No interest u/s 234B can be levied in respect of payments on which TCS stands collected: Apex Court

Read Judgment: Director of Income Tax, New Delhi vs. M/s. Mitsubishi Corporation

Pankaj Bajpai

New Delhi, September 20,2021:The Supreme Court has ruled that the provisions of Section 234B of the Income Tax Act cannot be construed in isolation & without reference to other provisions of Chapter XVII and hence, no interest u/s 234B can be levied in respect of payments on which tax has already been collected at source.

A Division Bench of Justice L. Nageswara Rao and Justice Aniruddha Bose observed that the phrase “would be deductible or collectible” in Section 209(1)(d) of the Finance Act,2012, has to be construed as entitling the assessee, for all assessments prior to FY 2012-13, to reduce income tax deductible or collectible, when computing advance tax liability.

The observation came to be passed in reference to the liability of an assessee to pay interest on short payment of advance tax due to default of the payer in not deducting tax at the time of payment, under the provisions of the Income-tax Act, 1961.

The background of the case was that a notice u/s 143(2) came to be issued to the assessee-company engaged in manufacturing automobiles as well as electrical appliances. Later, the AO passed an order holding that a portion of the assessee’s income was attributable to its activities in India and was therefore liable to be taxed in India, under Articles 4, 5 and 6 of the Double Taxation Avoidance Agreement (DTAA) between India and Japan, r/w the provisions of the I-T Act.

When the matter reached the Income tax Appellate Tribunal (ITAT), it was held that the assessee was not liable to pay interest u/s 234B when TDS had been deducted from payments made to it.

After considering the materials on record, the Top Court found that the primary issue pertains to the interpretation of Section 209(1)(d).

A proviso was inserted to Section 209 (1) (d) by the Finance Act, 2012, which is in the nature of an exception, as an assessee, who has received any income without deduction or collection of tax, is made liable to pay advance tax in respect of such income, noted the Court.

The Division Bench opined that the dispute relating to the interpretation of the words “would be deductible or collectible” in Section 209 (1) (d) of the Act can be resolved by referring to the proviso to Section 209 (1) (d), which was inserted by the Finance Act, 2012.

“The proviso makes it clear that the assessee cannot reduce the amounts of income-tax paid to it by the payer without deduction, while computing liability for advance tax. The memorandum explaining the provisions of the Finance Bill, 2012 provides necessary context that the amendment was warranted due to the judgments of courts, interpreting Section 209 (1) (d) of the Act to permit computation of advance tax by the assessee by reducing the amount of income-tax which is deductible or collectible during the financial year. If the construction of the words “would be deductible or collectible ” as placed by the Revenue is accepted, the amendment made to Section 209 (1) (d) by insertion of the proviso would be meaningless and an exercise in futility”, observed the Division Bench.

Therefore, the Top Court observed that, to give the intended effect to the proviso, Section 209 (1) (d) of the Act has to be understood to entitle the assessee, for all assessments prior to the financial year 2012-13, to reduce the amount of income tax which would be deductible or collectible, in computation of its advance tax liability, notwithstanding the fact that the assessee has received the full amount without deduction.

While the definition of “assessed tax” u/s 234B pertains to tax deducted or collected at source, the pre-conditions of Section 234B, viz. liability to pay advance tax and non-payment or short payment of such tax, have to be satisfied, after which interest can be levied taking into account the assessed tax, added the Court.

Therefore, the Apex Court concluded that Section 209 cannot be ignored while construing the contents of Section 234B.