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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:
Brief facts of the Case:
Question before ITAT:
Held: 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 >>
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