Case Law Details
Brief : S. 234D inserted by the FA 2003 w.e.f. 1.6.2003 is in the nature of a substantive provision and applies only for the AY 2004-05 and onwards and is not retrospective. A provision by which an 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. ITO vs. Ekta Promoters 305 ITR 1 (SB) (Del) approved)
Citation : Director of Income Tax Vs M/s. Jacabs Civil Incorporated, ITA No. 491/2008
Court : HIGH COURT OF DELHI
Recently, the Delhi High Court in the case of DIT v. Jacabs Civil Incorporated [2010] ITA No. 491/2008 (Del) held that interest under section 234B (Section 234B of the Act levies interest for default in payment of advance tax) of the Income Tax Act, 1961 (the Act) cannot be charged to non-residents (payee) if payer has defaulted in deducting tax at source.
Further, the High Court held that the liability to deduct or collect tax at source is that of the payer. It was not duty of the payee and therefore the question of payment of any interest would not arise since it cannot be said that the taxpayer was in default for the purposes of Section 234B of the Act.
Facts of the case
- · The taxpayer, a company, incorporated in the United States of America, was executing World Bank financed projects. One of these projects financed by the World Bank was undertaken by the National Highway Authority of India which was executed by the taxpayer.
- · The Assessing Officer (AO) found that there was short payment of taxes since the advance tax was not paid by the taxpayer on due dates. Accordingly, the AO held that the taxpayer was liable to pay interest under Section 234B of the Act.
Taxpayer’s contentions
- · The taxpayer being a non-resident, 100 percent tax at source was to be deducted by the National Highway Authority of India.
- · The taxpayer contended that it was the obligation and the statutory duty of the National Highway Authority of India to deduct the tax at source and accordingly there was no liability of the taxpayer to pay any advance tax. Therefore, interest under Section 234B of the Act could not be charged to the taxpayer.
Tax department’s contentions
- · Section 234B of the Act is an independent and stand-alone provision and since there was a default in payment of advance tax, interest thereupon had to be paid by the taxpayer as held by the Supreme Court in the case of CIT Vs. M.H. Anjum Ghaswala & Oth [2004] 252 ITR 1 (SC).
- · Explanation 1 (i) of Section 234B of the Act has used the expression “income deducted or collected at source”. Accordingly, it is to be seen whether the tax at source was deducted or collected and if it was not actually collected or deducted, the liability to pay interest arises.
Issue before the High Court
Whether the levy of interest under Section 234B of the Act for short deduction of tax at source is mandatory and is leviable automatically?
High Court ruling
- · 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. Section 209(1)(d) which deals with the situation under which advance tax is payable by the taxpayer states that the income-tax calculated shall be reduced by the amount of income-tax which would be deductible or collectible at source. This clause categorically uses the expression “deductable or collectable at source”.
- · If the payer making payments to the non-resident had defaulted in deducting the tax at source from such payments, the non-resident is required to pay taxes. However, in such a case, the non- resident is liable to pay tax and not advance tax. Therefore, it would not be permissible to charge any interest under Section 234B of the Act for failure to pay advance tax.
- · 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. The liability to deduct or collect tax at source is that of the payer. It was not duty of the payee and therefore the question of payment of any interest would not arise since it cannot be said that the taxpayer was in default for the purposes of Section 234B of the Act.
- · Once it is found that the liability to deduct tax at source was that of the payer and the payer has defaulted in deducting the tax at source, the tax department can take action against the payer under the provisions of Section 201 of the Act and recover the amount which such a person was required to deduct at source from the payments made to a non-resident along with penalties, etc.
- · The Supreme Court in the decision in the case of M.H. Anjum Ghaswala which is relied upon by the tax department held that if there is a default in making the payment of advance tax, then interest becomes payable under Section 234B of the Act. However, in the case under consideration, the provisions of Section 234B of the Act would not be attracted at all.
Our comments
This is an important ruling of the Delhi High Court where it has been held that interest under section 234B of the Act cannot be charged to non-residents if payer responsible for making payments to non-resident had defaulted in deducting tax at source.
Recently, the Bombay High Court in the case of DIT v. NGC Network Asia LLC [2009] 313 ITR 187 (Bom) held that on failure by payer to deduct tax at source, interest cannot be imposed on payee under section 234B of tax Act.
It is pertinent to note that, the Gujarat High Court in the case of CIT Vs. Rishikesh Apartments Co-operative Housing Society Ltd. [2002] 253 ITR 310 (Guj) held that since the entire tax payable was paid by the payee as advance tax and tax on self assessment, interest cannot be levied on the payer under section 201(1A) of the Act.
Further, the Bangalore Tribunal in the case of Intel Tech India Pvt. Ltd6 held that tax cannot be recovered from the payer if payee had already paid the tax. The Tribunal further held that the payer would be liable pay interest under section 201(1A) only up to the date of filing of return by the payee.
