NBFC Not Liable to TDS on Interest Income Credited on Purchase of Portfolio from Another Co

Case Details: Piramal Capital and Housing Finance Ltd. vs. Assistant Commissioner of Income-tax - [2024] 169 taxmann.com 512 (Mumbai - Trib.)[25-11-2024]

Judiciary and Counsel Details

• Amarjit Singh, Accountant Member & Rahul Chaudhary, Judicial Member
• Yogesh Thar, Ronak Doshi and Priyank Gala, Advs. for the Appellant.
• Ms Madhu Malati Ghosh and Raj Singh Meel, Advs. for the Respondent.

Facts of the Case

The assessee was a non-deposit-taking, non-banking finance company registered with the Reserve Bank of India. During the relevant assessment year, the assessee purchased from a related entity of the assessee, Non-Convertible Debentures (NCDs), Inter Corporate Deposits (ICDs) and Term Loans portfolio.

According to the Assessing Officer (AO) the payment made by the assessee in excess of the principle value constituted income liable to tax in the hands of the related entity was in the nature of ‘Interest Other Than Interest on Securities’, and therefore, the Appellant was under obligation to withhold tax in respect of the same under Section 194A. Accordingly, the AO treated the assessee as an ‘assessee-in-default’.

On appeal, the CIT(A) allowed partial relief to the assessee. Aggrieved by the order, an appeal was filed to the Mumbai Tribunal.

ITAT Held

The Tribunal held that on perusal of sections 193 and 194A, it is found that any person responsible for paying any income by way of ‘interest on securities’ or ‘interest other than interest on securities’ is under obligation to deduct income tax from the same (a) at the time of credit of such income to the account of the payee, or (b) at the time of payment thereof, whichever is earlier. Thus, the obligation to withhold tax under section 193 or 194A gets fastened on credit or payment, whichever is earlier.

It is an admitted position that, in the instant case, the accrued interest had been recorded in the books of account of the related party. The contention of the assessee that borrowers had deducted tax at source from such interest income at the time of credit of such income in the account of such related party in their respective books of account and had deposited the tax so deducted with the Government Treasury as per provisions of the Act was not controverted by the AO.

Therefore, in the present case, the provisions of section 193 or 194A having already been triggered and complied with at the time of credit of interest income to the account of that related party in the books of account of the borrowers [i.e. the person responsible for making payment of such interest income at the relevant time], would not again get triggered on payment of the same interest income by the assessee.

Further, if the contention of the AO was accepted, it would amount to subjecting the same interest income to deduction of tax at source once at the time of credit and then again at the time of payment. Section 193 or 194A provides for tax deduction at source at the time of credit or payment, whichever is earlier. Therefore, the provisions contained in section 193 or 194A were not attracted, and the question of assessee committing default in complying with the same does not arise.

Further, it is also admitted position that when the interest income had accrued to the related party, there existed a lender-borrower relationship between such party and the borrowers. Subsequently, the assessee stepped into the shoes of the related party, and as a result, the lender-borrower relationship between the assessee and the borrowers came into existence. The borrowers continued to be under contractual obligation to make payment of interest/accrued interest while the assessee acquired the right to receive the same. There was no dispute as to the fact that no lender-borrower relationship existed between the assessee and that related party at any point in time. Thus, in the absence of any statutory or contractual obligation on the part of the assessee to discharge the borrower’s obligation to make payment towards interest or accrued interest, the assessee cannot be regarded as person responsible for paying income by way of interest/interest on securities to that related party in terms of section 194A or 193.

List of Cases Reviewed

• American Express International Banking Corpn. v. CIT [2002] 125 Taxman 488/258 ITR 601 (Bom.)[Para 12] Distinguished

List of Cases Referred to

• American Express International Banking Corpn. v. CIT [2002] 125 Taxman 488/258 ITR 601 (Bombay) (para 5 and 7)
• State Bank of India v. Dy. CIT (TDS) [2024] 163 taxmann.com 266 (Mumbai – Trib.) (para 11)
• Idea Cellular Ltd. v. Asstt. DIT (International Taxation) [2015] 58 taxmann.com 101/69 SOT 526 (Mumbai) (para 11.2).