FIXED DEPOSITS IN NAME OF REGISTRAR GENERAL OF HIGH COURT UNDER DIRECTIONS OF COURT – WHETHER TDS APPLICABLE ON THE INTEREST ACCRUED?

[Mr. M. GOVINDARAJAN]

There are many situations in which the Court may direct to deposit the requirement amount by the litigants or at their instance or may direct to deposit funds in a case 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.   Interest is accrued on such deposits but it is not required to be paid to the person who deposited the amount as directed by the court.   It would be given to the beneficiary or the litigant as per the outcome of the case.   In such cases whether TDS is required to be made on the interest accrued on such deposits which is the issue to be discussed with reference to decided case law.

In ‘UCO Bank V. Union of India and others’ – 2014 (11) TMI 412 - DELHI HIGH COURT the UCO bank accepted a fixed deposit to the tune of ₹ 7,07,45,550/- in the name of Registrar General of Delhi High Court which was made in compliance with the directions passed by the High Court by M/s Oriental Building Furnishing Co. Limited.  The said fixed deposit was initially for a period of one year.   Before the maturity period certain amount was paid to some one and the remaining amount of ₹ 6,93,87,888/- which is the principal amount and accrued interest was accepted as fixed deposit for one year and renewed further.

The Department, in relation to the proceedings pending against M/s Oriental Building Furnishing Co. Limited, issued summons, dated 14.03.2011, directing the bank to furnish details of the interest accrued with the said fixed deposit.  The bank on 15.03.2011 intimated the details of the status of fixed deposit receipts.  Again the Department issued show cause notice dated 21.03.2011 to the bank for not deducting TDS on the interest accrued and to show cause why the bank be not treated as an assessee in default under Section 201(1)/201(1A) of the Act.  The bank submitted that the deposit was in the name of Registrar General of High Court as a custodian and no TDS was deducted on the accrued interest because the actual beneficiary was not known as the matter was sub judice.  TDS would be made on when payment is made to the beneficiary as may be decided by the High Court.

The Department considered the bank as an assessee in default and demanded ₹ 40,33,330/- and ₹ 14,19,804/- under section 201(1) and section 201(1A) of the Act, respectively, for the financial years 2004-05 to 2010-11.  Penalty proceedings were also initiated separately.  Against this the bank filed a writ petition before the High Court.  The Department submitted before the High Court that the CBDT was seized of the matter and there was a possibility of some solution.  The High Court disposed the writ petition with directions to CBDT to pass necessary orders within three months.

The CBDT issued a circular in this regard.  Circular No.8/2011 dated 14.10.2011 clarified that banks would have to deduct TDS under Section 194A of the Act at the time of accrual of interest and issue the TDS certificate in the name of the depositor.  After that the Commissioner of Income Tax initiated proceedings under Section 263 of the Act as it was considered that the order dated 29.03.2011 was prejudicial to the interests of the revenue.  He set aside the said order and directed the Assessing Officer to take into consideration of other similar deposits and pass an order afresh.

The Assistant Commissioner issued a separate notice on 25.04.2012 under Section 201(1) and 201(1A) of the Act directing the bank to submit the details of all deposits made in the name of Registrar General of the High Court during the financial years 2005-06 to 2010-11.  The bank against this notice filed a writ petition before the High Court and the court stayed the impugned notice on 25.04.2011.

The Deputy Commissioner, subsequently, issued a show cause notice on 26.11.2013 calling upon the bank to furnish the information in respect of deposits/accrued interest for the financial year 2011-12.  On 10.02.2014 summons were issued to the bank for submission of the details.  The Deputy Commissioner held that the bank is an assessee in default within the meaning of Section 201(1) of the Act and raised a demand of ₹ 7,78,34,950/- under Section 201(1)/(1A) of the Act.   Against this the bank filed another writ petition before the High Court.

The High Court framed the question to be decided in both writ petitions is – Whether the provisions of Chapter XVII of the Act would be applicable in respect of interest which is payable on the fixed deposits maintained by the High Court with the bank, in the name of Registrar General.  The High Court observed that money deposited by the litigants or at their instance and kept in fixed deposit with the bank are not funds or assets of the High Court and would be payable to the person as may be ultimately directed to the concerned proceedings.  Any accretion on account of interest on the said deposit also do not inure to the benefit of the High Court.

The High Court analyzed the provisions of Section 4 of the Act.  According to High Court it is apparent from the plain language of section 4 (1) of the Act that income tax is charged in respect of the total income of the previous year of every person.  For any charge to be sustained under the Act it is essential that-

• There is an assessee whose income would form the basis of the charge; and
• There is income which is subject to tax under the provisions of the Act.

Chapter IV of the Act provides for computation of income under various heads.  Chapter XIV contains provisions for the procedure of assessment.  Chapter XVII contains the machinery provisions for collection and recovery of tax.   Part B of this Chapter contains specific provisions for deduction of tax at source.   Section 190 of the Act provides for deduction of tax at source in accordance with the provisions of Chapter XVII.  Section 191 provides that where the provisions are not made for deducting income tax at the time of payment or in accordance with the provisions of Chapter XVII of the Act, the income tax shall be paid by the assessee directly.

In terms of section 201 of the Act, if a person who is obliged to deduct tax at source and pay to the Central Government, fails to do so, he would, by legal fiction, be considered as an assessee in default and be subjected to proceedings for recovery of tax in the same manner as an assessee who had defaulted in paying his taxes.  Considering the facts of the present case the High Court observed that in terms of Section 194A of the Act, the bank would, in the normal course, be obliged to deduct tax at source in respect of any credit or payment of interest on deposit made with it.   In the present case the question that needs to be addressed is whether Section 194A of the Act contemplates deduction of tax in a situation where the assessee is not ascertainable and the person in whose name the interest is credited is also, admittedly, not a person liable to pay tax under the Act.

The Registrar General is not the recipient of the income and not also an assessee in respect of the deposits made with the bank pursuant to the orders of the High Court.  The deposits as well as the interest accrued on such deposits are the funds of the Court.  The credit of interest to such account is not a credit to an account of a person who is liable to be assessed to tax.  Therefore the bank 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 Section194A 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 the assessee.  Further the Registrar General cannot be considered as a ‘payee’ for the purposes of Section 194A of the Act.

The High Court that the impugned circular proceeds on an assumption that the litigant depositing the money is the account holder with the bank and is the recipient of the income represented by the interest accruing therein.  This assumption is erroneous as the litigant who is asked to deposit the money in court ceases to have any control or proprietary right over that amount.    Therefore the High Court set aside the impugned notice and also the Circular No.8/2011 dated 14.10.2011.