No need for TDS remittance until earners identity is clear
November, 29th 2006
You have no liability to pay TDS until you know the identity of the person who receives the income. This is the upshot of a Mumbai Income-Tax Appellate Tribunal (ITAT) ruling.
The ITAT, the second appellate body on tax matters, gave this order on an appeal filed by the Industrial Development Bank of India (IDBI) which faced an interest and penalty of over Rs 4 crore on charges of defaulting on TDS remittance. IDBI did not remit TDS on interest payable to its Regular Return Bond holders, even though it had claimed deduction on account of the same. The department did not accept IDBIs reason for not remitting TDS.
IDBI took the stand that there was no way of knowing before March 31, the last date for making advance tax payment, the identity of the bondholders who were to be paid interest. The identity of the bondholders could not be known earlier, because IDBI, for the purpose of paying interest, takes into account only bondholders who are registered with IDBI on May 15 of each year.
The ITAT held that IDBI has no liability to deduct tax at source in relation to interest payable to its bondholders since it did not know who were the bondholders until March 31, the last date for paying advance tax each year.
In the relevant accounting year, IDBI made a provision of Rs 55.31 crore for interests accrued and claimed deduction in computation of business income. Though deduction was claimed on account of interest payable to the bondholders, IDBI did not remit the tax payable from such interest payments.
Section 193 of the Income-tax Act and the explanation read with it stipulate that TDS is payable as and when payment is made or credited. Thus, the Income-tax assessing officer held that IDBI was required to deduct the tax at source from the credit to interest payable account; since this was not done, interest and penalty was levied on the bank. The concerned officer made an order levying tax and penalty for three years aggregating to Rs 4.37 crore. The assessment years in this case are 1994-95, 1995-96 and 1996-97.
IDBI counsel Dinesh Vyas argued that liability to tax deduction at source is a vicarious liability and presupposes existence of a principal liability in the hands of a person who is to receive the income. He argued that while IDBIs liability to pay interest is certain and provision has to be made as on March 31 upon the end of the accounting year, the bond being freely transferable, it cannot be ascertained as to who will be the registered bondholder as on May 15 every year. In this situation, IDBI will not know by the end of the fiscal year that who will be entitled to receive the interest.
The tribunal held, It is a sine qua non for vicarious tax deduction liability that there has to be a principal tax liability in respect of the relevant income first, and a principal tax liability can come into existence when it can be ascertained as to who will receive or earn that income. In this view of the matter, tax deduction at source mechanism cannot be put into practice until identity of the person in whose hands it is includible as income can be ascertained.