No Requirement to deduct TDS on Interest payable on FDRs made in the name of the Registrar General of court.
In the Honorable Delhi High Court, UCO Bank Versus DCIT
Bank accepted a Fixed Deposit (FD) in the name of Register General of this Court and issued a Fixed Deposit Receipt (FDR).
ACIT issued a show cause notice to the petitioner bank for not deducting TDS on the interest accrued and to show cause why the petitioner bank be not treated as an assessee in default under Section 201(1)/201(1A) of the Act. The petitioner, by its reply, submitted that the said FD was in the name of Register General of this Court as a custodian and no TDS was deducted on the accrued interest because the actual beneficiary was not known as the matter was sub judice. It was also submitted that the TDS would be deducted on when payment is made to the beneficiary as may be decided by the Court.
Thereafter, the ACIT passed an order considering the petitioner bank as an assessee in default and demanded tax & interest under Section 201(1) and Section 201(1A) of the Act and the penalty proceedings under Section 271C of the Act were also initiated.
The CBDT, thereafter, issued the impugned circular (bearing no.8/2011 dated 14.10.2011) clarifying that Banks would have to deduct TDS under Section 194A of the Act at the time of accrual of interest. The relevant portion of the said Circular is quoted below:-
“3.1 The matter has been examined in the Board and it has been decided that, subject to para 4 below, this circular shall be applicable to cases where one or more than one litigant is directed by the court that a specified amount be deposited in the bank directly or through the court. The bank shall in accordance with the provisions of the Act, deduct tax at source on the interest accruing on the above mentioned deposit(s) as per existing procedure and at the rates in force. The certificate of deduction of tax shall be issued by the bank in the name of ‘the depositor’. If more than one person has been directed to deposit any specified amount, the amount of TDS shall be corresponding to each such depositor for the portion of interest accrued in its respective share in the total amount deposited and TDS certificates shall be accordingly issued by the bank.
3.2 At the time of making deposit of the amount ordered by the court, the depositor(s) shall submit a prescribed declaration with the court for record purpose and to facilitate the administration of TDS. The Registrar/Prothonotary and Senior Master or any person authorized by the court will pass the information furnished therein to the bank concerned for TDS properly in the name of the depositor(s) in accordance with the provisions of the Act.”
Essentially, the controversy in the present case involves the question whether the provisions of Chapter XVII of the Act would be applicable in respect of interest which is payable on the fixed deposits maintained by this Court with the petitioner bank, in the name of the Registrar General. Concededly, money deposited by litigants or at their instance in this Court and kept in fixed deposit with the petitioner bank are not funds or assets of this Court and would be payable to the person as may be ultimately directed in the concerned proceedings. Any accretion on account of interest on the said deposits also do not inure to the benefit of this Court.
Section 4 of the Act is the charging Section and reads as under:-
“4. Charge of income-tax. – (1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person“
It is apparent from the plain language of Section 4(1) of the Act that income tax is charged in respect of the total income of the previous year of every person. Plainly, for any charge to be sustained under the Act, it is essential that
- There is an assessee whose income would form the basis of the charge; and
- There is income which is subject to tax under the provisions of the Act.
Chapter IV of the Act provides for computation of income under various heads. Chapter XVII of the Act contains the machinery provisions for collection and recovery of tax. Part B of Chapter XVII contains specific provisions for deduction of tax at source.
Sub-section 2 of Section 190 makes it clear that the provisions of Sub-section 1 of Section 190 would not prejudice the charge of tax under the provisions of Section 4(1) of the Act. That means section 4(1) prevail over the section 190.
Section 191 of the Act provides that if income tax shall be paid by the assessee directly, deduction of income tax shall not require.
In the present case, the controversy is regarding applicability of Section 194A of the Act which provides for deduction of tax at source in respect of any payment/credit on account of interest, other than interest on securities.
In terms of Section 194A of the Act, the petitioner bank would, in the normal course, be obliged to deduct tax at source in respect of any credit or payment of interest on deposits made with it.
However, in the present case, the question that needs to be addressed is whether Section 194A of the Act requires deduction of tax in a situation where the assessee is not ascertainable and the person in whose name the interest is credited is also not “a person liable to pay tax” under the Act.
The Registrar General of this Court is clearly not the recipient of the income represented by interest that accrues on the deposits made in his/her name. The Registrar General is also not an assessee in respect of the deposits made with the petitioner bank pursuant to the orders of this Court.
The deposits kept with the petitioner bank under the orders of this Court are, essentially, funds which are custodia legis, that is, funds in the custody of this Court. The interest on that account although credited in the name of the Registrar General and Interest are also funds that remain under the custody of this Court. Thus the credit of interest to such an account is not a credit to an account of a person who is liable to be assessed to tax.
In this view, the petitioner bank would have no obligation to deduct tax, because at the time of credit there is no person assessable in respect of that income.The words “credit of such income to the account of the payee” occurring in Section 194A of the Act have to be ascribed a meaning in conformity with the scheme of the Act and that would necessarily imply that deduction of tax bears nexus with the income of an assessee.
The expression “payee” under Section 194A of the Act would mean the recipient of the income whose account is maintained by the person paying interest. In the present case, although the FD is made in the name of the Registrar General, the account represents funds which are in custody of this Court and the Registrar General is neither the recipient of the amount credited to that account nor the interest accruing thereon. Therefore, the Registrar General cannot be considered as a “payee” for the purposes of Section 194A of the Act. The credit by the petitioner bank in the name of the Registrar General would, thus, not attract the provisions of Section 194A of the Act.