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Direct Tax Alert - SC holds that interest under section 234B not leviable prior to FY 2012-13 if tax is deductible at source from income (even if not deducted)

28 September 2021

BACKGROUND

As per Section 234B of the Income-tax Act, 1961 (IT Act), where a taxpayer (liable to pay advance tax) either does not pay the advance tax or the advance tax paid by him falls short of 90% of the assessed tax, an interest of 1% is attracted. Further, Section 195 of the IT Act provides that where the payment to non-resident is liable to tax in India, the payer is required to withheld taxes.  

Generally, non-resident taxpayer contends that the interest under section 234B of the IT Act is not warranted in its case as the tax on the entire income is to be withheld under section 195 of the IT Act and thus, there is no liability to pay any advance tax. This stand took significance when the taxes were not withheld by the payer. While the tax officer opined that a non-resident taxpayer is required to pay interest under section 234B of the IT Act, the non-resident taxpayer denied its liability for the said interest.

With a view to address this anomaly, the Finance Act, 2012 inserted a proviso to Section 209(1)(d) of the IT Act to provide that for computing advance tax liability, tax liability calculated shall not be reduced by TDS/TCS which would be deductible or collectible at source during the said financial year under any provision of the IT Act from any income, if the person responsible for deducting tax has paid or credited such income without deduction of tax or it has been received or debited by the person responsible for collecting tax without collection of such tax. This proviso was inserted with effect from Fiscal Year (FY) 2012-13. For period prior to FY 2012-13, the controversy continues to exist.

In this regard, recently, the Supreme Court1 has examined the applicability of section 234B of the IT Act where neither the payer has withheld tax nor the taxpayer has paid the advance tax. We, at BDO in India, have summarised the ruling of the Supreme Court and provided our comments on the impact of this decision hereunder.

 

FACTS OF THE CASE

The taxpayer, a Japanese Company, carries out its business of carbon crude oil, LPG, ferrous products, industrial machinery, mineral, non-ferrous metal and products, textiles, automobiles etc. through its liaison office in India. The Tax Officer, for the Fiscal Years (FY) 1997-98 to 2003-04 respectively, brought the income attributable to its activities in India to tax in terms of Article 4, 5 and 6 of India-Japan Double Tax Avoidance Agreement (DTAA) rejecting the taxpayer’s contention. The Tax Officer also levied interest under section 234B of the IT Act. Aggrieved, the taxpayer filed an appeal before the First Appellate Authority in respect of levy of interest under section 234B of the IT Act, which was dismissed as not being maintainable. In further appeal to Delhi bench of Tax Tribunal, it was held that the taxpayer was not liable for payment of interest under section 234B of the IT Act when TDS was deductible from payment to the taxpayer. Aggrieved, revenue authorities filed an appeal before the Delhi High Court, which was subsequently dismissed.  Thereafter, the revenue authorities filed an appeal before the Supreme Court and made the following submissions:

  • The obligation of the taxpayer to pay advance tax is independent of the payer’s obligation to deduct TDS and such obligation of the taxpayer continues under section 190 and 191 of the IT Act, even in case of non-deduction at source by the payer.
  • Section 234B of the IT Act is a standalone provision and the words used in Section 209(1)(d) of the IT Act cannot be imported into Section 234B of the IT Act.
  • Clause (a) and (d) of Section 209(1) of the IT Act makes it clear that the taxpayer shall estimate his current income and income-tax for payment of advance tax on the basis of rates in force in the FY. The calculation of the advance tax is to be reduced by the amount of income tax which would be deductible or collectible during the said FY. In case of failure to pay advance tax under section 208 of the IT Act or where the advance tax paid by the taxpayer as per the provision of Section 210 of the IT Act is less than 90 percent of the assessed tax, the taxpayer shall be liable to pay interest according to Section 234B of the IT Act.
  • The Delhi High Court committed a serious error in its interpretation of the phrase ‘deductible or collectible at source’ under section 209(1)(d) of the IT Act as it would not take into its fold tax which was not deducted within the statutory time limit and was, in fact, paid to the taxpayer without deduction. 

 

SUPREME COURT RULING

The Supreme Court held that the taxpayer is not liable to interest under section 234B of the IT Act in respect of sums on which tax was deductible at source but was not deducted by the payer. While coming to this conclusion, it made the following observations:

  • The primary issue pertains to the interpretation of Section 209(1)(d) of the IT Act. A proviso was inserted to Section 209(1)(d) of the IT Act by Finance Act 2012. The proviso is in the nature of an exception to Section 209(1)(d) of the IT Act, as the taxpayer, who has received any income without deduction or collection of tax, is made liable to pay advance tax in respect of such income. This amendment was brought into effect from 1 April 2012 and made applicable to cases of advance tax payable in the FY 2012-13 and thereafter. The appeal is for the period prior to FY 2012-13 and hence this amendment shall not have any impact while providing their conclusion on the appeal before them.
  • Referring to its earlier decision in the case of SK Roy2 and Gem Granites3 it observed that while dealing with matters of construction, subsequent legislation may be looked at in order to see what is the proper interpretation to be put upon the earlier Act, where the earlier Act is obscure or ambiguous or readily capable of more than one interpretation.
  • The proviso to Section 209(1)(d) of the IT Act makes it clear that the taxpayer cannot reduce the amounts of income tax paid to it by the taxpayer without deduction, while computing liability for advance tax. The Memorandum explaining Finance Bill, 2012 provides necessary context that the amendment was warranted due to the judgements of courts, interpreting Section 209(1)(d) of the IT Act to permit computation of advance tax by the taxpayer by reducing the amount of income-tax which is deductible or collectible during a FY.
  • If the construction of words “would be deductible or collectible” as placed by the revenue authorities is accepted, the amendment made by inserting proviso to Section 209(1)(d) of the IT Act would be meaningless and exercise of futility. Thus, to give the intended effect to the proviso, Section 209(1)(d) of the IT Act has to be understood to entitle the taxpayer, for all FY’s prior to FY 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 taxpayer has received the full amount without deduction.
  • The pre-conditions of Section 234B of the IT Act viz. liability to pay advance tax and non-payment/short payment of such tax have to be satisfied, after which interest can be levied considering the assessed tax. Therefore, Section 209 of the IT Act which relates to the computation of advance tax payable by the taxpayer cannot be ignored while construing the contents of Section 234B of the IT Act.  

 

BDO COMMENTS

With the amendment made in section 209 of the IT Act, this issue has more or less attained finality for the FY 2012-13 and onwards. However, for earlier years, this judgement will be helpful to taxpayers to contend that there is no interest liability. Accordingly, the taxpayer could consider raising this ground (if not already raised) before the appellate authorities.

The Supreme Court has reiterated and upheld the principle that, while dealing with matters of construction, subsequent legislations may be looked at in order to see what is the proper interpretation to be put upon the earlier Act, where the earlier Act is obscure or ambiguous or readily capable of more than one interpretation.  

 

1DIT, New Delhi vs. M/s Mitsubishi Corporation., Civil Appeal No. 1262 of 2016 (Supreme Court)

2State of Bihar v. S.K.Roy [1966] Supp. SCR 259 (Supreme Court)

3Gem Granites v. CIT, TN [2005] 1 SCC 289 (Supreme Court)