QUESTIONS & ANSWERS
TDS by banks on cumulative deposits
It is a provision in the accounts and not a credit to the depositor’s account so that the question of debit of such tax should not arise.
I am a subscriber of a cumulative deposit for three years. Since I am an income-tax assessee, I cannot file Form 15H to avoid tax deduction. But all the same, I am liable to account for the income only on the date of maturity, not only because I am adopting cash basis of accounting both for my profession and income from other sources, but also because I do not have the right to receive the interest before maturity so that it could not also be taxed on accrual basis. Tax should have, therefore, been deducted at source only at the time of actual payment of interest on maturity of the deposit. If tax is deducted at the end of each year and my deposit is treated as reduced by the tax so deducted, interest that is paid to me is on the reduced balances for the second and third years. It is against the undertaking of the bank as to the amount of interest payable to me.
The bank accepted that there is an interest loss in my case to the extent of Rs. 1,236.63, which is less than the maturity amount promised to me but explained that it is because of the compound interest of the TDS amount deducted annually. The consolation given by the bank was that the amount of tax has been deposited with the Income-tax Department and certificate of tax deduction has also been given to me. The matter was taken up to the Banking Ombudsman, who repeated the bank’s reply that the tax amount had been passed on to the Income-tax Department so that there could be no cause for grievance. The bank was advised that the deposit receipt should state in future that maturity value will vary, where tax is to be deducted periodically. The fact that money has been paid to the Income-tax Department is no consolation to me, since I am put to a loss to this extent. I would like to have your reaction to this situation.
The above letter from Dr. N. Revathy Sriram, a professional, highlights the TDS requirements on income which does not arise to the assessee during the year, apart from the grievance rightly aired that banks should have advised the prospective depositor as to the distortion in the promised return due to TDS made in advance of the payments. Similar grievances are aired from time to time by other readers as well.
There is something wrong in the TDS system in practice. Banks provide for interest annually in their books as liability accrued, but not due, because of the mercantile system of accounting. It is a provision in the accounts and not a credit to the depositor’s account so that the question of debit of such tax should not arise. The requirement is for deduction of tax only on payment or credit to the depositor under Sec. 194A of the Act. But banks, including public sector banks, deduct tax to accord with the Department’s expected interpretation that even in such a case, tax is required to be deducted. Deductors often are prompted by the provision under Sec. 40(a)(ia) in terrorem disallowing deduction itself apart from other consequences for failure to deduct tax, where the assessing officer is of the opinion, rightly or wrongly, that tax should have been deducted. Deduction is available for the bank on such provision but does not require tax deduction at source till the amount becomes payable at the end of maturity. If such a course is followed, the legitimate grievance as aired by the reader would not have arisen. Banks should take up the matter with the Income-tax Department instead of deducting tax and placing unnecessary burden on the depositors.
The burden of the depositors arise for another reason. Where the amount of tax is deducted at source from interest without placing such interest in the hands of the depositor, such tax so deducted should be adjusted as tax deduction at source in the same year so that the net loss of interest is much less. But then, by an interpretation of Sec. 199 providing for tax credit to the year to which the related income becomes assessable, the department retains the amount of tax collected by deduction from the bank without benefit of interest on such amount retained. Sec. 199 as earlier intended was only a facility, where tax credit could be given to a person other than the person named in the tax deduction certificate or in a year different from the year of deduction, as long as the related income is offered for tax. The section was not intended to bar refund or postpone adjustment merely because the related income is liable to tax in a later year. Sec. 199 has been substituted by the Finance Act, 2008, with effect from April 1, 2008. In sub-section (3), power is taken by the Board to prescribe the terms under which tax credit could be given. Rule 37BA enacted in pursuance of this rule-making power provides that credit “shall be given for the assessment year for which such income is assessable”. In view of the word “shall”, the rule may be interpreted to mean what was once permissive before amendment is now made mandatory. There could still be a fair interpretation that the refund cannot be delayed, where credit is claimed in the year in which it was deducted.
The depositor is the person, who is affected by the mismatch as between the years in which tax is deducted at source by the bank and the credit is given by the Income-tax Department.
It is one of the reasons why taxpayers split up the deposits between different branches of the same bank or in different banks to avoid tax deduction at source. The matter should be examined by the Board and clarifications given.
S. RAJARATNAM
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