The Jammu and Kashmir and Ladakh High Court observed that there is no obligation on the bank to deduct Tax Deduction at Source (TDS) from interests on fixed deposit (FD) paid to Jammu Development Authority.
For both the assessment years i.e 2010-11 and 2011-12, the Joint Commissioner of Income Tax, Range-1 Jammu [‘the Assessing Authority’] decided the issue in favour of the Revenue and held that the Jammu Development Authority [‘JDA’] is a Local Authority which is not exempt from payment of tax and, therefore, the assessee-Bank was under an obligation to deduct the TDS on the deposits of JDA.
On appeal by the assessee-Bank, M/s The J&K Bank Ltd, against the order of assessment passed by the Assessing Authority, the Commissioner of Income Tax (Appeals), Jammu [‘CIT(A)’] accepted the plea of the assessee Bank and held that, it was not required to deduct any tax at source on its interest payments made to the JDA.
From a plain reading of sub-section (1) of Section 194A of the Income Tax Act, it clearly transpires that any person except when he is an individual or Hindu undivided family who is responsible for paying to a resident any income by way of interest, other than the income by way of interest on securities is under an obligation to deduct income tax at source at the time of credit of such income to the account of payee.
In Commissioner of Income Tax (TDS), Kanpur vs. Canara Bank, the Supreme Court of India after elaborate discussion as to what constitutes a corporation and how the same can be said to have been established by or under an Act of Legislature, concluded that NOIDA was a corporation established by or under the Act of State Legislature and, therefore, exempt from the provisions of Section 194A (1) of the Income Tax Act. Supreme Court ruled that the Canara Bank was under no obligation to deduct the TDS form the interest income paid by it to NOIDA on its fixed deposits lying with the Bank.
A Division Bench of Justices Javed Iqbal Wani and Sanjeev Kumar observed that “We hold that ITAT committed no error of law in confirming the order of CIT(A) deleting the non-deduction of TDS on account of interest on fixed deposits paid to the Jammu Development Authority even when JDA is a taxable entity.”
“We further hold that the assessee was under no obligation to deduct TDS on interest payments made to the JDA on its fixed deposits in terms of Section 194A of the Income Tax Act. The JDA being a corporation established by the State Act. i.e the Development Act 1970 was, thus, outside the purview of sub-section (1) of Section 194A of the Income Tax Act” the Bench concluded.
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