TeDiouS provisions appear to be simple but are complex and have been subject matter of litigation over the years. This is especially true for section 195 because divergent views have been expressed by various courts as to when the liability gets fastened u/s 195 to deduct tax and when an assessee may not deduct tax at source.
A plain reading of section 195 suggests that the section would come into operation when the payment being made to the recipient constitutes income in the hands of the recipient. The moot question therefore is that who decides whether the payment constitutes income in the hands of the recipient? Is it the payer or the Assessing Officer?
Consider a case where you purchase a property from a non-resident. The non-resident represents that the capital gain has already been invested in another property by taking benefit of the 'one year before purchase' clause and accordingly there shall be no capital gain accruing to the seller. As there is no income chargeable to tax under the transaction whether you as a buyer of the property liable to deduct tax u/s 195 of the Act.
The Hon'ble Bangalore ITAT recently adjudicated upon a similar issue in the case of A. Mohiuddin v Additional Director of Income-tax (International Taxation), Mangalore [2015] 119 DTR 76 Bangalore. The facts were that the assessee purchased property from a non-resident Indian lady. While making payment to the vendor the assessee did not deduct tax at source, as at the time of execution of sale deed and payment of consideration, it was represented by the vendor that she had purchased a house property within the prescribed period of one year prior to the date of sale deed and as she had made investment in the new residential house which was eligible for exemption under section 54 of the Act. Accordingly, there was no income chargeable to tax and hence no requirement to withhold tax on the gross consideration. The assessee did not deduct the tax at source while making payment to the non-resident lady.
The assessee was treated as an 'assessee-in-default' u/s 201 of the Act for not deducting tax at source u/s 195 of the Act. Interest was also levied u/s 201(1A) of the Act.
The Tribunal held that as the assessee while making payment to the vendor was well aware that the vendor had purchased a residential house within the prescribed period as such, the capital gain in her hands would be eligible for exemption under section 54 of the Act. Thus, the assessee cannot be treated as "assessee in default" under section 201 of the Act for not deducting tax at source under section 195 of the Act while making payment to the vendor and consequently on interest under section 201(1A) of the Act was also leviable.
This was a case where the investment was already made by the vendor which most likely prompted the ITAT to rule in favour of the assessee. However, if the facts are twisted wherein the vendor represents that a property would be purchased within the stipulated time or investment would be made u/s 54EC of the Act would the buyer be justified in such a case to not to withhold tax. The answer to my mind should be 'No'. Nevertheless, in situations similar to the above, one can surely take benefit of the aforesaid judgement.
Originally published August 10, 2015
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
