1. All these appeals, disposed of by a common order, though heard by us sitting in 'A' and 'C' Benches, but transferred to this Bench for consolidation and for the sake of convenience, the common sole question that arises for consideration is whether the provisions of Section 194A of the Income-tax Act, 1961 ('the Act') are attracted to a case where interest is not credited to the account of the payee but to an interest account for the purpose. Since the facts are very few, it will be very convenient and appropriate also to note the provisions of Section 194A at this juncture.
2. Section 194A(1), which is necessary for our present purpose, is in the following terms: 194A. Interest other than 'interest on securities'.--(1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of interest other than income chargeable under the head 'interest on securities', shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force: Provided that no such deduction shall be made in a case where the person (not being a company or a registered firm) entitled to receive such income furnishes to the person responsible for making the payment-- declaring that his estimated total income assessable for the assessment year next following the financial year in which the income is credited or paid will be less than the minimum liable to income-tax.
Under this section, which was introduced by the Finance (No. 2) Act, 1967, with effect from 1-4-1967, tax has to be deducted at source on interest income other than interest on securities at the time of credit of such income to the account of the payee or at the time of payment thereof by any mode whichever is earlier, at the rates in force.
Certain exceptions are provided to the application of this section to obviate difficulties in the case of small taxpayers and other persons referred to in the latter portion of that section. The question that is now posed for consideration before us is when interest can be said to have been credited to the account of the payee within the meaning of this section. In the cases before us, the assessees were maintaining accounts on mercantile basis. At the close of the previous year, for the purpose of closing accounts and arriving at the income to be returned for the purposes of the assessment, the assessees herein calculated the interest payable to the creditors but credited the interest to the 'interest payable/outstanding expenses account' while debiting the interest account. In other words, interest account was debited and was transferred to the profit and loss account and charged against the profits, but the corresponding credit was not given to the creditors' accounts, i.e., the payees, but to a nominal account called 'interest payable/outstanding expenses' account. The amount of interest varied from case to case, which is not necessary for our present purpose. On the ground that the interest was not credited to the account of the payee, the assessee did not deduct the tax at source at the rates in force in respect of such interest but they claimed before the ITO that since no credit was given to the account of the payee, the stipulation of deduction of tax at source and paying it to the account of the Government under Section 194A did not arise. But the ITO did not accept this contention. According to him, under the provisions of Section 194A, the assessee should have deducted tax at source even in respect of such interest which was credited to the 'interest payable account' though not to the account of the payees. The ITO, thereafter called upon the assessee to explain why no tax was deducted at source from such interest and why the consequential penal provisions should not be invoked of levying interest under Section 201(1A) of the Act.
For coming to this conclusion, the ITO relied upon Circular No. 288 [F.No. 275/46/79-IT(B)], dated 22-12-1980, of the Central Board of Direct Taxes-- 130 ITR (St.) 2. The levy of such interest for not deducting tax at source is the subject-matter of appeals in all these cases. The amount of interest levied varied from case to case and we are not referring to those amounts since we are concerned only with the principal.
3. In the appeal filed against the levy of interest, to the Commissioner (Appeals), the assessee has taken two grounds. One was that the provisions of Section 194A would not be attracted unless the interest was paid to the creditor or credited to his account. Since the interest was not credited to the account of the payee nor paid to him, the question of deduction of tax at source and resultant or consequent default for the incurring of the liability for the levy of interest, would not arise. Secondly, even though there is Circular No. 288, dated 22-12-1980, issued by the CBDT, earlier, in a circular issued by the Board under its No. 276/72/77-IT(B), dated 25-1-1979--[Taxmann's Direct Taxes Circulars, Vol. 1, 1980 edn., p. 734]--addressed to the Federation of Indian Chambers of Commerce and Industry, the Board had clarified that when interest was neither credited to the account of the payee nor paid to the creditor, no tax need be deducted. That circular governed the assessments in question and under that circular, the assessee could not be said to be an assessee in default for not deducting tax at source and no interest should have been levied. The Commissioner (Appeals) considered that it was the latter Circular No.288 issued on 22-12-1980 that should govern the appeals and not the earlier circular. His reasoning was that circular of 1978 explained the action to be taken in genuine cases of difficulty and it did not cover cases where the provisions were being abused implying thereby that the 1980 circular was issued only to govern cases of abuse. Noticing that while calculating the interest payable, the assessees have taken into account not only the principal amount lying to the credit of the creditor but also the interest due or accrued up to the first date of every accounting year, the Commissioner (Appeals) held that that would show that the interest due for every accounting year had been actually credited to the account of the concerned party even though by resort to a camouflage it was credited to 'interest payable account' only to avoid deduction of tax at source on such interest. He also noticed that while debiting the interest account and crediting the 'interest payable' or 'outstanding expenses' account, the interest due to each creditor was calculated, then interest due to all creditors were totalled up and credited to that account which meant, rather clearly showed, according to him, that the interest credited to that account could be analysed creditor-wise, which would show that the appellant did take note of his liability to the creditors towards interest. He, therefore, held that interest must be held to have been constructively and effectively credited to the account of the payee when it was credited to the 'interest payable account'. He, thus, agreed with the ITO and held the assessee to be an assessee in default and upheld the levy of interest, but reduced it with regard to the period for which it has to be calculated.
4. In the present batch of appeals filed, the view of the Commissioner (Appeals) is questioned. The first major attack on the order of the Commissioner (Appeals) is that he should have held that the CBDT circular, dated 8-11-1978, governed the appeals and not the latter circular. If the latter circular was meant to cover cases of abuse, Shri Ramamani, learned Counsel appearing for the assessee, pointed out by tracing the circumstances, namely, lack of financial viability, under which the assessee was obliged to credit the interest not to the payee's account but to the 'interest payable account', that the assessee had a very bona fide and genuine reason for adopting this procedure of crediting the interest and that there was no abuse and even on that ground the latter circular should have been held to be applicable. Shri Ramamani also submitted that under the circumstances of the case, neither an interest can be taken to have been paid to the account of the payee nor credited and the provisions of Section 194A did not apply at all. He then explained to us the need for inserting Section 194A and submitted that the need for insertion was to ensure proper recovery of tax without loss of revenue. By casting the obligation of deducting tax at source on the person responsible for paying the interest, that responsibility continues to lie on the shoulders of the assessee because when the payment of interest was made to the creditors concerned, tax will have to be deducted at source at that time. When the persons responsible for payment are confronted with this situation, when money was not available for payment of tax deducted at source, it cannot be presumed that the Parliament had intended to cast an unbearable burden on them which would be the result if the interpretation placed by the learned Commissioner (Appeals) on Section 194A and the meaning of the expression 'credited' is accepted.
Actually it was the responsibility of the payee to pay the tax on income due by way of interest. That was shifted to the payer by obligating him to deduct the tax at the time of payment. This must naturally take into consideration the capacity of the payer to pay the tax deducted at source. In a case where the payer has no funds available and is facing a genuine hardship for money which could be demonstrated and proved, he cannot be driven into a situation where the credit for interest not given to the account of the payee is still deemed to be the credit given to the account of the payee and compelling to pay the tax and treating him as a defaulter and levy interest on him like adding insult to injury. It is this bona fide aspect that was missed to be noticed by the Commissioner (Appeals) which he pointed out was properly appreciated by the Board when it issued the circular of 8-11-1978 and that appreciation of genuine difficulties was not at all detracted when the subsequent circular of 1980 was issued.
5. The departmental representative relied mainly upon the order of the Commissioner (Appeals) and advanced the contention that when the assessee is claiming a deduction for the payment of interest as a liability by debiting his profit and loss account, it should be deemed under the method of accounting employed by it that the corresponding credit was given to the account of the creditor, i.e., the payee, even though the assessee had by clever means chosen to give credit to the 'interest payable account'. Since the 'interest payable account' was credited with the interest payable to each of the creditors in separate narrations capable of being analysed credit-wise as pointed out by the Commissioner (Appeals), the credit for the interest is only to the account of the payee. For the purpose of appreciating the concept of tax to be deducted at source in respect of interest, the capacity of the assessee to pay the tax is not relevant. If the assessee is not able to pay the tax deducted at source, there are rules made to ameliorate the difficulties and hardships. All he has to do is to follow the rules, apply to the concerned authorities and obtain time for payment of tax. Here is an attempt made by the assessee to gain a double advantage of claiming deduction for the interest paid without crediting the account of the creditors, at the same time not deducting the tax at source on such interest. The result of accepting the interpretation placed by the assessee on the provisions of Section 194A would be to permit the assessee to defeat the very object of enacting Section 194A and that should not be countenanced at any cost.
6. After carefully considering the arguments advanced to us and cogitating over the matter keeping in view the provisions of Section 194A, the object of its insertion, the views expressed by the Board in its circulars, it appeared to us that the view taken by the revenue is perhaps too abridged to be held to be in conformity with the intentions of the Legislature. It is also be set with several practical problems and unintended hardships. When tax is sought to be deducted at source by the person responsible for paying the interest, it is not the tax liability of the assessee, it is the tax liability of the person on whose behalf the tax is sought to be deducted. The tax liability of the payee is shifted to the payer to a very large extent, only in order to see that the payees do not escape the payment of tax due on the income.
This is, therefore, a provision made to ensure proper collection of tax due to the State. Though the liability cast upon the assessee for the recovery of such tax deducted at source is the same as his own tax liability, there is a clear distinction between the liability cast upon him on account of the payees and his own liability. Insofar as the former is concerned, it is thought that it does not add any burden to the extent responsibility for personal tax by paying the income by way of interest or dividend, etc., because it is out of the amounts payable to the payees, certain amount is to be deducted by way of tax and only the balance is to be made over to the payees. Actually, the person responsible for paying the tax is not put to a greater burden than is equal to the gross amount of income payable. But, circumstances do arise where the persons responsible for paying the tax may, taking advantage of the provision for deduction of tax at source, pay only the net amount to the payee, and retain the tax deducted at source with them by not paying it to the Government. There was thus a possibility of gaining an unfair and unintended advantage of utilising that retained money as working capital for the purpose of business. It is true that to overcome this eventuality, a provision was made for payment of tax deducted at source within a particular time.
Circumstances may also arise when the person responsible for paying the income may not have liquid resources. He may not be even in a position to raise the moneys then the person responsible for paying the income would delay the payment both to the payee as well as the tax due to the State. Thus, the question so far as the requirement of Section 194A that tax must be deducted and made over to the Government at the time of payment of the income in cash or by cheque is concerned, is met. But when the section requires that tax should be deducted at source even when a credit for such income is given to the account of the payee by implication, it must be inferred that the availability of cash as well as capacity for payment of that sum also is taken into consideration.
This becomes clear when we look at Section 201 which provided in terms for the consequences of failure to deduct the tax or after deducting fails to pay the tax deducted at source. Section 201 deems him to be an assessee in default in respect of that tax. An assessee in default in respect of payment of tax is liable for imposition of penalty under Section 221 of the Act. This section lays down that when an assessee is in default or is deemed to be in default in making a payment of tax, he shall be liable, by way of penalty, to pay such amount as the ITO may direct, and in the case of continuing default, such further amount or amounts as the ITO may, from time to time, direct. That section further provides that before levying such a penalty, the assessee shall be given a reasonable opportunity of being heard. That section also provides that when the ITO is satisfied that the default was for good and sufficient reasons, no penalty shall be levied under that section.
This indicates that a person who is deemed to be an assessee in default and who incurred the liability to pay penalty under Section 221 of the Act, and who is entitled to be given a reasonable opportunity of being heard before a penalty is levied can on his satisfying the ITO that the default was for good and sufficient reasons, claim that no penalty shall be levied under that section. This shows that the assessee can advance what he considers to be good and sufficient reasons to show that he is not an assessee in default or deemed to be in default in making the payment of tax. He can show lack of necessary money, and it is open to him to say that due to lack of funds he could not make the payment of tax and that, in our opinion, could be taken as very good and sufficient reason to take him out of the provisions of Section 221.
Thus, when lack of money is a good and sufficient reason for non-levy of penalty under Section 221, it must mean that Parliament has taken into consideration this aspect as well. In fact, the Income-tax Rules do provide for grant of time in certain circumstances for payment of the tax deducted at source. Thus, non-availability of cash resources can be a reason not to credit the interest to the account of payee, notwithstanding the accrual of liability to pay the interest, under the method of accounting adopted. When a credit is given to the account of the payee, no money moves. Only a liability is incurred and the debtor makes the sum available to the creditor acknowledged. That acknowledgment will bring in its wake the liability to deduct income-tax thereon at the rates in force. We have to, therefore, see whether at the time of credit of such income in the accounts of the payee, there is a constructive payment so as to fasten upon the assessee the liability to deduct income-tax thereon.
7. The word 'credit' used in Section 194A has not been defined in the Income-tax Act. It has to be understood in the manner in which it is commonly understood by people in the commercial world of accountancy, businessmen, etc.
8. In this context, it is useful to refer to the decision of the Supreme Court in Ramesh R. Saraiya v. CIT  55 ITR 699, where the Supreme Court interpreted the meaning of the word 'credited' as used in Section 16(2) of the Indian Income-tax Act, 1922 ('the 1922 Act'). The material part of section 16(2) of the 1922 Act, as it stood before it was deleted by Section 7 of the Finance Act, 1959, with effect from 1-4-1960, reads as follows: For the purposes of inclusion in the total income of an assessee any dividend shall be deemed to be income of the previous year in which it is paid, credited or distributed or deemed to have been paid, credited or distributed to him . . . .
The expression 'paid' used in this section came up for consideration before the Supreme Court in J. Dalmia v. CIT  53 ITR 83. There, the Supreme Court held that the expression 'paid' does not contemplate actual payment by the company or receipt of the dividend by the member and dividend may be said to have been paid within the meaning of Section 16(2) when the company discharges its liability and makes the amount of dividend unconditionally available to the member entitled thereto.
9. In the later case in Ramesh R. Saraiya (supra), the next expression 'credited' used in Section 16(2) came up for consideration before the Supreme Court. Adopting the interpretation given to the word 'paid', the Supreme Court held in this case that the expression 'credited' must also mean the same, namely, making the amount unconditionally available to the member, and the concerned observation of the Supreme Court is reproduced below: We are unable to accept the contention. In J. Dalmia v. CIT  53 ITR 83, Shah, J., speaking for the Court, had observed: In general, dividend may be said to be paid within the meaning of Section 16(2) when the company discharges its liability and makes the amount of dividend unconditionally available to the member entitled thereto.
This condition must also be fulfilled in case a dividend is credited. In other words, the credit must be in such form that the dividend is unconditionally available to the member.
The meaning given to the word 'credited' as used in Section 16(2) can in no manner be different from the meaning to be given to the same expression used in Section 194A. When Section 194A stated that tax must be deducted at the time of credit of such income to the account of the payee, it must mean that when the interest income is unconditionally made available to the creditor. In fact this is the purpose of giving credit to the account of the payee. Mere acknowledging the liability to pay interest is not enough. Giving credit to the account of the payee will mean and convey two things. One is acknowledgment of the debt, and the other, informing the creditor that so much money was transferred to his account and made available to him for being withdrawn whenever he chooses to do so. If this is the meaning of the expression 'credit' as explained by the Supreme Court in Saraiya's case (supra) referred to above, then that requirement is not fully satisfied in the cases before us, because by not giving credit to the account of the payees, the sums in questions were not made available unconditionally to the payees enabling them to draw the money whenever they chose. They were prevented from drawing the money even though a debt for interest was acknowledged when the interest account was credited. This was done not with a view to defeat the purpose of Section 194A but with a view to tell the creditor or the payee that money was not available to him for withdrawal. That is also the cause now given to us for not crediting the interest to the account of the payee. Thus, when interest was credited to the account of the 'interest payable account', that cannot tantamount to crediting the account of the payee. Thus, crediting the account of the payee when it has got a special significance, namely, making the money credited unconditionally available to the payee, credit given in any other manner cannot be equated to crediting the account of the payee. The assessee might have acknowledged the liability by crediting the 'interest payable account' with the amount of the interest. That is not sufficient for the purposes of Section 194A. The requirements of Section 194A can be said to have been satisfied only when the letter of the law as well as the spirit of the law is complied with, namely, crediting the account of the payee with the interest amount, the letter of the law being crediting the account of the payee, and not any other account, and the spirit of the law being giving a credit to the account of the payee only when the amount is available with the person responsible for paying the income. Thus, the view taken by the revenue does not commend itself to us as proper, legal and justified.
10. It is in this context we have got to see the circulars issued by the CBDT. In the first circular of 1978, the Board appears to have understood the meaning of the expression 'credit' in the manner in which we have understood it, and also in accord with the meaning given to this expression by the Supreme Court in the cases referred to above, when it said that the crediting of interest to the account of the payee is not the same thing as crediting the interest to the 'interest payable account'. The Board also clarified in the circular that the section requires deduction of tax at source only at the time when the interest is credited to the account of the payee or payment thereof, and there is no obligation on the part of the assessee to deduct tax at the time of making a provision in the accounts in respect of interest payable by him. Thus, a distinction has been drawn by the B oard between making a provision in the accounts for the liability of interest payable and crediting of interest to the account of the payee which meant making the money available to the creditor for drawing.
What has happene d in this case is only making a provision in the accounts in respect of the interest payable by him when the 'interest payable account' was credited. The other aspect of making the money available unconditionally to the payee has not been done by not crediting the accounts of the payees. That cannot be now superimposed on the assessee by a process of inference because that, if we may say so would amount to imposing upon the parties a different contract than what the parties intended, which the department is not, we think, permitted to do for the purposes of Section 194A.11. In the latter circular, the Board considered that the apparent nomenclature of the particular account in which the credit is made is not conclusive in the matter and went on to say that the nominal accounts like 'interest payable account', etc., are heads or captions meant to cover stray transactions of unidentifiable receipts and payments and except in stray cases failure to credit the interest to the account of the payee cannot also be called a method of accounting regularly employed within the meaning of Section 145(1) of the Act and would not be accepted as an explanation for failure to deduct the tax at source. Then the Board pointed out that the burden of proving that there was a valid justification for crediting interest to any account other than the account of the payee would rest obviously on the person responsible for making the deduction. Now we have got to see what exactly the Board has conveyed by this latter circular. We would not express any opinion on what the Board has expressed in the circulars except to state that the Board has taken a view that the earlier circular was being misused and needed corrective measure. It, therefore, cast the burden of proving that there was valid justification on the persons responsible for making the deduction and if there is valid justification, crediting of interest to other account is permissible, without attracting the provisions of Section 194A. We have to therefore see whether that burden of proof cast upon the assessees, has been discharged in these appeals. The valid justification given by the assessee for not crediting the amounts to the accounts of the payees, is lack of money. We have already expressed the view earlier that lack of money is very good and sufficient reason.
If the assessee has no money, he cannot be called upon to pay the tax when he is not in a position to pay the creditor himself. Lack of money pleaded in these cases was not disputed. There is, therefore, a valid justification for crediting the interest to an account other than the account of the payee. When the Board has stated in the circular that there should be proof that there was a valid justification for crediting the interest to any account other than the account of the payee, as a reason for not levying penalty or interest, it meant it bears repetition to say, that in proper cases, valid justification for crediting interest to any account other than the account of the payee, is not only envisaged but also considered justified. The assessee's plea that he had no funds had not been doubted. Thus, even on the basis of the latter circular, the assessees must be deemed to have discharged the burden of proof cast upon them by showing why the interest was credited to the nominal account and not to the accounts of the payees.
That apart, this circular which has been issued on 22-12-1980, cannot take away the concession given by the earlier circular of 1978. The assessees are entitled to arrange their affairs on the basis of the law as explained by the CBDT for the benefit of the assessees in the country. It cannot, therefore, retrospectively withdraw that concession and then impose a new burden. The courts in India did not view this procedure with favour, some High Courts having been frowned upon this procedure, as this would catch the assessees unawares and withdraw the concession without notice causing hardships. So, the circular given in 1978 alone must be held to hold the field. According to that circular, the assessees did not violate the requirements of Section 194A. Thus, looked at from any angle the view taken by the revenue does not appear to be correct. We, therefore, accept the assessee's contentions and hold that when the interest was credited to the 'interest payable account', it did not amount to crediting the interest to the accounts of the payees and, consequently, no liability for deducting the tax on the interest amount was incurred. The levy of interest is, therefore, uncalled for. We, therefore, vacate the interest levied, and allow the appeals.