ORDER
M.M. Cherian, A.M.
1. In view of the common grounds involved in these two appeals by the same appellant, they are consolidated in a common order for the sake of convenience. These appeals are filed by M/s Crescent Housing (P) Ltd., Santhome High Road, Chennai-28 against the order passed by the CIT(A) in respect of the asst. yrs. 1996-97 and 1997-98.
2. The appellant is a private limited company engaged in the business of promoting housing activity. The ITO (TDS) came to know that the appellant had availed of loan facility from GIC Housing Finance Ltd. and that interest was payable on the loan amount. During the previous year ending on 31st March, 1996 (asst. yr. 1996-97) the appellant paid a total sum of Rs. 11,40,275 by way of interest on the loan amounts. During the year ending 31st March, 1997 (asst. yr. 1997-98) there was a total sum of Rs. 87,43,817 paid to GIC Housing Finance Ltd. as interest on borrowings. The ITO (TDS) was of the view that on the interest payment the appellant ought to have deducted tax at source as provided in Section 194A of the IT Act, 1961. According to the ITO (TDS), the appellant should have deducted tax of Rs. 2,62,263 (23% of Rs. 11,40,275) for the asst. yr. 1996-97 and Rs. 18,79,920 (21.5 per cent of Rs. 87,43,817) for the asst. yr. 1997-98. But on the interest payment for both years, the appellant had not deducted tax under Section 194A. The ITO (TDS) issued a show-cause notice on 6th Feb., 1998 asking the appellant as to why they should not be treated as a defaulter as per Section 201(1) of the IT Act, 1961.
In the absence of any reply from the appellant the ITO (TDS) passed orders under Section 201(1) on 10th March, 1998 treating the appellant as an assessee in default and directed the payment of Rs. 2,62,263 for the asst. yr. 1996-97 and Rs. 18,79,920 for the asst. yr. 1997-98. The ITO (TDS) also charged interest under Section 201(1A) from the dates on which tax was deductible. For the asst. yr.
1996-97 interest levied under Section 20K(A) was Rs. 81,512 and for the asst. yr.
1997-98 Rs. 3,18,997. Though the appellant took up the matter in appeal, the CIT(A) dismissed the appeals for both years holding that the ITO (TDS) had rightly treated the appellant as a defaulter under Section 201 in respect of the tax deductible and payable to the Government account on the interest payment to GIC Housing Finance Ltd. The levy of interest under Section 201(1A) was also upheld by the appellate authority. Aggrieved with the order passed by the CIT(A) the appellant has filed these two appeals before the Tribunal.
3. On behalf of the appellant N. Devanathan, advocate submitted before us that the CIT(A) was not correct in confirming the orders passed by the ITO (TDS) and holding that the appellant had been rightly treated as an assessee in default in regard to the tax deductible under Section 194A. According to the learned counsel, the appellant was not liable to deduct tax on the interest payment to GIC Housing Finance Ltd. and so there was no question of the appellant being a defaulter under Section 201(1). Drawing our attention to Section 194A Sri Devanathan submitted that though there could be liability to deduct tax at source on a person paying any income by way of interest, the provisions were not applicable in respect of any payment to a financial corporation established by or under a Central, State or Provincial Act. According to him, GIC Housing Finance Ltd. is a financial institution promoted by the Government of India and hence as per the provisions of Section 194A(3) the appellant was under no obligation to deduct tax at source on the interest payment. He further stated that GIC Housing Finance Ltd. was assessed to income-tax at Mumbai by the Addl. CIT, Spl. Range, XXXVI, Mumbai and that in their income-tax returns the interest receipts from the assessee-company had been offered for assessment. In the paper book filed before us by the learned counsel at p. 129 there is the copy of a letter dt. 30th Jan., 2001 from the ITO, TDS VIII, Chennai addressed to the TRO, 1(1), City Cir. m, Chennai in which the fact about the assessment of GIC Housing Finance Ltd. at Mumbai is mentioned. It was submitted that Section 194A and the connected sections of the IT Act relating to deduction of tax at source and payment of tax so deducted to the Revenue laid down only a mode of recovery of the tax, which was actually, the liability of the recipient. According to Devanathan, the tax paid over to the Revenue after deduction is for and on behalf of the recipient only. He also drew our attention to Section 199 of the Act which provides for credit to be given for the tax deducted at source as a payment of tax on behalf of the person from whose income the deduction was made. It was the contention of the learned counsel that once it was ascertained that tax had been paid by the deductee-assessee there was no need for the payer to make a payment of tax once again. In the present case according to him, the ITO (TDS) could not have enforced collection of tax from the appellant once it was found that GIC Housing Finance Ltd. had been assessed on the amount by way of interest paid by the appellant. Devanathan also brought to our notice the Circular in F.No. 275/20l/95-IT(B), dt. 15th Jan., 1991 issued by the CBDT on the subject of deduction of tax at source-consequence on failure to deduct. In the circular it is clarified that no demand visualised under Section 201(1) of the Act should be enforced after the tax deductor has satisfied the officer in charge of TDS that taxes have been paid by the deductee-assessee. Devanathan added that before the ITO, TDS passed the orders the assessee could not furnish any details regarding the assessment of GIC Housing Finance Ltd. at Mumbai on account of their strained relations consequent to the litigations pending before the Madras High Court. According to him, there was information gathered by the ITO, TDS subsequently as could be seen from the letter addressed to the TRO (supra) that in the income returned by GIC Housing Finance Ltd. the interest receipts from M/s Crescent Housing (P) Ltd., Chennai had been included. It was the contention of the learned counsel that in the light of the information received by the ITO, TDS regarding the assessment of GIC Housing Finance Ltd., at Mumbai, the present orders treating the assessee as a defaulter under Section 201(1) could not survive particularly in view of the circular issued by the CBDT on the subject. Regarding the circular it was submitted that the field officers were bound to follow the circular issued by the Board for their guidance. For the binding nature of the Departmental circular Devanathan placed reliance on the decision of the Supreme Court in the case of Paper Products Ltd. vs. Commissioner of Centra] Excise (1999) BLT 765 (SC). There was yet another contention raised by the learned counsel that the ITO, TDS had no authority under the law to raise a demand in respect of the tax otherwise deductible under Section 194A. According to him, Section 201(1) only empowers the ITO, TDS to deem a defaulter as an assessee in default in respect of the tax and that does not mean giving him the authority to raise a demand of tax under Section 201. For that contention he relied on a decision of the Tribunal, Madras Bench in the case of Palghat Chit Fund (P) Ltd. [ITA No. 1309 (Mad) of 1995], dt. 24th Dec., 1997). In that case it was observed that there was no power or authority being given to the ITO, TDS to pass any order to make or raise any demand in respect of the shortfall in making the TDS in respect of the appellant of interest payments. Devanathan vehemently argued that in any case the order passed by the ITO, TDS could not survive after there was the income-tax assessment made on GIC Housing Finance Ltd. at Mumbai in respect of the interest receipts, considering the clarification issued by the CBDT circular on the subject of tax deduction at source. He also brought to our notice an order passed by the CIT(A) in the case of Priya potteries (P) Ltd. wherein the appellate authority had set aside the order passed by the ITO, TDS to verify whether taxes due had been paid by the deductee-assessee and if so, not to enforce the demand visualised under Section 201(1) of the Act. Arguing on the above lines, the learned counsel made an earnest plea before us for setting aside the order passed by the CIT(A).
4. Per contra, S. Ravi, the learned Departmental Representative supported the order passed by the CIT(A) and submitted that there was no doubt about the obligation on the part of the appellant to deduct tax at source when payments by way of interest were made to GIC Housing Finance Ltd. The assessee had not complied with the requirement of law and in view of the default under Section 194A, the law permitted the appellant to be deemed as an assessee in default in respect of the tax deductible at source. Drawing our attention to Section 201 the learned Departmental Representative submitted that it was a consequence of the failure to deduct the tax at source or to pay It to the credit of the Government, that the person referred to in Section 194′ would be deemed to be an assesses in default. The deeming provision is applicable in respect of the tax payable under Section 194A. It was the contention of the learned Departmental Representative that once the payer is deemed to be an assessee in default, the ITO, TDS could enforce the collection of the tax from that person. Strictly speaking, there was no need for a separate order to be passed once the defaulter is deemed to be an assessee in default in respect of the tax. Only by way of abundant caution the-ITO, TDS passed a separate order under Section 201(1) so that the assessee might come to know as to why he was treated as an assessee in default. According to the learned Departmental Representative, the ITO, TDS was fully justified in proceeding against the appellant to recover the amount which was deductible as tax at source on the interest payment. In this connection our attention was also drawn to the decision of the Kerala High Court in the case of CIT vs. Kannan Devan HiU Produce Co. Ltd. (1986) 161 ITR 477 (Ker). Ravi submitted that though in that case the Court held that where the assessment in relation to an employee had been completed and had become final, and no further tax was found due from the employee the employer could not be deemed to be an assessee in default, still the decision would show that but for the completion of the assessment on the employee the collection of tax could be enforced from the employer. According to him, once there was failure to deduct tax, the assessee became a defaulter and by the order under Section 201(1), the ITO. (TDS) only determined the amount of tax in respect of which the assessee was a defaulter. Only after quantifying the amount in respect of which there was default, the ITO (TDS) could have proceeded with recovery action. Regarding the circular issued by the CBDT, Ravi submitted that there could be no doubt that the ITO (TDS) was bound to follow the circular, arid that for the strict application of the circular it was for the assessee to produce evidence to show that taxes had been paid by the deductee-assessee. In the present case, there was no evidence furnished by the appellant to show that GIC Housing Finance Ltd. had been assessed to tax on the interest amount and that the taxes had been paid by them. It was pointed out that in the letter from the ITO (TDS), Chennai (on which the assessee’s counsel had placed reliance) there was no mention about payment of tax by GIC Housing Finance Ltd. Ravi submitted that in the absence of any information regarding payment of tax by the deductee-assessee, the ITO (TDS) was left with no alternative but to treat the assessee as a defaulter under Section 201(1). He urged us to uphold the order passed by the CIT(A) confirming the direction of the ITO (TDS) to pay the amount of tax which the assessee should have deducted from the interest payments to GIC Housing Finance Ltd.
5. Section 194A(1) provides that any person, not being an individual or an HUP, who is responsible for paying to a resident any income by way of interest 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. Sub-section (3) I/W Clause (iii)(b) provides that the provisions of sub-s. (1) shall not apply’ in respect of such income credited or paid to any financial corporation established by or under a Central, State or Provincial Act. Though Devanathan, the learned counsel for the appellant submitted before us that GIC Housing Finance Ltd. was a financial institution promoted by the Central Government, we are not satisfied that this is a financial corporation established, by or under a Central, State or Provincial Act. No evidence was produced before us to show that it was established under any Central Act. GIC Housing Finance Ltd. is also not shown to be an institution, association or body falling under Clause (iii)(f) which the Central Government has notified in the Official Gazette as exempt from the operation of Section 194A(1). We do not accept the contention of the learned counsel that the appellant was under no obligation to deduct tax on the payment of interest to GIC Housing Finance Ltd.
6. In support of the other contention that the ITO, TDS has no power or authority to pass an order treating the assessee as a defaulter under Section 201, the learned counsel relied on the decision of the Tribunal in the case of Palghat Chit Fund (P) Ltd. (supra). It is provided in Section 201(1) that if any person does not deduct or after deducting fails to pay the tax as required by or under the Act, he shall without prejudice to any other consequences which he may incur be deemed to be an assessee in default in respect of the tax. Section 201 r/w Sections 194A and 200 indicate that a person responsible for deduction of tax at source in terms of Section 194A is deemed to be in default if he does not either deduct the tax at source or having deducted it does not pay it as required by Section 200 within the time-limit prescribed under Rule 30, of the IT Rules. Section 201 further shows that the failure of such person makes him an assessee in default, although he would not but for the default, be an assessee in respect of the sum referred to in Section 194A. It is his failure to discharge his statutory obligation that visits him with the liability of “an assessee in default”. This liability is cast upon him under the aforesaid provisions not because of any order or notice of demand, but because of the operation of the statute itself. This is quite unlike a regular assessment under which tax becomes payable only upon service of a notice of demand under Section 156, Once a liability is incurred, no further demand is necessary to recover the tax and the interest due thereon, unless the Revenue were to initiate proceedings for imposition of penalty in terms of the proviso to Section 201(1) r/w Section 221. In this connection reference may be made to the decision of the Kerala High Court in Traco Cable Co. Ltd. v. CIT (1987) 166 JTR 278 (K&r). The contention that there is no power or authority given to the ITO, TDS to demand the tax from the assessee cannot be, therefore, accepted because the appellant had already become a defaulter under Section 201, on account of the failure to deduct tax at source. It was not by the order under Section 201, the demand was created on the appellant. In the order under Section 201 the ITO, TDS has only quantified the amount of tax to be paid by the appellant. In view of the decision of the Kerala High Court cited above, we do not accept the contention of the learned counsel that the order passed by the ITO, TDS was without the authority of law.
7. At the same time, we find force in the contention of Devanathan that if the deductee-assessee has paid the tax no further demand could be raised on the payer in respect of the same amount of tax. It was his claim that GIC Housing Finance Ltd. had paid the tax on the interest paid by the appellant which had been included in their total income for the respective assessment years.
8. The provisions of Sections 194A, 201 and connected sections of the IT Act regarding deduction of tax at source and payment to the Revenue lay down only a mode of recovering the tax due from the recipient of the interest income. The duty on the payer is not an end in itself. It is only a means to an end i.e. recovery of tax payable by recipient of the interest income. Tax paid over to the Revenue after deduction by the payer is for and on behalf of the deductee-assessee. This is subject to the ultimate assessment to be made on the deductee-assessee and the tax so deducted and paid is to go in adjustment of the payee’s liability. The liability of the payer to make deduction at source and to pay over the tax to the Revenue is not independent of the liability of deductee-assessee to pay tax. In this connection we may refer to the decision of the Kerala High Court in the case of CIT v. Kannan Devan Hill Produce Co. Ltd. (supra). Reference may also be made to the decision of the Madhya Pradesh High Court in CUT v. Divisional Manager, New India Assurance Co. Ltd. (1983) 140 TTR 818 (MP). The above position of law is also clarified in the Circular issued by the CBDT in F.No. 275/201/95-IT(B) on 29th Jan., 1997 on the consequence of failure to deduct tax at source. In the above circular the Board has given clarification as under:
“. . . the Board is of the view that no demand visualised under Section 201(1) of the IT Act should be enforced after the tax deductor has satisfied the officer in charge of TDS that taxes have been paid by the deductee-assessee.”
That means if there is evidence to show that deductee-assessee has paid the tax on the interest income, there is no need for treating the payer as an assessee in default under Section 201(1) of the IT Act, 1961. Regarding the relevance of the circulars issued by the Department, this is what the Supreme Court held in Paper Products Ltd. ‘s case (supra):
“Apart from the fact that the circulars issued by the Central Board of Customs and Excise in exercise of its power under Section 37B of the Central Excise Act, 1944, are binding on the Department, the Department is precluded from challenging the correctness of the said circulars even on the ground of the same being inconsistent with the statutory provision. So far as the Department is concerned, whatever action it has to take, the same will have to be consistent with the circular which is in force on the relevant point of time.”
When the Board Circular says that no demand visualised under Section 201(1) of the IT Act should be enforced after the tax deductor has satisfied the ITO, TDS that taxes have been paid by the deductee-assessee, the ITO, TDS can enforce the demand only if the taxes had not been paid by the deductee-assessee. In this context Devanathan, the learned counsel for the appellant drew our attention to the letter dt. 30th Jan., 2001 (p. 129 of the paper-book) in which the ITO, TDS mentions about the assessment of M/s GIC Housing Finance Ltd. by the Addl. CIT, Special Range XXXVI, Mumbai. By that letter the ITO, TDS, Chennai informed the TRO £(1), City Cir. III, Chennai as under:
“M/s GIC Housing Finance Ltd. is assessed at Mumbai. The Addl. CIT, Special Range 36, Mumbai the AO has confirmed vide his letter dt. 17th Jan., 2001 that GICF Ltd. has filed the returns of income for the asst. yrs. 1996-97 and 1997-98 declaring total income of Rs. 11,37,54,570 and Rs. 10,74,84,280 respectively, which includes the interest income due from M/s Crescent Housing (P) Ltd., Chennai for which no tax has been deducted.
A letter dt. 25th Jan., 2001 was issued to the Addl. CIT, Special Range 36, Mumbai to confirm the nature of payment made by GICF Ltd. for the asst. yrs. 1996-97 and 1997-98, whether to charge interest under Section 201(1A) or not. Reply is awaited.
You are requested to keep the arrears in abeyance till the assessments are to be revised after receipt of the details from Add). CIT, Mumbai.”
Of course, this letter was issued after the order was passed by the ITO, TDS on 10th March, 1998 treating the appellant as an assessee in default. When the ITO, TDS passed the orders in respect of the asst. yrs. 1996-97 and 1997-98 he had no information regarding the assessment on GIC Housing Finance Ltd. being made by the Addl. CIT, Spl. Range XXXVI, Mumbai. From the letter dt. 30th Jan., 2001 it can also be seen that on 25th Jan., 2001 the ITO, TDS issued the letter to the Addl CIT having jurisdiction over M/s GIC Housing Finance Ltd. to confirm whether tax had been paid by that assessee on the interest income received by the appellant. In the circumstances of this case we find it necessary to set aside the orders passed by the ITO, TDS in respect of the asst. yrs. 1996-97 and 1997-98. We accordingly remit the matter to the ITO, TDS for fresh disposal after ascertaining from the AO concerned whether M/s GIC Housing Finance Ltd., the deductee-assessee, had paid the tax on the interest income received from the appellant. The appeals filed by the appellant against the orders passed under Section 201(1) of the IT Act, 1961 for the asst. yrs. 1996-97 and 1997-98 are thus treated as partly allowed.
9. Order under Section 201(1A) : The ITO, TDS levied interest under Section 201(1 A) for the asst. yrs. 1996-97 and 1997-98 as shown below :
Asst. yr. Interest under Section. 20K(1A) Rs.
1996-97 81,512
1997-98 3,18,997
It is provided in Section 201(1A) that if any such person as is referred to in Sub-section (1) of Section 201, does not deduct or after deducting, fails to pay the tax as required by or under this Act, he shall be liable to pay a simple interest at 15 per cent p.a. on the amount of such tax from the date on which such tax was deductible to the date on which the tax is actually paid. The ITO, TDS has levied interest on the amount which the appellant would have deducted as tax under Section 194A but not deducted and paid to the Government. In other words, interest has been charged under Section 201(1A) on the same amounts which were quantified as payable by the appellant under Section 201(1) of the Act. The CIT(A) confirmed the levy of interest on the view that the appellant ought to have deducted the tax in accordance with the provisions of Section 194A and that in case of default interest was rightly charged for the period from the date on which the tax was deductible.
10. Before us, the learned counsel submitted that in view of the fact that the appellant was not liable to pay the tax under Section 201(1) there could have been no liability to pay interest, According to him, when there was no obligation on the part of the appellant to deduct tax on the interest payment to GIC Housing Finance Ltd. there was no justification for charging interest. As interest was compensatory in nature, when no tax was deductible or payable to the Government by the appellant there was no question of the appellant compensating the Government for the delay in remitting the tax amount, Devanathan contended. There was the alternate contention by the learned counsel that as the order passed by the ITO, TDS under Section 201(1) has been set aside, the Tribunal may also set aside the order under Section 201(1A) for fresh disposal by the ITO, TDS.
11. Section 201 of the IT Act provides not only for collection of tax which has not been deducted but for levy and charge of interest also. Sub-s. (1A) of the said section provides for liability to pay simple interest at 15 per cent p.a. on the amount of tax from the date on which the tax was deductible till the date on which tax was actually paid. The provisions for payment of interest are mandatory and automatic and interest has to be paid from the date on which the tax was deductible. In the case of CFT v. Rathi Gum Industries (1995) 213 ITR 98 (Raj) the Rajasthan High Court held that if the tax has already been paid by the recipient on such income, IT Department may not be justified to recover the said amount of tax, but so far as the liability to interest is concerned, that cannot be considered to be non-existent on account of deposit of tax by the recipient at a subsequent or later stage. In this connection we may also refer to the decision in the case of CIT v. Dhanalakshmy Wvg. Works (2000) 245 TTR 13 (Ker), wherein the Kerala High Court had occasion to consider a similar contention of the assessee that interest under Section 201(1A) was not leviable when the recipient had already paid the tax. In that case, Dhanalakshmi Wvg. Works paid a sum of Rs. 2,85,980 to a firm ‘S’ as interest without deducting tax at source. The assessee produced before the AO evidence to show that income-tax
assessment of the firm had already been completed admitting the interest
received from the assessee and that taxes were also paid by the firm ‘S’ on
their assessment. For the assessee’s default in not deducting tax on interest in
accordance with the provisions of Section 194A of the IT Act, the AO levied interest
under Section 201(1A). The Tribunal cancelled the levy of interest. On a reference,
the Kerala High Court held as under : .
“the levy of interest is a compensatory measure” for withholding tax, which
ought to have gone to the exchequer. Section 201(1A) of the IT Act, 1961, makes it
clear that the levy of interest is mandatory. It is true that the use of the
expression ‘shall’ is not always determinative of -the fact whether a provision is
directory or mandatory in nature, but the context in which expression ‘shall’ is
used in Section 201(1A) makes it clear that the levy is mandatory. The purpose of the
levy is to claim compensation on the amount which ought to have been
deducted and deposited and has not been done; The ultimate liability for tax
being not there since the firm’ which received the interest from the assessee
had paid tax on. such interest did not dilute the requirements for the non-
compliance of which interest is levied under Section 201(1A).”
In the case of CIT v. K.K. Engg. Co. (2001) 249 ITR
447 (Ker) also it was; held that the liability for-interest stipulated, under Section 201(1A) accrues automatically on failure to pay the amount of tax by the due
dace.
12. In view of the above decisions we hold that the appellant was liable to pay interest under Section 201(1A) on the amount which was deductible as tax at source, at the time of payment of interest to M/s GIC Housing Finance Ltd. It is true that we have held that in the light of the circular issued by the CBDT, in a case where tax had been paid by the deductee-assessee, no demand visualised under Section 201(1) should be enforced. But that does not mean that the appellant could escape the liability to pay interest under Section 201(1A) on the ground that tax had been paid by the deductee-assessee. In fact, as pointed out by S. Ravi the learned Departmental Representative, in the same .Circular F.No. 275/201/95-IT(B) the Board has clarified that it would not alter the liability to charge interest under Section 201(1A) of the Act till the date of payment of tax by the deductee-assessee. We, therefore, do not find it necessary to set aside the orders passed by the ITO, TDS levying interest under Section 201(1A). We may mention here that in accordance with the Board circular interest under Section 201(1A) is leviable only till the date of payment of tax by the deductee-assessee. From the orders under appeal we notice that interest had been charged by the ITO, TDS till 28th Feb., 1998, i.e. taking the completed number of months till the date of passing the order. In the light of the circular issued by the Board, we direct the ITO, TDS to recompute the interest only till the date of payment of tax by the deductee-assessee, i.e. M/s GIC Housing Finance Ltd. The appellant will furnish necessary details, in respect of the dates upto which interest is chargeable as above. As the ITO, TDS is already in correspondence. with the Addl. GIT, Special Range XXXVI. Mumbai, who is the AO on M/s GIC Housing Finance Ltd. we also direct the ITO, TDS to ascertain the actual dates of payment of tax by that concern for the purpose of levying interest on the assessee under Section 201(1A). The order levying interest on the appellant will be modified accordingly.
13. In the result, these two appeals filed by the appellant for the asst. yrs 1996-97 and 1997-98 are partly allowed. The ITO, TDS will revise the orders accordingly.