JUDGMENT
1. The Tribunal, New Delhi, has referred to following question of law under Section 256(1) of the IT Act, 1961 (hereinafter referred to as "the Act"), for opinion of this Court:
"Whether, on the facts and in the circumstances of the case and in accordance with the provisions of law, the Tribunal was justified in confirming the view taken by the CIT(A) to hold that there had been no default on the part of the assessee in respect of TDS pertaining to the interest credited/paid on deposits ?"
2. The present reference relates to the asst. yr. 1985-86 in respect of proceedings arising out of charge of interest under Section 201(1A) of the Act.
3. Briefly stated, the facts giving rise to the present reference are as follows : Respondent-assessee is a public limited company. It has maintained mercantile system of accounting. During the assessment year under consideration it had followed a system whereby liability on account of interest was claimed by debiting interest account. The corresponding liability, however, is not credited to the respective account of the payees but taken into account styled as "interest payable account". The aforesaid entries are passed on the last day of the accounting period, viz., 30th Sept., 1984. The second step taken by the company is to debit the interest payable account on different dates and credit the respective account of the payees and also credited to the TDS account. The last step is the actual payment to the parties and the deposit of the amount deducted as TDS in the Government treasury. On the basis of the aforesaid facts the AO was of the view that the company had delayed the payment of TDS by the mode of not crediting the account of the payees but effecting the credit in the interest payable account. Taking the view that the credit to the interest payable account on 30th Sept., 1984, tantamounts to a credit in the account of the payees, the AO proceeded to treat the assessee to be in default for delay in deposit of TDS and levied interest to the tune of Rs. 87,898. Feeling aggrieved with the aforesaid order, the assessee preferred appeal before the CIT(A). CIT(A) has allowed the appeal and deleted the levy of interest and reduced the charge of interest to a figure of Rs. 3,448. Revenue feeling aggrieved, preferred an appeal before the Tribunal. Tribunal has upheld the order passed by CIT(A) and dismissed the appeal filed by the Revenue. Tribunal has upheld the view taken by CIT(A) which reads as follows :
"I have carefully examined the facts and circumstances of the case and the contentions of the learned counsel. The intention of the legislature in inserting the Explanation to Section 194A(1) appears to be very clear, i.e., to remove a lacuna for avoidance of tax. The law requires deduction of tax at source whenever interest is paid on deposits. This requirement applies equally where the interest is not actually paid, but is credited to the account of the party. However, in the present case, the interest was neither paid to the party nor credited to its account on 30th Sept., 1984, i.e., the close of the accounting year. The interest due was credited to interest payable account. Therefore, the appellant-company was able to avoid the requirement of TDS until time of actual payment of interest. It was to deal with such a situation that the law was amended by insertion of the Explanation. However, in view of the clear and specific direction in Section 47 of the Finance Act, 1987, the Explanation could not be applied to situations arising before 1st June, 1987.
In view of the foregoing, it is held that there was no default on the part of the appellant-company in deposit of TDS on interest and, therefore, no penal interest is chargeable under Section 201(1A) on the amount of TDS on interest. However, it would not apply insofar as the TDS on payments to contractors and TDS on salaries are concerned. The penal interest under Section 201(1A) amounting to Rs. 1,403 and Rs. 2,045 have correctly been charged in respect of the delay in deposit of TDS on contract payments and on salaries. The interest charged by the DC (Assessment) for delay in deposit of TDS on interest payments amounting to Rs. 84,450 (Rs. 877 + Rs. 120,296 + Rs. 30,127 + Rs. 1,417 + Rs. 41,733) is hereby deleted.
In the result, the appeal is partly allowed. The interest charged by the DC (Asstt.) under Section 201(1A) is hereby reduced to Rs. 3,448."
4. We have heard Sri Shambhu Chopra, learned standing counsel for the Revenue. Nobody has appeared on behalf of the respondent-assessee.
5. Learned standing counsel submitted that under Section 194A(1) of the Act, it was incumbent upon the assessee to deduct the tax at source while crediting the amount of interest to the account of the payees whether it had actually been paid over to the payee or not. According to him, crediting the amount of interest to the account and subsequently to the interest payable account to the creditor, the company was liable to deduct and pay tax at source at that very time in the aforesaid two accounts and in failure to deposit the tax is liable for interest. According to him, assessing authority had rightly levied the interest. He has referred to the Circular No. 288, dt. 22nd Dec., 1980, issued by the CBDT in which clarification regarding the liability for determination of tax at source under Section 194A(1) of the Act has been mentioned. In the said circular it has been stated as follows :
"3. The material expression in Section 194A(1) is 'at the time of credit of such income in the account of the payee...'. When interest is debited to 'interest account', or any other nominal account, the debit is for a specific amount calculated with reference to the deductor's liability to a particular creditor in accordance with the terms and conditions of the loan. What is, therefore, important is that the interest payable to a creditor has constructively been credited to the account of the payee; the apparent nomenclature of the particular account in which the credit is made is not conclusive in the matter. The nominal accounts like 'interest payable account', liability for expense account', 'suspense account', etc., are heads or captions meant to cover stray transactions of unidentifiable receipts and payments. Except in stray cases, failure to credit the interest to the account of the payee cannot also be called a method of accounting regularly employed within the meaning of Section 145(1) of the Act and would not, therefore, be accepted as an explanation for the consequential failure to deduct the tax at source. The burden of proving that there was a valid justification for crediting interest to any account other than the account of the payee would rest obviously on the person responsible for making the deduction. The time for deduction would be when the interest is credited.
4. It may be added that the time for making the payment of the tax deducted at source is governed by Section 200 of the Act read with Rule 30 of the IT Rules, 1962, and would reckon from the date of credit of interest made constructively to the accrual of the payee which would ordinarily be within one week from the last day of the month in which deduction is made. Where, however, the interest is credited by an assessee, carrying on business or profession, as on the date upto which the accounts thereof are made, the amount of tax deducted would be payable to the Central Government within two months of the expiration of the month in which the accounts of the assessee are made falls. For example, if the accounts are made upto say 7th Nov., 1980, the tax deducted on the interest credited on that date would be payable to the Central Government by 31st Jan., 1981, irrespective of when the closing entries are actually made."
6. Relying on the said circular, he submitted that when the interest is debited to the interest account and credited to the interest payable account, it would be deemed that the interest has been paid to the creditors as amount has been claimed as a deduction in the return. In support of his submissions, he had relied upon the following decisions :
1. Southern Brick Works Ltd. v. CIT
2. ITO v. A.K. Gupta and Ors.
3. CIT v. Rathi Gum Chemicals, (1995) 213 ITR 98 (Raj).
7. He further submitted that tax at source is to be deducted the moment it is credited to the payee's account.
8. We have given our anxious consideration to the various pleas raised by learned standing counsel and we find ourselves unable to accept them for the following reasons :
Under Section 194A(1) of the Act, as it stood during the relevant period, amount of tax was to be deducted at source 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 cheque or draft or by any other mode. So far as the present case is concerned, it is before the Explanation inserted by the Finance Act, 1987, w.e.f. 1st June, 1987, which was to the following effect :
"Explanation : For the purpose of this section, where any income by way of interest as aforesaid is credited to any account, whether called 'interest payable account' or 'suspense account' or by any other name, 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."
In view of the aforementioned Explanation, even where the amount of interest is credited to any account whether called interest payable account or suspense account or by any other means tax, the person liable to pay such interest, crediting would be deemed to be such income to the account of the payee and the provisions of Section 194A(1) of the Act have been made applicable-from 1st June, 1987.
Thus, in view of the provisions of Section 194A(1) of the Act, as it stood before the Explanation which was effective from 1st June, 1987, it is absolutely clear that the liability of tax at source arose only when the amount of interest is credited to the account of the payee or at the time of payment thereof. In situations other than mentioned above no liability accrued for deposit of tax, i.e., when the amount of interest has been credited to the interest payable account or suspense account and not credited to the account of payee or paid to the creditors. The insertion of the Explanation was to plug the lacuna or loophole in the unamended provisions of Section 194A of the Act. It may be mentioned here that interest has been levied on default for depositing the tax at source by paying interest or credit interest to the creditors. If under the provisions of Sub-section (1), Section 194A of the Act, there was no liability to deduct tax at source in case where interest has not been paid to the creditors, levy of interest has rightly been deleted by CIT(A), which has been upheld by the Tribunal. We further find that Explanation so added has been held to be prospective in nature by Punjab & Haryana High Court in the case of Punjab Business & Supply Co. (P) Ltd. and Anr. v. ITO and Anr. , Rajasthan High Court in the case of CIT v. Oriental Power Cables Ltd. , Gujarat High Court in the case of Alkapuri Investments (P) Ltd. v. D.S. Khoba and Ors, and in the case of Laxmi Industries Ltd. Co. and Ors. v. ITO and Anr. . In all these cases, it has been held that an Explanation brought on the statute book is ordinarily clarificatory in nature and has retrospective effect, as the Explanation so brought to a provision in the statute simply explains the law as it has always been in the main provision. However, the rule governing the construction of the provisions imposing penal liability upon the subject is that such provisions should be strictly construed. When a provision creates some penal liability against the subject, such provision should ordinarily be interpreted strictly. That apart, if two views of the interpretation or construction of a provision in the statute are reasonably possible, the view which is favourable to the subject should be adopted.
9. Contrary view has been taken by the Madras High Court in the case of ITO v. D. Manoharlal Kothari , wherein it has been held as follows :
"An Explanation cannot be treated as an amendment because the purpose of the Explanation is to explain or to clear any mental cobwebs surrounding the meaning of a statutory provision and to prevent controversial interpretations without giving the true meaning of the provision. Such Explanations are intended more as a legislative exposition or clarification of the existing law than as a change in it. When the Explanation serves the purpose of clarification of the existing law, there is no question of any prospective or retrospective operation of the Explanation. Hence, in this case, when in the year 1987, the legislature has expressed the intention or scope of Section 194A of the Act by making it clear that even the suspense account or interest payable account has to be deemed only as the account with credit entries, it is merely clarificatory."
10. We are in respectfully agreement with the views expressed by Punjab & Haryana High Court, Gujarat High Court and Rajasthan High Court in the cases referred to above for the reasons that in the present case by virtue of the Explanation, a liability has been created w.e.f. 1st June, 1987, to deduct tax at source even where the amount of the interest is being credited to interest payable account and has not been paid to the creditor to his account. Thus, Explanation imposes penal liability and cannot be held to be clarificatory in nature.
11. It is also well-settled that claim of deduction as business expenditure for the amount of interest payable where an assessee follows mercantile system of accounting does not depend on entries to be made in the books of account as held by the apex Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT and, therefore, the amount of interest credited to the interest payable account does not make any difference. The circular issued by the Board which has been heavily relied upon by the learned standing counsel only provides the guidelines for the Departmental authorities. It does not bind the assessee nor this Court. Moreover, the interpretation placed by the Board on the provisions of Section 194A(1) of the Act as amended w.e.f. 1st June, 1987, is not a correct interpretation. So far as the decisions relied upon by learned standing counsel are concerned, we find that in all these cases referred hereinabove, interest has been credited to the payee account and, therefore, liability for deducting tax at source did arise at that time itself in view of Sub-section (1) of Section 194A of the Act.
We, accordingly, answer the question referred to us in the affirmative, i.e., in favour of the assessee and against the Revenue. However, there shall be no order as to costs.