Commissioner Of Income Tax vs Delhi Public School
2011 Latest Caselaw 5236 Del

*      IN THE HIGH COURT OF DELHI AT NEW DELHI

                            Reserved on: 21st September, 2011
%                          Date of decision: 31st October, 2011

+      ITA NO.345/2009, ITA NO.414/2009, ITA NO.458/2009,
       ITA NO.780/2009 & ITA NO.787/2009

       All titled as:

       COMMISSIONER OF INCOME TAX          .....Appellant
               Through: Ms. Rashmi Chopra, Advocate.


              -versus-


       DELHI PUBLIC SCHOOL                  .....Respondent
                Through: Mr. Ajay Vohra, Advocate with
                         Ms. Kavita Jha, Advocate and
                         Mr. Somnath Shukla, Advocate.

       And

+      ITA NO.610/2010, ITA NO.611/2010, ITA NO.612/2010,
       ITA NO.898/2010 & ITA NO.900/2010

       All titled as:

       DELHI PUBLIC SCHOOL                   .....Appellant
                Through: Mr. Ajay Vohra, Advocate with
                         Ms. Kavita Jha, Advocate and
                         Mr. Somnath Shukla, Advocate.

              -versus-



       COMMISSIONER OF INCOME TAX        .....Respondent
               Through: Mr. Abhishek Maratha, Advocate.

ITA 345/2009 & Ors.                                  Page 1 of 10
        CORAM:
       HON'BLE THE ACTING CHIEF JUSTICE
       HON'BLE MR. JUSTICE SIDDHARTH MRIDUL

       1.     Whether reporters of local papers may be allowed to see
              the Judgment? No.
       2.     To be referred to the Reporter or not? No.
       3.     Whether the Judgment should be reported in
              the Digest? Yes.


SIDDHARTH MRIDUL, J.

1. Appeals of the Revenue are admitted on the following

substantial question of law:

"Whether on the facts and in the circumstances of the case, the learned ITAT erred in holding that Assessee was not in default under Section 201(1) and not liable for interest under Section 201(1A) of the Income Tax Act, 1961."

2. Some of the Appeals are filed by the Income Tax

Department and some other Appeals by the Assessee which are

in the nature of counter objections. Since the issue involved in

the Appeals of the Revenue is common, these Appeals taken up

first for decision.

3. An on-the-spot interactive education programme was

conducted on 10th March, 2005 wherein it was revealed that the

Assessee School was providing free educational facilities to the

wards of teachers/staff members. The Assessing Officer(AO),

based on his understanding of Rule 3(5) of the Income Tax

Rules, 1962, held that the Assessee had committed a default by

lower deduction of TDS from the total salary and was thus liable

to be treated in default under Section 201(1) and liable for

interest under Section 201(1A) of the Income Tax Act, 1961.

4. According to the AO survey operations were carried out in

the case of many other schools and in the instant case, as per

the fee structure furnished during the course of survey

operation, the tuition fees alone ranges from `1,600/- to `1,900/-

from class Nursery to class XII, excluding all other charges/fees.

Therefore, since the Assessee School did not meet its mandatory

obligations the Assessee School was treated as Assessee in

default as aforesaid. In this behalf, it is noted that the Assessing

Officer did not apply his mind to the latter part of Rule 3(5) of

the Rules, 1962 where the determination of the value of the

perquisite is with reference to the "cost" of such education in a

similar institution in or near the locality. In this behalf the latter

part of Rule 3(5) of the Rules, which requires the AO to

determine the cost of education in a similar institution in or

near the locality was completely overlooked by the AO and

therefore he proceeded on an entirely incorrect proposition.

5. The Assessee School carried the matter in Appeal before

the Commissioner of Income Tax (Appeals)[CIT(A)]. The CIT(A)

came to the conclusion that the interpretation adopted by the

AO was iniquitous. The CIT(A) held that the words used are

"cost of education" and this means the amount actually paid and

not the general fees charged from other students. Keeping the

requirements of the Rule in view, the CIT(A) held that the

perquisites are not chargeable to tax if the cost of such

education or the value of such benefit per child does not exceed

`1,000/- per month. Applying purposive construction in

preference to the literal construction, the CIT(A) held that in

view of the factual and legal position in the present matter, the

purposive and contextual interpretation in relation to the

provisions of Rule 3(5) requires to be preferred over the literal

interpretation, and came to the conclusion that there was no

case for treating the Assessee as an Assessee in default.

6. Before the Income Tax Appellate Tribunal (ITAT) the

Assessee School had argued that it had estimated the value of

perquisite in a bona fide manner and, therefore, the provisions

contained in Sections 201 and 201(1A) were not applicable. It

was also argued that primary responsibility of payment of tax

lay on various assessees as deduction of tax at source is merely

interim measure for collection of tax and, therefore, the tax

should be collected directly from the employees and teachers as

long time has elapsed after the close of various financial years.

The Assessee lastly argued that the computation made by the

AO was ad hoc in which tax was uniformally levied in each case

irrespective of the total income of the teachers and the

employees and the corresponding deductions under Section 88,

if any, on account of expenditure incurred on the education of

the wards had also not been taken into account.

7. On the facts and circumstances of the case the ITAT

observed that "the intention and rationale of the provision is not

to compute tax correctly but to facilitate recovery and collection

of tax. What is required to be done under the provision is to

estimate the income of the assesee under the head "salaries",

compute tax on the estimated income and deduct such tax and

deposit the same to the credit of the government". The ITAT

further came to the conclusion that the tax to be deducted is

merely an interim measure of an estimated amount subject to

final determination of the tax in the hands of the employees on

regular assessment and, therefore, by its very nature the

estimated amount could not have been contemplated to be an

exact amount and what is required is to deduct tax on the basis

of a bona fide estimate. In this connection reliance was placed

on the decision of the Madhya Pradesh High Court in the case of

Gwalior Rayon Silk Co. Ltd. v. Commissioner of Income Tax,

(1983) 140 ITR 832 and in the case of Commissioner of Income

Tax v. Nestle India Ltd., (2000) 243 ITR 435. On the basis of

these judgments it was observed that what the Assessee was

required to do was to make an honest and bona fide estimate of

income of the employees chargeable to tax under the head

"salaries", deduct tax thereon and deposit the same to the credit

of the Government and since this process had been undertaken

by the Assessee in a bona fide manner, it could not have been

treated as an Assessee in default. The ITAT, therefore, held that

since the Assessee had deducted a sum of `1,000/- per child per

month on the basis of the interpretation of the provisions given

in the ready reckoner, therefore, even though such an

interpretation may or may not have been correct, unless it is

shown that there was something more than mere reliance on the

ready reckoner, the Assessee cannot be held to be an Assessee

in default in terms of the decisions in the cases cited above.

Consequently the ITAT held that this case was not fit for passing

orders under Section 201(1) and consequently under Section

201(1A).

8. In Gwalior Rayon Silk Co. Ltd.(supra) it was held that:-

"The provisions of s.201 of the Act are attracted in the case of an employer only when that employer does not deduct tax at source or after deducting fails to pay the tax as required by the Act. A duty is cast on an employer to form an opinion about the tax liability of his employee in respect of the salary income. While forming this opinion, the employer is undoubtedly expected to act honestly and fairly. But if it is found that the estimate made by the employer is incorrect, this fact alone, without anything more, would not inevitably lead to the inference that the employer has not acted honestly and fairly. Unless that inference can be reasonably raised against an employer, no fault can be found with him. It cannot be held that he has not deducted tax on the estimated income of the employee."

9. In Commissioner of Income Tax v. ITC Ltd., 199 Taxman

412 (Del), in Paragraph 29 of the Report the Court held as

follows:-

"29. We have given out thoughtful consideration to the submissions of the learned counsels for the assessee based on bona fide belief and non- deducting tax at source from the payments made to the employees on account of tips. Learned counsel appearing for the Revenue did not controvert that this practice has been accepted by the Revenue by accepting the assessments in the form of annual returns of the assessees in the past. Since the taxes were to be deducted from the amounts, which were the dues of the employees, no dishonest intentions could be attributed to the assessees. In this regard, we find no reasons to disagree with the reasoning of Madhya Pradesh High Court and Delhi High Court in the cases of Gwalior Rayon Silk Co. Ltd. (supra) and Nestle India Ltd. (supra) respectively."

10. In the present matter it is seen that TDS has been

deducted on "estimated income" of the employee, and the

employer was not expected to step into the shoes of the AO and

determine the actual income. Furthermore, under Section 191

of the Act the liability to pay the tax was that of the recipient,

and that while forming this opinion the employer was

undoubtedly expected to act honestly and fairly and, therefore,

if it is found that the estimate made by the employer is

incorrect, this fact alone, without anything more, would not

inevitably lead to the inference that the employer has not acted

honestly and fairly as held in the decision of Gwalior Rayon Silk

Co. Ltd.(supra). Unless that inference can be reasonably raised

against an employer, no fault can be found against him and it

cannot be held that he has not deducted tax on the estimated

income of the employee. Further, it is noticed that the AO

without application of mind proceeded with the determination of

the value of the perquisite based on the survey operations in

many other schools without reference to the "cost" of such

education in a similar institution in or near the locality. Thus the

very basis on which the assessment was finalized is erroneous.

Factually, the CIT(A) held that on the basis of the accounts

maintained by the Assessee, the cost of education was less than

`1,000/- per month per child and, therefore, the Assessee was

also entitled to the benefit of the proviso to Rule3(5) of the

Rules, 1962.

11. In view of the above, we are of the opinion that the ITAT

was correct in coming to the finding that these were not fit

cases for passing orders under Section 201(1) and consequently

levying interest under Section 201(1A) of the Act. Resultantly,

the substantial question of law proposed above is answered in

favour of the Assessee and against the Revenue and the Appeals

filed on behalf of the Income Tax Department are dismissed

herewith. Further, we are also of the opinion, as urged on behalf

of the Assessee, that the ITAT, having come to the conclusion

that the Assessee was not an Assessee in default under Section

201(1) of the Act and consequently not liable to interest under

Section 201(1A) of the Act, should have left the other issues

unanswered for they have been rendered academic upon the

ITAT finding a recording of honest and bona fide conduct on the

part of the Assessee. The conclusions arrived at by the ITAT

apart from the issues decided in the present order are

accordingly reversed. Further, in view of our conclusion, the

Appeals filed on behalf of the Assessee are permitted to be

withdrawn as urged by Counsel for the Assessee and are

disposed of accordingly. No costs.

SIDDHARTH MRIDUL, J.

ACTING CHIEF JUSTICE

OCTOBER 31, 2011 mk