Case Note & Summary
The appellant, M/s Karnataka Power Transmission Corporation Limited, a government undertaking engaged in power transmission, filed appeals under Section 260-A of the Income Tax Act, 1961 against a common order of the Income Tax Appellate Tribunal (ITAT) dated 03.07.2009 for assessment years 2005-06 to 2007-08. The appellant purchases electricity from various parties under power purchase agreements, which provide for payment of interest on delayed payments. During the relevant assessment years, the appellant created provisions for contingent payment of interest on belated payments to its suppliers: Rs.17,65,75,903/- for 2005-06, Rs.12,40,70,972/- for 2006-07, and Rs.5,74,39,557/- for 2007-08. The Revenue contended that the appellant was liable to deduct tax at source under Section 194A of the Act on these provisions. The ITAT upheld the Revenue's contention. The appellant challenged this before the High Court. The court framed the substantial question of law as whether the assessee is liable to deduct TDS on provisions for interest on delayed payments. The court analyzed that under Section 194A, the obligation to deduct tax arises only when the amount is 'paid' or 'credited' to a specific payee. A mere provision for a contingent liability does not amount to payment or credit to any particular person. The court held that until the interest is actually paid or credited to the supplier's account, no TDS liability arises. Consequently, the court allowed the appeals, setting aside the ITAT order and answering the question in favor of the assessee.
Headnote
A) Income Tax - Tax Deduction at Source - Section 194A of Income Tax Act, 1961 - Provision for Interest on Delayed Payments - The assessee, a government undertaking, created provisions for interest on delayed payments to electricity suppliers. The Revenue contended that TDS was deductible on such provisions. The court held that a mere provision for contingent liability does not constitute 'payment' or 'credit' to a specific payee, and therefore no obligation to deduct tax at source arises under Section 194A. The appeals were allowed. (Paras 2-5) B) Income Tax - Appeal - Section 260-A of Income Tax Act, 1961 - Substantial Question of Law - The court framed the substantial question of law as whether the assessee is liable to deduct TDS on provisions for interest on delayed payments. The court answered in the negative, allowing the appeals. (Paras 1, 5)
Issue of Consideration
Whether the assessee is liable to deduct tax at source under Section 194A of the Income Tax Act, 1961 on the provision made for interest on delayed payments to suppliers of electricity, when no actual payment or credit to a specific payee has been made.
Final Decision
The appeals are allowed. The common order dated 03.07.2009 passed by the Income Tax Appellate Tribunal, 'B' Bench, Bangalore in ITA Nos.1449 to 1451/BNG/2008 is set aside. The substantial question of law is answered in favor of the assessee and against the Revenue.
Law Points
- TDS obligation arises only upon actual payment or credit to a specific payee
- not on mere provision for contingent liability
- Section 194A of Income Tax Act
- 1961
- Section 260-A of Income Tax Act
