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Commissioner Of Income Tax v. Smt. Sonal Bansal

Punjab & Haryana High Court

Dec 17, 2007

Judgment

Subsequent
References

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Structured Summary of the Opinion — IT Appeals Nos. 412, 413 & 414 of 2007

Factual and Procedural Background

The Revenue filed IT Appeals Nos. 412, 413 and 414 of 2007 under section 260A of the Income Tax Act, 1961, challenging a composite order dated 25th January 2007 passed by the Income Tax Appellate Tribunal (Delhi, SMC Bench) in ITA Nos. 4097, 4098 and 4099/Del/2006. The Tribunal's order related to assessment years 2002-03 concerning the assessee-respondents Smt. Sonal Bansal, Smt. Ritu Bansal and Smt. Meenu Gupta.

Facts (as drawn from IT Appeal No. 412 of 2007): An original purchaser (Vivek Bansal) had originally purchased IDBI Deep Discount Bonds 1997 at Rs. 5,500 each. The assessee-secondary purchaser purchased those bonds from him on 1 January 2001 at Rs. 9,700 each (total Rs. 19,40,000). The bonds accrued interest year to year but interest was not paid out annually; the bonds were subject to taxation consequences on transfer before maturity and there was a modification by a press note. On maturity the assessee-secondary purchaser received a draft of Rs. 19,08,200 and accounted for interest and TDS entries in her books, declaring interest income of Rs. 60,000 in her return, while IDBI issued a tax deduction certificate showing gross interest of Rs. 9,00,000 and TDS of Rs. 91,800 (the full TDS being on the maturity amount).

The Assessing Officer (AO), processing the return, allowed only TDS credit of Rs. 6,120 (proportionate to declared interest of Rs. 60,000) and disallowed the claimed credit of Rs. 91,800, relying on Section 199 of the Income Tax Act. The assessee filed an application under section 154 seeking full credit of TDS which the AO rejected (17 Nov 2003). On appeal the CIT(A) allowed full credit by relying on Central Board of Direct Taxes (CBDT) Circular No. 2 of 2002, holding that full TDS benefit accrues to the holder of the bond at maturity and that the TDS certificate issued to the assessee-secondary purchaser entitled her to full credit. The Tribunal upheld the order of the CIT(A). The Revenue then filed these appeals to the High Court, raising two substantial questions of law.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the learned Tribunal was right in law in upholding the order of the CIT(A) directing the AO to allow full credit of TDS to the assessee, in contravention of the provisions of Section 199 of the Income Tax Act?
Whether, on the facts and in the circumstances of the case, the findings recorded by the learned Tribunal in allowing full credit of TDS to the assessee are perverse and unsustainable in view of the statutory provisions of Section 199 of the Income Tax Act, 1961?

Arguments of the Parties

Appellant (Revenue) — Primary contentions

The view taken by the CIT(A) and the Tribunal contravenes the provisions of Section 199 of the Income Tax Act; any deduction made under the chapter and paid to the Central Government must be treated as payment of tax on behalf of the person from whose income the deduction was made, and interpreting Section 199 otherwise produces injudicious results.
The Revenue's counsel submitted that credit for tax deducted can be given only where the tax is paid on the income in respect of which the deduction has been made and that income is offered for assessment in the hands of the person in whose return the credit is claimed — i.e., if the income is not taxed in that person's hands, that person would not be entitled to TDS credit for such income.
In support, learned counsel relied on two High Court judgments: CIT v. Tanjore Permanent Bank Ltd. (Madras High Court) and CIT v. Birla Janahit Trust (Calcutta High Court), contending that those authorities support the proposition that TDS credit requires the underlying income to be taxed in the hands of the claimant.

Respondent (Assessee) — Primary contentions and administrative authority relied upon

The assessee-secondary purchaser received the TDS certificate issued by IDBI in her name at the time of maturity and thus claimed credit of the full TDS amount in her return; she declared interest income for the period she held the bond.
The CIT(A) accepted the assessee's contention by placing reliance on CBDT Circular No. 2 of 2002, which (as interpreted by the CIT(A) and Tribunal) provides that TDS is to be made at maturity and the TDS certificate and benefit are to be given to the holder of the bond at the time of maturity.
The CIT(A) disagreed with the AO's approach that TDS benefit is to be given whenever income is declared during the life of the bond because that approach is impractical (multiple persons could claim portions of the credit and have different AOs), and instead held that the certificate and credit issued in the name of the bond-holder at maturity entitles that holder to the entire TDS credit.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
CIT v. Tanjore Permanent Bank Ltd. (Madras High Court)	Proposition that credit for tax deducted can be given only in cases where the tax is paid on the income in respect of which deduction was made and which is offered for assessment in the hands of the person claiming credit.	The Court held this authority was not applicable to the present case because it concerned earlier assessment years prior to the amendment effective 1 April 1997 and did not consider the CBDT Circular No. 2 of 2002; therefore the Court did not follow it for the facts at hand.
CIT v. Birla Janahit Trust (Calcutta High Court)	Similar rule as above: TDS credit tied to taxation of the underlying income in the hands of the person claiming the credit.	The Court held this authority was not applicable to the present facts for the same reasons (earlier assessment years and absence of the 1997 amendment and the 2002 CBDT circular in those decisions) and therefore did not apply it to defeat the assessee's claim.

Court's Reasoning and Analysis

The Court proceeded by considering the statutory language of Section 199 as amended with effect from 1 April 1997 (by Finance Act, 1996). The amendment added expressions such as "owner of the security" and "unit holder" to the provision that any deduction made of tax at source and paid to the Central Government shall be treated as payment of tax on behalf of the person from whose income the deduction was made or of the owner of the security, etc., and that credit shall be given on production of the certificate under Section 203 in the assessment made for the assessment year for which such income is assessable.

The Court accepted the Tribunal's exposition of CBDT Circular No. 2 of 2002 (as summarized by the Tribunal in five points), notably the clarification that:

Section 199's application to Deep Discount Bonds gave rise to practical problems, and CBDT issued the circular to resolve those problems;
Deep Discount Bonds can be transferred multiple times before maturity and transferors pay tax on capital gains but do not receive a TDS certificate;
TDS is to be made at the time of maturity and the certificate is to be issued to the holder of the bond at the time of maturity.

Applying the statute and the CBDT circular, the Court reasoned that the amended Section 199 contemplates TDS being treated as payment on behalf of the "owner of the security" and that where the TDS certificate was issued in the name of the assessee-secondary purchaser (who was the holder/owner at maturity), the TDS must be regarded as payment on her behalf. The Court emphasized that, in the present facts, the original purchaser had shown his income in his return and did not claim TDS benefit; the TDS certificate was issued to the holder at maturity (the assessee-secondary purchaser). Given those facts and the circular's guidance, the Court found the Tribunal's and CIT(A)'s interpretation to be correct.

The Court also addressed the Revenue's reliance on the two High Court judgments (Tanjore Permanent Bank Ltd. and Birla Janahit Trust), explaining that those decisions concerned assessment years prior to the amendment effective 1 April 1997 and did not consider CBDT Circular No. 2 of 2002; accordingly, those authorities were not applicable to the issues in the present appeals and need not be followed in this instance.

Holding and Implications

Holding: The appeals fail and are dismissed; both substantial questions of law raised by the Revenue are answered against the Revenue.

Implications:

Direct effect on the parties: The orders of the Tribunal and the CIT(A) stand; the assessee-secondary purchaser is entitled to the full credit of TDS (Rs. 91,800) as the holder of the bond at the time of maturity and as the person to whom the Section 203 certificate was issued.
On authority: The Court expressly declined to apply the earlier High Court judgments cited by the Revenue because those decisions related to pre-amendment years and did not consider the CBDT Circular No. 2 of 2002. The Court accepted the combined effect of the 1997 amendment to Section 199 and the 2002 CBDT circular as determinative in the present facts.
Broader precedent: The opinion answers the specific substantial questions in favor of the assessee in these appeals; the opinion does not state any broader doctrinal innovation beyond applying the amended wording of Section 199 together with CBDT Circular No. 2 of 2002 to holders of Deep Discount Bonds at maturity.

Disposition: Appeals dismissed and substantial questions answered against the Revenue.

Show all summary ...

1. This order shall dispose of IT Appeal Nos. 412, 413 and 414 of 2007 because similar issues are involved and the Tribunal vide its order dt. 25th Jan., 2007 has disposed of all the three appeals by one composite order.

2. The appeals have been filed under section 260a of the it act, 1961 (for brevity "the act") challenging composite order dt. 25th Jan., 2007 passed by the Tribunal, Delhi SMC Bench, New Delhi in ITA Nos. 4097, 4098, 4099/Del/2006 in respect of the same assessment orders of 2002-03 concerning assessee respondent Smt. Sonal Bansal, Smt. Ritu Bansal and Smt. Meenu Gupta (Annex. A-3). The Revenue has claimed that following two substantial questions of law would emerge for determination of this Court:

Whether on the facts and in the circumstances of the case, the learned Tribunal was right in law in upholding the order of the CIT(A), directing the AO to allow full credit of TDS to the assessee, in contravention of the provisions of Section 199 of the IT Act?

Whether on the facts and in the circumstances of the case the findings recorded by learned Tribunal in allowing full credit of TDS to assessee are perverse and sustainable in view of statutory provisions of Section 199 of IT Act, 1961?

3. For the sake of convenience, facts are being referred from IT Appeal No. 412 of 2007. There is one Vivek Bansal, Liberty House, Karnal who had originally purchased Deep Discount Bonds 1997 of Industrial Development Bank of India (IDBI) @ of Rs. 5,500 each (to be referred as the original purchaser). From him the assessee respondent purchased those bonds @ Rs. 9,700 each on 1st Jan., 2001 for total value of Rs. 19,40,000 (to be referred as the assessee-secondary purchaser). The original purchaser filed his return for the asst. yr. 2001-02 and reflected the difference in amount of purchase vis-a-vis the sale. Thus, a sum of Rs. 9,40,000 became long-term capital gain in respect of the original assessee. It is undisputed that the bonds were subject to accruing of interest year to year. Although, no income was received annually by the bond holder. The condition was modified by issuance of a press note later. The assessee-secondary purchaser received a draft of Rs. 19,08.200. The aforementioned amount has been accounted for by the assessee-secondary purchaser in the following manner:

IDBI Deep Discount Bonds 1997 Dr. to bank

1-4-2001 Opening balance 19,40,000 D.D. on IDBI Bonds 19,08,200

Redemption Amount

Interest a/c TDS a/c

By Interest on IDBI bonds 60,000 TDS on IDBI interest 91,800

Rs. 9,00,000

________________ ___________

20,00,000 20,00,000

________________ ____________

4. The tax deduction certificate filed for gross interest of Rs. 9,00,000 was also duly accounted for. The assessee-secondary purchaser had duly filed her return on 26th June, 2002 declaring her income of Rs. 1,07,140. The AO discovered at the time of processing of return on 31st March, 2003 that the assessee had claimed credit of TDS of Rs. 91,800 in the return of income that was deducted by IDBI on the interest income of Rs. 9,00,000 which was paid by the bank to the assessee-secondary purchaser. In her return, the assessee-secondary purchaser had declared interest income at Rs. 60,000 only. The AO allowed her credit for TDS of Rs. 6,120. Accordingly the credit as claimed by the assessee-secondary purchaser to the tune of Rs. 91,800 at the interest income of Rs. 9,00,000 was not allowed by relying upon Section 199 of the Act. The assessee filed an application Under Section 154 of the Act on 6th Oct., 2003 with a request to the AO to allow her full credit of TDS deducted by IDBI which was rejected on 17th Nov., 2003 placing reliance on Section 199 of the Act. The AO followed the reasoning that the provision of Section 199 of the Act stipulates that credit of TDS was to be given to the assessee-secondary purchaser for the amount so deducted on furnishing of a certificate under section 203 of act for the assessment year for which such income was assessable. On further appeal filed by the assessee, the CIT (A), Karnal accepted the contention of the assessee by placing reliance on Circular No. 2 of 2002 issued by the Central Board of Direct Tax (to be referred as, "CBDT"). The CIT (A) concluded that the effect of Circular No. 2 of 2002 issued by CBDT was that the entire TDS benefit was to be given to the holder of the bond at the time of maturity and the assessee-secondary purchaser was entitled to the same. The CIT (A) disagreed with the approach adopted by the AO that the TDS benefit was to be given whenever the income is declared because it was not a workable proposition as there can be a number of persons to whom the said credit may belong and that there can be different AO of such persons. The CIT(A) held that the credit was not to be available to other persons because the TDS certificate could not be issued in anyone else's name and that this was the intention and the meaning of the circular. It was further found that the assessee-secondary purchaser was required to declare interest income in respect of the period for which she had held the bond which has been correctly offered and there was no dispute on that question. The TDS certificate has also been correctly issued in the name of assessee-secondary purchaser as per the Circular No. 2 of 2002 issued by CBDT because she was the holder of the bond at the time of maturity. The only option was to give credit of TDS to the assessee-secondary purchaser. The CIT(A) holding that there was no other person to whom the credit should be given of any one portion of the TDS amount, the entire TDS credit was required to be given to the assessee-secondary purchaser only as per Circular No. 2 of 2002. Accordingly, direction was issued by the CIT(A) to the AO to allow credit to the assessee-secondary purchaser for the entire amount of TDS amounting to Rs. 91,800.

5. On further appeal filed by the Revenue, the Tribunal upheld the order of the CIT(A). The Tribunal summed up the contents of Circular No. 2 of 2002, dt. 15th Feb., 2002 by observing as under:

7. From the above circular, it is clear that:

I. The application of Section 199 for TDS on Deep Discount Bonds was giving rise to certain problems, therefore, CBDT issued the above said circular for resolving such problems. Hence, the circular will be applicable to the cases of Deep Discount Bonds.

II. The Deep Discount Bonds can be transferred by the initial subscriber to other persons, called the intermediate holder/purchaser and intermediate holder can further transfer and such transfer can take place any number of times during the life time of the bond.

III. On transfer before maturity the transferor has to pay tax on the capital gain calculated on the basis of his cost of acquisition and the transfer price. The cost of acquisition is increased by the amount of interest/business income offered by such transfer during the period the bond was held by him and no TDS will be made or certificate issued to such transfer.

IV. The interest income of business income as the case may be, on account of accrual of interest can he offered for taxation for each assessment year separately and the tax can be paid but no TDS will be made every year.

V. TDS will be made at the time of the maturity of the bond only and it will be issued to the holder of the bond at the time of maturity.

(emphasis, italicised in print, added).

6. After understanding the circular in the aforementioned manner, the Tribunal held that the circular was applicable to the case of the assessee secondary purchaser and that entire TDS benefit was required to be given to the holder of the bond at the time of maturity. Further view of the; Tribunal is discernible from Paragraph 9 of the impugned order, which reads as under:

I have considered the rival submissions and the material available on record. Section 199(1) provides, "Any deduction made in accordance with the foregoing provisions of this chapter and paid to the Central Government, shall be treated as payment of tax on behalf of the person from whose income the deduction was made or of the owner of the security or the depositor or owner of the property or of the unit holder or of the shareholder as the case may be and credit shall be given to him if the amount so deducted on the production of the certificate furnished under Section 203 in the assessment made under this Act for assessment year for which such income is assessable. I find that by Finance Act, 1996 w.e.f. 1st April, 1997 the words 'or depositor or owner of the property or of the unit holder' have been inserted in the existing provision of section 199 of the it act. In this case the Deep Discount Bonds were held by investor original purchaser, which were transferred during the intermediary period before the maturity. Therefore, problem arises as to how the same transaction is to be taxed. The CBDT Circular No. 2 of 2002 clarified the above position and issued certain guidelines which are mentioned by the CIT(A) in his impugned order reproduced above. It is admitted fact that the original investor has shown his income as per CBDT circular in his return of income in which he did not claim any benefit of deduction of TDS. For the subsequent income, the assessee has shown the income for the purpose of taxation and claimed benefit of TDS because TDS certificate was issued in the name of the assessee being holder of the bond at the time of maturity. Therefore, as per CBDT circular above and Section 199, the assessee being owner and holder of the bond rightly claimed the TDS benefit in the matter.

7. We have heard Mr. Yogesh Putney, learned Counsel for the Revenue on both the questions at a considerable length. According to learned counsel, the view taken by CIT(A) as well as the Tribunal contravenes the provisions of Section 199 of the Act. According to learned Counsel any deduction made in accordance with the provisions of Chapter XVII and paid to the Central Government was required to be treated as tax on behalf of the person from whose income the deduction was made and interpretation of Section 199 of the Act in any other manner would result into injudicious results. He has also submitted that the interpretation of Section 199 of the Act as adopted by the Tribunal is unacceptable.

Learned Counsel has emphasized that the Tribunal has proceeded on the wrong assumption that the original purchaser has shown his income in his return of income as per CBDT circular and that the original purchaser had not claimed any benefit of deductions of TDS. In support of his submissions, learned Counsel has placed reliance on a judgment of Madras High Court in case of CIT v. Tanjore Permanent Bank Ltd. , and argued that the credit for tax deducted can be given only in case where the tax is paid on the income in respect of which deduction has been made at source and which is offered for assessment. The argument appears to be that an assessee in whose hands if any income is not taxed then it would not be entitled to get the credit of TDS, concerning such income. He has also placed reliance on the judgment of Calcutta High Court in the case of CIT v. Birla Janahit Trust .

8. We have carefully considered the submissions made by learned Counsel and are of the view that the instant appeal lacks merit. In our view the Tribunal has correctly interpreted the provisions of Section 199 of the Act and Circular No.2 of 2002. The provisions of Section 199 as amended on 1st April, 1997 read as under:

199. Any deduction made in accordance with the foregoing provisions of this Chapter and paid to the Central Government shall be treated as a payment of tax on behalf of the person from whose income the deduction was made, or of the owner of the security, or depositor or owner of property or of unit holder, or of the shareholder, as the case may be, and credit shall be given to him for the amount so deducted on the production of the certificate furnished under Section 203 in the assessment made under this Act for the assessment year for which such income is assessable.

9. A perusal of the aforementioned provision shows that any deduction made of tax at source and paid to the Central Government is required to be treated as payment of tax on behalf of the person from whose income the deduction was made. However, w.e.f. 1st April, 1997 amendments were introduced by Finance Act, 1996 which resulted into addition of words 'depositor' or 'owner of property' or 'owner of security' or 'unit holder' as the case may be. Therefore, it has to be accepted that any deduction made of tax at source and paid to the Central Government is required to be treated as payment of tax on behalf of 'owner of security' or 'unit holder'. In the present case, it is obviously the assessee- secondary purchaser who is owner of security and therefore, TDS has to be regarded as payment made on her behalf. Moreover, certificate under Section 203 of the Act has also been issued to assessee-secondary purchaser.

10. In our view, the Tribunal has rightly interpreted the words 'owner of the property' or 'of the unit holder' to mean that the assessee-secondary purchaser was entitled to the benefit. The aforementioned situation has been made further clear by CBDT Circular No. 2 of 2002 by issuing guidelines. One of the guidelines in the CBDT circular is that the TDS is to be made at the time of maturity of the bond and it was to be issued to the holder of the bond at the time of maturity. It is undisputed that the TDS certificate was issued in the name of the assessee being holder or owner of the bond at the time of maturity. Therefore, the case of the petitioner is covered by the virtue of expression or owner of the property or the unit holder which were added in Section 199 w.e.f. 1st April, 1997. Therefore, we accept the view taken by the CIT(A) as well as the Tribunal as the correct view and accordingly answer both the questions against the Revenue.

11. We are also of the view that judgments of Madras High Court in the case of Tanjore Permanent Bank Ltd. (supra) and Birla Janahit Trust (supra) would not be applicable to the facts of the present case as those judgments were in respect of earlier assessment years. The amendment made w.e.f. 1st April, 1997 did not apply to those cases. Moreover, CBDT Circular of 2002 was also not subject matter of consideration in those two judgments. Therefore, we do not deem it necessary to undertake in detail discussion about the aforementioned two judgments.

12. In view of the above, these appeals fail and the substantial questions of law raised by the Revenue are answered against the Revenue. The appeals are accordingly dismissed.