(This ITA is filed U/s. 260-A of I.T. Act, 1961 arising out of Order dated 11-10-2006 & order dated 18.8.2006 passed in ITA No.1617/BNG/2005, for the Assessment year 2000-2001, praying that this Honble Court may be pleased to:

i) formulate the substantial questions of law stated therein, ii) allow the appeal and set aside the order passed by theAT Bangalore in ITA No.1617/BNG/2005, dated 11-10-2006 confirm the orders of the Appellate Commissioner and Income Tax Officer, (TDS), Ward-16(3) Bangalore.)

Sreedhar Rao, J.

The respondent (Insurance Company), pursuant to the award made under the M.V. Act has paid compensation to the victim of Motor Vehicle Accident. The award amount consisted of the compensation and interest liability.

2. The provisions of Sec.194(A)(3)(ix) mandates that when the respondent pays interest liability more than Rs.50,000/-, it should deduct TDS to an extent of 10.3% of the interest component. In default, the respondent becomes liable to pay the said amount to the revenue u/s 201 of the I.T. Act with interest and penalty.

3. The respondent failed to deduct and remit the TDS amount to the revenue. The A.O. issued notice to the respondent, after enquiry found that the respondent has violated the mandate of Sec.194(A). Hence, directed the company to deposit the TDS amount with interest on the TDS amount.

4. The C.I.T. in appeal confirmed the order of the A.O. The Appellate Tribunal in appeal at the instance of the respondent partly allowed the appeal. The direction to pay interest u/s 201 (1A) is set aside, the rest of the order is confirmed. The respondent is permitted under the order to split and spread over the interest liability for each of the assessment year. The revenue Aggrieved by the order of the Tribunal in denying the interest has filed the appeal. The respondent has not preferred any appeal against the order to the extent adverse to its interest.

5. In the above appeal, the following substantial questions of law are formulated for consideration:

i) Whether the Tribunal was correct in holding that no interest need be paid by the assessee for non deduction of TDS (being consequential) after having held that the assessee was liable to deduct TDS on the interest component paid by having remanded to verify certain facts and re-compute the interest

ii) Whether the Tribunal was corrects in holding that there was no specific provision to deduct TDS before insertion of Clause ix to Section 194A(3) of theand therefore, the assessee under a bonafide and reasonable cause had not deducted tax and hence, no interest under Section 201(1A) was leviable when such a plea was not raised

6. The tribunal held that the respondents are not entitled to pay interest on the undeducted TDS amount since the said liability is in the nature of penalty. In this regard, the tribunal relied upon the decision of this court in Mittal Steel Ltd. Vs. CIT, 240 ITR 707 [LQ/KarHC/1999/297] .

7. In the Mittal Steel case, the proviso to Sec.201 was under consideration. The said proviso empowers levy of penalty if the TDS deduction is not effected for any valid reason. However, sec.201(1A) is a distinct provision to levy interest for delayed remittance. It is in the practice of revenue that for belated payment of tax for any reasonable cause, the assessee is liable to pay interest at the rate of 12% p.a. Similarly, for refunds, revenue pays interest to the assessee. Therefore, the levy of interest u/s 201(1A) cannot at any rate be construed as a penalty. In that view, the courts finding of the tribunal is set aside. The questions of law are answered in favour of the revenue.

8. It is pertinent to note that most of the victims in the Motor Vehicle accident who get compensation belong to poorer strata of the society. They may not incur any tax liability. The tribunal has rightly directed that the interest paid above Rs.50,000/- is to be split and spread over the period from the date interest is directed to be paid till its payment. If the spread over is given in majority of cases, the respondent may not incur liability to pay any TDS. In the event, the respondent remits TDS amount as directed by the Tribunal, the revenue is directed to hold sue motto enquiry by issuing notice to the persons who have received compensation to find out their tax liability on the interest received. If it is found that there is a tax liability on the person concerned, the revenue should collect the tax from the person concerned and refund the amount to the respondent. So also, if there is no tax liability on the person concerned, the TDS collected should be refunded to the respondent, of course with interest in either case.

With the above observations, the appeal is allowed.