Income Tax

No TDS liability of bank on interest accrued on FD made by litigant on directions of Court

NO TDS In case of UCO Bank v. Union of India  Where lit­i­gant deposit FD with the bank on direc­tions of Court, he ceased to have any con­trol or pro­pri­etary right over those funds. Although FD was drawn in the name of the Reg­is­trar Gen­er­al, he was nei­ther the recip­i­ent of the amount cred­it­ed to that account nor the inter­est accru­ing there­on. There was no assessee to whom inter­est income from the FD could be ascribed, thus, bank was not liable to deduct tax under Sec­tion 194A on inter­est accrued on such FD.

Facts:

  1. a) The peti­tion­er (‘UCO Bank’) accept­ed a Fixed Deposit (‘FD’) made by lit­i­gant as per direc­tives of the Court. The bank did not deduct tax on accrued inter­est on such FD as it was in name of Reg­is­ter Gen­er­al of Court as cus­to­di­an and the actu­al ben­e­fi­cia­ries were not known, as the mat­ter was sub-judice.
  2. b)Thus, the issue that arose for con­sid­er­a­tion of the High Court was:

Whether the bank would be liable to deduct tax under Sec­tion 194A on inter­est accrued on such FD where the assessee was not ascer­tain­able and the per­son in whose name the inter­est was cred­it­ed was also not a per­son liable to pay tax under the income-tax Act (‘the Act’)?

The High Court held in favour of assessee as under:

1) The words “cred­it of such income to the account of the pay­ee” occur­ring in Sec­tion 194A of the Act nec­es­sar­i­ly imply that deduc­tion of tax bears nexus with the income of an assessee. In absence of an assessee, the machin­ery pro­vi­sions for deduc­tion of tax to his cred­it were inef­fec­tive. The expres­sion “pay­ee” under Sec­tion 194A of the Act would mean the recip­i­ent of income whose account was main­tained by the per­son pay­ing interest.

2) In the instant case, although FD was made in the name of the Reg­is­trar Gen­er­al, the account rep­re­sent­ed funds which were in cus­tody of the Court and the Reg­is­trar Gen­er­al was nei­ther the recip­i­ent of the amount cred­it­ed to that account nor the inter­est accru­ing there­on. Thus, the Reg­is­trar Gen­er­al could not be con­sid­ered as pay­ee for the pur­pose of Sec­tion 194A of the Act.

3) There was no assessee to whom inter­est income from the FD could be ascribed; no per­son could file return claim­ing the inter­est payable by bank as income. The machin­ery pro­vi­sions of recov­er­ing tax by deduc­tion of tax at source would not be applic­a­ble in absence of an ascer­tain­able assessee.

4) The lit­i­gant who was asked to deposit the mon­ey in the court ceased to have any con­trol or pro­pri­etary right over those funds. The amount deposit­ed vest­ed in the Court and the depos­i­tor ceased to exer­cise any domin­ion over those funds. It was also not nec­es­sary that the lit­i­gant who deposit­ed the mon­ey would be the ulti­mate recip­i­ent of income. The per­son to whom funds would be grant­ed was to be deter­mined by orders passed sub­se­quent­ly. Thus, peti­tion­er-bank was not required to deduct tax under Sec­tion 194A on inter­est accrued on FD made by the litigant.

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