Law: Income Tax Act, 1961

Section: 194,194A,194A(1),194A(3)

Income-tax--Deduction of tax at source---Interest---Scope of S.194-A---Crediting of interest---Deduction of tax to be made from gross interest and not on net interest payable after mutual set off between parties---Indian Income Tax Act, 1961, S.194A. Section 194A of the Income Tax, Act, 1961, postulates deduction of the tax at source on the gross amount of interest at the time of credit of the interest amount. The expression "interest" can only be gross interest, and it cannot refer to the net interest in the context of crediting of the interest by the person responsible for deducting the tax. Further, a person responsible for paying interest would credit in the account of the payee only the gross interest, and even under the commercial principles or accountancy principles the credit is only of the gross interest and not the net interest. Therefore, when he credits the gross interest in the account of the payee, a statutory obligation to deduct tax is imposed on him at the time of credit of the interest. It is not possible for him to cast off the, liability or shirk the liability imposed by the statute and deduct tax on the net interest that may be payable by him after mutual set off between the parties. Clause (i) of subsection (3) of section 194A of the Act providing for aggregation of the amount and subsection (4) of section 194A of the Act providing for adjustment in the payment of tax clearly indicate that it is only on the gross amount of interest that tax has to be deducted at source. The expression "income by way of interest" in section 194A would refer to the category of the income, viz., interest income and not the amount of income ultimately to be assessed in the hands of the payee. The expression "any income by way of interest" in section 194A of the Act would also seem to indicate that section 194A of the Act takes in all "interest income" except those which are specifically excluded from the scope of section 194A of the Act. Unintended hardships are likely to arise. But, that hardship is not peculiar to interest income, but common to all income on which tax is liable to be deducted at source. However, the hardship is minimised in the sense that it…

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