Delhi High Court
Director Of Income Tax vs M/S Jacabs Civil Incorporated on 30 August, 2010
Author: A.K.Sikri
REPORTED
I-18 to 26
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITA No.491/2008
Director of Income Tax ..... Appellant
Through: Mr.Sanjeev Sabarwal, Adv. with
Mr.Utpal Saha, Adv.
versus
M/s. Jacabs Civil Incorporated ..... Respondent
Through: Mr.N.Venkatraman, Sr. Advocate, with
Mr.Achin Goel, Mr. Satish Kumar,
Mr. R.Satish Kumar and Ms. Anjali
Chaudhari, Advocates.
and
+ ITA No.209/2009
Director of Income Tax ..... Appellant
Through: Mr.Sanjeev Sabarwal, Adv. with
Mr.Utpal Saha, Adv.
versus
M/s. Mitsubishi Corporation ..... Respondent
Through: Mr.N.Venkatraman, Sr. Advocate, with
Mr.Achin Goel, Mr. Satish Kumar,
Mr. R.Satish Kumar and Ms. Anjali
Chaudhari, Advocates.
and
+ ITA No.229/2010
Director of Income Tax ..... Appellant
Through: Mr.Sanjeev Sabarwal, Adv. with
Mr.Utpal Saha, Adv.
versus
ITA No.491/2008 and connected matters Page 1 of 17
M/s. Mitsubishi Corporation ..... Respondent
Through: Mr.N.Venkatraman, Sr. Advocate, with
Mr.Achin Goel, Mr. Satish Kumar,
Mr. R.Satish Kumar and Ms. Anjali
Chaudhari, Advocates.
and
+ ITA No.282/2010
Director of Income Tax ..... Appellant
Through: Mr.Sanjeev Sabarwal, Adv. with
Mr.Utpal Saha, Adv.
versus
M/s. Mitsubishi Corporation ..... Respondent
Through: Mr.N.Venkatraman, Sr. Advocate, with
Mr.Achin Goel, Mr. Satish Kumar,
Mr. R.Satish Kumar and Ms. Anjali
Chaudhari, Advocates.
and
+ ITA No.283/2010
Director of Income Tax ..... Appellant
Through: Mr.Sanjeev Sabarwal, Adv. with
Mr.Utpal Saha, Adv.
versus
M/s. Mitsubishi Corporation ..... Respondent
Through: Mr.N.Venkatraman, Sr. Advocate, with
Mr.Achin Goel, Mr. Satish Kumar,
Mr. R.Satish Kumar and Ms. Anjali
Chaudhari, Advocates.
and
+ ITA No.297/2010
Director of Income Tax ..... Appellant
Through: Mr.Sanjeev Sabarwal, Adv. with
Mr.Utpal Saha, Adv.
ITA No.491/2008 and connected matters Page 2 of 17
versus
M/s. Mitsubishi Corporation ..... Respondent
Through: Mr.N.Venkatraman, Sr. Advocate, with
Mr.Achin Goel, Mr. Satish Kumar,
Mr. R.Satish Kumar and Ms. Anjali
Chaudhari, Advocates.
and
+ ITA No.301/2010
Director of Income Tax ..... Appellant
Through: Mr.Sanjeev Sabarwal, Adv. with
Mr.Utpal Saha, Adv.
versus
M/s. Mitsubishi Corporation ..... Respondent
Through: Mr.N.Venkatraman, Sr. Advocate, with
Mr.Achin Goel, Mr. Satish Kumar,
Mr. R.Satish Kumar and Ms. Anjali
Chaudhari, Advocates.
and
+ ITA No.316/2010
Director of Income Tax ..... Appellant
Through: Mr.Sanjeev Sabarwal, Adv. with
Mr.Utpal Saha, Adv.
versus
M/s. Mitsubishi Corporation ..... Respondent
Through: Mr.N.Venkatraman, Sr. Advocate, with
Mr.Achin Goel, Mr. Satish Kumar,
Mr. R.Satish Kumar and Ms. Anjali
Chaudhari, Advocates.
and
+ ITA No.320/2010
Director of Income Tax ..... Appellant
Through: Mr.Sanjeev Sabarwal, Adv. with
Mr.Utpal Saha, Adv.
ITA No.491/2008 and connected matters Page 3 of 17
versus
M/s. Mitsubishi Corporation ..... Respondent
Through: Mr.N.Venkatraman, Sr. Advocate, with
Mr.Achin Goel, Mr. Satish Kumar,
Mr. R.Satish Kumar and Ms. Anjali
Chaudhari, Advocates.
% DATE OF DECISION: August 30, 2010
CORAM:
HON'BLE MR. JUSTICE A.K.SIKRI
HON'BLE MS. JUSTICE REVA KHETRAPAL
1. Whether reporters of local papers may be allowed
to see the judgment?
2. To be referred to the Reporter or not?
3. Whether judgment should be reported in Digest?
J U D G M E N T (ORAL)
30.08.2010
: A.K.SIKRI, J.
In ITA No. 491/2008, M/s. Jacabs Civil Incorporated is the
assessee and in all other appeals, M/s. Mitsubishi Corporation is the
assessee/respondent. However, the issue in all the cases is the same
which relates to the charge of interest under Section 234B of the Income
Tax Act, 1961. We may point out at the outset that both these assessees
are non-resident companies. The common question of law which arises
for consideration in all these appeals relate to "whether the levy of
interest under Section 234B of the Income Tax Act, 1961 for short
deduction of TDS is mandatory and is leviable automatically." For the
sake of convenience, we may look into the facts as they appear in ITA
No. 491/2008.
2. The assessee in this case is a company which is incorporated in
the United States of America and is executing World Bank finance
projects. One of these projects financed by the World Bank is
undertaken by the National Highway Authority of India which was also
executed by the assessee. For the assessment year 2001-02 the assessee
filed its return of income declaring an income of Rs.96,83,278/-. This
return was picked up for detailed scrutiny and notice under Section
143(2) of the Income Tax Act, 1961 was issued. Thereafter, the
assessment was framed on 26th March, 2004. The Assessing Officer had
inter alia found that there was short payment of taxes inasmuch as the
advance tax was not paid by the assessee on due dates and therefore, the
Assessing Officer was of the opinion that the assessee had incurred
interest liability under Section 234B of the Act. After giving show cause
notice in this behalf, the Assessing Officer added the liability of interest
under Section 234B of the Act.
3. We may point out at this stage itself that the plea of the assessee
was that all the projects which were being executed by the assessee at
the relevant time, it was the obligation and the statutory duty of the
National Highway Authority of India to deduct the tax at source and the
assessee being a non-resident, 100% tax at source was to be deducted.
For this reason there was no liability of the assessee to pay any advance
tax and thus interest under Section 234B of the Act could not be charged
from the assessee. This contention was not acceptable to the Assessing
Officer. In his opinion, it was for the assessee to show income from all
the projects, compute the tax and take credit of taxes paid either prepaid
or otherwise by enclosing the proof of such payment along with return of
income. The TDS certificates were to be collected by the assessee even
where taxes are borne by the payer. Since the assessee had not disclosed
any certificates nor shown proof of payment of taxes, the Assessing
Officer held that the assessee was liable to pay interest under Section
234B of the Act. The assessee preferred an appeal before the CIT(A)
against the assessment order so passed challenging the levy of interest
under the said provision. The assessee was successful in that appeal
inasmuch as CIT(A) allowed the appeal vide order dated 29th November,
2004 and set aside the order of the Assessing Officer on this aspect. The
Revenue, feeling aggrieved by the order of the CIT(A), approached the
Income Tax Appellate Tribunal. However, the plea of the Revenue was
not accepted by the ITAT which resulted in dismissal of the said appeal
vide impugned orders dated 13th April, 2007.
4. Under similar circumstances, in the assessment orders passed for
the various assessment years in case of M/s. Mitsubishi Corporation,
interest charged under Section 234B of the Act has been deleted by the
Tribunal. In these judgments passed by the Tribunal, the Tribunal has
referred to the two judgments namely that of the Uttaranchal High Court
and the Bombay High Court where the views taken by the said courts
that since it was the payer who paid the amount to the assessee to deduct
the tax at source, the assessee could not be fastened with the liability of
interest. The judgment of the Uttaranchal High Court in the case of
Commissioner of Income Tax and Anr. vs. Sedco Forex International
Drilling Co. Ltd. 264 ITR 320. After extensively dealing with the
identical issue, the court gave the following reasons for holding that the
liability of the assessee to pay interest would not arise under these
circumstances: -
"17. Although we agree with the conclusions of the
Tribunal, we prefer to give our own reasons in
support of our conclusion that on the facts and
circumstances of this case, levy of interest under
Section 234B on the assessee is not justified.
Firstly, the decisions of the Tribunal on the
interpretation of the contracts regarding on period
and off period salary were conflicting. Ultimately,
the Legislature has stepped into clarify the position
by the Finance Act of 1999. In this connection, it is
important to note that Section 234B imposes
interest, which is compensatory in nature and not as
a penalty (see Union Home Products ltd, v.
[1995]215ITR 758, 766 (Karn)). Secondly,
although Section 191 of the Act is not overridden
by Sections 192, 208 and 209(1)(a)(d) of the Act,
the scheme of Sections 208 and 209 of the Act
indicates that in order to compute advance tax the
assessee has to, inter alia, estimate his current
income and calculate the tax on such income by
applying the rates in force. That under Section
209(1)(d) the income-tax calculated is to be
reduced by the amount of tax which would be
deductible at source or collectible at source, which
in this case has not been done by the employer
company according to the law prevailing for which
the assessee cannot be faulted. As stated above at
the relevant time there were conflicting decisions of
the Tribunal. A bona fide dispute was pending. The
assessee had to estimate his current income. The
words used under Section 209(1)(a) make the
assessee estimate his current income and since a
bona fide dispute was pending, imposition of
interest under Section 234B was not justified
without hearing and without reasons. Accordingly,
we answer this question in the affirmative, i.e., in
favour of the assessee and against the Department."
5. This judgment was followed by the Bombay High Court in the
case of Director of Income Tax (International Taxation) vs. NGC
Network Asia LLC 222CTR (Bom) 86. The Bombay High Court also
took note of the judgment of the Madras High Court in the case of
Commissioner of Income Tax, Tamil Nadu-I, Madras vs. Madras
Fertilizers Ltd. 149 ITR 703 which had taken a similar view. The
following observations of the Madras High Court are also worth
quoting: -
"......If the tax deductible at source has not been
deducted and paid over to the Department, then the
banks whose duty it is to make deduction can be
treated as the assessee in default under the
provisions of s. 201 of the Act. Interest also can be
collected along with the amounts which they ought
to have deducted but which they did not deduct
under s. 201(1A). Therefore, under the provisions
of s. 201, that portion of the tax which has not
been deducted and paid over to the Department
will have to be paid with interest by the banks
which are under a duty to make the deduction at
the source. We have thus to keep in mind s.
201(1A) of the Act while construing s. 215 of the
Act which deals with the interest payable by the
assessee in respect of the tax assessed on him.
Section 215(1) of the Act proceeds as follows :
"215. Interest payable by assessee :-(1)
Where, in any financial year, as assessee has
paid advance tax under section 212 on the
basis of his own estimate and the advance
tax so paid is less than seventy-five per cent.
of the assessed tax, simple interest at the rate
of twelve per cent. per annum from the 1st
day of April next following the said
financial year up to the date of the regular
assessment shall be payable by the assessee
upon the amount by which the advance tax
so paid falls short of the assessed tax."
5. This section provides that when the advance tax
paid is less than seventy-five per cent. of the
assessed tax, simple interest at the rate of 12 per
cent. per annum shall be levied from the 1st day of
April next following the said financial year up to
the date of the regular assessment, on the amount
by which the advance tax falls short of the
assessed tax. The "assessed tax" has been defined
in s. 215(5) of the Act, as meaning the tax
determined on the basis of the regular assessment
as reduced by the amount of tax deductible in
accordance with the provisions of ss. 192 to 194, s.
194A, etc. As per this definition, "assessed tax"
represents the tax determined by regular
assessment as reduced by the amount of tax
deductible in accordance with the provisions of s.
194A of the Act. Therefore, the expression
"assessed tax" used in s. 215(1) of the Act has to
be understood as the tax finally assessed as
reduced by the amount of tax deductible in
accordance with the provisions of s. 194A of the
Act. As already stated, that tax is deductible at
source on the interest income under s. 194A of the
Act cannot be disputed. So long as s. 215 of the
Act permits the levy of interest only on the
difference between the assessed tax and advance
tax actually paid, we have to take note of the
amount of tax deductible at source under s. 194A
of the Act, and this has been specifically provided
in sub-s. (5) of s. 215 of the Act. It is significant to
note that normally advance tax is paid either on the
basis of the previous year's assessment or on the
basis of the estimate given by the assessee long
before the final assessment and at that stage, there
is no question of actual deduction of the tax at
source in respect of the interest income and the
deduction at source takes place practically at the
end of the year when the interest is paid and it is
for this reason the statute in sub-s. (5) of the Act
uses the expression "deductible" instead of
'deducted'. Therefore, construing sub-s. (5), it is
not possible to understand the expression
"deductible" occurring therein as possible to
understand the expression "deductible" occurring
therein as "deducted".
6. Further, the learned counsel for the assessee
appears to be right in his submission that in cases
where the tax is deductible at source, that will have
to be excluded from consideration while the
estimate of the income for the payment of advance
tax is submitted. Reliance is placed by the learned
counsel on the language used in s. 190(1) which is
as follows :
"190. (1) Notwithstanding that the regular
assessment in respect of any income is to be
made in a later assessment year, the tax on
such income shall be payable by deduction
at source or by advance payment, as the case
may be, in accordance with the provisions of
this Chapter."
7. That section seems to provide that the tax in
respect of a regular assessment is payable either by
deduction at source or by advance payment, as the
case may be, in accordance with the provisions of
Chapter XVII. Thus, the deduction of tax at
source and payment of advance tax have been
treated as two alternative modes of payment in
advance. Hence, where the statute provides for
deduction of tax at source in respect of a particular
income, the concerned assessee need not pay any
advance tax in relation to the said income. In this,
case, it is not in dispute that in respect of the
interest income, deduction of tax at source is
contemplate under s. 194A of the Act. However,
the deduction at source has not been effected by
the banks which paid the interest to the assessee
which they should have done as per the provisions
of the Act. For the default of compliance with s.
194A the bank can be brought under s. 201 as an
assessee in default. Section 201(1A) specifically
provides that if a person or authority who is bound
to make a deduction of tax at source as
contemplated by the statute does not deduct or
after deducting fails to pay the tax, then such a
person or authority is liable to pay simple interest
on the amount of tax not deducted from the date on
which such tax was deductible to the date on
which the said tax was actually paid. Thus, in
respect of interest income on which deduction of
tax at source should have been made, the liability
to pay interest is fastened on the person or
authority who failed to make deduction as required
under s. 194A. Therefore, in respect of the tax
payable on the said interest income, the assessee
also cannot be taken to be liable to pay interest.
Otherwise, it will mean that there are two persons
under the Act to pay interest on tax on the same
income. The Legislature would not have
contemplated such a situation where in respect of
the tax on interest income, two persons are liable
to pay interest for the delayed payment of tax. We
are, therefore, inclined to hold that whatever there
is a possibility of a deduction of tax at source, the
person who had failed to deduct tax at source is
liable to pay interest and not the assessee, as
otherwise, there will be charging of interest twice
on the payment of tax in relation to the same
income. Such an interpretation should normally be
avoided. In this case, therefore, the Tribunal
appears to be right in holding that in terms of s.
215 interest could not be levied on the assessee on
the tax which is deductible at source. We answer
the said questions referred to us in the affirmative
and against the Revenue. The Revenue will pay the
costs of the assessee."
6. Mr. Sabharwal, the learned counsel appearing for the Revenue
strenuously argued that Section 234B of the Act was an independent and
stand-alone provision and once the ingredients /conditions contained in
that Section were satisfied, the liability to pay the interest would arise.
Reading the provision of the Section, he argued that since there was a
default in payment of advance tax, interest thereupon had to be paid by
the assessee as held by the Supreme Court in the case of CIT vs. M.H.
Anjum Ghaswala and Ors. 252 ITR Page 1. He submitted that it was
totally unnecessary to look into the other provisions like Sections 191,
195, 201, 209, 215 etc. for determining the liability of payment of
interest. His submission was that whereas Section 209(1) (d) uses the
expression "deductable or collectable", the Legislature in Explanation 1
(i) of Section 234B of the Act had consciously used the expression
"income deducted or collected at source....". Therefore, what was to be
seen was whether the tax at source was deducted or collected or not and
if it was not actually collected or deducted, the liability to pay interest
arose. We are not persuaded by this submission of Mr. Sabharwal. It is
stated at the cost of repetition that the liability to deduct or collect the tax
at source is that of the payer. Therefore, for the purposes of Section
234B of the Act, the question would be as to whether the payee, i.e. the
assessee in this case, had any role in deducting or collecting the tax.
Once that is in the negative, and it was not duty of the payee/assessee,
the question of payment of any interest would not arise as it cannot be
said, in such circumstances, that the assessee is in default for the
purposes of Section 234B of the Act. No doubt, as per the judgment in
the case of Anjum Ghaswala (supra), if there is a default in making the
payment of advance tax, the consequence which is to follow is that the
interest becomes payable under Section 234B of the Act. But in the
instant case, the provisions of Section 234B of the Act would not be
attracted at all.
7. Section 2(1) of the Act defines "advance tax" to mean the advance
tax payable in accordance with the provisions of Chapter XVII-C of the
Act. These provisions are contained from Section 207 onwards. Section
209 falls under this Chapter. Sub-section (1) thereof deals with four
situations under which the advance tax payable by the assessee is to be
computed. Admittedly, these cases do not concern with clauses (a) to
(c). Clause (d) of sub-Section (1) of Section 209, which is relevant reads
as under: -
"(d) The income-tax calculated under clause (a) or
clause (b) or clause (c) shall, in each case, be
reduced by the amount of income-tax which would
be deductible or collectible at source during the
said financial year under any provision of this Act
from any income (as computed before allowing
any deductions admissible under this Act) which
has been taken into account in computing the
current income or, as the case may be, the total
income aforesaid; and the amount of income-tax as
so reduced shall be the advance tax payable."
8. This clause categorically uses the expression "deductable or
collectable at source" and it is this clause which is incorporated by the
Uttaranchal High Court in the said judgment (supra) in the manner
already pointed above. The scheme of the Act in respect of non-
residents is clear. Section 195 of the Act puts an obligation on the payer,
i.e. any person responsible for paying to a non-resident, to deduct
income tax at source at the rates in force from such payments excluding
those incomes which are chargeable under the head „Salaries‟.
Therefore, the entire tax is to be deducted at source which is payable on
such payments made by the payee to the non-resident. Section 201 of
the Act lays down the consequences of failure to deduct or pay. These
consequences include not only the liability to pay the amount which such
a person was required to deduct at source from the payments made to a
non-resident but also penalties etc. Once it is found that the liability
was that of the payer and the said payer has defaulted in deducting the
tax at source, the Department is not remedy-less and therefore can take
action against the payer under the provisions of Section 201 of the
Income Tax Act and compute the amount accordingly. No doubt, if the
person (payer) who had to make payments to the non-resident had
defaulted in deducting the tax at source from such payments, the non-
resident is not absolved from payment of taxes thereupon. However, in
such a case, the non-resident is liable to pay tax and the question of
payment of advance tax would not arise. This would be clear from the
reading of Section 191 of the Act along with Section 209 (1) (d) of the
Act. For this reason, it would not be permissible for the Revenue to
charge any interest under Section 234B of the Act.
9. We thus, answer the aforesaid question in favour of the assessee
as we are of the opinion that the Tribunal has rightly held that the
assessee was not liable to pay any interest under Section 234B of the Act
following the judgments of the Uttaranchal and Bombay High Courts.
10. In some of the appeals, which pertains to the assessee-M/S.
Mitsubishi Corporation, the additional issue in respect of the interest
under Section 234D is raised by the Revenue. The Tribunal has held
that the assessee was not liable to pay the interest under the aforesaid
provision which was normally charged from the assessee for the
assessment years 2002-03 and 2003-04.
11. We find from the order of the Tribunal that the Tribunal was of
the opinion that Section 234D was applicable only from the assessment
year 2004-05 onwards and not in the earlier assessment years and
therefore no interest under that provision could be levied for the period
prior to the assessment year 2004-05. For this purpose, the Tribunal has
relied upon its own judgment rendered by a Special Bench of the ITAT
in the case of ITO vs. Ekta Promoters Pvt. Ltd. 305 ITR (1) ITAT.
12. Mr. Venkatraman, the learned Senior Counsel appearing for the
assessee submitted that even if Section 234D related to the charge of
interest, it was in the nature of a substantive provision as held by the
Supreme Court in the case of J.K. Synthetics Ltd. vs. Commercial
Taxes Officer 119 CTR 222 SC. Thus, he submitted that it could not
have retrospective operation, more so when it was not so provided by the
Legislature while inserting Section 234D. We find substance in this
submission of Mr. Venkatraman. In J.K. Synthetics (supra), the
Supreme Court has categorically held that the provision for charging
interest would be construed as a substantive law. The following
discussion in the said judgment is reproduced hereinafter: -
"7. It is well known that when a statute levies a
tax it does so by inserting a charging section by
which a liability is created or fixed and then
proceeds to provide the machinery to make the
liability effective. It, therefore, provides the
machinery for the assessment of the liability
already fixed by the charging section, and then
provides the mode for the recovery and collection
of tax, including penal provisions meant to deal
with defaulters. Provision is also made for
charging interest on delayed payments, etc.
Ordinarily the charging section which fixes the
liability is strictly construed but that rule of strict
construction is not extended to the machinery
provisions which are construed like any other
statute. The machinery provisions must, no doubt,
be so construed as would effectuate the object and
purpose of the statute and not defeat the same.[See
Whitney vs. IRC 1926 AC 37, CIT vs. Mahaliram
Ramjidas (1940) 8 ITR 442 (PC), Indian United
Mills Ltd. vs. CEPT (1955) 1 SCR 810 and
Gursahai Saigal vs. CIT (1963) 3 SCR 893]. But
it must also be realized that provision by which the
authority is empowered to levy and collect interest,
even if construed as forming part of the machinery
provisions, is substantive law for the simple reason
that in the absence of contract or usage interest can
be levied under law and it cannot be recovered by
way of damages for wrongful detention of the
amount.[See Bengal Nagpur Railway Co. Ltd. vs.
Ruttanji Ramji AIR 1938 PC 67 and Union of India
vs. A.L. Rallia Ram (1964) 3 SCR 164 at 185-190].
Our attention was, however, drawn by Mr. Sen to
two cases. Even in those cases, CIT vs. M.
Chandra Sekhar (1985) 44 CTR (SC) 110 : (1985)
151 ITR 433 (SC) and Central Provinces
Manganese Ore Co. Ltd. vs. CIT (1986) 58 CTR
(SC) 112: (1986) 160 ITR 961 (SC), all that the
Court pointed out was that provision for charging
interest was, it seems, introduced in order to
compensate for the loss occasioned to the Revenue
due to delay. But then interest was charged on the
strength of a statutory provision, may be its
objective was to compensate the Revenue for delay
in payment of tax. But regardless of the reason
which impelled the legislature to provide for
charging interest, the Court must give that meaning
to it as is conveyed by the language used and the
purpose to be achieved. Therefore, any provision
made in a statute for charging or levying interest on
delayed payment of tax must be construed as a
substantive law and not adjectival law. So
construed and applying the normal rule of
interpretation of statutes, we find, as pointed out by
us earlier and by Bhagwati, J. in the Associated
Cement Co‟s case, that if the Revenue‟s contention
is accepted it leads to conflicts and creates certain
anomalies which could never have been intended
by the legislature."
13. We are, therefore, of the opinion that the Tribunal was right in
deleting the interest under Section 234D of the Act for the period prior to
the assessment year 2004-05. As a result, these appeals of the
Department are dismissed.
A.K. SIKRI
(JUDGE)
REVA KHETRAPAL
(JUDGE)
August 30, 2010
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