holders under the provisions of the section 193 of the Act. At the end of tax deducting is requirement of paying any income by way of interest on security but above facts indicate that there was no such requirement at the end of the assessee for paying any income by way of interest on security to debenture holders. In view of precarious financial position of the assessee as stated above the provision of such interest was made in view of compulsory requirement of amounting standards as well as Companies Act, 1956 hence, assessee was rightly held not responsible for paying any income by way of interest on securities to debenture holders in such situation provisions of section 193 of the Act are not applicable. In this background CIT(A) was justified in holding that assessee has not committed any default in this regard. Thus, the assessing officer has rightly been directed not to treat as ‘assessee in default’ accordingly, he was rightly directed to delete the payment of Rs.2,92,49,251/- as worked out under provisions u/s 201(1)/201(1A) of the Act. This reasoned factual finding of CIT(A) need not interfere from our side we uphold the same. As a result, appeal filed by revenue is dismissed.

6. Similar issues arose in ITA No. 6966 (Assessment Year: 1999-2000), ITA No. 6967 (Assessment Year: 2000-01), ITA No. 6968 (Assessment Year: 2001-02). Facts being similar, so following same reasoning, we are not inclined to interfere in the findings of CIT(A) in these years as well wherein CIT(A) has granted the similar relief on same line. We uphold the orders of CIT(A) in these three years as well.

7. As a result, all four appeals filed by revenue are dismissed as indicated above.

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