TMI Blog2012 (5) TMI 138X X X X Extracts X X X X X X X X Extracts X X X X ..... to him for the amount so deducted for the assessment year for which such income is assessable - The Revenue will never allow credit as the amount is not chargeable to tax and it cannot retain such amount in contravention of Article 265 of the Constitution so to circumvent the situation credit for the tax deducted at source to the payee of the amount in the year for which such tax was deducted and the amount was paid after deduction of tax at source is allowed – in favour of assessee. - IT Appeal NO.6708 (MUM) of 2010 - - - Dated:- 2-5-2012 - R.S. SYAL, S.S. GODARA, JJ. ORDER R.S. Syal, Accountant Member This appeal by the assessee arises out of the order passed by the Commissioner of Income Tax (Appeals) on 08.07.2010 in relation to the assessment year 2007-2008. 2. The only issue pressed in this appeal emanates from ground no.1 which states that : "On the facts and in the circumstances of the case, the learned CIT(A) erred in confirming disallowance of credit of TDS amounting to Rs. 8,77,881". 3. Briefly stated the facts of the case are that the assessee filed its return declaring total loss of Rs. 7.72 crore. On the basis of the AIR information for CASS-0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d between M/s Arvind Brands Limited, a sister concern of the assessee and the franchisee. Guys Gals paid the rent to the assessee after deduction of tax at source. The assessee paid over the gross amount of rent to M/s Arvind Brands Limited on gross basis. M/s Arvind Brands Limited paid the rent to the above referred five landlords after deduction of tax at source at the rate applicable. 5. The incorporation of this transaction in the books of account of the assessee with hypothetical figures, can be appreciated with the following entries. Suppose gross rent payable by Guys Gals is Rs. 100. Rate of TDS on rent payable to company assessee is 20% plus surcharge and to a non-company assessee is 15% plus surcharge. ( i ) On receipt of rent by the assessee, the following entry was passed. Bank A/c Debit 80 T.D.S. Receivable A/c Debit 20 To Guys Gals 100 ( ii ) At the time of the assessee paying such amount to M/s Arvind Brands Limited, the following entry was passed. M/s Arvind Brands Limited A/c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax at source at the rate of 15% plus surcharge amounting to Rs. 52,134. In this way the entries for remaining 11 months have been passed accordingly. From the above transactions, it can be seen that there is one rental income for the month of April 2006 at Rs. 3,09,750 which has suffered deduction of tax at source twice viz., firstly at the time of receipt by the assessee from Guys Gals and secondly, at the time of eventual payment by M/s Arvind Brands Limited to the landlords. This factual position has not been controverted either by any of the authorities below or the learned Departmental Representative. 9. In such a situation a question arises as to whether the assessee is entitled to refund of Rs. 8,77,765 being the amount of tax deducted at source by Guys Gals at the time of making payment to it for onward transmission to the landlords. 10. Chapter XVII of the Act with the caption : "Collection and Recovery of Tax" comprises of seven Parts. Part A begins with section 190 having marginal note as : "Deduction at source and advance payment". Sub-section (1) of this section provides that : "(1) Notwithstanding that the regular assessment in respect of any income is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argeability of the amount in the hands of the payee. Now comes section 199 with the marginal note "Credit for tax deducted". Sub-section (1) of section 199, at the material time, read as under:- "199. Credit for tax deducted. - (1) Any deduction made in accordance with the foregoing provisions of this Chapter and paid to the Central Government shall be treated as a payment of tax on behalf of the person from whose income the deduction was made, or of the owner of the security, or depositor or owner of property or of unit-holder or of the shareholder, as the case may be, and credit shall be given to him for the amount so deducted on the production of the certificate furnished under section 203 in the assessment made under this Act for the assessment year for which such income is assessable." 11. A bare perusal of section 199 brings out that deduction of tax at source made in accordance with the earlier sections of this Chapter and paid to the Central Government shall be treated as payment of tax on behalf of the person from whose income the deduction was made. The second component of this provision is that the credit shall be given to the payee of income for the amount so dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the payer to the payee, such amount is liable for deduction of tax at source if it is of the nature as specified in the relevant provision concerning with the deduction of tax at source. If however the amount is paid by the payer to the payee not directly but indirectly, that is, through the medium of some other person, then such other person receives the amount as an obligation and not as income in his hands. Neither the amount received by such middleman can be considered as income in his hands nor there can be any requirement under law fastening some sort of tax liability on him towards such transaction. The said middleman does not earn any income from the payer nor incurs any expenditure by mediating in the transaction between the payer and receiver of income. From the earlier provisions it has been noticed that deduction of tax at source is warranted when any amount in the nature of income is paid or credited by the payer to the payee. Unless the amount so paid assumes the character of income, there can be no deduction of tax at source. In the case of transaction of payment of income routed through some middleman, its chargeability can occur only once and that too in the ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they had not entered into any direct agreement with the landlords for taking the payment of rent. When M/s Arvind Brands Limited paid over the rent to the landlords they also deducted the tax at source at the appropriate rate. Thus though there is one transaction resulting into income but deduction of tax at source has been made twice to facilitate the compliance with the requisite provisions. Guys Gals could not have deducted tax at source in favour of the landlords as they had entered into agreement only with the assessee-company. In such a case they could have neither deducted tax at source in favour of the landlords nor avoided the deduction of tax at source on rent paid by them u/s 194-I. Under such circumstances they treated the assessee-company as landlord for the purpose of deduction of tax at source albeit the rental income in fact belonged to the landlords. 14. Section 199 has been enshrined in the Act to give a logical conclusion to the earlier sections under which tax is deducted at source from various items of income as enumerated therein so that credit for the tax deducted at source is allowed to the person while assessing the income in the hands of the payee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be refunded to payee because of the very mandate of section 199 as per which such amount is ' treated as a payment of tax on behalf of the person from whose income the deduction was made' that is the payee. 15. Thus it emerges that the major function of section 199 is to allow credit for tax deducted at source to the payee. The modus operandi for the discharge of such function is in-built in the section itself. It is done by finding out the year in which the income on which tax was deducted, is assessable to tax. It is quite natural that the credit for tax deducted at source from the amount of income should be allowed simultaneous with the event of chargeability of such income to tax. So once the year of chargeability of the amount received in the nature of income is determined, the credit for tax deducted has to be allowed to the payee in such year. This is the only mandate of section 199. This section basically deals with the question of determination of the year in which the credit for the tax deducted at source should be allowed. The object of this section is to avert the situation of claiming credit of the tax deducted at source in the year of assessee's choice. Tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matically read as providing for allowing credit for the tax deducted at source in the year of the receipt of the amount, on which tax was deducted at source. If the view point canvassed by the Revenue is accepted and the assessee is not allowed credit for the tax deducted at source, an arduous situation will arise. The amount of tax deducted at source will remain in limbo. The Revenue will never be in position to allow credit for such tax because the amount is not chargeable to tax in the hands of the assessee and it cannot retain such amount with it in contravention of Article 265 of the Constitution of India. To circumvent such a situation, the only possible solution is to allow credit for the tax deducted at source to the payee of the amount in the year for which such tax was deducted and the amount was paid after deduction of tax at source. As in the present case the assessee received the amount after deduction of tax at source from Guys Gals and such amount is not admittedly chargeable to tax in its hands, we hold that the credit for the tax deducted at source should be allowed in the instant year. We, therefore, set aside the impugned order on this issue and direct that the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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