ORDER
M.C. Agarwal, Judicial Member
1. This is an assessee’s appeal against the levy of interest under Section 201(1A) of the Income-tax Act, 1961 for not deducting tax from its interest of Rs. 92,652 which the assessee claimed as expenditure and instead of crediting the same to the accounts of the creditor credited it to an account titled ‘interest payable account’. In response to the notice, the assessee contended that since the interest had neither been paid to the creditors nor credited to their accounts, there was no obligation on the assessee under Section 194 A to deduct tax. This contention was negatived by the assessing officer who took recourse to a Circular No. 288 dated 22-12-1980 issued by the Central Board of Direct Taxes and levied an interest of Rs. 1380. The assessee appealed to the Commissioner of Income-tax (Appeals) who also followed the said circular and held that there was no justification for the assessee to credit the interest to the interest payable account and not to the accounts of the creditors themselves.
2. The learned counsel for the assessee contended that under the terms of Section 194A, tax was deductible only when the amount was credited to the account of the creditor or was paid and since in this case, nothing of that sort had been done, there was no obligation on the assessee to deduct tax and, therefore, there was no default for which interest could be levied on the assessee. It was also contended that the Circular of the Board could not change the law and put a larger burden on the assessee than the statue. He also referred to a judgment of a Bench of this Tribunal in the case of Pater son Engg. Co. (I) Ltd. v. ITO [1989] 35 TTJ (Bom.) 245 in which this Tribuna. had taken a view that where interest was only credited to the interest payable account, there was no obligation to deduct tax at source.
3. The learned departmental representative on the other hand relied upon the Board’s Circular as well as the addition of Explanation to Section 194A with effect from 1-6-1987. The said Explanation says that where interest is credited to any account whether called “interest payable account” or “suspense account” or by any other name, such crediting shall be deemed to be credit of such income to the account of the payee. According to the learned departmental representative, this amendment is of a clarificatory nature and will, therefore, have retrospective effect.
4. A similar controversy had come before me in Doab Food & General Industries Ltd. v. IAC [IT Appeal No. 1588 (Delhi) of 1990 for assessment year 1984-85] decided vide order dated 2-4-1991 in which I observed as under:
5. Under Section 194A, a debtor is obliged to deduct income-tax from interest payable to creditor when he credits the amount of interest to the account of such creditor or when he pays the same to the creditor in cash or by issue of a cheque or draft or by any other mode. In the case before me the assessee admittedly has neither credited the amount of interest to the account of the creditor nor has it paid the same in cash or by the issue of a cheque or draft. What it has done is that it has shown its liability to pay interest by crediting the amount in an account called ‘Interest payable account’ and charging the same to the profit & loss account. On the plain language of Section 194A, the liability to deduct income-tax did not arise. The learned departmental representative referred to the Explanation to Section 194A, which reads as under:
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 or 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.
The said Explanation was inserted by the Finance Act, 1987 with effect from 1 -6-1987 and the contention of the learned Departmental Representative was that this Explanation is of a clarificatory nature and would, therefore, apply even to the period prior to 1-6-1987. The learned counsel for the assessee contended that this Explanation has no retrospective effect and he referred to the explanatory notes issued by the Central Board of Direct Taxes vide Circular No. 495 dated 22-9-1987. Paragraph 38.6 of these explanatory notes printed at page 1195 of Taxman’s Direct Tax Circulars, Volume III, 1988 edition states that these amendments will come into force from 1-6-1987. The Board did not say that the amendment to Section 194A by the addition of the aforesaid Explanation would have retrospective effect. The Explanation enlarges the scope of Section 194A. Earlier the debtor was obliged to deduct tax when he actually paid the amount in cash or by cheque or draft or in any other mode or credited the same to the account of the payee. The Explanation says that if the interest is even credited to an interest payable account or a suspense account, then it shall be deemed to have been credited to the account of the payee. The language of the Explanation shows that it was intended to plug a loophole and to remove a lacuna in the language of Section 194A and would require a debtor to do what according to the language of Section 194A he could reasonably say and understand that he was not required to do. It, thus, enlarges the obligation to a tax-payer and, therefore, cannot be given retrospective effect when the Legislature itself has clearly said that it will have effect from 1-6-1987. In my view, therefore, the assessee having not paid the interest nor having credited the same to the account of the payee, it was not obliged to deduct tax under Section 194 and, therefore, its failure to deduct tax did not oblige it to pay interest under Section 201(1A).
5. As regards the circular of the Board, it is patently of the nature of the Explanation referred to above which the Legislature inserted by the Finance Act, 1987 with effect from 1-6-1987 and certainly enlarged the scope of Section 194A and consequently places a higher burden on a taxpayer than could legitimately be assumed from the plain language of the statute. The Central Board of Direct Taxes has no power to increase the rigour of the statute and pluging the loophole in the statute by issue of an administrative circular. Patently, it took them more than 6 years to give the intention of the circular a statutory form by the addition of the said Explanation and yet the Legislature did not think it proper to give the said Explanation retrospective effect. So much so, that it did not even make the Explanation operative from the first day of the assessment year and made it operative from 1-6-1987 with sufficient prior notice to all concerns. Therefore, the circular issued by the Board cannot change the meaning and the purpose of the statute and could not have been relied upon by the authorities below for holding that in the circumstances of the case the assessee was liable to deduct tax from the amount of interest credited to interest payable account and for failure to do so, the assessee was liable to pay interest under Section 201(1A).
6. For the reasons discussed above, the assessee’s appeal is allowed and the levy of interest in question is hereby cancelled.