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THE Supreme Court has ruled the companies have statutory obligation to deduct tax at source (TDS) on interest payments for the loans taken in the name of its directors. The revenue department is empowered to impose interest on such a company for not deducting tax by declaring it assessee in default, the apex court said.

Allowing the appeals by the income-tax department, the apex court overturned the order of the Income Tax Appellate Tribunal saying the revenue department is empowered to impose interest on the assessee company for not deducting TDS on such interest payment, invoking Section 201(1A) of the Income-Tax Act.
A Bench comprising Justice SH Kapadia and Justice BS Reddy, which allowed the appeal by the income-tax department, said the material expression used in Section 194(1) of the Income-Tax Act is “at the time of credit of such income to the account of the payee”.

When the interest is debited to the interest account, the debit is for a specific amount calculated with reference to the liability of the deductor to a particular creditor in accordance with the terms and conditions of the loan. Therefore, whenever interest is credited to the account of the payee, the payer has to deduct the TDS, the court said. The apex court added the assessee companies are under statutory obligation to deduct TDS on the interest paid by it.

The income-tax department had found cheque receipts and payment registers within the premises of the assessee company which was engaged in real estate and construction work. These revealed the company directors had taken loans in their individual capacity from the creditors in the name of the assessee company.

The loan amounts were received by way of bank account of the assessee and transferred to the account of the directors on the same day by issuing corresponding cheques. When the directors repaid the loan amount or interest, such payments were also routed through the assessee company. The directors issued cheques in favour of the assessee which, in turn, issued cheques to the creditors/lenders of such directors. The receipt of loan amounts by the directors as well as repayment of loans and interests were reflected in the books of accounts of the directors. The books of accounts of the assessee company did not reflect the loans borrowed by it.

The assessing officer found that when interest was paid by cheques issued by the company to the creditor, no TDS was deducted by the assessee on the interest payments, as required under law. It then imposed interests on the assessee company. The tribunal had accepted the plea of the assessee that as it was merely disbursing the repayment of loans along with interest, it was not liable to deduct TDS.

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