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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI. GEORGE GEORGE K & MS. PADMAVATHY S
O R D E R Per Padmavathy S, Accountant Member
This appeal is against the order of the CIT(A)-11, Bengaluru, dated 15.02.2022 for the Assessment Year 2019-20. The assessee raised the following grounds:
1. The impugned order of the Ld. CIT(A)-11, Bengaluru, passed under Section 250 of the Income Tax Act, 1961 is bad in law in the facts and circumstance of the case.
2. The learned CIT(A) has erred in confirming the action of the Assessing Officer ('AO') in treating the Appellant as assessee in default with respect to non-remittance of TDS of Rs.9,18,59,358/- without appreciating the fact that non-remittance was due to genuine hardship and severe financial crisis faced by the Appellant.
The learned CIT(A) has erred in confirming the action of the AO in treating the Appellant as assessee in default without appreciating the fact that payees have filed their return of income and remitted the tax due and therefore by virtue of 1" proviso to section 201(1), the Appellant cannot be treated as assessee in default.
The learned CIT(A) has erred in confirming the action of AO in concluding that the Pre EMI interest borne by the Appellant on behalf of the buyers under subvention scheme is interest u/s 2(28A) of the Income Tax Act and is liable for TDS u/s 194A of the Income Tax Act.
5. The learned AO has erred in not appreciating that the responsibility to comply with TDS provisions was only on the buyer, who had availed the loan from NBFC and not the Appellant.
The Appellant denies its liability to be charged with interest under Section 201(1A) of the Act in the facts and circumstances of the case.
7. The Appellant craves for leave of this Hon'ble Tribunal, to add, alter, delete, amend or substitute any or all of the above grounds of appeal
as may be necessary at the time of hearing.
8. For these and other grounds that may be urged at the time of hearing of appeal, the Appellant prays that the appeal may be allowed for the advancement of substantial cause of justice and equity.
2. The brief facts of the case are assessee is a Pvt. Ltd., company engaged in the business of development of residential apartments, layouts, hospitality, schools and colleges and commercial complexes. A survey under section 133A(2A) of the Income Tax Act, 1961 (‘the Act’) was conducted at the business premises of the assessee on 20.08.2019. During the course of survey proceedings, it was noticed on verification of books of accounts that there were non-remittances of TDS deducted under various heads amounting to Rs.9,18,59,358/-. In the oath statement under section 131 of the Act, the CEO Mr. Srinivasan Gopalan stated that the assessee was expending disbursement and additional funding from Indiabulls Housing Finance Ltd., (IFHL) which did not happen on time. He further stated that due to market conditions and financial crisis and various other compelling factors, the TDS remittance were not made in time. The AO initiated proceedings under section 201 and 201(1A) of the Act by issuing notice asking the assessee to show cause why it should not be treated as an assessee in default for not depositing the TDS in respect of payments made to various entities. The assessee submitted before the AO that it is heavily dependent on borrowings and due to slump in the real estate market, the assessee was unable to service the debts and other obligations. However during the course of proceedings the assessee arranged funds and paid a sum of Rs.1 Crore vide challan dated 07.09.2019 and requested the AO to grant additional time to remit the balance TDS dues. The AO also noticed that the assessee has paid pre EMI interest to the tune of Rs.18,62,17,196/- to IHFL under subvention scheme on behalf of buyers and TDS was not deducted on the same. In response to the query raised by the AO in this regard, the assessee submitted that the assessee has entered into an Tripartite Agreement dated 14/09/2018 with IHFL and the buyer as per the terms of which in a scheme of subvention interest, the assessee paid the pre EMI interest on behalf of the buyers. Therefore the assessee submitted that the liability to deduct tax at source under section 194A of the Act would not be applicable as the payment made does not fall within the definition of interest under section 2(28A) of the Act. The assessee further submitted that in a scheme of subvention interest wherein the borrowal/debt is incurred by the buyer of the residential unit and the interest liability payable by the buyer has been diverted to the assessee only for economic purposes and the primary liability to pay interest of the underlying loan continues to remain with the buyer. The AO did not appreciate the submissions of the assessee and passed an order under section 201 and 201(1A) of the Act treating the assessee as an assessee in default raising a demand of Rs.11,62,16,891/- which was subsequently rectified under section 154 to Rs.11,47,27,154/-. Aggrieved, the assessee preferred an appeal before the CIT(A) who confirmed the order of the AO by relying on various judicial pronouncements including the decision of the Madras High Court relied on by the AO in the case of Viswapriya Financial Services & Securities Ltd vs ITO (2008) 303 ITR 122 (Madras).
3. The assessee is now in appeal before the Tribunal against the order of the CIT(A).
The issue of non-remittance of TDS 4. The learned AR reiterated the submissions made before the lower authorities and explained that the assessee is in serious financial crisis due to which the TDS deducted could not be remitted into the government account. The learned AR prayed that an opportunity may be given to produce Form 26A to evidence that the payee to whom the amounts are credited have included the same in their return of income and the tax thereon have been duly paid.
The learned DR submitted that the assessee cannot take shelter under the proviso to section 201 as the proviso is applicable only to those who have not deducted the tax whereas in assessee’s case, the assessee has deducted but not paid the tax. Therefore the assessee is to be treated as an assessee in default under section 201 of the Act.
6. The ld AR in rebuttal to the contention that the proviso to section 201(1) is not applicable to assessee’s case submitted that the decision of the Supreme Court in the case of Hindustan CocaCola Beverage (P.) Ltd vs CIT [2007] 293 ITR 226 (SC) covers the assessee’s case and hence prayed that the assessee should be given an opportunity to substantiate that the payees have paid the tax on the payments made by the assessee.
We heard the rival submissions and perused the material on record. The assessee has deducted tax as per details below but had not remitted the same into the Government account due to financial constraints as submitted by the ld AR.
Section Amount INR 194A 6,78,70,481 194C 1,05,01,844 194H 4,407 194J 1,30,21,296 195 4,61,330 Total 9,18,59,358
8. We see merit in the argument of the ld DR that the assessee cannot take shelter under the proviso to section 201(1) which reads as follows from which it is clear that the proviso is applicable for those assessee’s who failed to deduct tax at source. 201. (1) Where any person, including the principal officer of a company,— ************* Provided that any person, including the principal officer of a company, who fails to deduct the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid to a payee or on the sum credited to the account of a payee shall not be deemed to be an assessee in default in respect of such tax if such payee— (i) has furnished his return of income under section 139; (ii) has taken into account such sum for computing income in such return of income; and (iii) has paid the tax due on the income declared by him in such return of income,
and the person furnishes a certificate to this effect from an accountant in such form as may be prescribed57: 9. We are therefore of the considered view that the assessee cannot take shelter under the proviso to section 201(1). However we notice that the decision of the Hon’ble Supreme Court in the case of Hindustan CocaCola Beverage (P.) Ltd (Supra) is applicable to assessee’s case. The Hon’ble Supreme Court in this case held that 10. Be that as it may, the Circular No. 275/201/95-IT(B), dated 29- 1-1997 issued by the Central Board of Direct Taxes, in our considered opinion, should put an end to the controversy. The circular declares "no demand visualized under section 201(1) of the Income-tax Act should be enforced after the tax deductor has satisfied the officer-in-charge of TDS, that taxes due have been paid by the deductee-assessee. However, this will not alter the liability to charge interest under section 201(1A) of the Act till the date of payment of taxes by the deductee-assessee or the liability for penalty under section 271C of the Income-tax Act."
Considering the above decision, in the interest of justice we are of the view that the assessee should be given an opportunity to prove whether the payees have paid the taxes due. We therefore remit this issue back to the AO to consider the evidences that the assessee produces in support of the claim that the payees have paid the taxes due with respect to the amount credited by the assessee and decide the case on merits in accordance with law. The assessee is directed to submit all the necessary details and evidences as may be required by the AO and cooperate with the proceedings. It is ordered accordingly.
Non-deduction of TDS on subvention interest
11. The assessee has entered into a tripartite agreement with the potential buyers and IHFL as per the terms of which the assessee would pay the pre EMI interest to the lender under interest subvention scheme. The lender while disposing the loan withheld the pre EMI interest. The assessee therefore submitted before the AO that the pre EMI interest paid to the lender does not fall under the definition of interest under section 2(28A) of the Act and therefore a liability to deduct tax under section 194A of the Act. The AO, after perusal of various clauses of Tripartite Agreement, held that the payment made by the assessee to the lender is in the nature of interest and the assessee has agreed to take up the responsibility of making interest payments on behalf of the buyer. The AO held that the claim of the assessee that form and not the substance need to be examined is not acceptable. The AO further held that there is obligation on the assessee to deduct TDS as per the provisions of section 194A which clearly states that the person who is liable to pay interest is required to deduct tax at source. The AO in this regard relied on the decision in the case of CIT Vs. Vishwapriya Financial Services and Securities Ltd., (Supra). Aggrieved, the assessee preferred an appeal before the CIT(A).
12. Before the CIT(A), the assessee submitted that the responsibility to comply with TDS provisions was only on the buyer who availed the loan from IHFL and not on the assessee. The amount paid towards subvension interest is in the nature of marketing expenses incurred by the assessee to attract buyers and therefore it is a business expenditure. On this basis, the assessee submitted that there is no liability to deduct tax at source arising on payments made to IHFL. The CIT(A) did not agree with the arguments of the assessee by stating that as per section 194A of the Act, it is the person who is paying such interest is liable to deduct tax at source and in the given case, it is the assessee who is paying the interest. Further, the provisions of section 194A of the Act require deduction of tax at source if the amount paid is “any income by way of interest” and therefore if the amount in the hands of the payee is interest, the provisions of TDS would apply. The CIT(A) further stated that the accounting treatment in the books of accounts of the assessee is not relevant in this case. The CIT(A) relied on the decision of Cochin Bench of the Tribunal in the case of Agreenco Fibre Foam Pvt. Ltd., Vs. ITO (2-13) 38 taxmann.com 155.
Aggrieved, the assessee is in appeal before the Tribunal. Before us, the learned AR referred to clauses 10 to 12 of the Tripartite Agreement as reproduced below: “10. That if the Borrower fails to pay the balance amount representing the difference between the loan sanctioned by IHFL and the actual purchase price of the unit/residential apartment; or in the event of death of the Borrower or in the event of cancellation of the residential unit for any reason whatsoever, the parties hereto agree that the total amount received by the Builder (prior to execution of sale deed) on account of the residential unit shall be applied and utilized as specified in clause no. 13. The Borrower hereby subrogates all his rights for refund with respect to the said residential unit in favor of IHFL.
Further if the Borrower commits a breach of any of the terms and conditions of this Tripartite Agreement it shall be treated as an event of default under the Agreement for Sale / Allotment cum Agreement for sale or any such agreement or document signed by and between the Borrower and the Builder for the sale of the said residential unit.
It is hereby agreed between the parties that the subvention interest paid/borne by the Builder, for and on behalf of the Borrower, during the continuity of liability period (in terms of clause number 4), to IHFL is non-refundable. The Builder hereby undertakes that they shall not make any claim for refund of subvention interest, which has been already paid to IHFL, in the event of cancellation of allotment or on account of any other reason, whatsoever.”
The learned AR submitted that from the above clauses, it is clear that it is the buyer who is responsible for payment of interest and that the assessee has paid the interest only for and on behalf of buyer. The learned AR submitted that the treatment in the hands of the buyer where if the buyer paid the said interest there is no liability to deduct tax at source would influence the assessee’s liability to deduct tax at source. Alternatively, learned AR submitted that in case, it is held that there is a liability to deduct tax under section 194A of the Act, the assessee should be given an opportunity to file Form 26A.
The learned DR submitted that as per clauses 3 and 4 of the Tripartite Agreement as reproduced below, there is an assumed responsibility by the assessee to pay the pre EMI interest. 3. The housing loan advanced to the borrower by IHFL shall be payable by the borrower by way of equated monthly installments (EMI). The date of commencement of EMI shall be the 1st day of the month following the month in which the disbursement of the loan will have been completed and consequently the due date of payment of 1st EMI shall in such a case. 1st day of the following month. Till the commencement of EMI the borrower shall pay pre- EMI which is the simple interest on the loan amount disbursed calculated at the rate of interest as mentioned in the respective loan agreement of the borrower. 4. The borrower has informed IHFL about the scheme of arrangement between the borrower under builder in terms thereof the builder hereby assumes the liability on account of interest payable by the borrower to IHFL during the period to be referred to as the “Liability Period.” in terms of …….. months from the date of first disbursement of loan facility i.e. till 31/12/ 2019 and/or any other period as agreed by and between the borrower and the builder, more particularly referred under schedule I annexed herein (the liability period is referred to as “Assumed liability for the builder”). It is however agreed that during the liability period the payment of assumed liability is joint and several by and between the borrower and the builder. The assumption of liability by the builder in no manner whatsoever releases, relinquishes and/or reduces the liability of the borrower and that the same shall not be affected in any manner on account of any difference and/or dispute between the borrower and the builder under arrangement between them.
The learned DR submitted that the wordings used in section 194A is “person responsible for paying” and therefore the assessee being the person responsible for paying the interest is liable to deduct tax under section 194A of the Act. The learned DR reiterated that the proviso to section 201 is not applicable in assessee’s case and hence the alternate plea of the assessee to submit Form 26A should not be allowed.
We heard the rival submissions and perused the materials on record. The issue for our consideration is whether the subvention charges, which is in the form of pre-EMI interest paid by the assessee to IHFL is liable for TDS u/s.194A. Section 194A reads as follows
“Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of interest other than income by way of interest on securities, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force:…..”
From the above it is clear that a person who is responsible for paying any income by way of interest is liable to deduct tax at source u/s.194A. In other words when a payment is made which is treated as interest income then the person responsible for making such payment is liable to deduct tax at source. We will therefore look at the definition of interest as per section 2(28A) of the Act
"interest" means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised;
For the purpose of deciding whether the assessee is an assessee in default for failure to deduct tax at source u/s.194A, the following two tests are critical (i) Whether the payments made are in the nature of ‘interest’ income (ii) Whether assessee is the ‘person responsible’ for the paying the interest.
A close reading of the provisions of section 2(28A) would make it clear that to call an amount received as interest at least one of the conditions should be satisfied that the amount has been received as due on account of any money either borrowed or debt incurred. In the given case money is borrowed by the buyer when IHFL extended to the housing loan to the buyer. Therefore there can be no dispute that the payments made are in the nature of income by way of interest and would attract the provisions of section 194A.
Now coming to the issue of who is the ‘person responsible for paying the interest’. We notice that the Madhya Pradesh High Court in the case of KrantiKumarSaxena, In re (2003) 262 ITR 33 while considering the issue of person responsible for paying interest u/s.194A held that
This section 194A has been inserted in the Income-tax Act, 1961, by the Finance (No. 2) Act, 1967, w.e.f. 1st April, 1967, which relates to deduction of income-tax at source from interest. Under this new section tax deduction at source is permissible in respect of interest on compensation on compulsory acquisition of land and also accrued on enhanced compensation under section 18 of the Land Acquisition Act where the total income assessable to tax exceeds taxable limit, interest accrued after order from the date of delivery of possession of land till the date of order granting enhanced compensation and its yearwise break-up shall be taken into account. This section has to be read in conjunction with section 204 which furnishes the meaning of "person responsible for paying". Where land is compulsorily acquired and the money to be paid as enhanced compensation, is deposited in the execution Court and interest is awarded on such compensation, the Court is not the person responsible for paying any income by way of interest to the assessee. The real person responsible for paying income-tax by way of interest is Land Acquisition Officer/Collector who had money in his possession and was responsible for making the payment of that income to the assessee.
The assessee has entered into a tripartite agreement with IHFL and the buyer i.e. borrower whereby the assessee assumes the liability of payment of pre-EMI interest on behalf of the buyer/borrower until the possession of the flat to the buyer/borrower. On perusal of following clauses of the agreement, it is clear that buyer of flat is primarily the person responsible for the payment of interest.
(i) As per tripartite agreement, the Buyer of residential unit is termed as the ‘Borrower’ (Pg 2 of PB-I).
(ii) The Borrower has agreed to secure with IHFL the said residential unit under finance as and by way of mortgage of all the rights, title, benefits that would accrue from the said residential unit till the currency and term of said loan (Pg 3 of PB-I).
(iii) Borrower has given irrevocable undertaking that there will be no repayment default for any reason and obligation to repayment the loan shall be distinct and independent of obligation, more particularly, independent of any issues/dispute between Buyer and Assessee (Pg 4 of PB-I).
(iv) The housing loan advanced to the Borrower by IHFL shall be subject to the Borrowers repayment capacity as assessed by IHFL and shall be secured against first and exclusive mortgage in favour of IHFL (Para 2 of Pg 4 of PB-I).
(v) The housing loan advanced to the Borrower by IHFL shall be repayable by the Borrower by way of EMI (Para 3 of Pg 4 of PB-I).
(vi) As per the tripartite agreement between the assessee, IHFL and the Buyer/borrower the assessee assumes the liability on account of interest payable to IHFL during the liability period. It further agreed between the parties that the assumption of liability by assessee in no manner whatsoever releases, relinquishes and /or reduces the liability of the Buyer/Borrower and that same shall not be affected in any manner on account of any difference and/or dispute between the Buyer/Borrower and assessee under the arrangement between them (Para 4 of Pg 5 of PB-I).
(vii) The Borrower shall be liable to pay regular EMI as per the terms and conditions of the Loan Agreement, subsequent to completion of the Liability Period (Para 6 at page 5 of PB-I).
(viii) As per the Memorandum of Understanding (MOU) between the Buyer/Borrower and the assessee, Buyer/Borrower is responsible for loan approval, documentation and applicable charges. (page 1 of PB-I).
From the above it is explicitly clear that the Buyer/Borrower who has taken the loan is the person responsible for payment of interest. The assessee as a business strategy to attract customers agrees to bear the burden of pre-EMI interest payment. This does not absolve the primary liability of the borrower/buyer to make the EMI payment including interest and this is clearly stated in the Tripartite Agreement (refer Clause 4). The assessee in the given facts has acted as an agent of the buyer/borrower while meeting the liability on behalf of the buyer/borrower. As per section 194A, an individual and HUF are not liable to deduct tax at source on payments made by them by way of interest income. The buyer/borrower is therefore not liable to deduct tax at source on the interest payments made as part of EMI. When the buyer/borrower being the person responsible to making the interest payment is not liable to deduct tax at source, the assessee who is making the pre-EMI interest on behalf of the buyer/borrowe cannot be held to be liable to deduct tax at source. In view of the above discussion we hold that the assessee is not to be treated as assessee in default u/s.201 of the Act and the demand raised u/s.201 and 201(1A) is hereby deleted.
In the result, appeal is allowed in favour of the assessee
Pronounced in the open court on the date mentioned on the caption page.