Opportunity Should Be Given Before Deeming Assessee in Default for Non-Deduction of TDS.

Issue: Is it mandatory for the Assessing Officer to provide an opportunity of being heard to the assessee before holding them as an ‘assessee deemed to be in default’ under Section 201(1) of the Income-tax Act, 1961, for failing to deduct Tax Deducted at Source (TDS) under Section 194A on interest payments made to Non-Banking Financial Companies (NBFCs)?

Facts:

The Assessing Officer conducted a verification of the assessee’s TDS compliance for the assessment years 2006-07, 2007-08, and 2008-09.
During this verification, it was found that the assessee had not deducted TDS on the total interest payments made to various NBFCs.
Consequently, the Assessing Officer held the assessee to be an ‘assessee deemed to be in default’ under Section 201 and determined the amount of TDS payable along with the applicable interest.
The Assessing Officer did not provide an opportunity of being heard to the assessee before imposing this liability.

Decision: The court held in favor of the assessee, stating that the Assessing Officer should have provided an opportunity to the assessee before imposing the liability under Section 201(1). As this was not done, the matter was remanded back to the Assessing Officer for fresh consideration. The Assessing Officer was directed to provide a due opportunity of hearing to the assessee and examine whether the tax deductees (the NBFCs) had paid tax on the interest received by incorporating these receipts in their books of account.

Key Takeaways:

Before holding an assessee as ‘deemed to be in default’ under Section 201(1) for failure to deduct TDS, the Assessing Officer must provide the assessee with a reasonable opportunity to be heard.
Principles of natural justice necessitate that the assessee should be given a chance to present their case and provide any relevant information before a liability for non-deduction of TDS is imposed.
In cases of non-deduction of TDS, it is relevant to ascertain whether the tax deductee has already paid the tax on the income received. If the deductee has paid the tax, it can have implications on the liability of the deductor under Section 201.

HIGH COURT OF CHHATTISGARH

Ravi Shree Narayan Transport

Assistant Commissioner of Income-tax, TDS

SANJAY K. AGRAWAL and Sanjay Kumar Jaiswal, JJ.

TAXC Nos. 178, 180 & 181 of 2024

MARCH 20, 2025

S. Rajeswara Rao, Adv. for the Appellant. Amit Choudhari and Ajay Kumrani, Advs. for the Respondent.

ORDER

Sanjay K. Agrawal, J.- Regard being had to the similitude of the questions of fact and law involved and being arising out of a common impugned order dated 26.12.2022, passed by the Income Tax Appellate Tribunal, Raipur (for short the “ITAT”), between the same parties, on the joint request of learned counsel for the parties, all these 03 tax appeals, filed under Section 260-A of the Income Tax Act, 1961 (for short the “Act of 1961”), are clubbed together, heard together and being decided by this common order on the following common substantial question of law framed separately in all these appeals by order of this Court dated 13.02.2025;

“Whether the three authorities are concurrently justified in imposing the liability on the appellant to pay amount towards TDS on impugned transaction, treating him as ‘assessee deemed to be in default’ under Section 201 of the Income Tax Act, 1961 by recording a finding which is perverse to the record ?”

2. The aforesaid substantial question of law arises for determination on the following factual backdrop:

2.1 TAXC-178-2024 relates to financial year 2006-07, TAXC-180-2024 relates to financial year 2007-08 and TAXC-181-2024 relates to financial year 2008-09. The common appellant in all these tax appeals is a partnership firm engaged in transportation business. The respondent-revenue authority has conducted verification of TDS (Tax Deducted at Source) compliance vis-a-vis deduction of TDS on various expenses and found that the appellant had failed to deduct TDS on aggregate payments made towards Labour Charges, Transportation Charges (under Section 194C) and Interest (under Section 194A) to the Non-Banking Financial Companies (for short the “NBFCs”), namely, (i) SREI International Finance Ltd., (ii) Magma Leasing Ltd. and (iii) Tata Motors Ltd., for the financial years 2006-07, 2007-08 & 2008-09 respectively.

2.2 Consequently, the Assessing Officer vide order passed under Section 201(1) of the Act of 1961, dated 19.03.2010, by holding the appellant as “assessee deemed to be in default”, has determined the amount of TDS [under Section 201(1)] alongwith interest [under Section 201(1A)] payable as under:

Appeal No(s).	Financial Year	TDS payable U/s. 201	Interest payable U/s. 201(1A)
TAXC-178-2024	2006-07	Rs.3,75,283/-	Rs.1,65,125/-
TAXC-180-2024	2007-08	Rs.3,66,750/-	Rs.1,17,360/-
TAXC-181-2024	2008-09	Rs.5,08,853/-	Rs.1,01,771/-

2.3 Feeling aggrieved against the said order dated 19.03.2010, passed by the Assessing Officer, the appellant preferred 03 appeals before the Commissioner of Income Tax (Appeals) [for short the “CIT (Appeals)]. By order dated 11.02.2020, the CIT (Appeals) though held that the appellant is not liable to deduct TDS on Labour Charges and Transportation Charges and set aside the order of the Assessing Officer dated 19.03.2010 to that extent, but held appellant is liable to deduct TDS on interest payment qua finance charges paid to the NBFCs under Section 194A of the Act of 1961. Against which, the appellant preferred 03 separate appeals before the learned ITAT, Raipur questioning the said part of the order passed by the CIT (Appeals) dated 11.02.2020, whereby the appellant has been held liable to deduct TDS on interest/finance charges paid to the NBFCs under Section 194A of the Act of 1961.

2.4 The learned ITAT, Raipur by its final order dated 26.12.2022, passed in all 03 appeals, affirmed the orders passed by the Assessing Officer and the CIT (Appeals) by holding that the appellant failed to satisfy the Assessing Officer that receipts of payments have duly been proved by them and they have failed to discharged their burden of proving their case that no TDS on finance charges/interest paid to the NBFCs are due on them because the receipients have incoproated the receipts in their books and paid tax on corresponding income and there also exits a good and sufficient cause for failure to deduct said TDS charges. Feeling aggrieved, the appellant has filed instant 03 appeals before this Court calling in question the legality, validity and correctness of the said order dated 26.12.2022, which have already been admitted for hearing on the substantial question of law, summarized in Para-01 of this order.

3. Mr. S. Rajeswara Rao, learned counsel appearing for the appellant submits that before the Assessing Officer held the appellant as “assessee deemed to be in default” under Section 201(1) of the Act of 1961, he ought to have given reasonable opportunity to the appellant to satisfy that taxes have been paid by the deductee/assessee, which has not been done in the present case and, on the same footing, the learned CIT (Appeals) and the learned ITAT, Raipur have also erred in dismissing the appeals of the appellant. As such, the impugned orders passed by the authorities below are liable to be set aside and the matter deserves to be remitted to the Assessing Officer for fresh consideration after affording due opportunity of hearing to the appellant to establish its case that taxes have been paid by the deductee/assessee as, in absence of which, the appellant has suffered great prejudice because heavy tax liability has been imposed/enforced on the appellant, which is impermissible in law. Hence, all the appeals are liable to the allowed.

4. Per-contra, Mr. Amit Choudhary and Mr. Ajay Kumrani, learned counsel appearing for the respondent-revenue authority supported the impugned orders passed by the authorities below and further submit that it was the duty on the part of the appellant to establish that TDS on interest/finance charges paid by them to the NBFCs have been deducted under Section 194A of the Act of 1961, which they failed to do and, therefore, all the appeals are liable to be dismissed.

5. I have heard learned counsel for the parties, considered their rival submissions made herein above and went through the record with utmost circumspection.

6. In the case at hand, the appellant was required to deduct TDS on interest/finance charges paid to the NBFCs by virtue of Section 194A of the Act of 1961, as such, it would be relevant to notice Section 194A of the Act of 1961, which reads as under:

“194A. Interest other than “Interest on securities”.-

(1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of interest other than 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 by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force:

*** *** *** ***”

7. In this regard, the Central Board of Direct Taxes (for short the “CBDT”) has also issued a Instruction/Circular No.275/201/95-IT(B), dated 29.01.1997 under Section 201(1) of the Act of 1961 visa-vis Consequence of failure to deduct or pay tax, which reads as under:

“The Board is of the view that no demand visualized under Section 201(1) of the Income-Tax Act should be enforced after the tax deductor has satisfied the officer- in-charge of TDS that taxes have been paid by the deductee-assessee”

8. The aforesaid circular dated 29.01.1997, issued by the CBDT has also been noticed by their Lordships of the Supreme Court in the matter of Hindustan Coca Cola Beverage (P) Ltd. v. Commissioner of Income-Tax , wherein at Para-10 it has been held as under:

“10. Be that as it may, the circular No. 275/201/95- IT(B) dated 29.1.1997 issued by the Central Board of Direct Taxes, in our considered opinion, should put an end to the controversy. The circular declares “no demand visualized under Section 201 (1) of the Income- tax Act should be enforced after the tax deductor has satisfied the officer-in-charge of TDS, that taxes due have been paid by the deductee-assessee. However, this will not alter the liability to charge interest under Section 201 (1A) of the Act till the date of payment of taxes by the deductee-assessee or the liability for penalty under Section 271C of the Income-tax Act.”

9. A careful reading of the judgment of the Supreme Court in Hindustan Coca Cola Beverage (P) Ltd. (supra) would show that it has categorically been made clear that demand visualized under Section 201(1) of the Act of 1961 should be enforced after the tax deductor has satisfied the Officer-In-Charge of TDS that taxes due on him have been paid by the deductee-assessee. In the present case, by virtue of Section 194A of the Act of 1961 the appellant was required to deduct TDS on payment of interest/finance charges made to the NBFCs but, admittedly, the same has not been deducted by the appellant herein and, consequently, the circular issued by the CBDT dated 29.01.1997 would come into play where it has been clearly held that demand visualized under Section 201(1) of the Act of 1961 should be enforced after the tax deductor has satisfied the Officer-In-Charge of TDS (Assessing Officer) that taxes due on him have been paid by the deductee/assessee. Admittedly, in the instant case, in accordance with Section 194A of the Act of 1961 TDS have not been deducted on the interest/finance charges paid by the appellant to the NBFCs and the respondentrevenue has held the appellant as “assessee deemed to be in default” and, therefore, enforced demand under Section 201 of the Act of 1961. However, the Assessing Officer was required to afford opportunity to the appellant/tax-deductor to satisfy and establish that taxes have been paid by the deductee/assessee, as, in absence of which, the appellant/tax-deductor has failed to satisfy the Assessing Officer (Officer-In-Charge of TDS) by establishing that taxes have been paid by the deductee/assessee more particularly when the appellant/tax-deductor and NBFCs/tax-deductee/ assessee are two different entites/personalities. As such, the Assessing Officer ought to have given opportunity to the appellant before imposing liability under Section 201(1) of the Act of 1961 which, in the present case, has not been done and straightaway liability sought to have been imposed upon the appellant by the Assessing Officer and same has also been affirmed by the learned CIT (Appeals) and the learned ITAT, Raipur.

10. Accordingly, the orders dated 23.12.2009, 11.02.2020 & 26.12.2022, passed by the Assessing Officer, the CIT (Appeals) and the learned ITAT, Raipur respectively to the extent that the appellant failed to deduct TDS on interest/finance charges paid to the NBFCs, under Section 194A of the Act of 1961, for the financial years 2006-07, 2007-08 & 2008-09 respectively are hereby set aside. The matter is remitted to the Assessing Officer for fresh consideration on the point whether the assessee/tax-deductee has paid tax on the amount received by them by incorporating the receipts in their books of accounts for the financial years 2006-07, 2007-08 & 2008-09 respectively, after providing due opportunity of hearing to the appellant. Since the matter relates to the for the financial years 2006-07, 2007-08 & 2008-09, therefore, the Assessing Officer is directed to expedite the hearing and pass fresh order expeditiously in accordance with law. However, this will not alter the liablity to charge interest under Section 201(1A) of the Act of 1961 till the date of payment of taxes by the tax-deductee/assessee.

11. Consequently, all the appeals are party allowed to the extent indicated herein above.