TDS credit – When the payer and receiver of an income is the same person

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TDS credit – When the payer and receiver of an income is the same person

Facts:

• In the return of income file by the assessee – a non- resident bank, the head office had credited the interest received from the branch as income and offered the same for taxation while the branch had debited the same in its accounts and claimed as expense

• The A.O noticed that while interest paid by the Indian branch to the head office was not assessed as income of the foreign Bank on the ground of payment to self, credit was given for the tax deducted at source by the branch. Accordingly, through a rectification order u/s 154, he held that that the assessee was not eligible for credit of tax deducted on interest payment made to Head Office

• In appeal, the CIT(A) decided against the AO.

• Aggrieved, the Revenue appealed to the Tribunal and submitted that the consolidated return filed for the head office and branch office was assessed as such and , as no income on account of interest was taxed, the benefit of TDS also could not be granted in terms of the existing section 199.

Issues: Payment of interest by the Branch Office to the Head office was nothing but a payment to self. Should the resultant tax deducted on such payment be considered as payment of tax by the assessee?

Decision:

• The Tribunal held that the Head Office and Branch Office filed a consolidated return of income and assessment was done accordingly. Therefore the inter se transactions have to be considered as having not actually taken place

• The deduction and payment of tax at source by the Branch Office in such circumstances will constitute payment of tax by the assessee as there is no outside recipient of the interest

• Section 199 provides that the benefit of TDS shall be allowed to the recipient of the income in the year in which the income on which such tax was deducted, is assessable

• If the department s contention was accepted that the assessee should not be allowed the benefit of TDS against its tax liability it would mean that the tax actually paid by the assessee to the Central Government would never be adjusted against any tax liability

• Every deduction of tax at source pre-supposed, the existence of two distinct persons and the taxability of income in the hands of the recipient. If the payer and receiver of an amount was the same person, naturally the amount of tax deducted and paid by the assessee would partake of the character of tax paid by the assessee against its tax liability. Thus the AO was not justified in initiating rectification proceedings on this count

ADIT, Mumbai Vs M/s Antwerp Diamond Bank