Whether, for purpose of TDS u/s 194A, decision of Special Court would prevail over ITAT order - YES: HC

THE issue before the Bench is - Whether, for purpose of TDS u/s 194A, decision of Special Court would prevail over ITAT order. YES is the answer.

Facts of the case

The assessee company entered into an agreement with Fairgrowth Financial Services Ltd. (FFSL), as per which Loan of different amounts were sanctioned by the FFSL in favour of assessee and the same were accepted. The said loan was against the pledge of 3,28,000 shares of United Phosphorous Ltd. As per the terms of the agreement, assessees had to repay 20% within 60 days and balance 80% within 180 days. The assesees handed over 3,28,000 shares of UPL together with duly executed transfer form to FFSL since as per the agreement the assessees had to repay 20% amount within 60 days. In the meantime FFSL illegally sold 2,28,000 shares to Syndicate Bank and sub-pledged 1,00,000 shares to NHB. In the month of June, 1992, the Government promulgated Special Court ordinance, 1992. On 2nd July, 1992, custodian appointed for FFSL. On 10.08.1992, the Syndicate Bank purchased 2,28,000/- shares and presented before UPL for registering the transfer. On 13.08.1992 UPL received intimation of sub-pledge of 1,00,000 shares with NHB. On 14.08.1992, the assessee filed Misc. Petition No.10 of 1992 against the Custodian, FFSL, Syndicate Bank, NHB and UPL. On 18.08.1992, the Ordinance was replaced by the Special Court Act, 1992. In some of the matters, the Special Court held that provisions of TDS did not apply to "payments made pursuant to Orders and Directions of Court" and directed the party to recover on its own TDS paid from Income Tax department and not to deduct TDS. The Special Court passed an order and accepted the ownership of the assessee but restrained the assessee from transferring the shares in any manner whatsoever. On 4th April, 1994, the Special Court clarified that the earlier order was not an interim order, but the same was in the nature of final order.

Against the order of Special Court, the Syndicate Bank as well as the assessees filed appeals before SC, which had admitted both the appeals and directed both the parties in each appeal to maintain status quo. However, subsequently, on 20th February, 1995, in one of the matters, Special Court had framed a ruling that Department had no priority above the payments under the Special Court Act and the said order was passed after hearing IT department and FFSL Custodian. Thereafter, Special Court passed an order in the suit filed by the Syndicate Bank wherein the Syndicate Bank wanted to declare that it was the owner of the shares or that it must get back the purchase price paid by it. The said suit was stayed by the Court. Therefore, the question of repayment of loan of interest was out of question. The Special Court gave another ruling in continuation of the 1st ruling after hearing the advocates for the CBDT, Income Tax Department and FFSL that its 1st decision had applied even in case of TDS payment and that no one can pay over to Income Tax Department any amount of TDS in spite of status quo order passed by the SC in case of assessee. On 13.05.1998, the SC disposed of the both the appeals against the 1st ruling by dismissing the appeal. Thereafter, Special Court gave further direction in the Misc. petition No.28 of 1999 that there can be no deduction of TDS and that payers must make payments without deduction of TDS and that the whole income was to be paid over to the Custodian. By the impugned judgment and order, the assessees were directed to deduct TDS and pay the same to the credit of the Central Government.

Held that,

++ it is not in dispute that Special Court Ordinance came into force on 30th June, 1992 and the Custodian was appointed on 2nd July, 1992. Needless to say that the provisions of a Special statute would come into force from the date on which the Notification is issued. Any clarificatory order by Special Court or SC which is in the nature of interim order or final order regarding interpretation of law will have an effect from the date on which the Act or Ordinance comes into force. In the present case, we find that the Tribunal has committed serious error in interpreting the provisions of law. It goes without saying that Special Court was created for fast tracking the economy. The purpose for which the Special Court was enacted will prevail over the other law. Hence, we are of the opinion that the Tribunal has committed grave error in holding that the order of the Special Court will not prevail and that the TDS is required to be deducted by interpreting that it will apply only from the date of the order of the SC i.e. 9th September, 1996. In our view, the Tribunal has committed an error of law in restraining / prohibiting / constraining. Apart from that the assessees have not made any payment to the Department but have so simply made provision for it. Further, the observations of the Tribunal that TDS is income of the department, in our view is contrary to the observations of the Bombay HC in the case Sir Joseph Kay, K.B.E. In that view of the matter, the interpretation put forward by the Tribunal that TDS is income of the Department is misconceived. Therefore, in our view, restrained TDS could not have been deducted. In that view of the matter, we are of the considered opinion that the Tribunal was not right in passing the impugned judgment and in holding that assessees were liable to deduct tax at source as required u/s 194A, in spite of the order of the Special Court. For the foregoing reasons, all these appeals deserve to be allowed and the same are allowed accordingly. The impugned judgment and order of the Tribunal as well as the order of AO and CIT(A) are hereby quashed and set aside. Accordingly, we hold that the Tribunal was not right in law in holding that the the assessess were liable to deduct TDS as required u/s. 194A.