Facts of the Case

The petitioner, UCO Bank, held several Fixed Deposits (FDs) in the name of the Registrar General of the Delhi High Court. These deposits were made pursuant to court orders in various litigations where the court acted as a custodian of the funds until a final beneficiary was determined. In 2011, the Income Tax Authorities issued notices to the bank for failing to deduct Tax Deducted at Source (TDS) on the interest accrued on these deposits. The bank contended that since the actual beneficiary was unknown while the matter was sub judice, TDS could not be deducted or credited to any specific person. Subsequently, the CBDT issued Circular No. 8/2011, clarifying that banks must deduct TDS on such interest and issue certificates in the name of the "depositor". The Deputy Commissioner of Income Tax later held UCO Bank to be an "assessee in default" under Section 201(1) for a sum of approximately ₹7.78 crores.

Issues Involved

  • Whether the provisions of Chapter XVII of the Income Tax Act, 1961 regarding TDS are applicable to interest on FDs maintained in the name of the Registrar General of a High Court.
  • Whether a bank can be treated as an "assessee in default" for not deducting tax when the ultimate beneficiary of the interest is not yet determined by the Court.
  • The validity of CBDT Circular No. 8/2011 regarding the requirement to issue TDS certificates in the name of the depositor in court-related matters.

Petitioner’s Arguments

  • Unknown Beneficiary: The bank argued that the Registrar General is merely a custodian; the actual beneficiary is unknown until the court passes a final order.
  • Inability to Credit Tax: TDS cannot be deducted or credited because the "person" to whose account the income belongs cannot be identified at the time of accrual.
  • Deferred Liability: The bank maintained that TDS should only be deducted at the time of the actual payment to the beneficiary as decided by the Court.

Respondent’s Arguments

  • Statutory Mandate: The Income Tax Authorities argued that under Section 194A, tax must be deducted at the time of credit of interest to the account or at the time of payment, whichever is earlier.
  • CBDT Clarification: Respondents relied on Circular No. 8/2011, which mandated that banks deduct tax and issue certificates in the name of the depositor (the litigant) to ensure revenue collection.
  • Default Recovery: Since the bank failed to deduct tax, it was legally deemed an "assessee in default" under Section 201.

Court Findings / Order

  • Nature of Charge: The Court observed that under Section 4, income tax is a charge on the income of a "person." For a charge to be sustained, there must be an identifiable assessee.
  • Custodial Capacity: The Court held that funds deposited in the name of the Registrar General are not the assets of the Court; the Court acts only as a custodian.
  • TDS Mechanism: The Court noted that TDS is a machinery provision for collecting tax on behalf of an assessee. If the assessee (beneficiary) is not ascertainable, the obligation to deduct TDS under Section 194A cannot be triggered.
  • Circular Validity: The Court found that the CBDT Circular was based on a misunderstanding of the law, as it required deduction even when the recipient was unknown.
  • Conclusion: The Court stayed the notices and orders treating the bank as an assessee in default, emphasizing that tax cannot be recovered from the payer if the recipient's liability is not yet established.

Important Clarification

The Court clarified that Section 199 makes it clear that TDS is treated as payment of tax on behalf of the person from whose income the deduction was made. If the person entitled to the interest is not yet identified, no "income" can be said to have "accrued" to a specific person for the purposes of withholding tax.

Sections Involved

  • Section 4: Charge of Income Tax
  • Section 190 & 191: Deduction at source and direct payment
  • Section 194A: Interest other than interest on securities
  • Section 199: Credit for tax deducted
  • Section 201: Consequences of failure to deduct or pay (Assessee in default)

Link to download the order: https://delhihighcourt.nic.in/app/case_number_pdf/2014:DHC:5880/VIB11112014CW27142014.pdf 

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