Is TDS applicable on interest accured but not due?
October, 11th 2007
Two types of advance tax payments are recognised by the Indian Income Tax Act. The first one is in the nature of advance tax wherein tax is deposited by the tax-payer himself and the second is in the nature of tax deductions at source in which a certain percentage is deducted and deposited by the provider of such income on behalf of the taxpayer.
Tax deduction at source (popularly known as TDS) is becoming increasingly important as non-deduction of TDS not only results in disallowance of an expenditure (Section 40 (a) (ia)), which is otherwise a deductible expense in the hands of the tax deducter but also results in penalty (Section 271C) of an amount equivalent to the tax deductible.
An important legal issue in the case of banks/ financial institutions is whether tax is deductible in respect of the interest liability reflected in the annual accounts by way of interest accrued but not due. Such a liability arises when the date of payment of interest falls later than the date of closure of books. Two kinds of situations may arise one when the recipient of interest income is identifiable and second, when the recipient of income is not identifiable. To illustrate, X Ltd has borrowed funds by way of issue of unsecured bonds to Y Ltd aggregating to Rs1,000, 000 on January 1, 2007 on which interest is payable at 12% per annum on December 31 every year. As on March 31, 2007, when the books of accounts close, X Ltd would have an accrued liability of Rs 30,000 for the period January to March. This may be provided for under the head interest accrued but not due.
Such a case (i.e. when the recipient is identifiable) gets covered under the Explanation to Section 193 of the Income Tax Act, which provides that when income by way of interest is credited to any account in the books of the payer, such credit would be deemed to be credited to the account of the payee and provisions of Section 193 (requiring deduction of tax) shall accordingly apply. Therefore tax would need to be indisputably deducted by X Ltd on the amount of Rs 30,000 provided in the books in respect of interest payable to Y Ltd, irrespective of the head of account where it is credited.
Now lets assume that in above example X Ltd had issued unsecured bonds which are freely transferable.