TMI Blog2005 (7) TMI 718X X X X Extracts X X X X X X X X Extracts X X X X ..... wherein it was explained in detail that there are no income chargeable to tax had accrued to the Members of the Trust and as such sum being outside the scope of total income, there was no obligation to deduct the tax at source. 4. That the CIT(A) has further overlooked that the amounts of interest credited by the appellant in respect of the balances outstanding to the account of retired employees of M/s. ONGC was not in the nature of income and as such, the provisions of section 194A of the Income-tax Act could not be invoked so as to conclude that the assessee had credited any income, by way of interest to such of the accounts of the retired employees of M/s. ONGC. It is, therefore, prayed that it be held that the order of the CIT(A) is erroneous being unsustainable in law. It be thus held that the order made under section 201 and 201(1A) of the Income-tax Act is vitiated being bad both as facts and in law. It be thus held that the amount allegedly required to have been deducted at source along with the interest aggregating to ₹ 58,74,456 be held in respect of which, the assessee could not be held to be in default as unsustainable. 2. Although th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thdraws the amount standing to his credit in the fund to argue that the membership of the retiring employees continued post-retirement unless withdrawn by the employee. With regard to the objection of the Assessing Officer that the assessee had not obtained a consent in writing from the retiring employees to retain the amounts, as required under rule 5 of Part A of the Fourth Schedule. It was argued that although no request was received in writing as required under rule 5(3) of Part A of the Fourth Schedule, yet it was a regular feature to retain the credit of the retired employees with the Fund from year to year; as the retired employees did not press for the withdrawal of the accumulated balance, the same be construed as a request having been made in writing. It was also submitted that the purported non-compliance of not obtaining a consent in writing to retain the amount as required, was a mere technical and venial breach of a rule. The retention was indeed permissible in terms of clause 18 of the Regulations. 3. The assessee also argued that the trust was a recognized Provident Fund and it credited the interest received by it from the investment of its funds and as su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he retiring employees and constructing it as a non-compliance of rule 5 of Part A of the Fourth Schedule is not justified. It is thus submitted that the assessee has complied with all the rules prescribed both under the Act and the Rules. 5. It was also argued that the Assessing Officer, while passing orders under section 201/201(1A) of the Act has exceeded his jurisdiction inasmuch as he has travelled beyond the approval granted by the CIT and held that since the assessee had failed to obtain declaration in writing, the interest paid was income in the hands of the assessee and, therefore, the appellant-trust was obliged to deduct tax at source under section 194A of the Act. It was further submitted that there was no requirement as such of obtaining a request in writing as per rule 5(3) of Part A of the Fourth Schedule to the Act as such a request in writing may not be in black and white on a paper, and could also be gathered from the conduct of the parties. The ld. Counsel further submitted that in any case such violation is a technical violation and argued that having regard to the decision of the Apex Court in the case of Collector, Land Acquisition v. Mst. Katiji [1987 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de to such employees by the trust treating such payments as salaries. Our attention was invited to rules 8, 9 and 10 of Part A of the Fourth Schedule in this regard. Reliance was also placed on the decision of the Hon ble Madras High Court in the case of M.C. Muthanna v. CIT [1989] 177 ITR 5011 in this regard. It was accordingly pleaded that the assessee was not, in law, required to deduct tax at source under section 194A of the Act in respect of interest credited to the account of the members of the fund who have ceased to be in employment of ONGC. 8. On the other hand, ld. DR has defended the orders of the lower authorities. According to the ld. DR, much emphasis has been laid by the assessee in relation to clause 18 of its Regulations to submit that the retiring employees could continue to remain members of the trust. According to the ld. DR, the existence or otherwise of clause 18 does not deviate from the fact that the assessee was required to deduct tax on such interest income credited to the account of the employees who had ceased to be in employment. The ld. DR referred to the provisions of section 10(12) to argue that the exemption from tax is available on the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refer to the relevant provisions of the Act, which we do hereinafter. 10. Section 10(12), which provides for exemption of the accumulated balance payable to an employee, reads as under :- (12) the accumulated balance due and becoming payable to an employee participating in a recognized provident fund, to the extent provided in rule 8 of Part A of the Fourth Schedule. 11. Rule 8 of Part A of the Fourth Schedule, which provides the extent and conditions for excluding the accumulated balance payable to an employee from total income, reads as under :- 8. The accumulated balance due and becoming payable to an employee participant in a recognized provident fund shall be excluded from the computation of his total income - (i )if he has rendered continuous service with his employer for a period of five years or more, or (ii)if, though he has not rendered such continuous service, the service has been terminated by reason of the employee s ill-health, or by the contraction or discontinuance of the employer s business or other cause beyond the control of the employee. (iii)If, on the cessation of his employment, the employee o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion or discontinuance of the employer s business or for any other reason beyond the control of the employee. Similarly, in terms of clause (iii), such accumulated balance is to be excluded if on the cessation of his employment, the employees obtain employment with any other employer and the accumulated balance due and becoming payable to such employee is transferred in the recognized Provident Fund maintained by the subsequent employer. The above situations, which have been envisaged under rule 8, are admittedly not attracted to the instant case. In the case before us, the credits have been made to employees who have since retired or in other words have ceased to be in employment. It is also not the case of the assessee that the cessation of such members is on account of their ill-health or by contraction or discontinuance of the employer s business or for any other cause beyond their control. Further, there is also no case made out that on the cessation of the employment with ONGC, such retiring employees have obtained employment with any other employer and the accumulated balances due and becoming payable has been transferred to another Provident Fund. Therefore, it would not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oncerned employer. However, if the membership is continued in the absence of the employment with the entity who constitutes and maintains the provident fund and neither of the conditions in clauses (ii) and (iii) of rule 8 are fulfilled, any payment due from such a provident fund would not acquire the character of salaries for the purpose of the Act. Such amount of interest, therefore, is not liable to be taxed under the head Salaries . It is in this background that we approve of the action of the Assessing Officer in holding the assessee in default for not having deducted tax at source in terms of section 194A of the Income-tax Act. Section 194A of the Income-tax Act provides for deduction of tax at source on payment made by a person, not being an individual or a HUF, of any income by way of interest in the manner prescribed therein. The amount credited by the fund is nothing but interest. 15. Now, regarding the reliance placed by the ld. counsel for the assessee on the judgment of the Hon ble High Court of Madras in M.C. Muthanna s case (supra) for the proposition that interest credited to the account of the members partook the character of salary under the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X
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