CBDT clarifies that Explanation to 194A is not
meant to apply in cases of banks where credit is made to provisioning account
on daily/monthly basis for the purposes of macro monitoring only by the use of
CBS software
As per provisions of
section 194A of the Income Tax Act 1961, income tax has to be deducted at
source at the time of credit of interest 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 other mode, at the rates in force if such interest amount exceeds specified
limit. Further, Explanation to section 194A states that “for the purpose of this section, where any income by way of interest as
aforesaid is credited to any account, whether called ‘Interest payable account’
or ‘Suspense Account’ or by any other name, in the books of account of the
person liable to pay such income, such crediting shall be deemed to be credit
of such income to the account of the payee and the provisions of this section
shall apply accordingly”.
2. Representations have been received from
Indian Banks Association (IBA) seeking clarification regarding deduction of tax
at source from payment of interest on time deposits by banks using Core-Branch
Banking Solutions (CBS) software. In case of banks using CBS software, interest
payable on time deposits is calculated generally on daily basis or monthly
basis and is swept & parked accordingly in the provisioning account for the
purposes of macro-monitoring only.
However, constructive credit is given to the depositor’s / payee’s
account either at the end of the financial year or at periodic intervals as per
practice of the bank or as per the depositor’s / payee’s requirement or on
maturity or on encashment of time deposits; whichever is earlier.
3. The matter has been considered by the
Board. Explanation to section 194A was introduced with effect from 1.4.1987 by
the Finance Act, 1987 to plug the loophole of avoiding deduction of tax at
source by crediting interest in the books of accounts under accounting heads
‘interest payable account’ or ‘suspense account’ instead of to the depositor’s
/ payee’s account. Therefore, the Explanation is not meant to apply in cases of
banks where credit is made to provisioning account on daily/monthly basis for
the purposes of macro monitoring only by the use of CBS software.
4. In view of the above position, it is
clarified that since no constructive credit to the depositor’s / payee’s
account takes place while calculating interest on time deposits on daily or
monthly basis in the CBS software used by banks, tax need not be deducted at
source on such provisioning of interest by banks for the purposes of macro
monitoring only. In such cases, tax shall be deducted at source on accrual of
interest at the end of financial year or at periodic intervals as per practice
of the bank or as per the depositor’s / payee’s requirement or on maturity or
on encashment of time deposits; whichever event takes place earlier; whenever
the aggregate of amounts of interest income credited or paid or likely to be
credited or paid during the financial year by the banks exceeds the limits
specified in section 194A.