Entities established by or under an Act of the State Legislature are exempt from the provisions of Section 194A(1) of the Income Tax Act, 1961.

JUDGMENT :

Sanjeev Kumar, J.

1. These two appeals filed by the Revenue under Section 260A of the Income Tax Act, 1961 [‘the Act’] are directed against a common order dated 28.02.2017 passed by the Income Tax Appellate Tribunal, Circuit Bench at Jalandhar [‘ITAT’] in ITA No. 74(Asr)/2015 for the assessment year 2010-11 and ITA No. 137 (Asr)//2015 for the assessment year 2011-12. Both the appeals have been admitted by this Court on the following substantial question of law :

“Whether the ITAT committed an error of law in confirming the order passed by the Commissioner of Income Tax (Appeals) deleting the non deduction of TDS on account of interest paid to the Jammu Development Authority even when the same is taxable entity and as such the assessee-Bank was under an obligation to deduct the TDS on interest payment to Jammu Development Authority under Section 194A of the Income Tax Act, 1961”

2. 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. Reliance was placed by the Assessing Authority on the judgment of Hon’ble Supreme Court rendered in the case of Adityapur Industrial Area Development Authority vs. Union of India and others, (2006) 283 ITR 97 (SC). On appeal by the assessee-Bank 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. The CIT (A) relied upon an earlier judgment of ITAT, Amritsar Bench passed in respect of the assessee-Bank in respect of its Shalamar and Gandhi Nagar, Jammu Branches.

3. The issue, inter alia, fell for consideration before the ITAT, Amritsar Bench in the appeals filed by the Revenue as well as the assessee-bank. While dealing with the issue in question, the ITAT upheld the decision of the CIT (A), relying upon its earlier decision passed in the case of assessee for the assessment years 2007-08 and 2008-09. The ITAT had upheld the deletion of addition for those years by holding as under :

“It has not been disputed that Jammu Development Authority stands incorporated by the J&K Development Act, 1970. CBDT Notification No. 3489 dated 27.10.1970 issued in pursuance of the provisions of Section 194A(3)(f) of the Act, provides that no tax was required to be deducted on interest on deposit paid to a Corporation incorporated under a State Act. The position is not any different so far as regards JDA incorporated under the State Act, too. Therefore, the provisions of section 194A of the Act are not applicable due to which the provisions of Section 40(a)(ia) are also not attracted.”

4. This is how the plea of the bank came to be finally accepted by the ITAT while deciding the appeals vide its order dated 28.02.2017. It is this order of the ITAT which is subject matter of challenge in these appeals.

5. The appeals have been preferred on multiple grounds, but this Court, after hearing both the sides, has found only one substantial question of law involved for adjudication in these appeals which we have already reproduced hereinabove.

6. Having heard learned counsel for the parties and perused the material on record, it is necessary to first set out Section 194A of the Act.

“194A. Interest other than interest on securities—

(I) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of interest other than income by way of interest on securities, shall at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any ot