Income from interest is taxable under income from other source and chargeable under section 194A

IN THE INCOME TAX APPELLATE TRIBUNAL

DELHI BENCH “B” New Delhi

BEFORE SHRI R.P. TOLANI AND SHRI SHAMIM YAHYA

ITA No. 4044 & 4045/Del/2009

A.Yr: 2004-05

Executive Engineer,

Civil Construction Division-II,

Dhalipur.

(Appellant)

Vs.

Income Tax Officer,

(TDS)-II, Dehradun.

 (Respondent)

Appellant by: Shri Girish K. Shukla Adv.

Respondent by: Shri J.S. Ahlawat SR. DR

O R D E R

PER R.P. TOLANI, J.M:

These are two assessee’s appeals against respective orders of CIT(A). Both the appeals are heard together and being disposed of by a common order for the sake of convenience. Respective grounds taken are as under: ITA no. 4044/Del/2009 [U/s 201(1)/201(1A)]:

“That the learned Commissioner (Appeals) erred on facts and in law in confirming the order of the Income Tax Officer (TDS), treating the appellant as assessee in default in respect of tax and interest amounting to Rs. 42,4,102/- under section 201(1)/201(1A) of the I.T. Act, 1961.

ITA no. 4045/Del/2009 [U/s 271C]:

That the learned Commissioner (Appeals) erred on facts and in law in confirming the penalty amounting to Rs. 39,92,201/- imposed on the appellant by the Addl. Commissioner of Income Tax under section 271C of the I.T. Act, 1961.

2. ITA no. 4044/Del/09 is against the demand raised by treating the assessee in default u/s 201(1)/201(1A) of the I.T. Act and ITA no. 4045/Del/09 is consequent penalty u/s 271C of the I.T. Act. It shall be pertinent to note that appeal no. 4044/Del/09 is barred by limitation by 1562 days. The assessee has filed an application for condonation of delay in filing this appeal. ITA no. 4045/Del/09 has been filed in time.

2.1. Brief facts are: Survey proceedings u/s 133Awere conducted by Income-tax department on 29-1-2004 in the office premises of Executive Engineer, Civil Construction Division-II, Dhalipur, Dehradun. It was found that vide Hon’ble Supreme Court order, assessee had paid following amounts to a contractor firm M/s Harish Chandra & Co. upon a dispute about civil construction.

Towards contractual payment Rs. 80,99,176

Towards interest Rs. 4,47,26,279

2.2. It was found that TDS @ 2.1% u/s 194C was deducted on whole payment whereas on the interest component the assessee was liable to pay TDS @ 11% u/s 194A. Show cause notices were issued as to why the assessee should not accordingly be treated in default u/s 201(1) for the short deduction of TDS. During the course of these proceedings, on 25-2-2004 the assessee stated that this contractor had filed a certificate of low deduction of tax from DCIT Cir. Rohtak U/s 194C(4) mentioning that tax on the payment may be deducted @ 0.50%. This certificate was in the name of M/s Harish Chandra (India) Ltd., 834/2 Jhung Colony Rohtak. It was stated that the business of M/s Harish Chandra & Co. was taken over by M/s Harish Chandra (India) Ltd. Assessing Office, however, held the assessee to be in default by following observations:

 “without prejudice to the above, it is clear that both these certificates issued by the DCIT, Circle, Rohtak are in the name of M/s Harish Chandra & Co. of New Delhi. The record further makes it clear that the payment was due to M/s Harish Chandra & Co. An agreement was entered on 26-10-1979 by M/s Harish Chandra & Co. respondent to the Civil Appeal no. 7643 of 1995. According to the agreement the work of construction was to be started on 1-12-1979 and was to be completed by 31.5.1983. The work was not completed by the due date as well as by extended time and the contracting parties i.e. State of U.P (Appellant) and M/s Harish Chandra & Co. (respondent) were the parties to the Civil Appeal before the Hon’ble Supreme Court. Finally the hon’ble Supreme Court delivered the order on 11.11.2003 and the aforesaid payments have been made to M/s Harish Chandra & Co. New Delhi.

All these facts reveals that the company M/s Harish Chandra (India) Ltd. has never been a party to the agreement dated 26- 10-1979 and also before the Hon’ble Supreme Court in the Civil appeal. Finally the payments have been made by the Department to M/s Harish Chandra & Co. and not to M/s Harish Chandra (India) Ltd.. Therefore, the contention on the point of certificate of lower deduction is rejected as the same do not pertain to M/s Harish Chandra & Co. New Delhi. Moreover, the matter before me is with regard to non deduction of tax on interest amount as required u/s 194A of the I.T. Act and not u/s 194C. The person responsible for making the payment was required to deduct tax on contractual payments u/s 194C @ 2.1% and on the amount of interest u/s 194A @ 11%. Thus, therefore, TDS amounting to Rs. 39,92,201/- u/s 194A was short deducted. Accordingly, I hold the Executive Engineer, Civil Construction Division-II, Dhalipur, Distt. Dehradun as an assessee in default u/s 201(1) with regard to the short TDS amounting to Rs. 39,92,201/- of I.T. Act 1961 accordingly order u/s 201(1) is made with these observations. Similarly order u/s 201(1A) is made for interest ….

2.3. Assessee filed first appeal, however, none appeared on behalf of the assessee in appeal before the CIT(A), which resulted in an ex parte order upholding the Assessing Officer’s order, treating the assessee in default. In the meanwhile Assessing Officer issued penalty notice u/s 271C. The assessee filed written submissions, explaining the facts. Assessing Officer , however, imposed the penalty vide order dated 23-4-2007, making following observations:

“3. On receipt of proposal from the ITO(TDS)-2, Dehradun, a show cause notice u/s 271C was issued to the person responsible on 9-10-2006 fixing the date of hearing on 26-10- 2006. On the date fixed neither anybody attended nor any written reply was received. Again a notice was issued on 5-12- 2006, fixing the hearing for 19-12-2006. In compliance to this, a letter dated 14-12-2006 was received in which it was mentioned that the person responsible is out of station and requested for adjustment after 20-12-2006. Accordingly, on the request of the person responsible, case was adjourned for 26- 12-2006. In response to the same, vide letter dated 27-12-2006, person responsible has stated that the project under which the payment was made has been transferred to Saharanpur in U.P. and the amount of tax short deducted has already been recovered by the ITO(TDS), therefore, it has been requested to transfer the penalty to that project at Saharanpur. Subsequent to it, another written explanation dated 22-01-2007 was filed by the Authorised Representative for the person responsible in  which it has been contended on behalf of the person responsible that M/s Harish Chandra & Co. has filed its return for the relevant year at Income-tax Office, Rohtak including therein the receipts along with interest received from the person responsible in his total receipts and has paid the tax on such receipts. It has also been contended on behalf of the person responsible that ITO(TDS)-II has also charged income-tax on the same receipts paid to M/s Harish Chandra & Co. and has claimed that tax has been charged twice on the same income.

Reliance has been placed by the authorized person on the decision of Hon’ble M.P. High Court.

4. I have considered very carefully the written submissions filed by the person responsible and subsequently filed by the authorized representative on behalf of the person responsible. I have also perused the case records of the person responsible. The claim of the person responsible that M/s Harish Chandra & Co. has already declared the contractual was well as interest income in its return of income and paid tax on the same In support of the same, copies of order u/s 143(3), intimation u/s 143(1) P&L A/c and copy of ledger account of contractor in respect of M/s Harish

Chandra & Co. for the A.Y. 2004-05 have been filed. A perusal of the same reveals that the assessee has shown income of Rs. 2,11,51,372/- in its return of income. This income has been worked out against the gross contractual receipt of Rs. 95,86,31,615/- and this gross contractual receipt include receipt of Rs. 5,04,87,404/- shown as received from Dhalipur A/c. Thus, it is seen that in respect of its contract with Dhalipur Project, M/s Harish Chandra & Co. has included gross contractual; receipt of Rs. 5,04,87,404/- whereas during the year under consideration in respect of Dhalipur project, gross receipts were Rs. 5,28,25,855/- out of which Rs. 80,99,176/- was the contract receipt and balance Rs. 4,47,26,279/- was the interest income awarded to the contractor consequent upon decision of Hon’ble Supreme Court. This interest income is taxable under the head Income from other sources. However, the contractor has included it in its return of income receipts of Rs. 5,04,87,404/- as contractual receipts and after reducing various expenses, net income of Rs. 2,11,51,373/- has been disclosed in his return of income. Thus the claim of the authorized representative for the person responsible that M/s Harish Chandra & Co. has included this interest income in its return of income is incorrect. By not deducting tax as per

provisions of Sec. 194A on the amount of interest paid by the person responsible led him to be treat ed as a person responsible in default accordingly, ITO(TDS)-II, Dehradun, has passed order

u/s 201(1) treating him as a person responsible in default for short deduction of tax u/s 194A by an amount of Rs. 39,92,201/- after giving him the credit for the tax deducted u/s 194C.The order of the ITO(TDS)-II, Dehradun has been contested in appeal filed by the person responsible and the learned Commissioner of Income tax ((Appeals)-I, Dehradun, has been pleased to dismiss the appeal of the person responsible vide his order dated 28-3- 2005 in Appeal no. 79/DDN/2004-05.

5. From the facts discussed above, it is evidently clear that the person responsible has deducted tax short by Rs. 39,92,201/- which was required to be deducted by him under the provisions of Sec. 194A and thus has rendered himself liable for imposition of penalty u/s 271C of the I.T. Act, 1961. Penalty imposable under Sec. 271C is the sum equal to the amount of tax which the person responsible has failed to deduct. Since in this case, amount of tax deducted short is Rs. 39,92,201/-, penalty of Rs. 39,92,201/- (Rupees Thirty Nine lacs ninety two thousand two hundred and one only) is hereby imposed under Sec. 271C of the I.T. Act, 1961.”

2.4. Aggrieved, assessee preferred first appeal against this order levying penalty u/s 271C. CIT(A) vide order dated 15-7-2009 confirmed the penalty, observing as under:

“6. I have considered the above submissions of the representatives of the appellant and the facts indicated in the penalty order of the Assessing Officer . It is observed that as a result of survey conducted at the office premises of Executive Engineer, Civil Construction Division-II, Dhalipur, Dehradun (person responsible) on 29-01-2004, it was noticed that a payment of Rs. 5,28,25,855/- was made by the person responsible on 21.11.2003 to M/s Harish Chandra & Co., in consequence of decision of Hon’ble Supreme Court. The aggregate amount of payment included Rs. 80,99,176/- on account of contractual work and the balance of Rs. 4,47,26,279/- is the component of interest, as worked out by the person responsible. The person responsible had deducted tax at source on the whole payment of Rs. 5,28,25,855/- @ 2.1% considering it as contractual payment covered u/s 194C of the Act. However, the tax was required to be deducted @ 11% on the portion of payment relating to interest in accordance with the provisions of Sec. 194A of the Act and not u/s 194C of the Act. Accordingly, there was a short deduction of tax at source at Rs. 39,22,201/-, which was required to be deducted under the provisions of Sec. 194C of the Act and in absence of such deduction, the Assessing Officer has passed an order u/s 201(1)

of the IT Act by treating the appellant, as person in default for short deduction of tax by an amount of Rs. 39,92,201/-. The order of the ITO(TDS)-II, Dehradun was contested in appeal before ld. CIT(A)-I, Dehradun and the said appeal has been dismissed vide order dated 28.03.2005 in A.No. 79/DDN/2004- 05. In consequence of the order of the ld. CIT(A)-I, Dehradun, the default for short deduction of tax at source u/s 194A of the Act becomes clearly established and the penalty is exigible u/s 271C of the IT Act, in absence of any plausible explanation for the same. Therefore, I uphold the action of the Assessing Officer in levying penalty u/s 271C of the IT Act to the tune of Rs. 39,92,2101/- and no interference is called for in this respect.”

3. Aggrieved, assessee is before us. As mentioned above, ITA no. 4044/Del/2009 i.e. in respect of proceedings u/s 201(1)/201(1A) is filed late by 1562 days. Learned counsel for the assessee drew our attention to the detailed condonation application and affidavit filed in this respect. It is

argued that the contract given to M/s Harish Chandra & Co. was awarded under the regime of undivided state of U.P. i.e. when the districts of Uttrakhand state were part of U.P. The irrigation project was known as Khara project of U.P. State Irrigation Department. The dispute arose with said M/s Harish Chandra & Co. and erstwhile Executive Engineer, Yamuna Link Channel Construction Division, Saharanpur. The dispute ensued about the implementation of terms of contract, which went right up to the Supreme Court. In the meanwhile the state of U.P. was bifurcated and the part of Khara project record pertaining to Uttrakhand was transferred to Dehradun.

3.1. It shall be pertinent to observe that the original default is not committed by the incumbent in question but by the erstwhile Executive Engineer, Saharanpur of undivided U.P. The partition of U.P. took place under tumultuouscircumstances and the concerned record was belatedly transferred from Saharanpur to Dehraun, which took its own time. The assessee could become aware of the CIT(A)’s order u/s 201(1)/ 201(1A) only when the penalty order u/s 271C was passed. This is a unique situation when the part of record was transferred from one state agency to reorganized other state agency i.e. irrigation department. It was not only TDS record but copious work of project also were transferred. It was humanly not possible to track each issue and look unforeseen time to streamline the affairs. Only when the penalty order u/s 271C was passed, the assessee became aware that three was an ex parte order of CIT(A) in respect of TDS liability u/s 201(1)/201(1A).

3.2. In these circumstances, assessee was left with no choice but to file a belated appeal as per the professional advice along with condonation application. It is pleaded that the circumstances were beyond the control of the incumbent which were made difficult by the reorganization of states, transfer of massive records of Khara project and insufficiency of human resources. The Irrigation department is a state government undertaking and works in public interest. The delay has been caused by these unfortunate circumstances and it will be travesty of justice that it is saddled with huge TDS liabilities which are otherwise not leviable. The said M/s Harish Chandra & Co. and its transferee are already assessed to tax and have offered this amount of compensation in their return of income and paid due taxes in this behalf.

3.3. Reliance is placed on Hon’ble Supreme Court judgment in the case of Hindustan Coca Cola Beverage (P) Ltd. Vs. CIT 293 ITR 226 (SC), which has held that if the payee is assessed to tax and has paid all the due taxes, the payer again cannot be held to be an assessee in default. Further reliance is placed on Hon’ble Supreme Court judgment in the case of Collector, Land Acquisition Vs. Mst. Katiji & ors. 167 ITR 471(SC) for the proposition that when substantial justice and technical considerations are pitted against each other, the cause of substantial justice deserves to be preferred.

3.4. It is pleaded that delay is not deliberate. No govt. department will abdicate the duty of filing appeal in time unless it is caused by some circumstances which in this case are division of state; the consequent delayed movement of record; allocation of accountabilities to the new state personnel and streamlining the record. If the condonation petition is not allowed then the present incumbent may be held liable for the default, if any, committed by some other incumbent. This will lead to a very anomalous situation of recovery when the payee stands assessed under income tax. In the interest of justice the condonation petition may be allowed.

4. Ld. DR is heard who contends that the govt. departments are expected to work diligently. The delay of about five years is not on account of any sufficient cause but callus attitude of the petitioner.

5. We have heard rival contentions and gone through the relevant material available on record. The fact of reorganization of state of U.P. is public knowledge. It has not been controverted that the original contract was executed by the Irrigation Department, Khara Project much earlier in undivided U.P. While judging the circumstances of delay, the law of limitation and sufficient cause for delay in filing the appeal, the consideration of sufficient cause depends upon the facts of each case. The assessee is a Govt. department. The Executive Engineer incumbent in such projects change from time to time. The reorganization of state does involve massive movement of record, assignment of duties, deployment of personnel and taking steps for control over all administration. We find merit in the argument of the learned counsel for the assessee and relying on the Hon’ble Supreme Court judgment in the case of Mst. Katiji & ors. (supra), we are of the view that assessee incumbent was prevented by sufficient cause in filing the appeal in time. Accordingly, we condone the delay in filing of the appeal.

5.1. Coming to the merits of the issue, it has been pleaded by the ld. counsel that M/s Harish Chandra & Co. has already been assessed to tax. According to assessee procurement of these papers is beyond the capacity of the assessee executive engineer to procure as he does not have any control or authority to call for this record from the said concern because of the disputes and from income tax office. Under these circumstances, it will be desirable that the concerned Assessing Officer goes through the assessment record of M/s Harish Chandra & Co. and the manner in which the interest income paid has been assessed. It is earnestly pleaded that the mater maybe set aside, restored back to the file of Assessing Officer to decide the issue of liability in the light of assessment record of M/s Harish Chandra & Co., to be obtained from the Income-tax office Rohtak and Hon’ble Supreme Court judgment in the case of Hindustan Coca Cola Beverage (P) Ltd. (supra).

6. Ld. D.R. is heard.

7. In our considered opinion, the facts of the assessee’s case give rise to a situation where the payee is already assessed to tax and as per income tax record no taxes are pending against him which is a matter of verification. Besides, Hon’ble Supreme Court in the case of Hindustan Coca Cola Beverage (P) Ltd. (supra) has taken a view that where no dues are pending against payee, TDS payer i.e. assessee cannot be held in default. Consequently, we are of the view that the case needs proper verification about the tax liability of the payee, consideration of CBDT Circular No. 275/201/95-IT(B) dated 29-1-1997, and Hon’ble Supreme Court in the case of Hindustan Coca Cola Beverage (P) Ltd. (supra). In the interest of justice it is desirable that both the appeals are set aside, restored back to the file of Assessing Officer to decide the same afresh in the light of above observations and in accordance with law, after affording reasonable opportunity of being heard to the assessee. We order accordingly.

8. In the result, both the appeals filed by the assessee stand allowed for statistical purposes.

Order pronounced in open court on 24-08-2012.

                                                        Sd/-                                  Sd/-

                                            (SHAMIM YAHYA)      (R.P. TOLANI)

                                      ACCOUNTANT MEMBER JUDICIAL MEMBER

                                      JUDICIAL MEMBER

Dated: 24-08-2012.

MP

Copy to:

1. Assessee

2. AO

3. CIT

4. CIT (A)

5. DR