Holding

A company that credits interest to its own account, even if the loan originated for directors, is liable to deduct TDS under Section 194A(1), and the Revenue was correct in invoking Sections 201 and 201(1A).

Summary

The Income Tax Department discovered that directors of Century Building Industries Pvt Ltd had taken loans in their own names but routed the proceeds and repayments through the company. The company paid interest on these loans without deducting tax at source (TDS) as required under Section 194A(1) of the Income Tax Act, 1961. The Assessing Officer declared the company an assessee-in-default and imposed interest under Sections 201(1) and 201(1A). The Income Tax Appellate Tribunal held that the company was merely a conduit and not liable to deduct TDS, a view upheld by the company in the Tribunal. The Supreme Court rejected this view, holding that whenever interest is credited to the payee’s account, the payer must deduct TDS, and the company cannot escape liability by claiming it was a mere medium. Consequently, the Court allowed the Revenue’s civil appeals and affirmed the applicability of Sections 201 and 201(1A).

Issues considered

Whether a company that merely routes loans taken by its directors in their individual capacities is liable to deduct TDS under Section 194A(1) on interest payments.
Whether the corporate veil can be lifted to treat the company as the deductor for TDS purposes.
Whether the Revenue was justified in invoking Sections 201(1) and 201(1A) against the company.

Legislation cited

Income Tax Act, 1961s. 133A, s. 194A(1), s. 201(1), s. 201(1A)

Subjects

TDSSection 194Aassessee-in-defaultCorporate veilInterest paymentsIncome Tax ActDirectors' loansTax deduction at source

Judgment

,_..;. ' COMMNR. OF INCOME TAX, BANGALORE AND ANR. A
v.
MIS. CENTURY BUILDING INDUSTRIES PVT. LTD.

AUGUST IO, 2007

[S.H. KAPADIA AND B. SUDERSHAN REDDY, JJ.] B
.
_.,,

-t Income Tax Act, 1961:

ss. 194-A, 201 and 20l(JA)-Tax deductible at source-On interest-
Liability to deduct-Directors of assessee-Company taking loans from c
creditors in the name of Company-Repayment of loan amount or interest
thereon also routed through assessee-company-TDS as required u!s 194A(l)
not deducted at source by assessee-company on interest payments-Company
declared as assessee-in-default and interest imposed u/s 201(1A)-Held:
Whenever interest is credited to the account ofpayee the payer has to deduct D
the TDS-Revenue was right in invoking provisions of ss. 201 and 20l(JA)
i against the assessee-Company-However, on facts, in the first instance over
the years Revenue should not have allowed non-deduction of TDS by assessee-
company and nothing prevented A.O. from raising objection to such practice.

A survey of the respondent-assessee Company was conducted u/s E
133-A of the Income Tax Act, 1961 and itwas detected that directors of the
Company took loans in their individual capacities from creditors in the name
of the assessee-company. The loan amounts received by way of cheques in
the name of the assessee were deposited in the bank account of the assessee
and transferred to the account of the directors on the same day by issuing
corresponding cheques. Repayments of the loan amounts or interest thereon F
\,__
were also routed the same way through the assessee-company. But TDS was
not deducted at source by the assessee-company on the interest payments as
required under Section 194A(l) of the Act and, therefore, the A.O. applied
the provisions of Section 201(1) of the Act by declaring the company as
assessee-in-default and also applied Section 201(1A) of the Act imposing G
interest for not deducting TDS at source. The order passed by the A.O. was
confirmed by the appellate authority. However, the Tribunal accepted the
..... contention of the assessee-company that it was merely a medium through which

""' 959
H
~
,A

960 SUPREME COURT REPORTS [2007] 8 S.C.R.

A the borrowings and payments were routed and it was merely disbursing the
repayments of loans along with interests and, therefore, it was not liable to -\....
deduct TDS at source under Section 194A of the Act. Aggrieved, the Revenue
filed the instant appeals.

Allowing the appeals, the Court
B ,.
HELD: 1.1. Income Tax Appellate Tribunal was not right in holding that ~
there was no obligation on the part of the assessee-company to comply with .;
the statutory requirements of Section l 94A of the Income-tax Act, 1961 by
~~
deducting tax deductible at source (TDS) on interest paid by it for loans availed
of by the assessee and repaid by it with interest on the ground that the loans
c were meant for the directors of the assessee-company and not for the assessee-
company and after recording a finding that the directors had misused the name •I
-~
of the company to avail of the loan. [Paras 1and9) [961-D, E; 967-E)

1.2. The material expression in Section_ 194A(l) of the Act is "at the
D time of credit of such income to the account of the payee". When interest is ...'
debited to "Interest Account" the debit is for a specific amount calculated
with reference to the liability of the deductor to a particular creditor in ,.
accordance with the terms and conditions of the loan. Therefore,. whenever y·
interest is credited to the account of the payee the payer has to deduct the
TDS. The crux of the matter is that the debit is for a specific amount
E calculated with reference to the deductor's liability to a particular creditor
in accordance with the terms and conditions of the loan. •.
l

(Para 7) [966-H; 967-A-B)

1.3. In the instant case, the lender had advanced the loan to the assessee-
company. Debit was made by the assessee-company to the "Interest Account"
F ~
for a specific amount calculated with reference to the deductor's liability to a ·-'-~
creditor. There is no resolution of the assessee-company placed before the I

A.O. whereby the company has agreed to act as a medium for routing the
borrowings and repayments. In the circumstances it cannot be said that the
'
assessee-company was incharge of disbursing the repayments made by
G directors in their individual capacities. Consequently, Department was right I-

in invoking the provisions of Sections 201and201(1A) of the Act. However, ..f
,-
on facts, in the first instance over the years the Department should have not
allowed non-deduction ofTDS by the company and nothing prevented the A.O.
from raising the objection to such practice. /
[Paras 7 and 8) [967-B, C; DJ
'·
H i't
I
COMMNR. OF INCOME TAX. BANGALORE"- CENTURY BUILDING INDUSTRIES PVT. LTD. (KAPADIA, l.J 961

~ CIVIL APPELLATE JURISDICTION : Civil Appeal No. 6820 of2005. A
/
From the Judgment and Order dated 11.03.2004 of the High Court of
Kamataka at Bangalore in ITA no. 204 of 2002.

WITH
B
CANos.6834,6833,6832,6831,6830,6829,6828,6827,6826,6823,6822,
6825, 6824, 6821 of2005 .
.J Vikas Singh, ASG, Pritish Kapoor, Vishnu Sharma, Raghwendra Rao,
Asha G. Nair and B.V. Balaram Das for the Appellants.
c
V. Shankar, Naresh Kaushik, Lalitha Kaushik, B.S. Methaila, Arnita Kalkal,
Satisti Dayanandan, Parag Goyal, Girija Shankar Pandey and Sameer Singh for
the Respondent.

The Judgment of the Court was delivered by
D
KAPADIA, J. I. A short question which arises for determination in
.... these civil appeals is : whether Income Tax Appellate Tribunal was right in
~
holding that there was no obligation on the part of the assessee-company to
comply with the statutory requirements of Section l 94A of the Income-tax
Act, i961 (for short, 'the Act') by deducting tax deductible at source (TDS)
on interest paid by it for loans availed of by the assessee and repaid by it E
with interest on the ground that the loans were meant for the directors of the
assessee-company and not for the assessee-company and after recording a
finding that the directors had misused the name of the company to avail of
the loan.

2. The facts giving rise to these civil appeals are as follows: F
'-

Assessee (sole respondent in all the civil appeals) is a company
incorporated under the Companies Act, 1956 engaged in the business of real
estate and construction. A survey was conducted under Section 133A of the
Act when cheque receipt registers and cheque payment registers were found
G
in the business premises of the compan.y. On examination of the said books,
the Department detected taking of loans by the directors of the company
(assessee) in their individual capacities from creditors in the name of the
'\ assessee-company. The loan amou_nts received by way of cheques in the
name of the assessee were deposited in the bank account of the assessee and
transferred to the account of the directors on the same day by issuing H
962 SUPREME COURT REPORTS [2007] 8 S.C.R.

A corresponding cheques. When the directors repaid the loan amount or
interest thereon such payments were also routed through the assessee-
company. The directors issued cheques in favour of the assessee and the
assessee in tum issued cheques to the creditors/lenders of such directors.
Receipt of loan amounts by the directors as also repayment of loans and
B interests were all reflected in the books of accounts of the respective directors.
The receipts and outgoings were shown in the accounts of the directors with
the assessee-company. The books of accounts of the assessee-eompany did
not reflect the loans borrowed by the assessee-company. According to the
assessee, neither the borrowing nor repayment nor payment of interest on the
borrowing were reflected as transactions of the assessee in its books of
C accounts, they were only reflected in the accounts of the directors in the
books of the assessee-company.

3. The A.O. found that when interest was paid by cheques issued by
the company to the creditor, TDS was not deducted at source by the assessee
on the interest payments as required under Section l 94A(l) of the Act and,
D therefore, the A.O. applied the provisions of Section 201(1) of the Act by
declaring the assessee-company as assessee-in-default and also applied Section
201 (l A) of the Act imposing interest for not deducting TDS at source. The
order passed by the A.O. was confirmed by the appellate authority. Before
the Tribunal the assessee contended that the borrowings were routed through
E the company; that the company was merely a medium through which the
borrowings and repayments were routed; that the loans were taken by the
directors and not by the company which loans and interests thereon were not
reflected in the company's books of accounts and that the company was
merely disbursing the repayments of loans along with interests and, therefore,
it was not liable to deduct TDS at source under Section l 94A of the Act. This
F contention of the assessee has been accepted by the Tribunal. Hence, these
civil appeals are filed by the Department.

4. In the present matter, it is not in dispute that the assessee-company
has paid interests without deducting TDS under Section l 94A of the Act. It
is not in dispute that the loans were advanced by the lenders to the assessee-
G company. It is not in dispute that the loans were repaid by the assessee
through its bank accounts. It is not in dispute that interest was paid by the
assessee.

5. The above facts came to be detected only in the course of survey
H conducted by the Department under Section l 33A of the Act on 6.12.95. It
COMMNR. OF INCOME TAX. BANGALORE'· CENTURY BUILDING INDUSTRIES PVf. LTD. (KAPADIA. J.J 963

was never disclosed in the returns filed by the assessee. Opportunity was A
given to the company to explain why the company failed to deduct TDS under
Section 194A of the Act. In reply,~he director of the company admitted that
the transactions made were only for namesake. However, it was urged that
it was the duty of the Department to look at the substance of he transaction
between the lenders and the assessee which would indicate that in substance
it was a loan to the individual directions and not to the company and that
B
the company was merely a conduit. In reply, director of the assessee-company
further stated that the name of the company was lent, borrowings were routed
through the company and that in substance loans were in fact given to the
directors of the company. One more aspect needs to be mentioned, even
according to the impugned decision of the Tribunal the directors had misused C
the name of the company to avail of the loans and even with this finding the
Tribunal has held that there was no obligation on the part of the assessee
to comply with the statutory requirements of Section 194A of the Act by
deducting TDS on the interests paid by the assessee to the cceditors. The
first question which arises for determination in these civil appeals is : whether
it is open to the directors of the assessee-company to contend before the D.
A.O., after search and survey operations, that the transactions entered into
by the assessee were for namesake and that they actually related only to
individuals and not to the assessee-company. In other words, it is sought
to be submitted that the A.O. should lift the corporate veil at the behest of
the assessee who says that the deal was for namesake, ascertain the substance E
of the transaction and record a finding that the loan was in fact given not
to the company but to the individual directors.

6. In our view, such a submission cannot be accepted. Section 194A
of the Act forms part of recovery mechanism. We quote hereinbelow the said
section which reads as under: F
"--
"l 94A. Interest other than "Interest on securities".

(I) 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 [by way of interest on securities], shall, at. G
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 an individual or a Hindu undivided family, whose H
964 SUPREME COURT REPORTS [2007] 8 S.C.R.

A total sales, gross receipts or turnover from the business or
profession carried on by him exceed the monetary limits specified
under clause (a) or clause (b) of section 44AB during the financial
year immediately preceding the financial year in which such interest
is credited or paid, shall be liable to deduct income-tax under this
section.]
B
Explanation.-For the purposes of this section, where any income
by way of interest as aforesaid is credited to any account, whether
called "Interest payable account" or "Suspense· account" or by
any other name, in the books of account of the person liable to
pay such income, such crediting shall be deemed to be credit of
c such income to the account of the payee and the provisions of
this section shall apply accordingly.]

(2) [Omitted by the Finance Act, 1992, w.e.f. 1-6-1992.]

(3) The provisions of sub-section ( 1) shall not apply-
D (i) where the amount of such income or, as the case may be, the
aggregate of the amounts of such income credited or paid or
likely to be credited or paid during the financial year by the
person referred to in sub-section (1) to the account of, or to, the
payee, [does not exceed five thousand rupees:]
E Provided that in respect of the income credited or paid in respect
of-
(a) time deposits with a banking company to which the Banking
Regulation Act, 1949 (10of1949) applies (including any bank or
banking institution referred to in section 51 of that Act); or
F
(b) time deposits with a co-operative society engaged in carrying
on the business of banking;
(c) deposits with a public company which is fonned and registered
in India with the main object of carrying on the business of
providing long-term finance for construction or purchase of
G
houses in India for residential purposes and which is eligible for
deduction under clause (viii) of sub-section (I) of section 36
[***],

(* * *] the aforesaid amount shall be computed with reference to the
H income credited or paid by a branch of the banking company or the
COMMNR. OF INCOME TAX. BANGALORE v. CENTURY BUILDING INDUSTRIES PVT. LTD. (KAPADIA. J.( 965

..;
-(
co-operative society or the public company, as the case may be;] A
(ii) [***]

(iii) to such income credited or paid to-

(a) any banking company to which the Banking Regulation Act,
1949 (l 0 of 1949), applies, or any co-operative society engaged B
in carrying on the business of banking (including a co-operative
land mortgage bank), or
\. }
(b) any financial corporation established by or under a Central,
State or Provincial Act, or
(c) the Life Insurance Corporation of India established under the
c
Life Insurance Corporation Act, 1956 (31 of 1956), or
(d) the Unit Trust of India established under the Unit Trust of
India Act, 1963 (52 of 1963), or
(e) any company or co-operative society carrying on the business E>
of insurance, or
(t) such other institution, association or body [or class of · ·
institutions, associations or bodies] which the Central Government
may, for reasons to be recorded in writing, notify in this behalf
in the Official Gazette; E
(iv) to such income credited or paid by a firm to a partner of the firm;

(v) to such income credited or paid by a co-operative society [to a
member thereof or] to any other co-operative society;]

(vi) to such income credited or paid in respect of deposits under any f
scheme framed by the Central Government and notified by it .in this
behalf in the Official Gazette;

(vii) to such income credited or paid in respect of deposits (other than
time deposits made on or after the 1st day of July, 1995) with a
banking company to which the Banking Regulation Act, 1949 (I 0 of G
1949) applies (including any bank or banking institution referred to in
sectiun 51 of that Act);

(viia) to such income credited or paid in respect of,-

(a) deposits with a primary agricultural credit society or a primary H
966 SUPREME COURT REPORTS [2007) 8 S.C.R.

A credit society or a co-operative land mortgage bank or a co-
operative land development bank;

(b) deposits (other than time deposits made on or after the I st
day of July, 1995) with a co-operative society, other than a co-
operative society or bank referred to in sub-clause (a), engaged
.B in carrying on the business of banking;]

(viii) to such income credited or paid by the Central Government under
any provision of this Act or the Indian Income-tax Act, 1922 (I I of
1922), or the Estate Duty Act, 1953 (34of1953), or the Wealth-tax Act, -L
1957 (27 of 1957), or the Gift-tax Act, 1958 (18of1958), or the Super
c Profits Tax Act, 1963 (l 4 of 1963 ), or the Companies (Profits) Surtax
Act, 1964 (7 of 1964), or the Interest-tax Act, 1974 (45of1974);]

(ix) to such income credited or paid by way of interest on the
compensation amount awarded by the Motor Accidents Claims Tribunal
where the amount of such income or, as the case may be, the aggregate
D of the amounts of such income credited or paid during the financial
year does not exceed fifty thousand rupees;]
,>
(x) to such income which is paid or payable by an infrastructure "/-.
capital company or infrastructure capital fund or a public sector
company in relation to a zero coupon bond issued on or after the 1st
E day of June, 2005 by such company or fund or public sector company.]

Explanation I .-For the purposes of clauses (i), (vii) and (viia),
"time deposits" means deposits (excluding recurring deposits)
repayable on the expiry of fixed periods.

Explanation.-2 - Omitted.
F
(4) The person responsible for making the payment referred to in sub- ~
I
section (I) may, at the time of making any deduction, increase or
reduce the amount to be deducted under this section for the purpose
of adjusting any excess or deficiency arising out of any previous
deduction or failure to deduct during the financial year."
G
(emphasis supplied)

7. The material expression in Section 194A(l) of the Act is "at the time
of credit of such income to the account of the payee". When interest is
debited to "Interest Account" the debit is for· a specific amount calculated
H
COMMNR. OF INCOME TAX. BANGALORE,._ CENTURY BUILDING INDUSTRIES PVT. LTD. (KAPADIA, J.] 967

' with reference to the liability of the deductor to a particular creditor in A
accordance with the tenns and conditions of the loan. Therefore, whenever
interest is credited to the account of the payee the- payer has to deduct the
TDS. The crux of the matter is that the debit is for a specific amount
calculated with reference to the deductor's liability to a particular creditor in
accordance with the tenns and conditions of the loan. In the present case,
the lender had advanced the loan to the assessee-company. Debit was made a
by the assessee-company to the "Interest Account" for a specific amount
calculated with reference to the deductor's liability to a creditor. There is no
resolution of the assessee-company placed before the A.O. whereby the
company has agreed to act as a medium for routing the borrowings and
repayments. In the circumstances it cannot be said that the assessee-company C
was incharge of disbursing the repayments made by directors in their individual
capacities.

8. Consequently, Department was right in invoking the provisions of
Sections 201and20l(IA) of the Act. However, on facts we are of the view
that in the first instance over the years the Department should have not D
allowed non-deduction of TDS by the company and nothing prevented the
A.O. from raising the objection to such practice.

9. For the aforestated reasons, we answer the above question in the
negative, i.e., in favour of the Department and against the assessee-company.
The Department's civil appeals are accordingly allowed with no order as to E
costs.

RP. Appeal allowed.

' '),,.