Income-Tax Officer v. New Era Engg. Co. — 1990 DIGILAW 246 (MAD)

ORDER Per Shri R. Rangayya, Accountant Member - These two appeals are filed by the revenue against the order of the AAC for the asst. years 1980-81 and 1982-83, cancelling the interest levied u/s. 201(1A) of the Income-tax Act, 1961 for the two years under consideration. 2. The assessee is stated to have credited interest of Rs. 4,40,174 and Rs. 4,85,605 to the accounts of certain parties from whom it borrowed monies for its business, during the accounting years relevant to the asst. years 1980-81 and 1982-83, which ended on 30-6- 79 and 30-6-1981 respectively. The assessee deducted tax of Rs. 42,614 and Rs. 48,561 from the above amounts of interest credited to the parties account and paid to the Government on 9-12-1980 and 2-2-1981 for the asst. year 1980-81 and on 1-2-1983 for the asst. year 1982-83. On the ground that there was a delay in payment of the tax deducted at source, the ITO levied interest of Rs. 7,285 and Rs. 9,227 u/s. 201(1A), read with Rule 30(b). 3. Aggrieved with the alove levy of interest, the asseasee filed appeals before the AAC, who purporting to follow the orders of the Tribunal in some other similar cases, allowed the assessees appeals. The assessees claim before the first appellas auth ority was that though its accounting year ended on 30-6-79 and 30-6-1981, the accounts were actually closed much later and it was only then the interest was credited to the respective accounts of the creditors. Since the amounts of tax Decided at source was remitted to the Government within two months from the end of the month inwhich the interest was actually credited to the accounts of the porties conorned, it was contended that no interest would be chargeable u/s 201 (1A). This argument of the assessee was accepted by the AAC for the both the year. Hence the present appeals before us by the Revenue. 4. It is contended by the learned departmental representative that interest its charged u/s 201 (1A) as a compensation for the delay in payment of tax, which the assessee ought to have deducted and paid to the Government. Under sec. 194A of the income tax Act. Hence the present appeals before us by the Revenue. 4. It is contended by the learned departmental representative that interest its charged u/s 201 (1A) as a compensation for the delay in payment of tax, which the assessee ought to have deducted and paid to the Government. Under sec. 194A of the income tax Act. 1961, any person, who is responsible for paying to a resident any income by way of interest, shall, at the time of credit of such income 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, whichever is earlier, deduct income-tax thereon at the rates in force. According to sec. 200, any person deducting any sum in accordance with the provisions of sections 192 to 194/194A shall pay within the prescribed time, the sum so deducted to the credit of the Central Government or as the Board directs. Sec 201(1A) provides that if any person does not deduct or after deducting fails to pay the tax as required by or under the Act, he or it shall be liable to pay simple interest at 12% per annum on the amount of such tax, from the date on which such tax was deductible to the date on which such tax is actually paid. Under scc. 194A, the tax was deductible when the interest was credited to the account of the creditor. under Rule 30 (1)(b)(i), in respect of sums deducted in accordance with the provisions of scc. 194A, where income by way of interest referred to in scc. 194A, is credited by a person carrying on a business or profession, to the account of the payee as on the date up to which the accounts of such business or profession are made, within two months of teh capirstaion of the month in which that date falls. Inasmuch as the assessees accounts were closed on 30-6-79 and 30-6-1981 respectively for the two asst years under consideration and interest is credited to the account of the creditors as on that date up to which the accounts of the business were made up, the amount ought have been paid by the assessee within two months from 30th June, 1979 or 1981 respectively. Since the amounts have not been paid within the time allowed, under rule 30(1)(B)(i), it is contended that the lower authorities are correct in charging interest u/s 201(1A). The learned Departmental representative also relies on the Circular No. 288 [F. No. 275/46/79-IT(B) dt. 22-12-1980] issued by the Central Board of Direct Taxes appearing at page 1510 of Tax-mans Direct Taxes Circulars (vol.2) 1988 Edn., in which it is stated that interest should be payable from the end of he period of two months from the end of the accounting year, irrespective of when the closing entries are actually made. 5. Shri Ashok Kumbhat, the learned representative for the assessee, on the other hand, claims that the liability to deduct tax arises only as and when the interest is crdited to the creditors account. If the assessee does not pay or choose to credit any interest to the creditors account, there will be no liability to deduct any tax. Thus, the liability to deduct tax arises only as and when the amount of interest is paid or credited to the creidtors account. In this case no interest payment was made to the creditors. Though it is true that the interest is credited as on 30th June, 1979 and 1981. According to Shri Kumbhat though such interest was credited to the parties account as on the fast date of the respective accounting years, physically such credit was given much later. According to him, the process of closing the accounts and passing the adjustment entries takes quite some time and it is only in the Course of such passing of adjustment entries that interest is credited to the creditors account. If that date is taken into accounts, according to Shri Kumbhat, there will be no delay in the payment of tax to the Government. he relies in this connection on the dection of the Tribunal in the case of Todi Investments (P.) Ltd. v. ITO [1983] 4 ITD 360(Cal.) and the decision of the Tribunal, D-Bench, Madras in the case of Kumar Bros. (Agency Division) IT Appeal Nos. 1065 and 1066 (Mad.) of 1988 dated 29-4-1983. In both the cases the Tribunnal held that the liability to deduct tax arises only when the interest is credited to the creditors account. (Agency Division) IT Appeal Nos. 1065 and 1066 (Mad.) of 1988 dated 29-4-1983. In both the cases the Tribunnal held that the liability to deduct tax arises only when the interest is credited to the creditors account. Though such entries may be passed as on the last date of the year, where in fact the entries were passed much later, as it happened in those cases, the period of two months has to be counted from the date of which such adjustment entries were actually passed and not from the last date of the accounting year. It is contended by Shri Kumbhat that in the present case also the assessee could not pass the adjustment entries on the last date of the accounting years. The returns for these two years were filed by the assessee on 30-12-1980 and 21-1-1983 respectively. In view of this fact, according to him, should be presumed that the adjustment entries have also been passed from before filing of the returns. If that date is taken into account, according to Shri Kumbhat, the payment is made within a period of two months and so no interest could be charged u/s 201(1A) of the Act. 6. In reply, the learned Departmental Representative points out that under the scheme of the Income-tax Act, tax could be collected either on the basis of the regular assessment or by a deduction at source or by way of advance tax. U/s 194A any person, who is responsible for paying to a resident any income by way of interest shall, at the time of credit of such income 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, whichever is earlier, deduct income-tax thereon at the rates in force. The tax so collected by way of tax deducted at source has to be treated as payment of tax on behalf of the person from whose income the deduction is made (vide Sec. 199). U/s 200 any person deducting tax in accordance with sec. 194A shall pay within the prescribed time, the sum so deducted to the credit of the Central Government or as the Board directs. U/s 200 any person deducting tax in accordance with sec. 194A shall pay within the prescribed time, the sum so deducted to the credit of the Central Government or as the Board directs. Under rule 30 where income by way of interest is credited by a person carrying on a business or profession to the account of the payee he has to pay the tax deducted u/s 194A within two months from the expiration of the month in which that date falls. The date up to which the accounts of the business are made is the last date of the previous year because it is on that day books are closed and accounts are made up. He brings to our notice in this connection the definition of the term "previous year" given in sec. 3 of the Income-tax Act, in which it is stated that "previous year" means if the accounts of the assessee have been made up to a date within a financial year, then, at the option of the assessee, the twelve months ending on such date. On the basis of the above definition it is stated that the accounts of the assessee having been made up on 30th June, 1979 and 1981 in the present case and as the credit of interest has been given to the payees account on the said dates, the assessee will have to pay the amount so deducted within two months of the expiration of the month in which that date, i.e. the date up to which accounts are made up falls. In this case, as the accounts have been made up to 30th June 1979 and 1981, the amounts of tax deducted have to be paid before 31st August of 1979 and 1981 respectively. Since this has not been done, it is stated that the lower authorities are correct in charging interest. It may happen that in some cases interest may be credited not at the end of the year, i.e., on the date up to which accounts are made but periodically either monthly, quarterly, etc. In such cases the amounts of tax deducted at the time of such periodic credits will have to be paid within 7 days from the end of the month in the course of which such credit is made. In such cases the amounts of tax deducted at the time of such periodic credits will have to be paid within 7 days from the end of the month in the course of which such credit is made. It is also pointed out that what is important is deduction of tax, and payment thereof is to be reckoned with reference to the date on which accounts are made up and not on any other date on which the assessee may actually pass adjustment entries. It is also claimed that there is not evidence or material in support of the assessees claim that the adjustment entries are passed/or the interest is credited on a date other than the date recorded in the books accounts. Admittedly the books show that interest has been credited to the parties accounts. Admittedly the books show that interest has been credited to parties account in the books of account of the assessee on 30-6-1979 and 30-6-1981 respectively. In the absence of any other material, it is pointed out that these dates should be taken as actual dates of credit and not any other imaginary dates on which the assessee actually claims to have given credit. 7. We have considered the rival submissions. As pointed out by the learned Departmental Representative under the Scheme of XVII of the Income-tax Act, tax deducted at source is also one of the modes of collection of tax. Sec. 194A imposes an obligation on the person paying income by way of interest, other than income by way of interest on securities, to deduct income-tax thereon at the rates in force at the time of credit of such income to the account of the payee or at the time of payment thereof, either in cash or by issue of a cheque/draft etc., whichever is earlier. There is no dispute that according to the entries passed in the books the assessee had credited the accounts of the parties with the interest due to them on 30th June 1979 and 1981 respectively. This much is fairly conceded by Shri Kumbhat, the learned representative for the assessee. However, the contention of Shri Kumbhat is that in practice it is not possible to pass the closing entries and adjustment entries in the books of any assessee on the last day of the previous year and such entries are passed actually much later. This much is fairly conceded by Shri Kumbhat, the learned representative for the assessee. However, the contention of Shri Kumbhat is that in practice it is not possible to pass the closing entries and adjustment entries in the books of any assessee on the last day of the previous year and such entries are passed actually much later. It is only when actually such entries are passed, the credit is given to the accounts of the parties and it is only then that there is a liability to deduct tax. Accourding to him, since the assessee had filed returns of income for these two years much later, i.e., on 30th Dec. 1980 and 21st January 1983, respectively and since the assessee was seeking for time to file the returns on the ground that the accounts were not yet redy, it is to be presumed that the credit entries crediting interest to the accounts of the parties have actually been made near about the above dates and not on 30th June 1979 and 1981 as recorded in the books of account. 8. We are not in a position to agree with these representative of Shri Kumbhat. Firstly, the books of accounts show that the interest to the accounts of the parties are credited as on 30th June of the respective accounting years. The claim of the assessee that credit was actually given in the account much later is not supported by any material whatsoever. The fact that the returns were filed much later does not ipso facto mean that the credit of interest to the account of the parties is also given much later. There may be any number of reasons why the accounts could not be finalised in time. It may be due to lethargy or illness of the persons concerned or there might be so many other genuine considerations like inability to reconcile the balances of various parties, not being able to prepare a proper trial balance etc. But merely because the returns are filed after a delay, we cannot persume that the interest to the parties account have also been credited much later, on or about the time when the returns were filed and not on the dates on which such interest is actually found credited in the books of account. But merely because the returns are filed after a delay, we cannot persume that the interest to the parties account have also been credited much later, on or about the time when the returns were filed and not on the dates on which such interest is actually found credited in the books of account. Normally when the documentary evidence by way of entries in the books of accounts show that interest is credited on a particular date ho and why, especially in the absence of other clinching material, we should assume that such credit was given on a later date. In the circumstances, we are of the opinion, that the date on which interest is credited on the books i.e., 30th June should be taken as the date of giving such credit. Even otherwise, according to Rule 30(1)(b)(i), the relevant date is the date up to which the accounts of the business are made up. Such dates for the two years under consideration will be 30th June of 1979 and 1981 respectively. The Rule does not speak of actual date of credit or the date on which adjustment entries are passed. Therefore, the interest has to be paid within two months of those dates. As the assessee had not deducted and paid the sums within the stipulated time, we are of the opinion that the ITO is justified in charging interest u/s 201(1A). 9. The two decisions of the Tribunal sought to be relied upon by the learned representative for the assessee, in our opinion, are clearly distinguishable. In the first case in Todi Investments (P.) Ltd.s case (supra) the Tribunal found as a matter of fact that the credit for interest was given in Sept. 79. It was on the basis of this finding of fact that it was held that the assessee will have further two months time to pay the tax deducted at source. In the second case of Kumar Brothers Agency Divsion (supra), the Tribunal gave a factual finding that the credit was given much later. It was on the basis of that finding it was held that the time for payment will start from the date on which the credit entries were passed. In the second case of Kumar Brothers Agency Divsion (supra), the Tribunal gave a factual finding that the credit was given much later. It was on the basis of that finding it was held that the time for payment will start from the date on which the credit entries were passed. In this case we have already held that in the absence of any other acceptable evidence that the dates on which the credit had been given in the accounts of the assessee viz. 30th June of the respective accounting years, should be taken as the dates on which interest is credited. In the circumstances, the assessee had to pay the amounts TDS within two months from those dates. Since it has not been done, we hold that the Board in its Circular No. 288 dt. 22-12-1980 had clarified that the tax on interest credited will be payable to the Government not on the basis when the closing entries are actually made, but on the basis of the due date according to Rule 30 of the Income-tax Rules for payment of tax falls i.e., within two months from the expiration of the month in which the accounts of the assessee are made falls. In our opinion, this Circular lays down the correct position of law. 10. In the result, the appeals of the Revenue are allowed.