K.C. Agrawal, C.J. - (1.) THIS application under Section 256(2) of the Income-tax Act, 1961, has been filed by the Commissioner of Income-tax, Rajasthan, Jaipur, for making a reference of the following question : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was not under obligation to deduct tax at source under Section 194A and consequently erred in quashing the Income-tax Officer's order under Section 201(1A) of the Income-tax Act, 1961 ?" The controversy has arisen in the background that the respondent-assessee, Messrs. Oriental Power Cables Ltd., Cable Nagar, Kota, was required to deduct tax at source on interest. There was a failure on its part to deduct tax, and therefore, a penalty under Section 201(1A) was levied for non-deduction of tax under Section 194A in respect of the assessment year 1978-79.
(2.) THE Income-tax Officer held that the assessee having not deducted the tax at source under Section 194A was liable to pay interest under Section 201(1A) and penalty. Aggrieved, the assessee went up in appeal and took the plea that the amount was credited to the suspense account and not to the accounts of the individual parties and, as such, the provision of Section 194A was not applicable. The appellate authority did not accept the plea of the assessee and rejected the same. Against the said order, the assessee preferred a second appeal before the Income-tax Appellate Tribunal, and it was allowed on the ground that there was no obligation on the assessee to deposit interest inasmuch as it was maintaining accounts in accordance with the mercantile system of accounting, hence, instead of crediting the interest income to the account of the payee, it used to credit it to the "interest payable account" or against the "suspense account". Section 194A of the Income-tax Act, 1961, requires every person, other than an individual or a Hindu undivided family, to deduct income-tax at source at the prescribed rate from interest (other than interest on securities) at the time of credit of such interest to the account of the payee or at the time of payment thereof where the amount credited, or paid or likely to be credited or paid, to the assessee during the financial year exceeds Rs. 1,000 (now Rs. 2,500). That is a general law, but, where the assessee had opened an "interest payable account" or "suspense account", it would not be required to make any deduction. Learned counsel for the assessee urged that since the interest was not credited to the account of the payee nor paid to him, the question of deduction of tax at source or consequent default for incurring of liability for levy of interest, did not arise. For the submission made, learned counsel for the assessee referred to the decision of the Supreme Court in CIT v. Toshoku Ltd. [1980] 125 ITR 525. In this case, the question was whether the commission earned by the non-resident sales agents could be taxed in India, treating B as a representative assessee under Section 161 of the Income-tax Act. The same principle applies to the present case. A credit balance, without more, only represents a debt and a mere book entry in the debtor's own books did not constitute payment constructive or accrual. Hence, there was no obligation on the assessee under Section 194A to make a deduction of tax at source and it was not liable to pay either interest or penalty.
(3.) LEARNED counsel for the Revenue referred to the Explanation added to Section 194A by the Amending Act, 1987, and urged that the same being clarificatory, it has made clear what was implied in Section 194A. We are unable to accept the submission. The explanatory note regarding the amendment states that Section 194A has been amended to provide that the tax will be deducted at source on accrual of interest at the end of the accounting year or at the time of crediting it to the account of the payee or at the time of payment, whichever is earlier, and it further states that it was done with a view to prevent postponement of liability relating to such deduction of tax at source. Thus, the explanatory note itself reveals that there was a lacuna or loophole in the unamended provisions of Section 194A. This Explanation was prospective in operation. It did not, therefore, apply to the present case. For the reasons given above, the question referred to above is answered against the Revenue and in favour of the assessee with costs which are fixed at Rs. 500.;