IN THE HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE No 105 of 1990 with INCOME TAX REFERENCE NOS. 147/90, 192/90, 193/90, 195/90, 110/91, 115/91, 161/91, 173/91, 185/91, 187/91, 217/91, 219/91, 220/91, 227/91, 234/91, 245/91, 14/92, 27/92, 51/92, 60/92, 61/92, 83/92, 283/92, 285/92, 378/92, 392/92, 270/95, 284/95, 285/95, 62/96, 66/96, 68/96 AND 69/96. For Approval and Signature: Hon'ble MR.JUSTICE R.K.ABICHANDANI and MR.JUSTICE KUNDAN SINGH ============================================================ 1. Whether Reporters of Local Papers may be allowed to see the judgements? 2. To be referred to the Reporter or not? 3. Whether Their Lordships wish to see the fair copy of the judgement? 4. Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder? 5. Whether it is to be circulated to the Civil Judge? -------------------------------------------------------------- COMMISSIONER OF INCOME-TAX Versus RANOLI INVESTMENT PVT LTD. & ORS. -------------------------------------------------------------- Appearance: MR MIHIR THAKORE, with MR MANISH R BHATT, Advocates for Petitioner MR D.A. MEHTA, MR. R.K. PATEL, MR. M.K.PATEL AND MR. B.D. KARIA, ADVOCATES for the Respondents. -------------------------------------------------------------- CORAM :MR.JUSTICE R.K.ABICHANDANI and MR.JUSTICE KUNDAN SINGH Date of decision: 31/03/98 ORAL JUDGEMENT (Per R.K.Abichandani,J.) In this group of References, similar question is involved though worded slightly differently as indicated hereunder and all these matters have been argued together taking ITR No. 105/90 as a lead matter and both the sides have filed therein a copy of the decision of the Tribunal in I.T.A No. 2037/Ahd/86 in Kanchanjunga Investments Pvt.Ltd. (IVL), Ahmedabad Vs. ITO, which decision has been followed by the Tribunal in all these matters. 2. In ITR Nos. 105/90, 147/90, 192/90, 193/90, 195/90, 110/91, 115/91, 161/91, 173/91 and 187/91, the question referred is worded as under:- "Whether, the Appellate Tribunal is right in law and on facts in holding that tax deductible at source should be deducted and thereafter interest should be calculated"? In ITR Nos.217/91 and 392/92, the question referred is worded as under:- "Whether, the Appellate Tribunal is right in law and on facts in holding that the interest under Section 215 of the Income Tax Act should not be levied without giving credit for tax deducted at source?" In ITR Nos.219/91, 227/91, 234/91, 14/92, 60/92, 61/92 and 283/92 the question referred reads as under:- "Whether, the Appellate Tribunal is right in law and on facts in holding that interest under Section 215 should be charged after giving credit for the tax deducted at source which was not actually deducted during the year but was actually deducted and paid in the next year?" In ITR Nos. 270/95, 62/96, 66/96, 68/96 and 69/96, the question referred is worded as under:- "Whether the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in holding that it is the tax deductible at source and not the tax actually deducted at source which is to be taken into consideration while computing the interest under Section 215 of the Income Tax Act, 1961?" In ITR No. 185/91, the question referred is worded as under:- "Whether the Appellate Tribunal is right in law and on facts in holding that credit has to be given for tax deducted at source for the purpose of charging interest under Section 215?" In ITR No. 83/92, the question referred is worded as under:- "Whether the Appellate Tribunal is right in law and on facts in holding that assessed tax had to be arrived at by reducing from the tax determined on the basis of the regular assessment the amount of tax "deductible" under Section 192 to 195 and not the tax actually deducted at source in accordance with these statutory provisions and thereby accepting the assessee's claim for interest under Section 215?" In ITR Nos. 284/95 and 285/95, the question referred is worded as under:- "Whether the Appellate Tribunal is right in law and on facts in directing the Assessing Officer to work out the amount of tax deductible at source on the amount of interest income and to give due credit for the same for the purpose of working out the assessed tax under Section 215(5), notwithstanding the fact that no tax was in fact deducted at source?" In ITR No. 220/91 and 51/92, the question referred is worded as under:- "Whether, the Appellate Tribunal is right in law and on facts in accepting the assessee's claim and coming to the conclusion that charging of interest under Section 215 is to be computed after giving credit for tax deducted at source?" In ITR No. 245/91, the question referred is worded as under:- "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that in computing interest under Section 215 of the I.T Act, 1961, the credit should be given in respect of tax deductible at source on the interest income including in the total income although such tax was deducted and credited to the account of the Central Government in the next financial year by the party who paid the interest income?" In ITR No. 27/92, the question referred is worded as under:- "Whether, the Appellate Tribunal is right in law and on facts in directing the I.T.O. to compute the interest charged under Section 215 after giving credit for tax deductible at source?" In ITR No. 378/92, the question referred is worded as under:- "Whether the Appellate Tribunal is right in law and on facts in holding that the interest under Section 215 of the I.T Act should not be deducted at source? In ITR No. 285/92, the question referred is worded as under:- "Whether, the Appellate Tribunal is right in law and on facts in holding that interest under Section 215 should be levied after giving credit for tax deducted at source which was not actually deducted during the year but deducted and paid in the next year?" 3. Though questions are worded slightly differently, the controversy involved is the same and boils down to the aspect whether in the said definition of the words "assessed tax" incorporated in sub-section (5) of Section 215 of the Act for the purpose of Sections 215, 217 and 273, the tax determined on the basis of the regular assessment is to be reduced by the amount of tax which was deductible at source under the provisions mentioned therein or it was to be reduced by the amount of tax actually deducted in accordance with those provisions. According to the Revenue, it is the amount of tax which is actually deducted at source, which was to be reduced from the tax determined at the regular assessment while according to the assessee, the amount of tax which was deductible was required to be reduced, notwithstanding the fact whether the payer actually deducted it or not. This distinction has a bearing on spelling out the liability of the assessee to pay interest under Section 215(1) of the Act. If the advance tax paid by the assessee in any financial year is less than 75% of the assessed tax, simple interest at the rate of 12% per annum from 1st day of April next following the said financial year upto the date of the regular assessment becomes payable by the assessee upon the amount by which the advance tax so paid falls short of the assessed tax. 4. In Income Tax Reference No. 105/90, the relevant assessment year is 1982-83. The return of income was filed by the assessee on 31st July, 1982. The accounting period shown separately for the source of income was 30th September, 1981. The assessee's source of income was, inter-alia, interest income. In respect of the interest income, tax was required to be deducted at source by the payer at the time of giving of credit or making the payment, whichever was earlier, as provided by Section 194A of the Act. The tax was deducted by the payer however, on 16.7.1982 i.e. after the financial year and much after the interest income accrued to the assessee. The assessee was given credit of the amount which was deducted by the payer from the assessee's interest income, but it was not to treated as tax deducted at source as such, and was treated as assessee's deposit, for which credit was given. The Assessing Officer on 22.3.1985, inter-alia, ordered interest under Section 215 to be charged without giving any credit for the said amount. The CIT (Appeals), rejected the assessees' appeal against the charge of interest under Section 215 of the Act. The Tribunal, followed its decision in the case of Kanchanjunga Investments Pvt.Ltd. Vs. I.T.O., and holding that it squarely applied to the facts of these cases which were identical, partly allowed the appeal pertaining to interest under Section 215 and directed the ITO to recompute the interest after giving benefit of the tax deducted at source from the interest income. Similar orders were made in all other matters from which the aforesaid references arise. This is why both the sides have placed the papers pertaining to the decision of the Tribunal in the case of Kanchanjunga Investments Pvt.Ltd. on the record of the lead matter, being Income Tax Reference No. 105/90. Since in all these matters the Tribunal has incorporated by reference its reasoning in its earlier decision in Kanchanjunga Investments Pvt.Ltd., we would refer to that reason to the extent that it is relevant to the question involved in these references. The aspect of interest under Section 215 was considered in detail by the Tribunal in paragraphs 5 onwards of its decision dated 7th June, 1988 in the case of Kanchanjunga Investments. In that case, the assessee had filed the estimate of advance tax after deducting from tax payable on current income the amount of estimated tax deductible at source on interest income receivable by it. The ITO analysed the question of deducibility of the tax deductible at source for computation of advance tax payable and noted that the entire interest income received by the assessee was from companies. When the interest became due to the assessee at the end of their previous year, instead of crediting the interest amount to the assessees' account, they credited the same to `interest payable account'. At that point of time no credit whatsoever was given to the assessees' account and no tax was deducted at source. The assessee on the other hand debited the interest receivable by it not in the account of the payers, but to `interest receivable account'. This estimated interest was offered by the assessee for taxation. The ITO had noted that this system was being followed by the assessee consistently. It was further noted by him that after a lapse of several months and in some cases exceeding even two years, the payer companies had given the credit of the interest payable by them to the assessee, to the account of the assessee. It was at that point of time that the tax was deducted by them from the interest amount payable to the assessee. The payer companies then sent a note to the assessee company and based upon such notes, the assessee company transferred from the `interest receivable account', the interest receivable by it from those companies to their respective accounts. The ITO therefore, issued necessary notice to the assessee to show cause as to why interest under Section 215 of the Act should not be charged without giving credit for the tax deductible at source from the interest income of the assessee, for the purpose of computation of advance tax. According to the assessee company, they bonafide believed that the tax deductible at source on the interest income was to be reduced. The ITO was, however, of the opinion that as per the system followed by the companies of Sarabhai Group of the assessee company, tax was not deductible at source during the financial year. He therefore, charged interest under Section 215 of the Act without giving the credit for the tax deductible at source for the purposes of computation of interest under Section 215, though credit was given for the tax actually deducted at source for tax purpose on the ground that the requisite certificate showing deduction of tax was produced before him at the time of the assessment. The CIT (Appeal) had confirmed this decision of the ITO. The Tribunal held that the expression "assessed tax" had a specific meaning as provided by Section 215 (5) of the Act and as per that meaning, the assessed tax would mean, tax determined on the basis of regular assessment as reduced by the amount of tax deductible under the various provisions mentioned therein. It was held that in view of the specific meaning of the expression "assessed tax", the word "deductible" occurring in Section 215(5) could not be confused for the meaning of term "deducted". The Tribunal relied upon the decision of the Madras High Court in CIT Vs. Madras Fertilizers Ltd., reported in 149 ITR 703, in which the High Court while construing the provisions of Section 215 of the Act, held that, where the tax was deductible at source, the person who had failed to so deduct the tax at source, was liable to pay interest and not the assessee, as otherwise, there would be charging of interest twice on the amount of tax in relation to such income. The Tribunal directed the ITO to give credit for the amount of tax deducted at source in computation of the interest income of the assessee. We have referred to the reasoning adopted by the Tribunal in the context of the facts of Kanchanjunga Investments, because, as held by the Tribunal in its decisions from which the aforesaid references arise, the facts of all these cases are also similar and the point involved identical, the Tribunal had followed its decision in Kanchanjunga Investments' case. Both the sides have made their contentions on the footing that the facts as regards the said question in all these matters are similar, the question involved same and the reasoning adopted by the Tribunal common, as reflected from its decision in Kanchanjunga Investments' case. 5. It was contended by the learned Counsel appearing for the Revenue in these references that the entries made by the assessees in respect of the interest income in the `interest receivable account' and correspondingly made by the payer - companies in the `interest payable account' should be treated as credit of interest to the account of the assessees within the meaning of Section 194A of the Act. It was contended that since the interest income was offered for tax in respect of the relevant previous years by these assessees, and since entries were made in respect thereof in `interest receivable and interest payable accounts' of the parties, the tax became deductible at source at the time when such credit was given by making such entries. It was submitted that, in any event, when the income had actually accrued in the previous year in question and offered for tax in the assessment year by the assessees, it should be treated as having been credited to them without any deduction being made by the payers. It was contended that the assessees knew that the tax would not be deducted by the payer companies from their interest income during the financial year and therefore, the tax was not deductible as contemplated by Section 215 (5) of the Act. In any event after the credit was given by the payer company to the assessee of the full interest income without making any deduction of tax at source, the tax ceased to be deductible at source and it became the liability of the assessee to pay the same. It was contended that merely because the deduction was made by the payer at a later point of time notwithstanding the credit earlier given, it will not make such deduction a tax deductible at source under the Act. It was contended that merely because credit was given at the regular assessment of such amount which was subsequently deducted and paid to the Revenue by treating as a deposit of tax on behalf of the assessee, it cannot be said that such an adjustment would absolve the assessee from its liability to pay interest under Section 215 of the Act. It was contended that the idea behind providing for payment of advance tax and deduction at source, was to recover the tax payable by the assessee and if there was a shortfall, to compensate the revenue for loss of interest by making the assessee liable to pay interest at the prescribed rate, if the difference between the advance tax payable and the assessed tax was wider than 25 per cent. It was therefore, submitted that the word "deductible" in Section 215(5) should be understood as the tax actually deducted. Even if it was to be read as deductible, there was nothing which was required to be deducted after the credit of interest and since no amount remained deductible after the credit in the `income payable' and `income receivable' accounts of the parties, there was no question of reducing any deductible tax from the tax assessed at the regular assessment. It was contended that the provisions of Sections 199, 202 and 205 indicate that it is only when the tax is actually deducted at source that the liability of the assessee ceases. It was submitted that if the tax is not deducted at source and it is treated as a deductible tax to be reduced from the assessed tax and no interest is to be charged thereon, it would frustrate the very object underlying Section 215 of the Act. It was also submitted that the consequence ensuing from non-deduction of tax at source against the payer are distinct from the liability of the assessee to pay interest under Section 215 of the Act. It was finally submitted that the use of the words " tax deductible" in Section 215(5) can only mean tax deducted on or before 1st April of the financial year, because, the object of Section 215 is to see that 75 per cent of the assessed tax is paid in the financial year and it is only after the assessee has paid up 75 per cent of the assessed tax inclusive of the amount deductible as tax without any reduction, that his liability to pay interest will not arise. 6. The learned Counsel appearing in all these references for the assessees, on the other hand, contended that the word "deductible" appearing in Section 215(5) was used in context of the advance tax computed under Section 209 of the Act. It was submitted that the word deductible should have the same meaning in Section 215(5) as it had in Section 209 of the Act. It was argued that the provisions of Section 209 cannot be given a go-by, because when the advance tax was worked out under as that provision, the assessee could not have known that the tax will not be deducted at source by the payer. It was further contended that the assessee, in cases where credit is given to his account by the payer but no intimation is given, would have no reason to suspect that the deduction would not be made at source. It was submitted that in cases where the income accrued by way of interest at the end of the previous year which ended in March, the assessee would not, even at the time of payment of his third instalment by 15th March, know whether there would be any deduction made or not by the payer. It was therefore submitted that the expression "deductible at source" in Section 215(5) should carry the same meaning as it has under the provisions of Section 209(1)(a)(iii), which require the income tax calculated for the purpose of advance tax to be reduced by the amount of income tax which would be deductible during the financial year, in accordance with the provisions mentioned therein, on any income (as computed before allowing any deductions admissible under the Act) on which tax was required to be deducted, and which had been taken into account in computing the total income. It was the net amount of income tax calculated in accordance with sub-clause (iii) that was, subject to clauses (c) and (d), to be the advance tax payable. 7. Chapter XVII of the Act deals with collection and recovery of tax and as provided by Section 190(1), notwithstanding the fact that the regular assessment in respect of any income is to be made in a later assessment year, the tax on such income shall be payable by deduction at source or by advance payment, as the case may be, in accordance with the provisions of this Chapter. The provisions regarding deduction at source are contained in Section 192 to 206B falling in Part "B" of Chapter XVII while the provisions regarding advance payment of tax contained in Section 207 to 219 fall in Part "C" of the said Chapter. As provided under Section 191, in the case of income in respect of which provision is not made under this Chapter for deducting income-tax at the time of payment and in any case where income-tax has not been deducted in accordance with the provisions of this Chapter, income-tax shall be payable by the assessee direct. Income tax is deductible at source in respect of any interest other than interest on securities as provided by Section 194A of the Act, which inter-alia lays down that 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 chargeable under the head "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. Thus, when credit of such income is given to the account of the payee, earlier than the time of actual payment by any of the modes indicated, the income-tax would be deductible at the earlier point of time of giving of such credit. In other words, the tax in such a case would be deductible at source at the time when credit was given to the account of the payee and not thereafter at any subsequent stage including that of actual payment. When the tax is deducted at source, it would be treated as income received by the assessee, as provided by Section 198 of the Act. The person who deducts the tax, under the provisions of Section 200, is required to pay the same within the prescribed time limit to the credit of the Central Government or as the Board directs. Any deduction made in accordance with the provision of Section 194A and paid to the Central Government is to be treated as payment of tax on behalf of the person from whose interest income the deduction was made and credit is to be given to him for the amount so deducted on production of the certificate furnished under Section 203 in the assessment, if any, made for the immediately following assessment year, under the Act as provided by Section 199. Under Section 203, the person deducting the tax at source is required to furnish to the person to whose account such credit is given or to whom such payment is made, a certificate to the effect that tax has been deducted and specifying the amount so deducted, the rate at which the tax has been deducted, and such other particulars as may be prescribed. Such certificate was required to be given in Form 19A prescribed under Rule 31 (4A) of the Income Tax Rules in force at the relevant time. This certificate in the prescribed form was required to indicate the date on which the amount deducted at source was