By TIOL News Service

BANGALORE, FEB 12, 2016: THE issue is - Whether the assessee can be treated as in default, for not deducting TDS on such 'likely to be paid interest', which was utlimately reversed in the book entries. NO is the answer.

Facts of the case

The assessee is an undertaking of the Government of Karnataka engaged in power transmission, which purchases electricity from various parties by entering into power purchase agreements. For such purchases, the asseessee used to make payments. However, when the payment of purchase price was delayed, the agreement provide for payment of interest to suppliers of electricity by the assessee. During A.Ys 2005-06, 2006-07 & 2007-08, the assessee had created provisions for a sum of Rs.17,65,75,903/-, Rs.12,40,70,972/- and Rs.5,74,39,557/- respectively for contingent payment of interest on belated payments to its suppliers. For the first two years, the assessee in its P&L A/c treated the said amount of provision as expenditure to arrive at the profit. However, in its returns for the A.Ys 2005-06 and 2006-07, the assessee arrived at the taxable income without excluding such amounts of provision towards such interest. However, as these amount of provision created by book entries towards contingent interest payable for A.Ys 2005-06 and 2006-07, a corresponding reversal entries were made in the books of accounts during the F.Y 2007, indicating that the subject amounts of provision towards contingent interest would never be paid.

In respect of A.Y 2007-08, a similar provision towards contingent interest payable on belated payments were created but at the end of the year, the said amount though treated as expenditure in the P&L A/c was not excluded to arrive at the taxable income in the return for the A.Y 2007-08. The TDS Officer thereafter, invoking the provisions of Section 194(A)(1) held that the assessee should have deducted TDS on the amount of provision made towards likely interest payable in respect of related purchase payments and held the assessee as an assessee in default and further, invoked the provisions of Section 201(1) and 201(1A).

Having heard the parties, the High Court held that,

++ it is not in dispute that the assessee has made a provision towards contingent payment of interest to suppliers of electricity when payment of purchase price is delayed by the assessee himself. Though the said provision is made towards contingent interest payable as expenditure, as per the return filed by assessee, the taxable income is arrived adding back such amount of provision towards contingent interest. The assessee having noticed, payment of such interest made in the provision would never be paid in view of the understanding between the assessee and its suppliers, corresponding reversal entries were made in the books of accounts during March 2007. It is noticed that though the amount made in the provision is treated as expenditure in the P&L A/c, it was added back to arrive at the taxable income. In such circumstances, we have to examine the obligation of the assessee in deducting TDS towards the provision of interest made reversed subsequently, which would not form 'any income' in the hands of payees i.e., the suppliers;

++ it is seen that prior to passing of the Finance Act, 2008, the provisions of Section 200 mandated that the amount of tax deducted should be paid to the credit of the Central Government. It does not speak about the person who has not deducted tax at source. If the said Section 200 is applied to Section 201[1] of the Act, it is only the following three categories of persons are held liable for the consequence of failure to deduct tax at source [a] any person deducting any sum [b] Employer, who provides perquisites and [c] Company making payment of dividends. Subsequently, the said provision is amended. By this amendment, the term 'any such person' is substituted with 'any person' including the Principal Officer of the Company. A new clause "who is required to deduct any sum in accordance with the provisions of the Act" is introduced. This amendment is given retrospective effect from 1st June, 2002 and has received the assent of the President of India on 10th May, 2008. It is however seen that the order of the TDS Officer has been passed on 18th Feb, 2008 & 27th Mar, 2008. Thus, it is clear the TDS Officer has passed the order based on non existent law during the interregnum period between the period of Finance Bill becoming the Finance Act by the assent of the President;

++ it is noted that Section 194A of the Act mandates the tax deductor to deduct 'income tax' on 'any income by way of interest other than income by way of interest on securities'. The phrase 'any income' and 'income tax thereon' if read harmoniously, it would indicate that the interest which finally partakes the character of income, alone is liable for deduction of the income tax on that income by way of interest. If the said interest is not finally considered to be an income of the deductee, as per reversal entries of the provision in the present case, Section 194A[1] of the Act would not be made applicable. In other words, if no income is attributable to the payee, there is no liability to deduct tax at source in the hands of the tax deductor. In view of the admitted fact that interest being not paid to the suppliers being reversed in the books of accounts, we are of the considered opinion that there would be no liability to deduct tax as no income accrued to the suppliers. It is the case of the assessee that the provision which was contingent was at no time materialized as income to be liable for payment of income tax on the said provision of interest. In the circumstances, the assessee falls outside the scope of Section 194A r/w/s 200 during the relevant A.Ys. Thus, the consequential provisions of Section 201(1) and Section 201(1A) are not attracted.

(See 2016-TIOL-253-HC-KAR-IT)