No penalty & interest for non deduction of TDS if deductee-payee having no tax liability

There cannot be any dispute that an assessee who is having losses cannot be compelled to pay the income-tax, as the Income-tax Act does not provide for such a situation, exception being the MAT provisions in the case of companies. What is required to be seen as per the circular issued by CBDT and which was approved by Supreme Court in Hindustan Coca Cola Beverage (P.) Ltd. v. CIT [2007] 293 ITR 226, is that Taxes due have been paid by the deductee-assessee. Therefore, the question of payment of tax does not arise, if there is no tax liability at all. Accordingly, in the instant cases, the question of liability for tax or tax due in the hands of partnership firms does not arise, if they had declared losses in the returns of income. Subject to verification of the fact of filing return of income by the partnership firms by duly including the interest paid by the assessees, the penalty levied under section 201(1) in their hands is liable to be deleted i.e., if the assessed income in the hands of the concerned partnership firms is loss, then the date of filing of return is to be considered as the date of deemed payment of tax due.


TDS under Section 194A deductible on Interest Paid by partner to its Firm :-
sec. 194A provides exemption from the obligation imposed under that section only in respect of interest paid/credited by a firm to its partner. The Act does not provide such exemption to the interest paid/credited by a partner to his firm.

The Ld A.R has contended that the position of legal relationship between the partners and the partnership firms as prevailing under the Partnership Act should be applied for the purposes of sec. 194A of the Act also. However, we are convinced with the contentions put forth by Ld D.R. that the Income tax Act, being taxing statute, should be subjected to strict interpretation. There cannot be any dispute that the Income tax Act recognizes a partner and a partnership firm as different Person, despite the legal position of relationship between them as prevailing under the Partnership Act. Further sec. 194A provides exemption from the obligation imposed under that section only in respect of interest paid/credited by a firm to its partner. The Act does not provide such exemption to the interest paid/credited by a partner to his firm. In the absence of any provision to provide for such exemption and further by considering the fact that the Act treats a partner and a firm as different Person, we are of the view that the position of legal relationship between a partner and his firm looses its importance/significance under the Income tax Act. Accordingly, we are of the view that the said position of legal relationship as prevailing under the Partnership Act should not be applied in abstract, only to the provisions of sec. 194A of the Act. Accordingly, we reject all the contentions raised by the assessee in this regard.

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