Ita/596/2009 Of Commissioner Of Income Tax, Cochin v. Smt. Pushpa Vijay, M/S Pure Rubber Co

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR.JUSTICE V.CHITAMBARESH MONDAY, THE 2ND DAY OF JANUARY 2012/12TH POUSHA 1933 ITA.No. 596 of 2009 ( ) ================== ITA.450/2004 of I.T.A.TRIBUNAL,COCHIN BENCH APPELLANT(S)/APPELLANT ============ 1 THE COMMISSIONER OF INCOME TAX, COCHIN. BY ADV.SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S) ============= 1 SMT.PUSHPA VIJOY, M/S.PURE RUBBER CO. BAZAR ROAD KOCHI-682 002. BY ADV. SRI.P.BALAKRISHNAN (E) THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 02-01-2012 , ALONG WITH ITA. 708/2009 AND CONNECTED CASES, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C.N.RAMACHANDRAN NAIR & V.CHITAMBARESH, JJ. ------------------------------- I.T.Appeal Nos.596, 708, 1122, 1273 & 1464 of 2009------------------------------- Dated this the 2[nd] day of January, 2012 J U D G M E N T Ramachandran Nair, J. The question raised in the two sets of appeals filed by the Revenue against the orders of the Income Tax AppellateTribunal issued in favour of the two assessees is one and thesame, i.e., whether the assessees are entitled to credit, taxdeducted at source in the assessment year following the previousyear in which deduction of tax at source and remittance was madeby the payer even though income in respect of which deduction ismade is not returned or assessed in that assessment year. 2. We have heard senior counsel Sri.P.K.R.Menon appearing for the Revenue and the learned counselSri.P.Balakrishnan appearing for the respondents-assessees. Theundisputed facts leading to the controversy are the following. 3. The respondents-assessees were holding cumulativeterm deposits in banks entitling them for interest on depositswhich was periodically credited by the Bank in the deposit account. As required under Section 194 A of the Income TaxAct, the Banks recovered tax at source on the interest creditedin the deposit account of the respondents-assessees and issuedTDS certificates to the respondents. Though the respondentsdid not returninterest income from these deposits as theirincome of the following assessment years, they claimed creditof tax based on TDS certificates issued by the banks. Theassessment years concerned are 1997-1998 to 2000-2001. Theassessing officer declined to give credit for the tax recoveredand remitted by the Banks in the name of the respondents inthe following assessment years for the reason that interestincome on which recovery of tax is made by the Banks is notreturned or assessed as income for the said assessment years. 4. In so far as the assessees' claim that interestincome credited by the Bank is not assessable in theassessment year following the year of deduction is concerned,the respondents-assessees' claim is that they are followingcash system of accounting and so much so they are liable to pay tax on the interest income only on collection of the interestamount from the banks which is on maturity of the depositamounts. The assessing officer accepted the respondent'scontention that interest is assessable based on the system ofaccounting followed by them, i.e., cash. As a consequence ofthis, the assessing officer did not assess any interest income forthe assessment year following the year of deduction, butdeclined to give credit for the tax recovered and remitted bythe banks at source at the time of credit of interest based onTDS certificates produced, probably by applying Section 199 ofthe Income Tax Act. 5. When the assessees filed appeals before the CIT pay tax on the interest income only on collection of the interestamount from the banks which is on maturity of the depositamounts. The assessing officer accepted the respondent'scontention that interest is assessable based on the system ofaccounting followed by them, i.e., cash. As a consequence ofthis, the assessing officer did not assess any interest income forthe assessment year following the year of deduction, butdeclined to give credit for the tax recovered and remitted bythe banks at source at the time of credit of interest based onTDS certificates produced, probably by applying Section 199 ofthe Income Tax Act. 5. When the assessees filed appeals before the CIT (Appeals), the assessees raised a contention that only the taxamount covered by the TDS certificates issued by the Banks istheir income received in cash during the previous yearrelevant for the assessment year and therefore the TDS amountitself should be assessed as “income” and the assessees areentitled to refund of the balance amount. Even though the first appellate authority did not accept this contention, he held thateven if interest is not assessable in the assessment yearsconcerned, the assessees are entitled to credit of tax recoveredat source in the assessment years relevant for the previousyears during which recovery of tax and remittance of the samewas made by the banks. On appeals filed by the Revenue,though the Tribunal did not agree with all the findings of theCIT(Appeals), they held that the assessees are entitled to fullcredit of tax in the assessment years concerned, no matterinterest income on which deduction has been made is notreturned or assessed in those assessment years. It is againstthese orders that the Department has filed these appeals. 6. During hearing, counsel for the respondentssubmitted that by virtue of Section 268 A of the Income Tax Actread with Circulars issued by the Board, appeals are notmaintainable for the reason that tax amount involved is belowRs.4 lakhs for maintainability of the appeal before the HighCourt. However, we notice that all these appeals were filed in May,2005 and September, 2007 and therefore maintainabilityhas to be considered with reference to the Circular of theCentral Board issued in 2005. Under the said Circular,appeals are maintainable, if substantial question of law ofimportance in the case concerned or in similar cases isinvolved. In these cases, we notice that question of law raisedis substantially important because the orders of the Tribunalwill apply for subsequent years, not only in the case of theseassessees but in the case of other assessees also. Moreover,we notice that the Tribunal has rendered their decision withoutreference to statutory provisions and no High Court judgmentis cited on the issue raised. Further the Supreme Court has inthe case of Commissioner of Income Tax v. Surya HerbalLtd. (2011 (243) CTR 327) held that the High Court can ignorethe Circulars and proceed to decide statutory appeals onmerits, if the question involved is substantial and arise inmany cases and for subsequent years. We therefore reject theobjection raised on maintainability and proceed to consider the question raised in the Appeals on merit. question raised in the Appeals on merit. 7. The senior counsel for the Revenue raised thecontention that tax deducted at source should be credited inthe assessment for any assessment year only if the very sameincome from which tax is deducted is assessed for that year.On the other hand, the counsel appearing for the respondentsreferred to the findings of the Tribunal with specific referenceto Section 143(1) of the Income Tax Act and contended thatthe assessee is entitled to get credit for all payments of taxincluding tax recovered at source and remitted by the payersin the assessment year following the previous year in whichsuch payment is made. He has also referred to Section 199 ofthe Income Tax Act which clearly declares that the recovery oftax made and remitted by the payer is tax payment on behalf ofthe assessee in whose account remittance is made and suchassessee is entitled to credit for tax in the assessment yearfollowing the previous year in which recovery and remittance ismade by the payer. 8. After hearing both sides and on going throughthe order of the Tribunal, what we notice is that though theTribunal has referred to Section 199 of the Income Tax Act,they have not considered the scope of the provisions in detail.Section 199 of the Income Tax Act has undergone variouschanges and for reference, we extract hereunder the section asit stood during the relevant assessment years, i.e., 1997-1998to 2000-2001, to which these appeals relate. 199. Credit for tax deducted - Anydeduction made in accordance with theprovisions of sections 192 to 194, section 194A,section 194B, section 194BB, section 194C,section 194D, section 194E, section 194EE,section 194F, section 194G, section 194H,section 194-I, section 194J, section 194K,section 195, section 196A, section 196B,section 196C and section 196D and paid to theCentral Government shall be treated as apayment of tax on behalf of the person fromwhose income the deduction was made, or ofthe owner of the security, or depositor or ownerof property or of unitholder or of theshareholder, as the case may be, and creditshall be given to him for the amount sodeducted on the production of the certificatefurnished under section 203 in the assessmentmade under this Act for the assessment year forwhich such income is assessable. Provided that- (i)in a case where such person orowner or depositor or unitholder orshareholder is a person, whose income isincluded under the provisions of section 60,section 61, section 64, section 93 or section 94in the total income of another person, thepayment shall be deemed to have been made onbehalf of, and the credit shall be given to, suchother person; ii)in any other case, where thedividend on any share is assessable as theincome of a person other than the shareholder,the payment shall be deemed to have beenmade on behalf of and the credit shall be givento, such other person in such circumstances asmay be prescribed. What is clear from the above provision is that the assessee isentitled to credit of tax paid in the assessment in which theincome is assessed. In other words, the assessee should claimcredit of tax based on TDS certificate in the year in which theassessee returns the income from which deduction is made forthe purpose of assessment. Even after the amendment of thesection through the introduction of sub-section (3) of Section199 of the Income Tax Act, the Central Board was authorised tomake rules for giving credit for tax deducted at source. As required under that section, Rule 37BA was framed by theIncome Tax (6[th] Amendment) Rules, 2009 wherein it isspecifically provided sub-rule 3(i) as follows:- (3)(i) Credit for tax deducted at source and paidto the Central Government, shall be given for theassessment year for which such income is assessable. required under that section, Rule 37BA was framed by theIncome Tax (6[th] Amendment) Rules, 2009 wherein it isspecifically provided sub-rule 3(i) as follows:- (3)(i) Credit for tax deducted at source and paidto the Central Government, shall be given for theassessment year for which such income is assessable. 9. As already stated, the Tribunal however withoutreferring to the statutory provisions and the Rules held that therespondents-assessees are entitled to credit of tax in theassessment year following the year in which the tax isrecovered and remitted by the Banks based on TDS certificatesissued by the Banks. The Tribunal has also made reference toSection 143(1) of the Income Tax Act wherein the assessee isentitled to credit of tax paid directly or indirectly includingpayments made by payers who recovered tax and remitted thesame under the provisions of Chapter XVII of the Income TaxAct. However, Section 143(1) of the Income Tax Act is subjectto Section 199 of the Act which specifically provides that taxhas to be credited based on TDS certificate only in the assessment in which the income from which deduction is madeis assessed to tax. So much so, Section 143(1)(c) will besubject to sub-sections (1) and (3) of Section 199 read withRule 37BA of the Income Tax Rules and when taken togetherthe effect is that the assessees can retain the TDS certificatesand claim credit in the assessment for the assessment year inwhich assessee returns the income on which deduction of tax ismade for assessment. 10. The respondents-assessees' counsel rightlypointed out that the assessees are entitled to account incomefrom interest which is the income from other sources, inaccordance with the system of accounting followed by theassessees as provided under Section 145(1) of the Income TaxAct. We do not think there can be any controversy on the issuebecause the entire interest income can be accounted on cashbasis and the assessees need to return the income forassessment year following the year in which it is received. TheDepartment also does not dispute this claim of the assessee and in fact the interest income in respect of which tax isrecovered by the Banks at the time of credit is not assessed onaccruel basis. 11. The question to be considered is whether theassessing officer was justified in refusing to give credit for taxpayments based on TDS certificates issued by the Bank for thereason that income is not returned for assessment by theassessees in the assessment year following the year in whichtax is recovered and paid by the Banks. We do not think thereis any justification for assessees' claim because Section 199 ofthe Income Tax Act makes it clear that the assessee is entitledto credit based on TDS certificate only in the assessment yearin which income from which tax is deducted is assessed.Therefore, when the statute makes it mandatory that credit oftax based on TDS certificate is available only in the assessmentyear in which the income from which tax deducted at source isassessed, we do not know how the Tribunal can over-rule thestatutory provisions and allow the claim. In our view, going by the practical difficulty to retain TDS certificates for severalyears until the interest is returned for assessment on cashbasis, prudent assessees should return income on which tax isrecovered and remitted by the payer in the assessment yearfollowing the year in which such income is subject to deductionof tax and remittance by the payer. The assessees who do notdo it should follow Section 199 and Rule 37BA, retain the TDScertificates and claim credit in the assessment year in whichsuch income is returned for assessment. the practical difficulty to retain TDS certificates for severalyears until the interest is returned for assessment on cashbasis, prudent assessees should return income on which tax isrecovered and remitted by the payer in the assessment yearfollowing the year in which such income is subject to deductionof tax and remittance by the payer. The assessees who do notdo it should follow Section 199 and Rule 37BA, retain the TDScertificates and claim credit in the assessment year in whichsuch income is returned for assessment. 12. The finding of the Tribunal that there is noprovision in the Income Tax Act or Rules to defer credit of taxin assessments based on TDS certificates obtained is reallyincorrect because sub-sections (1) and (3) of Section 199 readwith Rule 37BA of the Income Tax Rules specifically authorisethe assessee to retain TDS certificates and to produce it andclaim credit in the year in which income on which recovery oftax made is returned for assessment. As of now, the Act doesnot provide that assessees should return the income for assessment in the assessment year following the previous yearin which tax is recovered at source and TDS certificate isissued by the payer and if so provided assessment and credit oftax will go together which will avoid botheration for theassessees as well as for the Departmental Officers. In ourview, the provisions contained in sub-sections (1) and (3) ofSection 199 read with Rule 37BA of the Income Tax Rulesserve a purpose because if income is not assessable in theassessment year and at the same time assessess are entitled tocredit of tax recovered and remitted in respect of such income,the Department will be compelled to refund the entire taxamount every year and along with it, if refund is not madewithin three months from filing of return, mandatory interestwill also payable, as provided under Section 243(1) of theIncome Tax Act which will defeat the purpose of TDSprovisions in the Act. Therefore, we do not find anyjustification for the Tribunal to allow credit of tax based onTDS certificates without corresponding assessment of income in the assessment years concerned which is against thestatutory provision. We also do not find any merit in thecontention of the respondents-assessees that the amountcovered by TDS certificates itself should be treated as incomeof the previous year relevant for the assessment yearconcerned and the tax amount should be assessed as income bysimultaneously giving credit for the full amount of tax remittedby the payer. In these cases, the entire interest creditedshould be assessed on maturity of the deposit and on paymentby the bank, as the assessees are admittedly following cashsystem of accounting. However, in our view, if Section 145(1)is amended for assessment of income on which TDS is made inthe assessment year following the year in which deduction ismade irrespective of the system of accounting followed by theassessee, the same will avoid problems for the assessees andthe Department. Based on the findings above, we allow theDepartmental appeals by reversing the orders of the Tribunal and that of the first appellate authority and by restoring theassessments denying credit of tax in the assessments for whichcorresponding income is not assessed. However, since we areallowing the Departmental Appeals, we leave it open to therespondents-assessees to claim credit based on the very sameTDS certificates against the interest income assessed in theyear in which such income is assessed. C.N.RAMACHANDRAN NAIR, Judge. V.CHITAMBARESH, Judge. nj.