M/S.KARNATAKA POWER TRANSMISSION vs. THE DEPUTY COMMISSIONER OF

4 of provision towards contingent interest would never be paid.

5 Section 201(1A) of the Act for the assessment years in question were passed.

“1. Whether in law, the Appellate Tribunal was justified in ignoring the evidence and submissions of the appellant with regard to mutual agreement between the appellant and the suppliers of power not to enforce the interest clause in the Power Purchase Agreement and thereby the appellant had no obligation to pay interest and consequently, had no

6 obligation to deduct tax at source under Section 194A of the Act.

(i) Character of the sum for which provision was made

(ii) Liability for deduction of tax at source even when no income accrued to the payees (the suppliers)

(iii) Jurisdiction of the Officer to invoke Section 201(1) and 201(1A) of the Act.

8 in the books of accounts, actually and ultimately, interest was not paid. There would be no liability to deduct tax as no income accrued to the payees (suppliers) as the interest was not paid. This is a case where the appellant and the suppliers by the understanding and conduct were ad-idem that no liability to pay interest arose on belated payment of purchase price.

(1) non-deduction of tax at source i.e., failure to deduct tax at source

(2) failure to pay the tax so deducted at source to the revenue.

9 of Section 200 has to be read along with Section 201 of the Act. The provisions of Section 200 prior to the Finance Act, 2008 mandated that the amount of tax deducted should be paid to the credit of the Central Government within the prescribed time limit. It does not spell out about the person who has not deducted tax at source. It is concerned exclusively with those who had deducted tax at source. The provisions of Section 201(1) contemplates who are all the persons who would have to face the consequences of: (1) failure to deduct tax (2) failure to pay the tax deducted at source to Government account.

10 (i) Any person who has deducted any sum (ii) Employer referred to in sub-section (1a) of Section 192, and

(iii) another category of persons referred to in Section 194 i.e., a company which makes a dividend is liable to deduct TDS on dividend payments

11 relevant point of time to deduct tax at source and the provision of interest made and subsequently, the entries being reversed in the account books. The TDS Officer proceeded to pass the orders on a non-est provision during the relevant point of time. This crucial point has been lost sight of by the Appellate Commissioner as well as the Tribunal while upholding the order of the TDS Officer.

12 power purchasers without deducting tax at source as evidenced in the Annexure – V of the 3CD report (auditor’s report) for the relevant assessment years. Section 194A and the explanation thereof provides that the provision for interest is liable for deduction of tax at source. Non-compliance of the said provision provides for invoking Section 201 and Section 201A of the Act. No relief could be given for the provision if reversed later, would be out of the scope of the TDS provisions. The assessee not deducting tax can never take shelter under the provisions of Section 201 of the Act prior to the amendment to shed away with the statutory responsibility.

13 in accordance with the provisions of the Act shall be an assessee in default under Section 201.

This amendment is made applicable with retrospective effect from 01.06.2002. The said amendment is made to Section 200(1) to overcome the view that that the provisions of Sub-section (1) of Section 201 do not cover, failure to deduct tax at source, such an interpretation being contrary to the intent of the Legislature.

15 mandatory provision under Section 194A of the Act has not been complied by the Assessee.

16 said provision is made towards contingent interest payable as expenditure, as per the return of income filed by the Assessee, the taxable income is arrived adding back such amount of provision towards contingent interest. The assessee having noticed, payment of such interest made in the provision would never be paid in view of the understanding between the appellant and its suppliers, corresponding reversal entries were made in the books of accounts during March 2007. It is noticed that though the amount made in the provision is treated as expenditure in the profit and loss account, was added back to arrive at the taxable income. In such circumstances, we have to examine the obligation of the Assessee in deducting the tax at source towards the provision of interest made reversed subsequently, which would not form ‘any income’ in the hands of payees (suppliers).

17 21. Section 194A[1] of the Act and explanation thereof reads thus: “Interest other than “Interest on securities” 194A. (1) 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 : [Provided that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which such interest is credited or paid, shall be liable to deduct income-tax under this section.]

[Explanation.—For the purposes of this section, where any income by way of interest as aforesaid is credited to any account, whether called "Interest payable account" or "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of

18 such income to the account of the payee and the provisions of this section shall apply accordingly.]”.

Provided that no penalty shall be charged under Section 221 from such person, principal officer or company unless the [Assessing] Officer is satisfied that such person or principal officer or company, as the case may be, has [without good and sufficient reasons] failed to deduct and pay the tax.”

19 accordance with the provisions of Chapter – XVII, shall pay within the prescribed time, the sum so deducted to the credit of the Central Government or as the Board directs. Section 200[2] of the Act contemplates that any person being an employer referred to in sub-section [1A] of Section 192 shall pay, within the prescribed time, the tax deducted to the credit of the Central Government or as the Board directs. As could be seen from these provisions, prior to passing of the Finance Act, 2008, the provisions of Section 200 mandated that the amount of tax deducted should be paid to the credit of the Central Government. It does not speak about the person who has not deducted tax at source. If the said Section 200 is applied to Section 201[1] of the Act, it is only the following three categories of persons are held liable for the consequence of failure to deduct tax at source [a] any person deducting any sum [b] Employer, who provides perquisites and [c] Company making

20 payment of dividends. Subsequently, the said provision is amended and the same is extracted below: “Consequence of failure to deduct or pay: 201.(1) Where any person, including the principal officer of a company,—

(a) who is required to deduct any sum in accordance with the provisions of this Act; or (b) referred to in sub-section (1A) of section 192, being an employer, does not deduct, or does not pay, or after so deducting fails to pay, the whole or any part of the tax, as required by or under this Act, then, such person, shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default in respect of such tax:

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 resident or on the sum credited to the account of a resident shall not be deemed to be an assessee in default in respect of such tax if such resident— (i) has furnished his return of income under section 139;

21 (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 prescribed.

Provided further that no penalty shall be charged under section 221 from such person, unless the Assessing Officer is satisfied that such person, without good and sufficient reasons, has failed to deduct and pay such tax.”

22 Assessment Year Date of Order 2005-06 27.03.2008 2006-07 27.03.2008 2007-08 18.02.2008

Thus, it is clear the TDS Officer has passed the order based on non existent law during the interregnum period between the period of Finance Bill becoming the Finance Act by the assent of the President.

23 clarified by the Finance Act, 2008 with retrospective effect from 1.6.2002. This amendment Act was not in force during the relevant assessment years in dispute at the time of passing of the orders by TDS Officer. In such circumstances, the Order of the Tribunal upholding the views of the TDS Officer and the Appellate Commissioner would go contrary to the provisions of Section 201[1] of the Act that existed during the relevant time.

24 of interest. If the said interest is not finally considered to be an income of the deductee, as per reversal entries of the provision in the present case, Section 194A[1] of the Act would not be made applicable. In other words, if no income is attributable to the payee, there is no liability to deduct tax at source in the hands of the tax deductor. In view of the admitted fact that interest being not paid to the payees [suppliers] being reversed in the books of accounts, we are of the considered opinion that there would be no liability to deduct tax as no income accrued to the payees [suppliers]. It is true that in the case of Ericsson Communication Limited [supra], the Delhi High Court was dealing with the case of Section 195 of the Act wherein obligation of a person to deduct tax at source would be applicable to the ‘income chargeable under the Act’. Absence of such words ‘chargeable to tax’ under the provisions of Section 194-A of the Act would not empower the authorities to

25 invoke the provisions of Sections 201 and 201(1A) of the Act ignoring the words ‘any income by way of interest’.

Based on this circular, it is held that the assessee- company has failed to prove that neither the deductor- assessee had deducted and remitted the tax nor the deductee-assessee had paid the same through advance tax or self assessment tax. It is the case of the assessee

26 that the provision which was contingent was at no time materialized as income to be liable for payment of income tax on the said provision of interest. In such circumstances, the reasoning of the Tribunal that the deductor-assessee nor the deductee-assessee had paid the tax on the provision amount and thus the provisions of Sections 201 and 201[1] of the Act are attracted is not acceptable. There is no cavil with the CBDT Circular referred to above by the Tribunal. But, the said circular in no way assists the Revenue to reject the stance taken by the Assessee i.e., reversal of the provisions during March 2007.

27 right of claiming or will be debarred from being allowed that deduction. Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter.”

The said Judgment of the Apex Court would enunciate that the existence or absence of entries in the books of accounts is not decisive or conclusive factor in deciding the right of the Assessee claiming deduction. The said Judgment is squarely applicable to the facts of the present case. The provision of law existing on the relevant date of passing of the order by the TDS Officer would establish that Sections 201 and 201[1A] of the Act were not applicable to the appellant’s case. In the circumstances, the Assessee falls outside the scope of Section 194A read with Section 200 of the Act during

28 the relevant assessment years. Thus, the consequential provisions of Section 201(1) and Section 201(1A) are not attracted.

Sd/- JUDGE

Sd/- JUDGE

brn, AN/-