No TDS on Fixed Deposits with Court/Registrar under Motor Vehicle Act- Himachal Pradesh High Court quashes Income Tax Circular 8/2011

Circular No 8/2011 of the Income Tax  deals with  Section   194A   of income-tax act, 1961 namely, deduction of tax at source - interest other than interest on securities - 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.

As per the circular, it had been clarified that The bank shall deduct tax at source on the interest accruing on the above mentioned deposit(s) as per existing procedure and at the rates in force. (Read full Circular Click Here >>)

However, The Registrar of the Himachal Pradesh High Court brought to the knowledge of the Himachal Pradesh High Court that Bank Authorities were making tax deductions on interest accrued on the term deposits i.e. fixed deposits made by the Court Registry in terms of the orders passed by the Court in Motor Accident Claims cases.

The matter was first referred to the Finance/Purchase Committee for examination and since the committee was of the view that the dispute involves the public interest, the recommendation of the committee was treated as Public Interest Litigation and suo motu proceedings were started by the Himachal Pradesh High Court.

It was submitted by the banks involved that it was only after the objections by the Income Tax authorities for non-deduction of TDS, they started making deductions. Also attention of the court was invited to the Circular No.8/2011 (F.No.275/30/2011-IT(B)], dated 14.10.2011 issued by CBDT requiring deduction of tax at source on the interest.

The Division Bench of the Himachal Pradesh High Court comprising of Chief Justice Mansoor Ahmad Mir and Justice Tarlok Singh Chauhan declared the said circular as not in tune with the mandate of Sections 2(42) and 2(31), read with Section 6 of the Income Tax Act, 1961, and also not in accordance with the mandate of Section 194A of the Act.

The Court remarked "Chapters X and XI of the Motor Vehicles Act, 1988 provides for grant of compensation to the victims of a vehicular accident. The Motor Vehicles Act has undergone a sea change and the purpose of granting compensation under the Motor Vehicles Act is to ameliorate the sufferings of the victims so that they may be saved from social evils and starvation, and that the victims get some sort of help as early as possible. It is just to save them from sufferings, agony and to rehabilitate them. We wonder how and under what provisions of law the Income Tax Authorities have treated the amount awarded or interest accrued on term deposits made in Motor Accident Claims cases as income. Therefore, the said Circular is against the concept and provisions referred to hereinabove and runs contrary to the mandate of granting compensation."

The Court even refereed to the judgment of the Supreme Court where the apex court had observed that

“while awarding compensation under the Motor Vehicles Act, should not succumb to niceties, technicalities and mystic maybes”

Accordingly, the Himachal Pradesh High Court has quashed the said Circular No. 8/2011 while disposing of the PIL on Wednesday, 15-10-2014

Read Full Judgment Click Here >>

Delhi High Court in UCO Bank case has also quahed the said circular on 11-11-2014. Read Full Judgment Click Here >>