Per Pramod Kumar, Accountant Member. - This is an appeal filed by the assessee and is directed against the order dated 27th August, 1997 passed by the CIT(A) in the matter of penalty imposed on the assessee under section 221 read with section 193 of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’), for the assessment year 1994-95.
2. The core issue requiring our adjudication in this case pertains to the scope of Explanation to section 193 of the Act. To be more specific, all that we are required to adjudicate here is whether or not section 193 of the Act requires tax to be deducted at source in respect of the provision for ‘interest accrued but not due’ made by an assessee where the ultimate recipient of such ‘interest accrued but not due’ cannot be ascertained at the point of time when the provision is made.
3. The case before us also raises another important legal issue about the scope of section 221 per se, and whether a penalty under the said section can be imposed at all, as a consequence of non-deduction of tax at source, after the insertion of section 271C with effect from 1st April, 1989. That aspect of the matter, however, we will deal with a little later.
4. Coming back to the core issue, it is necessary to briefly explain the expression ‘interest accrued but not due’. The expression ‘interest accrued but not due’ is essentially an accounting expression which refers to the interest liability which has arisen in respect of the interest payable by a person, but liability to pay such interest has not crystallised. This expression becomes particularly relevant when interest is payable on a date later than the date on which books of account of the assessee are closed annually, and, therefore, as at the time of closure of annual accounts, the assessee has incurred a liability in respect of interest but that liability is to be discharged at a later date. To illustrate, let us take a situation in which a person, who follows financial year as his accounting year, has borrowed funds aggregating to Rs. 10,00,000, as on 1st April, on interest @ 12% p.a. and such interest is to be paid at the end of each calendar year. On 31st December of that year, therefore, the assessee has a liability to pay Rs. 90,000 to his borrowers. Now as on 31st March of the following year, the assessee will have a interest liability incurred for the remaining three months but the liability to pay the same will crystallise only at the end of this calendar year. While, for the purposes of accounting, this interest liability of Rs. 30,000 is to be provided in the books of account as a charge on income but since liability for payment will only mature at the end of the relevant accounting year, the corresponding credit is not to be given to the respective lenders but only to an appropriate provision account. It is such an interest liability which is referred to as ‘interest accrued but not due’.
5. The facts of the case before us, however, are little more complex than the situation visualised in the above simple illustration. Let us set out the material facts first.
6. The assessee before us is one of the pioneer financial institutions in India. The assessee follows financial year as its accounting year. In 1993, the assessee raised funds aggregating to more than Rs. 200 crores, by issuance of certain unsecured bonds. One of the bonds so issued was ‘Regular Return Bond - Series II’ and the assessee offered 16% interest p.a. payable annually on these bonds. As regards the terms for interest payment of this bond, the offer document, inter alia, describes the same as follows :
"The interest will become due and payable yearly on June 9 every year and at the time of maturity. The said interest will be payable to the bondholder registered with the IDBI on 15th May of each year. The first payment will be made on June 9, 1994."
7. It is also relevant to note that the bonds so issued by the assessee company were transferable by endorsement and delivery. As regards the transferability of these bonds, the offer document stated as follows :
"These bonds, being negotiable instruments, are transferable by endorsement and delivery by the transferor. The endorsement by the transferor will be made on the Bond by affixing his signature at the place indicated thereon. The transferee shall also affix his signature on the Bond at the appropriate place."
8. As regards the requirement of registration of the transfer of these bonds, the same offer document further observed as follows :
". . . For the purpose of registration, the transferee shall intimate his/her name, address, occupation, if any, and shall deliver the bond certificate(s) to IDBI at Bombay. In case of Regular Return Bonds, the transferees must get their names registered with the IDBI as aforesaid since the yearly interest thereon, is payable only to the registered bondholders. . . ."
9. The above terms and conditions, sofaras material for the purposes of our adjudication, can be summarized as follows :
(a)The assessee is liable to pay interest @ 16% annually in respect of regular return bondholders.
(b)The interest is payable on 9th June of each calendar year, except in the year of maturity, when interest is payable on maturity.
(c)The interest, except at the time of maturity, is paid to the person whose name is registered in the records of the assessee-company as on 15th May of each calendar year.
(d)The bonds are transferable by endorsement and delivery, and the assessee does not, in any way, control such transfer of ownership.
Let us now appreciate the impact of the above terms and condition so far the issue in appeal before us is concerned. As on 31st March of the year, the assessee liability for ‘interest accrued but not due’ because interest is payable only once annually on a date other than the date of closure of accounts but the assessee will have no means to find out as to who could be the recipients of ‘interest due but not payable’ in respect of ‘Regular Return Bond’ because while assessee’s liability to pay interest @ 16% is certain and is to be made as on 31st March i.e. on the end of the relevant accounting year, the bonds in question being freely transferable, it cannot certain as to who will be the registered bondholder as on 15th May of that year. The assessee cannot be expected to have clairvoyance of knowing, as on 31st March, as to who will own the bonds on 15th May of that year. Therefore, in such a situation, while the assessee certainly has the liability to pay the interest for the period till the end of the relevant accounting year, the assessee certainly does not know for sure as to who will be entitled to receive this interest.
10. In the simple illustration that we had taken earlier, the assessee knows the person who is to be paid ‘interest accrued but not due’, when the same becomes payable, because the interest is to be paid to the lender and the lender obviously cannot remain unidentified. In the case before us, the interest is to be paid to a ‘registered bondholder’ as on a future date, and there cannot be any method to find out as to who will be registered bondholder on a future date.
11. Let us now take a look at the provisions of section 193 which are at the core of this controversy. Section 193 is reproduced below for ready reference.
"Chapter XVII - Collection and Recovery of Tax
B - Deduction at source
Section 193. Interest on Securities.—The person responsible for paying to a resident any income by way of interest on securities 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 any other mode, whichever is earlier, deduct income tax at the rates in force on the amount of interest payable.
Provided .............. (As it is not relevant for our purposes, we are not reproducing the same)
Explanation - For the purposes of this section, where any income by way of interest on securities is credited to any account, whether called ‘interest payable account’ or ‘suspense account’ or by any other name, in the books of account of 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."
12. Very briefly, the case of the revenue is that in the light of Explanation to section 193, tax is required to be deducted at source in respect of all provisions for ‘interest accrued but not due’ because crediting of such interest to any account, by whatever name called, is to be treated as ‘credit of such income to the account of the payee’. The assessee, on the other hand, contends that unless the payee can be ascertained, there is no question of deduction of tax at source. It is contended that when the payee cannot be ascertained at the point of time when provision is made, as is the case before us, the machinery of deduction at source cannot be put into action.
13. We may now briefly touch upon the developments giving rise to this appeal before us.
14. At the end of the relevant previous year, the assessee-company made a provision of Rs. 55,31,68,800, for ‘interest accrued but not due’ in respect of Regular Return Bonds (Series II). This provision was charged to the profit and loss account, and accordingly a deduction in respect of the same was claimed in computation of business income. The said provision was credited to the ‘interest payable account’ and was reflected as such in the balance sheet. In the course of scrutiny of tax deduction at source returns, the Assessing Officer noticed that the assessee did not deduct tax at source in respect of the provision so made. The Assessing Officer was of the view that in terms of the provisions of section 193, particularly read with Explanation thereto, the assessee was required to deduct tax at source from the credit to ‘interest payable account’ and deposit the same with the Government. The Assessing Officer was of the view that the assessee knew the identity of all the bondholders as on 31-3-1994 because the assessee was maintaining a register of bondholders, and, therefore, it could not be said that the assessee did not know the names of the persons to whom interest was to be credited. The Assessing Officer thus concluded that the assessee was at fault inasmuch as the assessee did not comply with the provisions of section 193 read with Explanation thereto. Accordingly, the assessee was imposed a penalty of Rs. 1,49,64,354 on the ground that "the assessee has committed a default without any reason under section 201(1)" on account of non-deduction of tax at source in respect of interest liability credited to ‘interest payable account’. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. The CIT(A) rejected all the contention of the assessee and concluded as follows :
Thus it is evident from the above facts that the appellant had credited the interest payable to interest liability account and debited the same to profit and loss account, but failed to deduct income tax without any good or sufficient reason and in utter disregard to clear provisions of section 193 and Explanation below the said section. Hence, in my considered view, it is a fit case for not only the levy of interest under section 201(1A) but also levy of maximum penalty under section 221 read with section 201. Accordingly, ITO’s order levying the penalty is upheld.
Learned CIT(A) nonetheless modified the order of the Assessing Officer so far as quantum of penalty was concerned, as the correct interest provision was Rs. 44,85,97,164 and not Rs. 55,31,68,800 as stated in the Assessing Officer’s order. Based on CIT(A)’s direction to verify the facts and reduce the penalty accordingly, the penalty was finally reduced to Rs. 1,21,34,589.
15. Not satisfied with the order of the CIT(A), the assessee is in second appeal before us.
16. Shri Dinesh Vyas, learned Senior Advocate, assisted by Shri P.C. Tripathi, Advocate, appeared for the assessee, and Shri N.N. Mishra, learned Commissioner (DR) appeared for the revenue. During the course of hearing and finding that the grounds of appeal did not succinctly set out the controversy actually requiring our adjudication, we asked the parties to address us on the two legal issues that we have identified earlier in this order. Rival contentions are conscientiously heard, material on record is carefully perused and factual matrix of the case as also the applicable legal position are duly considered.
17. In our humble understanding, conceptually, liability of tax deduction at source is in the nature of a vicarious or substitutionary liability, which presupposes existence of a principal or primary liability. Chapter XVII-B is titled ‘Collection and recovery of tax - deduction of tax at source’ and this title also indicates that the nature of tax deduction at source obligations is obligations for collection and recovery of tax. Under the Income-tax Act, tax is on the income and it is the hands of the person who receives such income, except in the case of dividend’ distribution tax which is levied under section 115 ‘O’ - a section outside the chapter providing for collection and recovery mechanism and set out under a separate chapter ‘Determination of tax in certain special cases - special provision relating to tax on distributed profits of domestic companies’. A plain reading of section 190 and section 191, which are first two section under the Chapter XVII, and of sections 199, 202 and 203(1), would show this underlying feature of the tax deduction at source mechanism. These sections are reproduced below for ready reference :
"190. Collection and recovery of tax - general.—Deduction at source and advance payment :
(1)Notwithstanding that the regular assessment in respect of any income is to be made in a later assessment year, the tax on such income shall be payable by deduction or collection at source or by advance payment, as the case may be, in accordance with the provisions of this chapter.
(2)Nothing in this section shall prejudice the charge of tax on such income under the provisions of sub-section (1) of section 4.
191. Direct Payment.—In the case of income in respect of which provision is not made under this chapter for deducting income-tax at the time of payment, and in any case where income tax has not been deducted in accordance with the provisions of this chapter, income tax shall be payable by the assessee direct.
199. Collection and recovery of tax - deduction at source.—Credit for tax deducted :
(1)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 the owner of the security or the shareholder, as the case may be, and credit shall be given to him for the amount so deducted on the production of certificate furnished under section 203 in the assessment made under this Act for the assessment year for which such income is assessable.
Provided .....(As it is not relevant for our purposes, we are not reproducing the same)
202. Deduction only one mode of recovery.—The power to recover tax by deduction under the foregoing provisions of this chapter shall be without prejudice to any other mode of recovery.
203. Certificate for tax deducted.—(1) Every person deducting tax at source in accordance with the foregoing provisions of this chapter shall within such period as may be prescribed from the time of credit or payment of the sum, or, as the case may be, from the time of issue of a cheque or warrant for payment of any dividend to a shareholder, furnish to the person to whose account such credit is given or to whom such payment is made or the cheque or warrant is issued, a certificate to the effect that tax has been deducted, and specifying the amount so deducted, the rate at which tax is deducted and such other particulars as may be prescribed."
Section 190 makes it clear that the scheme of tax deduction at source is one of the methods of recovering the tax due from a person and it is notwithstanding the fact that the tax liability may only arise in a later assessment year. The tax liability is obviously in the hands of the person who earns the income, and tax deduction at source mechanism provides for method to recover tax such liability. Therefore, this tax deduction at source liability is, as we begun by taking note of, a sort of substitutionary liability. Section 191 further makes this position clear when it lays down that in a situation TDS mechanism is not provided for a particular type of income or when the taxes have not been deducted at source in accordance with the provisions of Chapter XVII, income tax shall be payable by the assessee directly. This provision thus shows that tax deduction liability is a vicarious liability and the principal liability is of the person who is taxable in respect of such income. Section 199 makes it even more clear by laying down that the credit for taxes deducted at source can only be given to the person from whose income the taxes are so deducted. Therefore, when tax deductor cannot ascertain beneficiaries of a credit, the tax deduction mechanism cannot be put into service. Section 202 lays down that tax deduction at source provisions are without any prejudice to any other mode of recovery from the assessee, which again points out to the tax deduction liability being vicarious liability in nature. Section 203(1) then lays down that for all tax deductions at source, the tax deductor has to "furnish to the person to whose account such credit is given or to whom such payment is made or the cheque or warrant is issued" which presupposes that at the stage of tax deduction the tax deductor knows the name of person whose to whom the credit is to be given, though whether by way of credit to the account of such person or by way of credit to some other account. This again shows that tax deduction at source liability is a vicarious liability to pay tax on behalf of the person who is to be beneficiary of the payment of credit with a corresponding right to recover such tax payable from the person to whom credit is afforded or payment is made. It would be thus seen that the whole scheme of tax deduction at source proceeds on the assumption that the person whose liability is to pay an income knows the identity of the beneficiary or the recipient of the income. It is a sine qua non for a vicarious tax deduction liability that there has to be a principal tax liability in respect of the relevant income first, and a principal tax liability can come into existence when it can be ascertained as to who will receive or earn that income because the tax on the income and in the hands of the person who earns that income. In this view of the matter, tax deduction at source mechanism cannot be put into practice until identity of the person in whose hands it is includible as income can be ascertained.
18. It is indeed correct that Explanation to section 193 lays down that even when an income is credited to any account in the books of account of 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, but the fact that the credit to any account is to be deemed to be credit to the payee’s account also presupposes that payee can be ascertained. Therefore, this deeming fiction can only be activated when the identity of the payee can be ascertained. To illustrate, in the example that we had taken in paragraph 4 above, as long as assessee knows the identity of lenders, whether the assessee credits the ‘interest accrued but not due’ in the account of the assessee or in some other account, tax would continue to be deductible under section 193 by the virtue of deeming fiction set out in the Explanation to section 193. The liability to pay in such a case would crystallise later, i.e. on due date of 31st December, and the corresponding credit to the lender’s account will also be given on 31st December, but the assessee will still have tax deduction liability in respect of ‘interest accrued but not due’ as on 31st March. However, on the facts of the present case, this Explanation cannot be put into practice because the payee is not known at the stage of provision for ‘interest accrued but not due’ being made. It is not difficult to visualize that Explanation to section 193, which was introduced with effect from 1st June, 1989, was apparently to take care of a situation in which instead of crediting the account of the payee, some other proxy account was credited, to avoid the tax deduction at source liability being invoked. For example, if at the end of the accounting year, the assessee is to make a provision for interest of Rs. 10,000 payable to Mr. X, but he creates the provision by way of credit to ‘interest payable account’. In such a situation, ‘interest payable account’ is de facto a proxy account for Mr. X either fully or to the extent of the amount payable to Mr. X. However, it could have been argued, in the absence of the Explanation to section 193, that since the credit is not to the account of Mr. X, the tax deduction liability cannot be invoked. The Explanation itself makes it clear that even when such a practice is adopted the credit will be deemed to be credit to the payee’s account. In our considered view, fiction embodied in the Explanation is only applicable in situations in which tax deduction liability is sought to be escaped by crediting interest to some other account other than that of recipient of interest. In our considered view, Explanation to section 193 cannot be invoked in a case where the person who is to receive the interest cannot be identified at the stage at which the provision for interest accrued but not due is made. This position is also accepted by the CBDT as evident from its letter dated 5th July, 1996 addressed to the Tata Iron & Steel Co. Ltd. [Letter No. 275/126/96 IT (B)], which, inter alia, states as follows:—
"I am directed to refer to your letter ref. 3A 13-21/1460 dated 23rd May, 1996, on the above subject, and to say that difference between the issue price of Rs. 5,000 and face value of Rs. 25,500 is in the nature of interest subject to provisions of section 193/193A. Although the company would be making provisions for interest on year to year basis in their books of account, there will be no deduction of tax at source in each such year as the payee is not known." [Emphasis supplied]
We agree with the merits of the stand so taken by the Central Board of Direct Taxes. The deduction of tax at source can only be effected when payee is known. As far as the situation before us is concerned, the regular return bonds being transferable on simple endorsement and delivery and the relevant registration date being a date subsequent to the closure of books of account, the assessee could not have ascertained the payees at the point of time when the provision for interest accrued but not due was made. Accordingly, no tax was required to be deducted as source in respect of the provision for interest payable made by the assessee which reflected provision for ‘interest accrued but not due’ in a situation where the ultimate recipient of such ‘interest accrued but not due’ could not have been ascertained at the point of time when the provision is made. In the present case, interest to such bondholders is to be paid as are registered with the assessee-company as on 15th May, 1995 but there could not have been any method of ascertaining, as at the time of making the provision for ‘interest accrued but not due’ i.e. on 31st March, 1994, as to who will be registered bondholders as on 15th May, 1994. It is also important to bear in mind that taxes were duly deducted at source at the time of payment i.e. on 9th June, 1994 and that there is no loss of revenue as such. In the light of these discussions, we hold that the assessee did not have any liability to deduct tax at source in respect of provision for interest accrued but not due, in respect of regular return bonds, made on 31st March, 1994. When there was no obligation of deduct tax at source, there cannot be any question of levy of penalty or interest. The appellant, therefore, must succeed.
19. There is, however, one more important aspect of the matter, and that is with regard to the question whether the Assessing Officer could have imposed the penalty at all under section 221. In the case of ITO v. Titagarh Steel Ltd. [2001] 79 ITD 532 (Cal.), a co-ordinate Bench of this Tribunal, dealing with the consequences of non-deduction or short deduction of tax at source, has held that post 1st April, 1989, penalty for non-deduction of tax at source or short deduction of tax at source can only be imposed under section 271C of the Act. While doing so, the Tribunal, articulating its views through one of us (i.e. the Accountant Member), observed as follows :
6. That takes us to the question that in case only one penalty, i.e., either under section 221(1) or under section 271C, is imposable for the default of short deduction of tax at source, under which section can such a penalty be imposed.
7. We find that section 271C was inserted in the Income-tax Act with effect from 1st April, 1989, by the virtue of Direct-tax Amendment Act, 1987, and that the Central Board of Direct Taxes, vide Circular No. 551, dated 23-1-1990, explained the insertion of this section in following words :
"16.5 Under the old provisions of Chapter XXI of the Income-tax Act, no penalty was provided for failure to deduct tax at source. This default, however, attracted prosecution under the provisions of section 276B, which prescribed punishment for failure to deduct tax at source or after deducting , failure to pay the same to the Government. It was decided that the first part of default, i.e., failure to deduct the tax at source should be made liable to levy of penalty, while the second part of default i.e., failure to pay the tax deducted to the Government, which is a more serious offence, should continue to attract prosecution. The Amending Act, 1987 has accordingly inserted a new section 271C to provide for imposition of penalty on any person who fails to deduct tax at source as required under the provisions of Chapter XVII-B of the Act. The penalty is a sum equal to the amount of tax which would have been deducted at source."
8. It was only at the time of insertion of section 271C that rigours of section 276B were relaxed and non-deductions and short deductions of tax at source were taken out of the purview of this section. We may mention that until that point of time, section 276B provided that ‘if a person, without reasonable cause or excuse, fails to deduct or after deducting, fails to pay the tax as required by or under the provisions of sub-section (9) of section 80E or Chapter XVII-B’, he shall be liable to be prosecuted and, in effect, a sentence in the prison. It is thus clear that upto 31-3-1989, only penalty which could have been imposed, if at all imposable, for the default of short deduction of tax at source was penalty under section 221(1). Since for our purposes it is not necessary to go further into this aspect of the matter, we leave it at that.
9. Let us now take a look at the legal position after the insertion of section 271C, i.e., with effect from 1st April, 1989. We have already noticed that section 271C is a specific provision dealing with assessee’s failure of non- deduction, or short deduction, of tax at source. It is fairly well-settled in law that general provisions do not override specific provisions, as aptly described by the maxim ‘generalia specialibus non derogant’. A special provision normally excludes the operation of a general provision and we are of the view that such a principal governs the instant case also. In the case of South India Corpn. (P.) Ltd. v. Secretary, Board of Revenue (AIR 1964 SC 207, at page 215), Hon’ble Supreme Court had an occasion to consider whether article 277 or article 372 of the Constitution of India should govern the particular situation involved therein. Their Lordships then pointed out that "a special provision should be given effect to the extent of its scope, leaving the general provision to control cases where specific provisions do not apply". In the light to these discussions, it is clear to that to the extent a default is covered by the specific provisions of section 271C, such a default cannot be subject-matter of penalty under section 221(1) of the Act. We are, therefore, of the considered view that penalty under section 221(1) cannot be imposed for the cases of non-deduction and short deduction of taxes at source, which are undisputedly covered by the specific provisions of section 271C, so far as period after 1st April, 1989 is concerned.
10. In view of the above discussions, we are of the considered view that the very levy of penalty under section 221(1), on the facts of this case, was unsustainable in law since the short deduction of tax at source took place in the financial year 1990-91, i.e. much after insertion of section 271C with effect from 1st April, 1989.
The levy of penalty under section 221(1) was thus quashed on the ground of jurisdiction. As a matter of fact, the CBDT itself has, in Circular No. 551, dated 23-1-1990, accepted that until section 271C was inserted in the Act, ‘no penalty was provided for failure to deduct tax at source’. It is not only merely a question of mentioning a wrong section, which could perhaps be covered up by recourse to section 292B, it also important to bear in mind that the impugned penalty is levied by an officer of the rank of the Income-tax Officer, whereas, penalty under section 271C could only have been levied by an officer of the rank of the Deputy (now Joint) Commissioner of Income-tax. The Income-tax Officer was from this point of view, not even competent to impose the impugned penalty. Learned Departmental Representative points out that penalty under section 221 has been upheld by the Hon’ble Calcutta High Court in the case of Jubilee Investments & Industries Ltd. v. Asstt. CIT [1999] 238 ITR 6481 and, therefore, Tribunal’s decision in the case of Titagarh Steel Ltd. (supra) is not good law. We don’t agree with this submission either. In fact, this judgment clarifies that penalty under section 221 is imposable when the assessee deducts the tax at source but does not deposit the same within the prescribed time limit, whereas penalty under section 271C is imposable in a case of assessee’s failure to deduct tax at source. While discussing this aspect of the matter at page 651 of the Report, Their Lordships have also taken note of the fact that the power to impose penalty in a case of non-deduction or short deduction of tax at source, i.e. under section 271C, is conferred on the Joint Commissioner of Income-tax but it is not the same case so far penalty under section 221 is concerned. Their Lordships have also made it clear that these sections operate in mutually exclusive areas by observing that "A perusal of both the sections, i.e. section 221 and section 271C, shows that though both the penalties are penalties for default - either in deducting the TDS or after deducting TDS the assessee’s failing to deposit that amount with the Central Government within the prescribed time limit.... Thus it is clear that penalty under both the sections is on different grounds". In the present case, even according to the revenue, the default was on account of deduction of tax at source. Such a default, for the reasons set out above, cannot be visited with penalty under section 221. For this reason also, the impugned penalty is unsustainable in law.
20. For the reasons set out above, we are of the considered view that the impugned penalty under section 221 is unsustainable in law and on the facts of this case. We, therefore, set aside the impugned penalty order. The assessee gets the relief accordingly.
21. The appeal is allowed. It was so announced in the open court upon conclusion of hearing of this appeal.
155/498