TMI Blog2012 (12) TMI 641X X X X Extracts X X X X X X X X Extracts X X X X ..... the said partnership firms, as there is no tax liability in their respective hands. Under this situation, can it be said that the Government is deprived of the funds due to it or any loss is caused to the Government. It may be noted that the prevailing rate of interest chargeable/payable u/s 201(1A)/244A are different, i.e., the rate of interest payable u/s 244A is lesser than the interest chargeable u/s 201(1A) of the Act. Due to this disparity, a question may arise as to the correctness of the view taken by us in the preceding paragraphs. In our view, the rate of interest is prescribed by the Government on the basis of various factors. The main principle considered by us is that pronounced by the Hon'ble Courts, viz., that, interest is compensatory in nature for depriving funds belonging to the revenue/assessee. Hence the disparity in the rate of interest shall not have any effect on the said principle. On the issue of levy of interest u/s 201(1A) matter restored to DCIT(TDS) to verify whether or not the recipients of the interest income, viz., the partnership firms were liable to pay tax on that income and then take appropriate decision about the chargeability of interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e years by filing appeals before Ld CIT(A), who confirmed the penalties levied in all the cases by placing reliance on the decision of Hon'ble Madras High Court, referred supra. The observations made by Ld CIT(A) in the case of Shri Thomas Muthoot is extracted below:- "I, therefore, hold the view that the obligation to deduct tax is imposed with a view to ensure that on an interest payment made in respect of which tax is required to be deducted at source, the State promptly receives the amount so required to be deducted and therefore the appellant's contention that the firm has shown income and paid tax on such income does not absolve the appellant from the responsibility of deducting and depositing the tax immediately to the Government Account. In this case the appellant failed to discharge the obligation cast upon him by the Income tax Act." The Ld CIT(A) confirmed the interest levied u/s 201(1A) of the Act by placing reliance on the following case law:- (a) Hindustan Coca Cola Beverage (P.) Ltd. v. CIT [2007] 293 ITR 226 (b) CIT v. Dhanalakshmy Weaving Works [2000] 245 ITR 13 (c) CIT v. Prem Nath Motors (P.) Ltd. [2002] 253 ITR 705 (d) Pentagon Engg. (P.) Ltd. v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall not be attracted to the interest paid by a partner to his partnership firm also. Accordingly he contended that the assessees are not liable to deduct tax at source u/s 194A of the Act on the interest paid by them to the partnership firms in which they are partners. 7. The Ld A.R further submitted that all the partnership firms to whom the interest were paid by these assessees have duly accounted for the interest receipts in their income statement and all the partnership firms have also filed their respective returns of income for the years under consideration. The Ld A.R submitted that the penalty u/s 201(1) is not levieble, if the payee has accounted for interest receipts and paid tax thereon. In this regard, he placed reliance on the instruction No. 275/201/95-IT(B) dated 29-01-1997 issued by CBDT, where in it is stated that no demand visualized under section 201(1) of the Income tax Act should be enforced after the tax deductor has satisfied the officer in charge of TDS that taxes due have been paid by the deductee-assessee. The Ld A.R further submitted that the partnership firms have incurred losses in some of the years even after including the interest paid by the part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een deducted from the impugned interest payments, the Government has to refund the entire amount of TDS along with interest to the partnership firms, since they have incurred losses. Hence, in this kind of situations, the question of compensation shall not arise and in that case, the question of payment of interest u/s 201(1A) shall also not arise". 10. In the alternative, the Ld A.R submitted that it is a settled principle that tax cannot be levied if the computation provision fails. In the case of Munak Investment (P.) Ltd. v. ITO [1995] 55 ITD 429 (Chd.) it was held that the interest u/s 201(1A) is not leviable, since it is incapable of computation in the absence of the date of payment of TDS. The said decision was followed in the case of K.V.S Caterers (ITA No.7514 7515/M/2004) by the Mumbai bench of ITAT. The interest u/s 201(1A) is chargeable for the period from the date on which such tax was deductible to the date on which such tax is actually paid. The Ld A.R submitted that the date of deduction/payment of TDS is not known in the instant cases, as the assessees have failed to deduct TDS assessees and hence the computation provision fails. 11. On the other hand, the Ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct recognizes a partner and a partnership firm as different 'Person', despite the legal position of relationship between them as prevailing under the Partnership Act. Further sec. 194A provides exemption from the obligation imposed under that section only in respect of interest paid/credited by a firm to its partner. The Act does not provide such exemption to the interest paid/credited by a partner to his firm. In the absence of any provision to provide for such exemption and further by considering the fact that the Act treats a partner and a firm as different 'Person', we are of the view that the position of legal relationship between a partner and his firm loses its importance/significance under the Income tax Act. Accordingly, we are of the view that the said position of legal relationship as prevailing under the Partnership Act should not be applied in abstract, only to the provisions of sec. 194A of the Act. Accordingly, we reject all the contentions raised by the assessee in this regard. 13. Now we shall take up the issue relating to the levy of penalty u/s 201(1) of the Act. The tax authorities have placed reliance on the decision of Hon'ble Madras High Court in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own by the Hon'ble Supreme Court in the case of Hindustan Coca cola Beverage (P.) Ltd. (supra), if the impugned interest receipts by the firms are duly included in their respective return of income. Accordingly, in our view, the ratio of decision in the case of Hindustan Coca-cola Beverage (P.) Ltd. (supra), can be applied to the facts of the instant cases also. However, subject to verification of the fact of filing return of income by the partnership firms by duly including the interest paid by the assesses herein, in our view, the penalty levied u/s 201(1) of the Act in their hands is liable to be deleted. Since the above said facts require verification, we set aside the orders of Ld CIT(A) on this issue and restore the same in all the cases to the file of DCIT(TDS) with the direction to verify the claim of the assessee and delete the penalty levied u/s 201(1) of the Act in all the cases after satisfying himself that the concerned partnership firms have filed their respective returns of income by duly including the impugned interest payments and the tax due, if any, has been paid. If the assessed income in the hands of the concerned partnership firms is "loss", then the date of f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax Act, i.e., whether interest is penal or compensatory in nature?. This question came to the consideration of Hon'ble Supreme Court in the context of interest chargeable under sec. 215/139(8) that were in force at the relevant point of time in the Act, which are akin to interest chargeable u/s 234B/234A under the present provisions. The Hon'ble Supreme Court considered the nature of levy of interest u/s 215/139(8) in the case of Central Provinces Manganese Ore Co. Ltd. v. CIT [1986] 160 ITR 961 and observed as under:- "it is not correct to refer to the levy of such interest as a penalty. The expression "penal interest" has acquired usage, but is, in fact, an inaccurate description of the levy. Having regard to the reason for the levy and the circumstances in which it is imposed, it is clear that interest is levied by way of compensation and not by way of penalty. The income-tax Act makes a clear distinction between the levy of a penalty and other levies under that statute. Interest is levied under Sub Section (8) of Section 139 and under Section 215 because, by reason of the omission or default mentioned in the relevant provision, the Revenue is deprived of the benefit of the ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T v. Prannov Roy /Civil 'Appeal No. 448/2003L the Supreme Court noted that**: "the High Court, while accepting the writ petition and setting aside the interest charged under section 234A of the Act, has come to the conclusion that interest is not a penalty and that the interest is levied by way of compensation to compensate the revenue in order to avoid it from being deprived of the payment of tax on the due date. Having heard counsel on both the sides we entirely agree with the finding recorded by the High Court as also the interpretation of Section 234A of the Act as it stood at the relevant time." (** reported in 309 ITR 231) "12. Coming back to the present appeals, we are of the view that Section 234A, Section 234B and Section 234C are of the same class. Ongoing through these provisions, it is clear that interest' is sought to be charged on account of the fact that the Government is deprived of its revenue. Under Section 234A, interest is charged if tax whichever to be paid at the time of filing of the return is not paid at that point of time, Section 234B provides for levy of interest for default in payment of advance tax and Section 234C stipulates the charging of inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 007, dated 29-3-2010]. 21. Now we shall turn to the facts of the instant cases before us, wherein interest u/s 201(1A) was levied upon the assessees. It may be noted that interest u/s 201(1A) is levied if there is any failure on the part of any assessee to deduct tax at source (TDS)/remit the same at the right point of time on the income paid by him. The TDS amount to be so deducted/remitted belongs to the revenue/Government. Hence, interest u/s 201(1A) is charged; since the assessee is considered to be enjoying the TDS amount, which belongs to the Government, till the time he deducts and remits the same to the account of the Government. It is pertinent to note that the Tax so deducted at source is given credit in the account of deductee- assessee. If the assessment of the deductee assessee results in refund of TDS amount, the Government shall refund the amount along with interest u/s 244A of the Act. The reason for paying interest u/s 244A is that the Government is considered to have enjoyed the amount, which it is not entitled to. Thus the interest is charged/paid as compensation for withholding/enjoying funds not belonging to the assessee/revenue. 22. Let us consider about e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yes, only if Mr. B is liable to pay tax. In this example, Mr. B is not liable to pay any tax and hence question of 'withholding any tax money' belonging to revenue does not arise. Accordingly, it cannot be said that Mr. A has withheld/enjoyed the tax amount belonging to the Government. Even if he is compelled to deduct TDS, ultimately, the same is liable to refunded to Mr. B. Hence, under this kind of situation, it cannot be said that the Government is deprived of its fund or any loss was caused to the Government. 24. The facts analysed in Situation B is applicable to the facts prevailing in the instant cases. On the basis of analysis made in situation B, we are of the view that the assessees herein are not liable to pay interest u/s 201(1A) of the Act, if the recipient of interest, viz., the partnership firms, are not liable to pay tax on the impugned interest income. However, in the paper book filed before us, only copies of the returns of income filed by the partnership firms have been furnished. It is not known whether the said returns of income were accepted as it is by the revenue or not, since copies of the assessment orders for relevant years, if any, were not filed befor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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