Questions & Answers

Paras S. Savla, Ajay Singh, Rahul Hakani, Advocates, M/s KSA Legal

Q.1. Mr. John has a proprietary concern in the name and style of M/s John Stanley & Co. He takes a loan from Axis Bank in his individual name and deposits the cheque of loan in his personal savings account and thereafter introduces the said amount in his concern M/s John Stanley & Co. as his capital.

M/s John Stanley & Co. has turnover of Rs. 95 lakhs in the last year, consequently he is liable to deduct the tax at source on interest paid or credited in firm by virtue of s. 194A.

Mr. John pays Rs. 50,000 as interest to Axis Bank in his individual capacity. Whether X is liable to deduct the tax at source on payment of interest to Axis Bank in his individual capacity though loan taken from Mr. John will be appearing in his personal balance sheet and not in the balance sheet of M/s John Stanley & Co.

If Mr. John does not deduct the tax in his individual capacity then shall the amount of interest paid to M/s Axis Bank be deductible from net profit of M/s John Stanley & Co. in computation of income of Mr. John.

What shall be the situation if Mr. John is proprietor in two concerns namely “M/s John Stanley & Co.” and “M/s Stanley Traders” and turnover of both the firms are 37 lakhs and 29 lakhs respectively.

Ans.: Proviso to s. 194A lays down that an individual whose total sales, gross receipts or turnover from the business carried on by him exceed forty lakhs rupees during the financial year immediately preceding the financial year in which such interest is credited or paid, shall be liable to deduct the income-tax under s. 194A. It is clear from the context that proviso is attracted when interest is paid or credited by an individual in the course of business carried on by him when turnover of said business exceeded in the immediately preceding year.

The proviso would not be attracted if an individual takes a loan for personal purposes, say, for marriage or construction of house, etc. and pays interest thereon even when he was carrying on business in which turnover had exceeded the above amount when the loan was in no way connected with said business.

In the present case Mr. John has taken a personal loan from Axis Bank and deposited the loan amount in his personal account and then introduced the said amount in the proprietary business. The fact that amount was first deposited in personal account and then introduced in the proprietary business and the fact that the loan appears in his personal balance sheet would be immaterial if his case was that money was borrowed for proprietary business and interest paid was deductible in the computation of profits and gains of said proprietary business. In such a case, interest is paid by him in the capacity of trader as business expenditure and proviso would be attracted and he would be liable to deduct tax at source.

However, if his case is that amount was not borrowed for purpose of business but was borrowed for his personal use and investment of that amount in business is made by way of an amount which personally belonged to him with the result that there was no question of claiming deduction of any interest on that amount in the computation of the profits of gains of said proprietary business, then the above proviso would not be attracted and there would be no liability to deduct tax at source from interest paid to Mr. John in his personal capacity and not as proprietor of business.

If the assessee owned two businesses turnover of which was 37 lakhs and 29 lakhs but if the amount had been borrowed for purpose of business and not for personal purpose, then the proviso would be attracted and there would be liability to deduct tax at source under s. 194A. This is because condition precedent stated in the proviso is that turnover of the individual should exceed forty lakh rupees and not that turnover of any of the several businesses owned by him should exceed forty lakh rupees.

When turnover of assessee is to be ascertained for the purpose of proviso, the turnover of all the businesses owned by him as proprietor shall have to be aggregated.

Q.2. Mr. Jaishankar is proprietor and dealer of certain edible items. His turnover exceeds

Rs. 40 lakhs. His accounts are audited under s. 44AB of the IT Act, 1961. As per agreement with the supplier, he has to make payment for the goods purchased within 15 days. For any late payment he has to pay interest. The amount of interest paid for Assessment Year 2007-08 is about Rs. 2 lakhs. No tax has been deducted from the interest paid for late payment to the supplier.

Whether tax has to be deducted on the interest paid for late payment of purchase price? What is the remedy available to the assessee for non-deduction of tax at source under these circumstances?

Ans.: As the total sales or gross receipts or turnover from business of the assessee in the present case exceeded the monetary limits specified in s. 44AB during the financial year immediately preceding the financial year in which interest is credited/paid, the assessee, though an individual, is required to deduct tax at source in view of proviso inserted in s. 194A by the Finance Act, 2002, w.e.f. 1st June, 2002. Sub-s. (1) of s. 194A enjoins upon any person who is responsible for paying to a resident any income by way of interest (other than interest on securities) to deduct income-tax at the rates in force at the time of credit of such interest to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode. No tax deduction is required to be made to (i) interest not exceeding five thousand rupees, (ii) interest income referred to in cls. (iii) to (x) of sub-s. (3), (iii) interest income covered by s. 196, (iv) cases covered by s. 197A.

In the present case, None of the exceptions applies. “interest” is defined in s. 2(28A) to mean interest payable in any manner in respect of any moneys borrowed or debt incurred and includes any service, fee or other charge in respect of moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized. In the present case, interest is payable on purchase price due from assessee, which is debt incurred by assessee and hence s. 194A would be attracted. It is immaterial whether interest income is assessable as business income or income from other sources in the hands of recipient. Reference can be made on Board’s letter No. 1 (429) 67 TPL (PT), dt. 14th Feb., 1968. In view of the relevant provisions, the assessee was under legal obligation to deduct tax at source under s. 194A in relation to interest credited/paid in respect of purchase price payable by assessee.

Failure to deduct tax at source would attract provisions of sections 201 and 221. The assessee would be deemed to be an assessee in default in respect of tax which he failed to deduct. Penalty under s. 221 is not imposable unless AO is satisfied that the assessee without good and sufficient reasons failed to deduct and pay the tax. The assessee would not be required to pay tax which he has failed to deduct if he is able to show that the payee has already paid tax on the amount of interest received by him. For this, he may rely on recent decision of the Delhi High Court in CIT vs. Adidas India Marketing (P) Ltd. (2006) 206 CTR (Del) 499 in which it has been held that the assessee who was obliged to, but had not deducted tax at source, could not be asked to pay the same where the deductee had paid it by showing the amount received by him as his income. Of course in such a case also, liability for payment of interest on the amount of tax which ought to have been deducted from the date of deductibility to date of payment of tax by deductee, would not get obliterated.

The Hon’ble Supreme Court in case of M/s Hindustan Coca Cola vs. CIT Beverage Pvt. Ltd. held in the light of circular No. 275/201/95-IT(B) dated 29-1-1997 issued by the CBDT, that if the tax has already been recovered from the payee, the same cannot be recovered from the payer by treating him as an assessee-in-default under s. 201.

Further reliance can be placed on the Gujarat High Court decision in case of CIT vs. Rishikesh Apartment Co-operative Housing Society Ltd. (2002) 253 ITR 310 where the payee had paid more amount of tax by way of advance tax than what was payable and had also paid tax on self-assessment and where in other years, tax was paid late, the assessee had accepted the finding of the AAC regarding its liability towards interest u/s 201(1A) of the Act. The Hon’ble High Court held that the assessee’s liability to deducted tax-at-source and payment the same to the Revenue was not independent of the liability of the contractor by charging interest to pay the tax and since, the contractor was not liable to pay any tax, hence by charging interest u/s 201(1A) the Revenue would derive undue benefit or advantage by getting interest on the amount of tax it had already received on the due date.

Q.3. Mr. Bhatti is the owner of trucks, but he is not running transport booking agency or transport company. He is plying his trucks in different parts of the country. He collects the goods from the transport booking agency and delivers it to the destination as per GR (Bilti) given by the booking agency and receives his freight amount from the customers at the time of delivery of the goods. At that time, the receiver of goods usually deducts the TDS from the freight amount, and issues the TDS Form No. 16A in the name of transport booking agency.

In this way, Mr. Bhatti is deprived from claiming the benefit of Form No. 16A. He is showing his income but not in a position to claim the credit of Form No. 16A, because the same is not in his name, but in the name of booking agency, who is only concerned about his booking charges. Whether this act of receiver of the goods is correct, and what remedy is available to my client?

Ans.: Mr. Bhatti receives the freight amount, from consignee, as a person entitled to receive the same in his own right and not as agent of the booking agency. If this is so, the consignee should issue tax deduction certificate in the Mr. Bhatti’s name and not in the name of booking agency. Mr. Bhatti should insist that it is he who is entitled to receive said amount for work done by him of carrying the goods to the consignee and that booking agency has no right to receive the freight amount and hence for the tax which is deducted by consignee at the time of payment of freight amount to him, the consignee is obliged to issue tax deduction certificate in his name and since payment is not made to booking agency, tax deduction certificate could not be issued in the name of booking agency. Circular No. 6, dt. 23rd June, 2006 issued by CBDT. Mentions as under :

“However, representations have been received that in the case of road transporters, where tax is deducted under s. 194C from the payment being made to the truck operator on delivery of goods by the consignee, the certificate is either not being issued by the consignee within the prescribed time or the certificate being issued in favour of consignor of goods in the place of truck operator. As a result of such irregularities, the truck operator is not able to claim credit for the tax deducted from the payments received by him. In consideration of the above and trade practice prevailing in the road transport industry, where the truck is booked by consignor but payment is made by the consignee on delivery of the goods, the Board hereby reiterates the provisions of s. 203 and advises the consignee to issue TDS certificate in the cases of the truck operators within the prescribed time in favour of such truck operators. It may be clarified that in case of any failure in timely issue of certificate or in case of issue of certificate in favour of any person other than the person from whose payment tax has been deducted at source, the provisions of s. 272A(2)(g) shall be attracted under which penalty of one hundred rupees for every day during which the failure continues is leviable.”

Mr. Bhatti should write to each consignee to issue tax deduction certificate in his favour and attach copy of this circular to the letter.

Reference can be made to the decision of the Hon’ble Bombay High Court in case of Yezdi Hirji Malegam vs. CIT, Income Tax Reference No. 414 of 1985 that, where the shares belonged to the firm but the shares stood in the name of the assessee, TDS certificates stood in the name of the assessee and the dividend income has also been assessed in the hands of the assessee, the assessee was entitled to credit for the TDS. The provio to s. 199 has no application to such a case.