Deductor cannot be treated an assessee in default till payee also failed to pay tax directly. Before holding assessee in default, AO must establish that payee failed to pay tax directly – ITAT
In a recent judgment, ITAT Jaipur has held that in cases of non deduction of TDS, the fact that payee has failed to pay tax directly is foundational and jurisdictional fact and only after finding that payee has failed to pay tax directly, deductor can be deemed to be an assessee in default u/s 201(1) in respect of such TDS not deducted.
ABCAUS Case Law Citation:
4229 (2024) (08) abcaus.in ITAT
In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming the order of the Assessing Officer (AO) treating the assessee as an assessee in default u/s 201(1) of the Income Tax Act, 1961 (the Act) in respect of the amount of tax which has not been deducted at source under section 194A and levying interest under section 201(1A) of the Act.
The appellant assessee was a real estate company carrying on the business construction of building. For the purpose of its business, the assessee company had obtained loans from individuals, bank and credit cooperative society.
During the course of survey conducted by ITO (TDS) it was found that the assessee had not deducted TDS on interest paid to a Credit Cooperative Society Ltd. (the payee) for three years. While passing the order, the AO held the assessee to be in default u/s 201(1) and raised a demand in respect of the TDS not deducted on account of payment made to the payee.
In first appeal, the CIT(A) dismissed the appeal of the assessee holding that ‘’No fault is found in the order of the ITO, TDS with respect to this issue.’’
Before the Tribunal the assessee contended that it was not required to deduct TDS on interest payments made to the payee, in view of the express provisions of 194A(3)(iii)(a) of the Act. It was also submitted that the auditor of the company in his audit report had also not made any adverse comments in this regard.
The Revenue contended that under this section relied upon by the assessee only those cooperative societies were covered that carried on banking business as per Banking Regulation Act 1949.
The Tribunal observed that section 194A(3)(iii)(a) does not clarify as to what is meant by business of Banking. Nor is business of banking defined anywhere in the Income Tax Act, 1961. In these circumstances, the general meaning of business banking has to be adopted for interpreting this clause without going into its technicalities. The meaning which would be understood by a layman should be considered in this regard. Banking in common parlance means accepting and lending money.
The Tribunal noted that the Hon’ble Supreme Court (Bench of five Judges) has summed up the principles applicable to the interpretation of a taxing statute as under:
(i) In interpreting a taxing statute, equitable considerations are entirely out of place. A taxing statute cannot be interpreted on any presumption or assumption. A taxing statute has to be interpreted in the light of what is clearly expressed; it cannot imply anything which is not expressed, it cannot import provisions in the statute so as to supply any deficiency,
(ii) Before taxing any person, it must be shown that he falls within the ambit of the charging section by clear words used in the section; and
(iii) If the words are ambiguous and open to two interpretations, the benefit of interpretation is given to the subject and there is nothing unjust in a taxpayer escaping if the letter of the law fails to catch him on account of the legislature’s failure to express itself clearly.
The Tribunal noted that it was important for consideration whether the Credit Cooperative Society in question was accepting deposits from its members and also providing loans to them and therefore, it could be said to have engaged in the business of banking as providing of credit facilities by the cooperative society to its member is defined as business of banking u/s 2(24)(viia) of the Income Tax Act.
The Tribunal further observed that Hon’ble Madras High Court while adjudicating the issue whether a credit co-operative society (Patsanstha) is covered by the expression “co-operative society engaged in carrying on the business of banking, their Lordships came to the conclusion that a credit society dealing with members only can be said to be in the business of banking.
The Tribunal opined that the two expressions are two distinct limbs of the definition and must be given meaning accordingly. The common thread, if at all be necessary, between the two expressions is the business of banking, which, in the esteemed opinion of the Hon’ble Madras High Court, includes business of giving loans to members.
Further, the Tribunal noted that the same view was taken by the Co-ordinate Bench Pune which under identical case held that a Cooperative Society which undertakes the business of banking such as, lending money to its members or accepting deposits or raising loans from financial banking institutions and advancing the same to its members is definitely engaged in the business of banking.
The Tribunal observed that the Revenue had relied upon the judgment of the Kerala High Court but their Lordship’s traveled beyond their jurisdiction, to import the meaning of Business of banking from Banking Regulation Act, 1949. Therefore, the revenue authorities erred in adopting the judgement favoring the revenue as it is a settled law that in case of conflicting decisions of two non-jurisdictional High Courts and absence of direct decision by the jurisdictional high court, the judgment favoring the assessee ought to be adopted.
The Tribunal further opined that even otherwise the CIT(A) has erred in confirming the order of the Assessing Officer treating the assessee as an assessee in default u/s 201(1) in respect of the amount of tax which has not been deducted under section 194-A from interest payment made to the Cooperative Credit Society.
The Tribunal held that the AO in order to hold the assessee as Assessee in default ought to have first established that the payee, i.e. HCCSL has failed to pay such tax directly. However, the AO had not spared a word regarding discharge or otherwise of the tax liability by payee. Therefore, the deductor cannot be treated an assessee in default till it is found that the payee has also failed to pay such tax directly.
The Tribunal also observed that in the instant case, the Income tax authorities had not adverted to the Explanation to Section 191 nor had applied their mind as to whether the payee had also failed to pay such tax directly. Thus, to declare a deductor, who failed to deduct the tax at source as an assessee in default, condition precedent is that payee has also failed to pay tax directly. The fact that payee has failed to pay tax directly is thus, foundational and jurisdictional fact and only after finding that payee has failed to pay tax directly, deductor can be deemed to be an assessee in default in respect of such tax. Further, as held by the Hon’ble Allahabad High Court, Explanation to Section 191 is confined only to the amount of tax which was required to be deducted.
Accordingly, the Tribunal held that the assessee was not liable to deduct TDS and the interest paid by it was not subject to deduction of TDS.
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