1058. Whether payer would be liable to deduct tax at source from interest in a case where he follows mercantile system of accounting and he, instead of crediting interest income to the account of payee, credits the same to "Interest payable account", etc
Circular No. 288 was issued by the Central Board of Direct Taxes on 22 December 1980. Its subject is 1058. Whether payer would be liable to deduct tax at source from interest in a case where he follows mercantile system of accounting and he, instead of crediting interest income to the account of payee, credits the same to "Interest payable account", etc.
Holds that crediting interest to a nominal account instead of the payee's account does not postpone the duty to deduct under section 194A. That section requires every person other than an individual or Hindu undivided family to deduct at the prescribed rate from interest other than interest on securities, at the time of credit to the account of the payee or at the time of payment, where the amount credited or paid or likely to be credited or paid in the financial year exceeds Rs. 1,000, and applies to residents, non-residents being governed by section 195. The Board says that where an assessee on the mercantile system debits interest to an interest account or other nominal account for a specific sum computed on his liability to a particular creditor under the terms of the loan, the interest has constructively been credited to the payee's account, and the name of the account is not conclusive. Nominal accounts such as 'Interest Payable Account', 'Liability for Expense Account' or 'Suspense Account' are meant for stray unidentifiable items, and except in stray cases the failure to credit the payee cannot be called a method of accounting regularly employed within section 145(1); the burden of justifying a credit to any other account lies on the person responsible for deduction. Time for payment over is governed by section 200 read with rule 30 and runs from the date of constructive credit, ordinarily within one week from the last day of the month of deduction, but where a business assessee credits interest as on the date to which his accounts are made up, the tax is payable within two months of the end of the month in which that date falls, whenever the closing entries are actually made.
Representations had been received asking whether a payer on the mercantile system who credits interest to a nominal account instead of the payee's account is liable to deduct.
1058. Whether payer would be liable to deduct tax at source from interest in a case where he follows mercantile system of accounting and he, instead of crediting interest income to the account of payee, credits the same to "Interest payable account", etc.
1. Section 194A requires every person, other than an individual or a Hindu undivided family, to deduct income-tax at source at the prescribed rates from interest (other than "interest on securities") at the time of credit of such interest to the account of the payee or at the time of payment thereof where the amount credited or paid, or likely to be credited or paid, to the assessee during any financial year exceeds Rs. 1,000. The deduction is required to be made under section 194A in the case of residents only. (For non-residents the provisions are different and are contained in section 195.)
2. Some representations have been received by the Board enquiring as to whether a person would be liable to deduct tax at source from interest where his accounts are being maintained in accordance with the mercantile system of accounting and who, instead of crediting the interest income to the account of the payee, credits the same to the "Interest Payable Account" or the "Liability for Expense Account" or "Suspense Account" or any other nominal account.
3. The material expression in section 194A(1) is "at the time of credit of such income in the account of the payee...". When interest is debited to "Interest Account", or any other nominal account, the debit is for a specific amount calculated with reference to the deductor’s liability to a particular creditor in accordance with the terms and conditions of the loan. What is, therefore, important is that the interest payable to a creditor has constructively been credited to the account of the payee; the apparent nomenclature of the particular account in which the credit is made is not conclusive in the matter. The nominal accounts like "Interest Payable Account", "Liability for Expense Account", "Suspense Account", etc., are heads or captions meant to cover stray transactions of unidentifiable receipts and payments. Except in stray cases failure to credit the interest to the account of the payee cannot also be called a method of accounting regularly employed within the meaning of section 145(1) and would not, therefore, be accepted as an explanation for the consequential failure to deduct the tax at source. The burden of proving that there was a valid justification for crediting interest to any account other than the account of the payee would rest obviously on the person responsible for making the deduction. The time for deduction would be when the interest is credited.
4. It may be added that the time for making the payment of the tax deducted at source is governed by section 200 read with rule 30 of the Income-tax Rules and would reckon from the date of credit of interest made constructively to the account of the payee which would ordinarily be within one week from the last day of the month in which deduction is made. Where, however, the interest is credited by an assessee, carrying on business or profession, as on the date up to which the accounts thereof are made, the amount of tax deducted would be payable to the Central Government within two months of the expiration of the month in which the accounts of the assessee are made, falls. For example, if the accounts are made up to, say November 7, 1980, the tax deducted on the interest credited on that date would be payable to the Central Government by January 31, 1981 irrespective of when the closing entries are actually made.
5. The above clarification may please be brought to the notice of all your members so that they can comply with the requirement for deducting tax at source.
Circular: No. 288 [F. No. 275/46/79-IT(B)], dated 22-12-1980.
In a section 201 proceeding on year-end interest provisions, and in the reconciliation of interest debited in the accounts with tax deducted.
A company closing its accounts on 7th November, 1980 credits interest of Rs. 50,000 due to a lender to its 'Interest Payable Account' on that date. Tax is deductible on that credit, and the amount deducted has to reach the Central Government by 31st January, 1981, whatever date the closing entries are actually passed.
Rules it names. Rule 30 of the Income-tax Rules, 1962. The 1962 Rules were replaced by the Income-tax Rules, 2026, which renumbered nearly everything: a rule number quoted here almost never means the same rule today.
Source: the Income Tax Department’s own published text — its page for this instrument.