"Income Tax Appellate Tribunal's Decision on Deduction of TDS by Assessee-Company for Loans to Directors Challenged; Department Appeals Ruling in Civil Appeals"

The civil appeals in question revolve around the determination of whether the Income Tax Appellate Tribunal was correct in holding that an assessee-company had no obligation to comply with the statutory requirements of Section 194A (of Income Tax Act, 1961). The case involved loans taken by directors of the company in their individual capacities, utilizing the company's name. The loans were deposited into the company's bank account and subsequently transferred to the directors on the same day. Repayments of the loans and interest were also routed through the company. The Department found that the assessee-company had not deducted TDS on the interest payments, leading to the application of Sections 201 and 201(1A) of the Act, declaring the company as an assessee-in-default and imposing interest for non-deduction of TDS. The Tribunal accepted the assessee's argument that the loans were for the directors and not for the company, relieving them of the obligation to deduct TDS. The Department filed civil appeals against this decision. The Appeals Tribunal found that the Department was correct in invoking the provisions of Sections 201 and 201(1A), but also noted that the Department should have objected to the non-deduction of TDS earlier. Ultimately, the appeals were allowed in favor of the Department.

1. A short question which arises for determination in these

civil appeals is : whether Income Tax Appellate Tribunal was

right in holding that there was no obligation on the part of the

assessee-company to comply with the statutory requirements

of Section 194A (of Income Tax Act, 1961) (for short, the

Act) by deducting tax deductible at source (TDS) on interest

paid by it for loans availed of by the assessee and repaid by it

with interest on the ground that the loans were meant for the

directors of the assessee-company and not for the assessee-

company and after recording a finding that the directors had

misused the name of the company to avail of the loan.

2. The facts giving rise to these civil appeals are as follows:

Assessee (sole respondent in all the civil appeals) is a

company incorporated under the Companies Act, 1956

engaged in the business of real estate and construction. A

survey was conducted under Section 133A (of Income Tax Act, 1961) when

cheque receipt registers and cheque payment registers were

found in the business premises of the company. On

examination of the said books, the Department detected taking

of loans by the directors of the company (assessee) in their

individual capacities from creditors in the name of the

assessee-company. The loan amounts received by way of

cheques in the name of the assessee were deposited in the

bank account of the assessee and transferred to the account of

the directors on the same day by issuing corresponding

cheques. When the directors repaid the loan amount or

interest thereon such payments were also routed through the

assessee-company. The directors issued cheques in favour of

the assessee and the assessee in turn issued cheques to the

creditors/lenders of such directors. Receipt of loan amounts

by the directors as also repayment of loans and interests were

all reflected in the books of accounts of the respective

directors. The receipts and outgoings were shown in the

accounts of the directors with the assessee-company. The

books of accounts of the assessee-company did not reflect the

loans borrowed by the assessee-company. According to the

assessee, neither the borrowing nor repayment nor payment of

interest on the borrowing were reflected as transactions of the

assessee in its books of accounts, they were only reflected in

the accounts of the directors in the books of the assessee-

company.

3. The A.O. found that when interest was paid by cheques

issued by the company to the creditor, TDS was not deducted

at source by the assessee on the interest payments as required

under Section 194A(1) (of Income Tax Act, 1961) and, therefore, the A.O.

applied the provisions of Section 201(1) (of Income Tax Act, 1961) by declaring

the assessee-company as assessee-in-default and also applied

Section 201(1A) (of Income Tax Act, 1961) imposing interest for not deducting

TDS at source. The order passed by the A.O. was confirmed

by the appellate authority. Before the Tribunal the assessee

contended that the borrowings were routed through the

company; that the company was merely a medium through

which the borrowings and repayments were routed; that the

loans were taken by the directors and not by the company

which loans and interests thereon were not reflected in the

company books of accounts and that the company was

merely disbursing the repayments of loans along with interests

and, therefore, it was not liable to deduct TDS at source under

Section 194A (of Income Tax Act, 1961). This contention of the assessee has

been accepted by the Tribunal. Hence, these civil appeals are

filed by the Department.

4. In the present matter, it is not in dispute that the

assessee-company has paid interests without deducting TDS

under Section 194A (of Income Tax Act, 1961). It is not in dispute that the

loans were advanced by the lenders to the assessee-company.

It is not in dispute that the loans were repaid by the assessee

through its bank accounts. It is not in dispute that interest

was paid by the assessee.

5. The above facts came to be detected only in the course of

survey conducted by the Department under Section 133A (of Income Tax Act, 1961) of

the Act on 6.12.95. It was never disclosed in the returns filed

by the assessee. Opportunity was given to the company to

explain why the company failed to deduct TDS under Section

194A of the Act. In reply, the director of the company

admitted that the transactions made were only for namesake.

However, it was urged that it was the duty of the Department

to look at the substance of he transaction between the lenders

and the assessee which would indicate that in substance it

was a loan to the individual directions and not to the company

and that the company was merely a conduit. In reply,

director of the assessee-company further stated that the name

of the company was lent, borrowings were routed through the

company and that in substance loans were in fact given to the

directors of the company. One more aspect needs to be

mentioned, even according to the impugned decision of the

Tribunal the directors had misused the name of the company

to avail of the loans and even with this finding the Tribunal

has held that there was no obligation on the part of the

assessee to comply with the statutory requirements of Section

194A of the Act by deducting TDS on the interests paid by the

assessee to the creditors. The first question which arises for

determination in these civil appeals is : whether it is open to

the directors of the assessee-company to contend before the

A.O., after search and survey operations, that the transactions

entered into by the assessee were for namesake and that they

actually related only to individuals and not to the assessee-

company. In other words, it is sought to be submitted that the

A.O. should lift the corporate veil at the behest of the assessee

who says that the deal was for namesake, ascertain the

substance of the transaction and record a finding that the loan

was in fact given not to the company but to the individual

directors.

6. In our view, such a submission cannot be accepted.

Section 194A (of Income Tax Act, 1961) forms part of recovery mechanism.

We quote here in below the said section which reads as under:

4A. Interest other than "Interest on securities".

(1) Any person, not being an individual or a Hindu

undivided family, who is responsible for paying to a

resident any income by way of interest other than

income [by way of interest on securities], 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 :

Provided that an individual or a Hindu undivided

family, whose total sales, gross receipts or

turnover from the business or profession carried

on by him exceed the monetary limits specified

under clause (a) or clause (b) of section 44AB (of Income Tax Act, 1961)

during the financial year immediately preceding

the financial year in which such interest is

credited or paid, shall be liable to deduct income-

tax under this section.]

Explanation.-For the purposes of this section,

where any income by way of interest as aforesaid

is credited to any account, whether called

"Interest payable account" or "Suspense account"

or by any other name, in the books of account of

the person liable to pay such income, such

crediting shall be deemed to be credit of such

income to the account of the payee and the

provisions of this section shall apply accordingly.]

(2) [Omitted by the Finance Act, 1992, w.e.f. 1-6-

1992.]

(3) The provisions of sub-section (1) shall not apply-

(i) where the amount of such income or, as the

case may be, the aggregate of the amounts of

such income credited or paid or likely to be

credited or paid during the financial year by the

person referred to in sub-section (1) to the

account of, or to, the payee, [does not exceed five

thousand rupees:]

Provided that in respect of the income

credited or paid in respect of-

(a) time deposits with a banking company to

which the Banking Regulation Act, 1949 (10

of 1949) applies (including any bank or

banking institution referred to in section 51 (of Income Tax Act, 1961)

of that Act); or

(b) time deposits with a co-operative society

engaged in carrying on the business of

banking;

(c) deposits with a public company which is

formed and registered in India with the

main object of carrying on the business of

providing long-term finance for construction

or purchase of houses in India for

residential purposes and which is eligible

for deduction under clause (viii) of sub-

section (1) of section 36 (of Income Tax Act, 1961) the aforesaid amount shall be computed

with reference to the income credited or paid

by a branch of the banking company or the co-

operative society or the public company, as the

case may be;]

(iii) to such income credited or paid to-

(a) any banking company to which the

Banking Regulation Act, 1949 (10 of 1949),

applies, or any co-operative society engaged in

carrying on the business of banking (including

a co-operative land mortgage bank), or

(b) any financial corporation established by

or under a Central, State or Provincial Act, or

(c) the Life Insurance Corporation of India

established under the Life Insurance

Corporation Act, 1956 (31 of 1956), or

(d) the Unit Trust of India established under

the Unit Trust of India Act, 1963 (52 of 1963),

or

(e) any company or co-operative society

carrying on the business of insurance, or

(f) such other institution, association or

body [or class of institutions, associations or

bodies] which the Central Government may,

for reasons to be recorded in writing, notify in

this behalf in the Official Gazette;

(iv) to such income credited or paid by a firm to a

partner of the firm;

(v) to such income credited or paid by a co-

operative society [to a member thereof or] to any

other co-operative society;]

(vi) to such income credited or paid in respect of

deposits under any scheme framed by the Central

Government and notified by it in this behalf in

the Official Gazette;

(vii) to such income credited or paid in respect of

deposits (other than time deposits made on or

after the 1st day of July, 1995) with a banking

company to which the Banking Regulation Act,

1949 (10 of 1949) applies (including any bank or

banking institution referred to in section 51 (of Income Tax Act, 1961) of

that Act);

(viia) to such income credited or paid in respect of,-

(a) deposits with a primary agricultural

credit society or a primary credit society or a

co-operative land mortgage bank or a co-

operative land development bank;

(b) deposits (other than time deposits made

on or after the 1st day of July, 1995) with a co-

operative society, other than a co-operative

society or bank referred to in sub-clause (a),

engaged in carrying on the business of banking;]

(viii) to such income credited or paid by the

Central Government under any provision of this

Act or the Indian Income-tax Act, 1922 (11 of

1922), or the Estate Duty Act, 1953 (34 of 1953),

or the Wealth-tax Act, 1957 (27 of 1957), or the

Gift-tax Act, 1958 (18 of 1958), or the Super

Profits Tax Act, 1963 (14 of 1963), or the

Companies (Profits) Surtax Act, 1964 (7 of 1964),

or the Interest-tax Act, 1974 (45 of 1974);

(ix) to such income credited or paid by way of

interest on the compensation amount awarded by

the Motor Accidents Claims Tribunal where the

amount of such income or, as the case may be,

the aggregate of the amounts of such income

credited or paid during the financial year does

not exceed fifty thousand rupees;

(x) to such income which is paid or payable by an

infrastructure capital company or infrastructure

capital fund or a public sector company in

relation to a zero coupon bond issued on or after

the 1st day of June, 2005 by such company or

fund or public sector company.

Explanation 1.-For the purposes of clauses (i),

(vii) and (viia), "time deposits" means deposits

(excluding recurring deposits) repayable on the

expiry of fixed periods.

Explanation.- Omitted.

(4) The person responsible for making the payment

referred to in sub-section (1) may, at the time of

making any deduction, increase or reduce the

amount to be deducted under this section for the

purpose of adjusting any excess or deficiency

arising out of any previous deduction or failure to

deduct during the financial year.

(emphasis supplied)

7. The material expression in Section 194A(1) (of Income Tax Act, 1961) is

at the time of credit of such income to the account of the

payee. When interest is debited to Interest Account the

debit is for a specific amount calculated with reference to the

liability of the deductor to a particular creditor in accordance

with the terms and conditions of the loan. Therefore,

whenever interest is credited to the account of the payee the

payer has to deduct the TDS. The crux of the matter is that

the debit is for a specific amount calculated with reference to

the deductor liability to a particular creditor in accordance

with the terms and conditions of the loan. In the present case,

the lender had advanced the loan to the assessee-company.

Debit was made by the assessee-company to the Interest

Account for a specific amount calculated with reference to the

deductor liability to a creditor. There is no resolution of the

assessee-company placed before the A.O. whereby the

company has agreed to act as a medium for routing the

borrowings and repayments. In the circumstances it cannot

be said that the assessee-company was incharge of disbursing

the repayments made by directors in their individual

capacities.

8. Consequently, Department was right in invoking the

provisions of Sections 201 and 201(1A) of the Act. However,

on facts we are of the view that in the first instance over the

years the Department should have not allowed non-deduction

of TDS by the company and nothing prevented the A.O. from

raising the objection to such practice.

9. For the aforestated reasons, we answer the above

question in the negative, i.e., in favour of the Department and

against the assessee-company. The Department civil appeals

are accordingly allowed with no order as to costs.