Salwan Construction Co. vs Assistant Commissioner Of ...
1995 Latest Caselaw 184 Del

ORDER

G. D. AGRAWAL, A.M. :

This appeal by the assessee is against the order of the CIT(A) - IV, New Delhi, who confirmed the levy of interest under s. 201(1A) by the Assessing Officer.

2. The facts of the case are that the assessee is a registered firm engaged in contract business. The assessee was awarded two contracts one by Air India and another by M/s Modipon. The assessee assigned the contract awarded by Air India to Salwan Construction Co. Pvt. Ltd. and the assessee was entitled to receive commission @ 2.5% of the receipts. The assessee also assigned the contract awarded by M/s Modipon to M/s Amarjit Singh, HUF and the assessee was entitled to receive commission @ 5%. The gross receipts from the contract awarded by Air India were Rs. 2,93,61,361 while from the contract of M/s Modipon Rs. 4,37,520. As per Assessing Officer, the assessee was required to deduct TDS @1% from the payment made to the sub-contractors as per provision of s. 194C(2). The Assessing Officer held that the assessee was to deduct Rs. 2,97,989 as TDS which he failed to deduct and deposit with the Central Government. Therefore, the Assessing Officer charged interest on the above amount from 1st January, 1986 to 28th March, 1990 (i.e., the date of regular assessment) amounting to Rs. 1,88,270 vide his order under s. 201(1A) dt. 20th January, 1992. The CIT(A) upheld the order of the Assessing Officer. Hence, this appeal by the assessee.

2.1 At the time of hearing, the learned counsel for the assessee vehemently contended that no interest under s. 201(1A) was at all chargeable, in this case. He argued the case at length. His arguments were five-fold as under :

(a) There was no tax payable by the so called sub-contractors (the assessee has used the expression 'so called' because he is denying that they are sub-contractors. However, hereinafter we shall refer them as 'payees'), hence, there was no liability of the assessee to deduct the tax. He has pointed out that the income of the first payee, namely, Salwan Construction Co. Pvt. Ltd. was loss in asst. yrs. 1986-87 and 1987-88. The assessment of second payee, namely, Shri Amarjit Singh, HUF has resulted in refund for asst. yrs. 1986-87 and 1987-88 both. Thus, he submitted that it was a clear case where no tax was payable by the payees and, therefore, there was no necessity of deduction of any TDS by the assessee. In this respect, he relied upon the following decisions :

(i) ITO vs. Sood Enterprises (1992) 41 ITD 234 (Del)

(ii) N. K. Patel & Co. vs. ITO (1993) 69 Taxman 39 (Ahd)

(iii) CIT vs. Divl. Manager, New India Assurance Co. Ltd. (1983) 33 CTR (MP) 248 : (1983) 140 ITR 818 (MP)

(iv) CIT vs. Life Insurance Corpn. (1986) 52 CTR (MP) 278 : (1987) 166 ITR 191 (MP)

(v) CIT vs. Manager, Madhya Pradesh State Co-op. Bank (1982) 31 CTR (MP) 187 : (1982) 137 ITR 230 (MP)

(vi) Gwalior Rayon Silk Co. Ltd. vs. CIT (1983) 37 CTR (MP) 351 : (1983) 140 ITR 832 (MP).

He submitted that when the tax was already paid by the payees, the deduction of TDS by the assessee would have amounted to unjust enrichment of the Revenue, which is not the intention of the law. He also submitted that when s. 201 cannot be invoked interest under s. 201(1A) cannot be charged.

(b) He submitted that s. 194C(2) will be applicable only when there is a relationship of contractor and sub-contractor between the payer and the payee. He pointed out that in this case, the assessee has assigned the right/obligation to execute the entire contract work. The profit and loss that may occur on the execution of the contract will be of the payee. The assessee was only entitled to the commission @ 2.5% or 5%, as the case may be. Thus, there did not exist any relationship of contractor and sub-contractor between the assessee and the payees. The receipt from the Air India or the Modipon stood diverted to the payees by overriding title created on account of the assignment of the work to the payees. He further submitted that the definition of the term contractor, as per contract with Air India, included the assignee of the contractor. That there was implied consent of the Air India authorities because the work was inspected/supervised by Air India authorities.

(c) The assessee remained under the bona fide impression that he is not liable to deduct the tax at source in view of the reasons mentioned under paras (a) and (b) above. Therefore, no interest under s. 201(1A) be charged.

(d) The order under s. 201(1A) was barred by limitation as provided under s. 231 of the IT Act.

(e) The quantum of interest charged under s. 201(1A) was not correct because (i) interest was charged up to regular assessment while as per the language of the statute it has to be charged up to the date of deposit. When the amount was not deposited at all by the assessee the interest cannot be obviously charged up to the date of deposit. Thus, when the computation of interest cannot be made the interest could not have been charged. In this respect he relied upon the decision of CIT vs. B. C. Srinivasa Setty (1981) 21 CTR (SC) 138 : (1981) 128 ITR 294 (SC). (ii) The TDS was to be deducted on the net receipt and not on the gross receipt. The Assessing Officer has worked out the interest considering the gross receipt by the assessee. (iii) The Assessing Officer has charged the interest in one year only while the receipt by the assessee retained to more than one years.

In view of the above, he submitted that the order charging interest under s. 201(1A) be quashed.

2.2 The learned Departmental Representative supported the order of the authorities below. She submitted that the order of the Tribunal in the case of Sood Enterprises (supra) was based upon the decision of the Hon'ble Madhya Pradesh High Court in the case of M. P. State Co-op. Dev. Bank Ltd. (supra). She submitted that the facts of the case before the Hon'ble Madhya Pradesh High Court were altogether different. Similarly, in the case of Gwalior Rayons (supra) the facts were different. In that case the default was "incorrect deduction from the salary of the employees". The difference between the income of the employees as considered by the assessee and by the Assessing Officer was on account of controversial additions made by the Assessing Officer and, therefore, the Hon'ble Madhya Pradesh High Court has found that the estimation by the assessee while deducting the income-tax was not dishonest or unfair. She submitted that the facts of the case under appeal are altogether different. Here the assessee was required to deduct tax at source, at the specified percentage, for every payment made to the sub-contractors. The assessee had clearly failed to deduct the tax as required by s. 194C(2). She further submitted that the Act itself provides for non-deduction of tax or the less deduction of tax under s. 194C(4)/194C(5) . Thus, if the income of the sub-contractor was less or there was no income they could have obtained the certificate from the Assessing Officer as per the provisions of s. 194C(4)/194C(5) . That in absence of such certificate obtained by the sub-contractor, it was obligatory on the part of the assessee to deduct the tax for every payment to the sub-contractor. As the TDS has to be deducted from the payment, the income of the sub-contractor is an irrelevant consideration. In this respect, she relied upon the decision of the Hon'ble Supreme Court in the case of Associated Cement Co. Ltd. vs. CIT (1993) 111 CTR (SC) 165 : (1993) 201 ITR 435 (SC). She also relied upon the decisions of the Punjab & Haryana High Court in the case of Tuhi Ram vs. Land Acquisition Collector (1992) 105 CTR (P&H) 378 : (1993) 199 ITR 490 (P&H) and Calcutta High Court in the case of Grindlays Bank Ltd. vs. CIT (1991) 94 CTR (Cal) 46 : (1992) 193 ITR 457 (Cal).

2.3 She further submitted that between the assessee and the payee, the relationship of contractor and the sub-contractor did exist. She submitted that even if the whole of the contract is transferred it is a case of sub-contract as per s. 194C(2). She has relied upon the meaning of the term contractor and sub-contractor as given in Webster's Third New Dictionary. She also submitted that whether the failure of the assessee to deduct the tax was on account of bona fide belief or not is an irrelevant consideration because the levy of interest is mandatory. She also submitted that the order passed by the Assessing Officer was not barred by limitation. In this respect, she relied upon the various decisions of the Tribunal reported in Jitan Clinical Thermometer vs. ITO (1991) 40 TTJ (Ahd) 484 : (1991) 38 ITD 105 (Ahd), ITO vs. Marshal Sons & Co. (I) Ltd. (1992) 42 ITD 496 (Cal), ITO vs. Om Prakash & Co. (1982) 1 ITD 992 (Del) and Grindlays Bank Ltd. vs. ITO (1982) 1 ITD 1100 (Cal).

3. We have carefully considered the arguments of both the sides. The substance of the argument of the learned senior Departmental Representative is that the liability to deduct tax at source arose at the time of payment by the assessee. Whether there was income or not in the hands of the payees is an irrelevant consideration. Since, the assessee has failed to deduct the tax the default occurred and the assessee became liable for the payment of interest as per s. 201(1A). The substance of the assessor's counsel's arguments is that on completion of assessment of payees there was no tax payable by them and, therefore, there was no liability of the assessee to deduct the tax at source. However, the issue before us is whether the impugned order upholding the order of the Assessing Officer under s. 201(1A) can be sustained. The Assessing Officer vide his order dt. 28th January, 1992, charged interest under s. 201(1A) amounting to Rs. 1,88,270. The interest was charged from 1st January, 1986, to 28th March, 1990 (i.e., date of regular assessment). Admittedly, on 28th January, 1992, assessments of the payees for both the relevant years were completed. In the case of the first payee, namely, M/s Salwan Construction Co. Pvt. Ltd. there was loss in both the years. In the case of another payee, namely, M/s Amarjit Singh, HUF, there was refund in both the years. This fact was not disputed by the learned senior Departmental Representative except stating that the position of tax payable by the payees may change subsequent to the passing of order by the Tribunal and, therefore, the matter should be decided irrespective of the position of income assessed by the payees. We are afraid we cannot accept this submission of the learned Departmental Representative because the case has to be decided as per the facts existing at the time of passing of the order by us. It is not disputed that at the time of passing of the order under s. 201(1A) by the Assessing Officer no tax was payable by both the payees. This factual position holds good till today. The Hon'ble Madhya Pradesh High Court had considered this issue in the case of CIT vs. Manager, Madhya Pradesh State Co-op. Development Bank Ltd. (supra), wherein it has been held :

"Where the regular assessment of an employee has been completed and the amount of tax fully paid by him, the ITO, Salaries Circle, has no jurisdiction under s. 201 of the IT Act, 1961, to demand further tax from the employer in respect of the tax alleged to have been short deducted at source in respect of the employee."

The above finding was reiterated in the case of CIT vs. Divl. Manager, New India Assurance Co. Ltd. (supra) and the case of CIT vs. Life Insurance Corpn. (supra). The Hon'ble Madhya Pradesh High Court had also considered the issue of levy of interest under s. 201(1A) in the case of Gwalior Rayon & Silk Co. Ltd. vs. CIT (supra). There it has been held :

"That in the instant case it had not been found by the ITO or the Tribunal that the assessor's estimate was not honest and fair. The assessee had deducted tax from the salary of the employees on the salary income honestly estimated by it and had also paid the tax as required by s. 200. It could not be held to be an assessee in default in respect of the tax. Therefore, the provisions under s. 201(1A) also were not attracted."

The learned senior Departmental Representative has relied upon the decision of the Calcutta High Court in the case of Grindlays Bank Ltd. vs. CIT (supra). In this case, their Lordships have upheld the validity of charging of interest under s. 201(1A) holding as under :

"That if the tax has been realised once from the employees, it cannot be realised once again but that does not mean that the assessee will not be liable for payment of interest or any legal consequence for their failure to deduct or to pay in accordance with law to the Revenue."

The Tribunal in the case of ITO vs. Sood Enterprises (supra), following the decision of the Hon'ble Madhya Pradesh High Court, referred to above, has held that interest under s. 201(1A) is not chargeable where the payee has already paid the tax. The same view was reiterated by the Tribunal (Ahmedabad Bench) in the case of N. K. Patel & Co. vs. ITO (supra). In view of the above decisions, there is unanimity of the view that when the assessments of the payees have been completed and no tax is payable by them, the TDS cannot be realised once again from the payer (the assessee). However, whether on the said amount interest under s. 201(1A) can be chargeable or not there is a divergence of views of Hon'ble Madhya Pradesh High Court and the Hon'ble Calcutta High Court. The Hon'ble Madhya Pradesh High Court in the case of Gwalior Rayons & Silk Co. Ltd. (supra) held that if the assessee cannot be treated in default under s. 201 interest under s. 201(1A) was not chargeable. On the other hand, the Hon'ble Calcutta High Court in the case of Grindlays Bank Ltd. (supra) has taken the view that though the tax cannot be realised once again but the assessee will be liable for payment of interest or any legal consequence for their failure to deduct or pay the TDS in accordance with law. After carefully considering the above legal position, we are inclined to hold that the Assessing Officer was not justified in charging interest under s. 201(1A) for the following reasons :

(a) It is a settled proposition of law that when two views are reasonably possible, the view which is favorable to the assessee should be adopted.

(b) Sec. 201(1A) reads as under :

"(1A) Without prejudice to the provisions of sub-s. (1), if any such person, principal officer or company as is referred to in that sub-section does not deduct or after deducting fails to pay the tax as required by or under this Act, he or it shall be liable to pay simple interest at (fifteen) per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid."

As per the above, the interest under s. 201(1A) is chargeable from the date on which tax was deductible to the date on which the tax is actually paid. In this case, the assessee has not paid the tax at all. As we have discussed earlier there is an unanimity of the views that when the payees had paid the tax, no tax under s. 201 can be recovered from the assessee. Thus, in this case also, the tax cannot be recovered from the assessee. Therefore, the interest if held to be chargeable it would be chargeable from the date on which the tax was deductible to the indefinite period. (Because interest is chargeable till payment is made - while in this case no payment is made). It will be a peculiar situation. Perhaps, the Assessing Officer was also alive to the situation, and, therefore, he has charged interest to the date of regular assessment. We may mention that there is no provision for charging of interest to the date of regular assessment. In the case of CIT vs. B. C. Srinivasa Setty (supra) the Hon'ble Supreme Court has held :

"The charging section and the computing provisions together constitute an integrated code. When there is a case to which computation provision cannot apply at all, it is evident that such a case was not entitled to fall within the charging section."

In view of the above, we hold that interest under s. 201(1A) is not chargeable. In view of this finding we deem it unnecessary to consider and discuss other various submissions made by both the parties.

4. In the result the appeal filed by the assessee is allowed.