Excel for
Chartered Accountants

Income Tax Appellate Tribunal (ITAT) Kolkata in a recent judgment has held that term deposits on maturity becomes demand deposits and the provisions of section 194A(1) related to TDS are not applicable to interest paid on them.

Case Details:
ITA No. 113/Kol/2013; Assessment Year:2009-10
DCIT (Appellant) vs United Bank of India (Respondent)
Date of Order: 30-12-2015

Brief facts of the Case:
The Assessing Officer (AO) during the course of assessment proceedings observed that the assessee bank had provided for interest on matured term deposits amounting to Rs. 21,66,00,000/- without deduction of tax at source. According to the assessee, the said interest did not fall under the ambit of section 194A of the Income Tax Act as the term deposits on maturity becomes payable to the customer on demand and hence it gets converted into a demand deposit and attracts interest only at savings bank interest rate as per RBI guidelines. The assessee argued that admittedly, the provisions of section 194A of the Act are applicable only in respect of interest on term deposits and not in respect of demand deposits. The Assessing Officer did not agree with this proposition and disallowed the interest on matured term deposits to the tune of Rs. 21,66,00,000/- for violation of TDS provisions and made disallowance u/s 40(a)(ia) of the Act. On first appeal, the CIT(A) appreciated the contentions of the assessee and deleted the disallowance. Being aggrieved, the revenue went in appeal before ITAT.

Question before ITAT:
Whether provisions of Sec 194A rws 40(a)(ia) not applicable on payment of interest on matured term deposits

Held:
ITAT upheld the order of CIT-A granting relief to the assessee bank and dismissed the ground raised by the revenue.

  Important Excerpt from ITAT Judgment:

…. Provisions of section 194A(3)(vii) of the Act makes it clear that the provisions of sub-section (1) of section 194A shall not apply to –

“such income credited or paid in respect of deposits (other than time deposits made on or after 1.7.1995) with a banking company to which the Banking Regulation Act, 1949 applies (including any bank or banking institution referred to in section 51 of that Act).”

Hence it is very clear that the provisions of section 194A of the Act does not apply to deposits other than time deposits on or after 1.7.1995. Now the short point that arises for our consideration is as to what would be the nature of deposit in respect of matured term deposits . In this regard, it would be pertinent to look into the relevant guidelines issued by RBI which are as below:-

Master Circular on Cash Reserve Ratio (CRR) and Statutory Liquid Ratio (SLR) vide reference in DBOD.No. Ret.BC.22/12.01.001/2012-13 dated 2.7.2012

1.5. Demand Liabilities

Demand liabilities of a bank are liabilities which are payable on demand. These include current deposits, demand liabilities portion of savings bank deposits, margins held against letters of credit / guarantees, balances in overdue fixed deposits, cash certificates and cumulative / recurring deposits, outstanding Telegraphic Transfers (TTs), Mail Transfers (MTs), Demand Drafts (DDs), unclaimed deposits, credit balances in the Cash Credit account and deposits held as security for advances which are payable on demand. Money at call and Short Notice from outside the Banking System should be shown against liability to others.

From the above meaning as clarified in RBI guidelines, it could be safely inferred that the once a term deposit gets matured, if the customer does not approach the bank for either withdrawing or renewing the matured term deposit, the bank cannot suffer interest applicable to the term deposits for the faults committed by the customer / depositor. Instead the banks are instructed by RBI to pay interest at the rate applicable to savings bank deposits which is much less as compared to the term deposit interest rate. Moreover, the term deposits on maturity becomes repayable by the assessee on demand and gets automatically converted into a demand deposit. The provisions of section 194A (3)(vii) are very clear that the provisions of section 194A(1) shall not apply to demand deposits and hence the assessee bank is not liable to deduct tax at source on interest provided on those demand deposits.

Download Full Judgment Click Here >>

Bank Term deposits on maturity become demand deposits qualifying for savings bank interest rate as per RBI guidelines hence TDS u/s 194A(1) not applicable | 01-01-2016 |