Delhi High Court Set Asides CBDT Circular 08/2011 Related to TDS on Fixed Deposits in the Name of Registrars during the Pendency of Litigation Where Assessee is Unascertainable and Absent

Recently, Himachal High Court quashed the circular no. 8/2011 of CBDT which required tax deduction at source on the deposits in banks in the name of the registrar/prothonotary and senior master attached to the Supreme Court/ high court etc. during the pendency of litigation of claim/compensation.

Now Delhi High Court has also set aside, the said circular. While delivering the judgment in Writ Petitions 3563/2012 and  2714/2012 in case of UCO Bank.

In the present case(s), tax authorities, treating the bank as ‘assessee in default” sought to initiate proceedings for non-deduction of tax at source u/s 194A on fixed deposits made in the name of the Registrar General of the Delhi High Court.

The important excerpts of the judgment are as under:

Concededly, money deposited by litigants or at their instance in this Court and kept in fixed deposit with the petitioner bank are not funds or assets of this Court and would be payable to the person as may be ultimately directed in the concerned proceedings. Any accretion on account of interest on the said deposits also do not inure to the benefit of this Court.

There are myriad of situations in which this Court directs deposit of money by litigants or at their instance; directions for depositing funds in a case are made after considering the relevant facts and circumstances of that case. The final recipient or the beneficiaries of the funds can be ascertained only after appropriate orders are passed in those proceedings.

Plainly, for any charge to be sustained under the Act, it is essential that (a) there is an assessee whose income would form the basis of the charge; and (b) there is income which is subject to tax under the provisions of the Act.

The provisions for collection of tax, under Part B of Chapter XVII of the Act, by way of tax deduction at source are, in substance, provisions for recovering tax payable by assessees and do not in any manner affect the levy or the charge of tax.

The Registrar General of this Court is, clearly, not the recipient of the income represented by interest that accrues on the deposits made in his/her name. The Registrar General is also not an assessee in respect of the deposits made with the petitioner bank pursuant to the orders of this Court. The deposits kept with the petitioner bank under the orders of this Court are, essentially, funds which are custodia legis, that is, funds in the custody of this Court. The interest on that account – although credited in the name of the Registrar General - are also funds that remain under the custody of this Court. The credit of interest to such account is, thus, not a credit to an account of a person who is liable to be assessed to tax. In this view, the petitioner would have no obligation to deduct tax, because at the time of credit there is no person assessable in respect of that income which may be represented by the interest accrued/paid in respect of the deposits. The words “credit of such income to the account of the payee” occurring in Section 194A of the Act have to be ascribed a meaning in conformity with the scheme of the Act and that would necessarily imply that deduction of tax bears nexus with the income of an assessee.

In the present case, although the FD is made in the name of the Registrar General, the account represents funds which are in custody of this Court and the Registrar General is neither the recipient of the amount credited to that account nor the interest accruing thereon. Therefore, the Registrar General cannot be considered as a “payee” for the purposes of Section 194A of the Act. The credit by the petitioner bank in the name of the Registrar General would, thus, not attract the provisions of Section 194A of the Act.

It is relevant to note that there is no assessee to whom interest income from the deposits in question can be ascribed; no person can file a return claiming the interest payable by the petitioner as income. The necessary implication of this situation is recovery of tax without the corresponding income being assessed in the hands of any assessee. The ultimate recipient of the funds from the FD would also not be able to avail of the credit of TDS. It is apparent that in absence of an ascertainable assessee the machinery of recovering tax by deduction of tax at source breaks down because it does not aid the charge of tax under Section 4 of the Act but takes a form of a separate levy, independent of other provisions of the Act. This is, clearly, impermissible.

The impugned circular proceeds on an assumption that the litigant depositing the money is the account holder with the petitioner bank and/or is the recipient of the income represented by the interest accruing thereon. This assumption is fundamentally erroneous as the litigant who is asked to

deposit the money in Court ceases to have any control or proprietary right over those funds. The amount deposited vests with the Court and the depositor ceases to exercise any dominion over those funds. It is also not necessary that the litigant who deposits the money would be the ultimate recipient of those funds. As indicated earlier, the person who is ultimately granted the funds would be determined by orders that may be passed subsequently. And at that stage, undisputedly, tax would be required to be deducted at source to the credit of the recipient. However, the litigant who deposits the funds cannot be stated to be the recipient of income for the reasons stated above.

Deducting tax in the name of the litigant who deposits the funds with this Court would also create another anomaly because the amount deducted would necessarily lie to his credit with the income tax authorities. In other words, the tax deducted at source would reflect as a tax paid by that litigant/depositor. He, thus, would be entitled to claim credit in his return of income. The implications of this are that whereas this Court had removed the funds from the custody of a litigant/depositor by judicial orders, a part of the accretion thereon is received by him by way of Tax deducted at source. This is clearly impermissible because it would run contrary to the intent of judicial orders.

In the given circumstances, the writ petitions are allowed and …… the impugned circular bearing no.  8/2011 …..set aside.

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Download Himachal Pradesh High Court Judgment Click Here >>

Downlaod CBDT Circular No. 08/2011 Click Here >>