We are pleased to
release a Tax Alert which summarizes a recent ruling of the Delhi High Court
(HC) in the case of UCO Bank (Bank) on the issue of tax withholding on interest
accruing on fixed deposits placed with banks in the name of Registrar/
Prothonotary/ Senior Master of the Court (Court official), pursuant to any
Court order during the pendency of litigation on claim/compensation (Court
deposits).
The Central Board of Direct Taxes (CBDT) had issued a Circular outlining the tax withholding procedure to be adopted in such cases. The Circular required banks to withhold tax in the name of the person depositing the funds with the Court/bank under the Court’s directions.
Quashing the Circular, the HC held that interest accruing on Court deposits is not liable for withholding since such interest neither accrues to the Court nor the litigant placing the deposit under the Court’s direction. The HC further held that withholding is a mode of recovery of tax which is levied on the person earning income. Unless the person assessable in respect of interest accruing on Court deposits is ascertainable, the machinery provisions for recovery of tax through withholding are ineffective. Hence, the Bank is not liable to withhold tax on interest accruing on such deposit. Withholding obligation shall arise when the deposit with accrued interest is finally paid to the person who is ultimately granted the funds by the Court.
Applicability of withholding on interest accruing on Court deposits is a vexed issue in the absence of the exact identity of the person who is entitled to receive such interest till the issue is finally resolved by the Court. The CBDT Circular tried to resolve the issue by directing the banks to withhold tax in the name of the depositor. The HC has held that this is inconsistent with the scheme of the ITL and has highlighted the legal and practical infirmities of this approach. The legal principles enunciated by the HC may have relevance in other scenarios where the payee may not be identifiable on the date of credit of income in the books of the payer.
The present HC ruling is in the context of Court deposits apparently arising out of a financial dispute between parties. Recently, the Himachal Pradesh HC was concerned with an identical issue on Court deposits made by an insurance company, arising out of a motor accident claims compensation case. The Himachal Pradesh HC also quashed the Circular by holding that interest on Court deposits in such cases does not take the character of income at all.
The Central Board of Direct Taxes (CBDT) had issued a Circular outlining the tax withholding procedure to be adopted in such cases. The Circular required banks to withhold tax in the name of the person depositing the funds with the Court/bank under the Court’s directions.
Quashing the Circular, the HC held that interest accruing on Court deposits is not liable for withholding since such interest neither accrues to the Court nor the litigant placing the deposit under the Court’s direction. The HC further held that withholding is a mode of recovery of tax which is levied on the person earning income. Unless the person assessable in respect of interest accruing on Court deposits is ascertainable, the machinery provisions for recovery of tax through withholding are ineffective. Hence, the Bank is not liable to withhold tax on interest accruing on such deposit. Withholding obligation shall arise when the deposit with accrued interest is finally paid to the person who is ultimately granted the funds by the Court.
Applicability of withholding on interest accruing on Court deposits is a vexed issue in the absence of the exact identity of the person who is entitled to receive such interest till the issue is finally resolved by the Court. The CBDT Circular tried to resolve the issue by directing the banks to withhold tax in the name of the depositor. The HC has held that this is inconsistent with the scheme of the ITL and has highlighted the legal and practical infirmities of this approach. The legal principles enunciated by the HC may have relevance in other scenarios where the payee may not be identifiable on the date of credit of income in the books of the payer.
The present HC ruling is in the context of Court deposits apparently arising out of a financial dispute between parties. Recently, the Himachal Pradesh HC was concerned with an identical issue on Court deposits made by an insurance company, arising out of a motor accident claims compensation case. The Himachal Pradesh HC also quashed the Circular by holding that interest on Court deposits in such cases does not take the character of income at all.
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