Case Law Details
ITAT HYDERABAD BENCH ‘A’
Dr. Surendranath Reddy
Versus
Deputy Commissioner of Income-tax, CC-6, Hyderabad
IT Appeal Nos. 1628 TO 1630 (HYD.) OF 2011
[ASSESSMENT YEARS 2006-07 TO 2008-09]
Date of Pronouncement – 18.01.2013
ORDER
Saktijit Dey, Judicial Member
These are bunch of three appeals filed by the assessee against the common order dated 23-6-2011 of the CIT (A)-I, Hyderabad pertaining to the assessment years 2006-07. Since common issues are involved in these appeals, these are taken up together and disposed of by this combined order for the sake of convenience.
2. There is a delay of one day in filing the appeals. After considering the submissions of the learned AR, we are inclined to condone the delay and admit the appeal for hearing on merits.
3. Grounds raised by the assessee are common for all the assessment years excepting the amounts of additions. Facts being identical in all the appeals, we deal with the facts as involved in asst. year 2006-07.
4. The assessee is an individual. The assessee derives income from salary, house property and other sources. The assessee was carrying on the activity of diagnostic services through his proprietary concern Vijaya Diagnostic Services till the end of financial year 2004-05. On 31-3-2005 the assessee entered into an agreement with Vijaya Diognostic Centre Pvt. Ltd. As per which the business of the proprietary concern was taken over by the company under certain terms and conditions. For the impugned assessment year the assessee filed its returns of income on 29-7-2006 declaring total income of Rs. 81,42,230/-. Subsequently a search operation was conducted in case of the assessee on 28-8-2008. During the search operation in the business premises of M/s Vijaya Diagnostic Centre Pvt. Ltd., wherein the assessee is the Managing Director, it was found from the books of accounts that huge amounts were debited as ‘commission paid’ and at the end of the years some amount was shown as outstanding. For the impugned assessment year commission paid of Rs. 28,40,000/- was debited to the P & L account as part of the ‘staff payments-2’ which was also appearing in the creditor’s list as on 31-3-2006. When the AO sought clarification on this in course of the assessment proceeding, it was explained that the commission was paid to the assessee calculated at the rate of 2% of the total sales made by the company. The assessee also contended that the amount did not accrue during the year as the royalty payable to the assessee could be ascertained only when the company’s accounts were audited.
5. When the AO found that no commission income was admitted by the assessee in the return of income he added he same as undisclosed income of the assessee for the assessment year. The assessee challenged the addition by filing appeal before the CIT (A). The CIT (A) however sustained the addition by observing in the following manner:-
“I have gone through the issue. It is the contention of the appellant that the amount debited by the company to its profit and loss a/c is not commission but royalty. It is also the contention of the appellant that the said royalty amount can be quantified only on the audit of the company’s accounts and then only the income is assessable in the hands of the appellant. In other words, the appellant submits that the said income is to be assessed on receipt basis only. However, on verification of the records, I find that the company is all along treating the amount to be paid or payable to the appellant as commission only. In fact, the administrative head of the company has also confirmed that the amount paid to the appellant is commission @2% on the total receipts. It is also found that for the purpose of tax deduction and also in Form 16 the said payment is shown as commission. Since commission is part of the salary it is obviously to be assessed on accrual basis or due basis. The amount is ascertainable from the accounts of the company. Accordingly, I do not find any infirmity in the order of the AO treating the amount credited to the appellant’s account by the company as commission and also assessing the same corresponding to the year in which the amount is debited to the P & L a/c of the company. In other words, I confirm the addition made by the AO in the asst. years 2006-07, 2007-08 and 2008-09 as against appellant’s claim for assessment in the asst. years 2007-08, 2008-09 and 2009-10.”
6. Being aggrieved of the order passed by the CIT (A) the assessee before us with the following grounds:-
“1. The order of the ld. CIT (A) is erroneous to the extent it is prejudicial to the appellant.
2. The ld. CIT (A) erred in confirming the action of the AO in holding that the royalty of Rs. 28,40,000/- became due from Vijaya Diagnostic Centre Pvt. Ltd., during the year under consideration particularly when such royalty is to be worked out based on the receipts and income arrived at as per the audited final accounts of the company duly approved by the Board.
3. The ld. CIT (A) ought to have considered the fact that the said royalty accrued only on the day on which the accounts of the company were audited and approved by the Board and the gross receipts have been certified by the auditors and such event took place only during the financial year 2006-07 relevant for the assessment year 2007-08.
4. The learned CIT (A) erred in confirming the addition of Rs. 28,40,000/-
5. The learned CIT (A) erred in confirming levy of interest u/s 234B and 234C of the Act.
7. At the outset, learned AR submitted that he does not want to press ground Nos. 1 to 4 and only wants to contest ground No.5 which relates to levy of interest u/s 234B and 234C of the Act. In view of such submission of the learned AR, ground Nos. 1 to 4 are dismissed as not pressed.
8. With regard to ground No.5 relating to levy of interest u/s 234B and 234C of the Act, the learned AR submitted that both sections 234B and section 234C refers to the liability to pay advance tax as per sec. 208 of the Act. Section 208 in turn provides for computation of tax in accordance with the provision under Chapter XVII. The learned AR submitted that as per sec. 19(1)(d) while computing the advance tax payable has to be reduced by the tax deductible at source during the relevant financial year under any provision of the Act from any income. The learned AR submitted that when commission received by the assessee is treated as salary then section 192 of the Act applies and the assessee was not obliged to pay advance tax. The learned AR in the alternative submitted as per the agreement with the company the assessee is entitled to receive commission at the rate of 2% on the gross sales. As the quantification of the amount payable is made at the time of finalization of the account of the company the assessee does not know what amount he will get therefore he is not in a position to compute the advance tax. The learned AR submitted in such circumstances interest u/s 234B and 234C cannot be charged. In support of his contention, the learned AR relied upon the following decisions:-
(i) Motorola Inc. v. Dy. CIT [2005] 95 ITD 269
(ii) DIT v. Maersk Co. Ltd. [2011] 334 ITR 79
(iii) DIT (International Taxation) v. NGC Network Asia LLC [2009] 313 ITR 187 (Bom.)
(iv) CIT v. Emilio Ruiz Berdejo [2010] 320 ITR 190
9. The learned departmental representative supporting the orders of the lower authorities submitted that levy of interest u/s 234B and 234C being automatic and mandatory. No discretion is left with the AO with regard to levy of interest.
10. We have heard submissions of the parties and perused the material on record. We have also examined the decision relied upon before us. It is the contention of the assessee that since the income earned by him from M/s Vijaya Diagnostic Centre Pvt. Limited has been treated as salary, the assessee is not obliged under the Act to pay advance-tax as provided u/s 208 of the Act. The assessee has also contended that as per the provisions of section 192 of the Act in case of payment of salary the entire tax payable has to be deducted by the employer at the time of payment of salary. From the order of the CIT (A), it is evident that the commission received from M/s. Vijaya Diagnostic Centre Pvt. Limited has been treated as part of salary. Section 234B of the Act provides that an assessee who is liable to pay advance-tax u/s 208 has failed to pay such tax or where the advance tax paid by the assessee is less than 90% of the assessed tax then the assessee shall be liable to pay interest of 1% for every month or part of the month. Section 208 of the Act imposes a liability for payment of advance-tax in a case where the tax payable during the financial year as computed in accordance with the provisions of Chapter XVII if exceeds Rs. 10,000/-. Thus, the tax to be computed is in accordance with the provisions contained under Chapter XVII. Section 192 of the Act which comes under Chapter XVII provides that any person responsible for paying any income chargeable under the head ‘salaries’ shall at the at the time of payment deduct income-tax on the amount payable at the average rate of income-tax computed on the basis of rates in force for the financial year in which the payment is made on the estimated income of the assessee. A conjoint reading of the aforesaid provisions makes it clear that in case of an assessee who earns income under the head “salary” the burden is cast on the employer to deduct tax at source while making payment. If the employer does not deduct tax as per the provision then the assessee shall pay the tax directly. Therefore, there is no obligation on the part of the assessee to pay advance-tax on the salary income. The Full Bench of the Hon’ble Uttarakhand High Court in case of Maersk Co. Ltd. (supra). While dealing with the identical issue held in the following manner:-
“The question now is, whether the assessee who became liable to pay the tax as it was not deducted at source also became liable to pay interest under section 234B of the Act ?
The payment of tax and interest has been separately dealt with under the Income-tax Act. When a regular assessment is made and the assessee is found liable to pay more tax than the advance tax paid by him including the tax deducted at source, his liability to pay interest would arise under section 220(2) of the Act only after an issuance of a notice under section 156 of the Act. The liability to pay the interest under section 234B of the Act arises only if the assessee who is liable to pay advance tax under section 208 of the Act has failed to pay such tax or where the advance tax paid by the assessee under the provisions of section 210 is less than 90 per cent. of the assessed tax. Advance tax on the salary of an employee is not payable under section 208 of the Act by the said assessee inasmuch as the obligation to deduct the tax at source is upon the employer under section 192 of the Act. A statutory duty is imposed upon the employer to deduct the tax at source for paying any income chargeable under the head “Salaries” under section 192 of the Act. The assessee cannot foresee that the tax deductible under a statutory duty imposed upon the employer would not be so deducted. The employee assessee proceeds on an assumption that the deduction of tax at source has statutorily been made or would be made and a certificate to that effect would be issued to him. Consequently, the liability to pay interest in respect of such deductible amount is therefore clearly excluded to that extent. The statute has taken care of the liability to pay tax by the assessee under section 191 of the Act directly if the tax has not been deducted at source. The liability to pay interest under section 234B of the Act is different and distinct inasmuch as the interest could only be imposed on the person who had defaulted which in the present case is the employer for not making deduction of tax at source as required under section 192 of the Act.
24. In the light of the aforesaid, we are of the view that the assessee was not liable to pay advance tax under section 208 of the Act inasmuch as the tax at source was required to be deducted by the person responsible for paying any income chargeable under the head “Salaries” at the time of payment under section 192 of the Act. The assessee only became liable to pay the tax directly under section 191 of the Act since it was not deducted at source. The stage for making payment of tax could only arise at the stage of self-assessment which is to be made in a later assessment year as is clear from section 190 of the Act, whereas advance tax is liable to be paid in a financial year only and not thereafter. We are consequently of the view that if the employer fails to deduct the tax at source while paying any income chargeable under the head “Salaries”, would be responsible for payment of interest under section 201(1A) of the Act. The assessee would not be liable to pay interest under section 234B of the Act since he was not liable to pay advance tax under section 208 of the Act.
25. In Sedco Forex International Drilling Co. Ltd. [2003] 264 ITR 320 (Uttaranchal), a Division Bench of this court held that interest was not payable by the assessee under section 234B of the Act on account of non-deduction of tax at source by the employer. The reasoning laid down in the said judgment and the principles enunciated therein are squarely applicable to the present facts and circumstances of the case and the said judgment applies on all force. We accordingly agree with the said decision.
26. Similarly, in CIT v. Halliburton Offshore Services Inc. [2004] 271 ITR 395 (Uttaranchal) and another Division Bench of this court relying upon the decision in Sedco Forex International Drilling Co. Ltd. [2003] 264 ITR 320 (Uttaranchal) reiterated and held that the Income-tax Appellate Tribunal was justified in holding that interest under section 234B of the Act could not be charged since the entire income of the assessee was subject to TDS whereas interest was chargeable on the assessed tax as defined by Explanation 1 under section 234B of the Act.
27. In CIT v. Madras Fertilisers Ltd. [1984] l ITR 703 (Mad), a Division Bench of the Madras High Court held that whenever there was a possibility of deduction of tax at source, the person who had failed to deduct the tax at source was liable to pay interest and not the assessee as otherwise there would be charging of interest twice on payment of tax in relation to the same income.
28. In CIT v. Ranoli Investment (P.) Ltd. [1999] 235 ITR 433 (Guj.), a Division Bench of the Gujarat High Court also came to the same conclusion, namely, that the liability to pay interest is on the payer for non-deduction of tax under section 215 of the Act and that the assessee was not liable to pay interest. the learned counsel for the appellant placed reliance on the decisions in CIT v. Anjum M. H. Ghaswala [2001] 252 ITR 1 (SC), CIT v. Hindustan Bulk Carriers [2003] 259 ITR 449 (SC) and CIT v. Kotak Mahindra Finance Ltd. [2004] 265 ITR 119 (Bom), in which it was held that the provision of section 234B of the Act is mandatory. There is no quarrel with the principles enunciated in the aforesaid decisions. The provision of section 234B of the Act is mandatory and absolute and runs throughout the period from the date when the tax was deductible till the date it was actually paid.
Looking into the scheme of Chapter XVII of the Act:, it is clear that the provisions relating to payment of tax and payment of interest operate in two different areas. If the tax has not been deducted at source, the liability is upon the assessee to pay directly as per section 191 of the Act and upon failure to deduct the tax at source, the liability is upon the employer to pay interest under section 201(lA) of the Act. An assessee whose income is liable to be deducted at source is not liable to pay advance tax under section 208 of the Act and consequently is not liable to pay interest under section 234B of the Act. The contention of the appellant that it is open to the Department to proceed against the employer or against the employee for the recovery of interest is patently misconceived and, in any case, would not make the assessee jointly and severally liable to pay interest on the amount of tax which was not deducted at source on the income by the employer.
In the light of the aforesaid, we concur with the decision of the Division Bench of this court in Tide Water Marine International [2009] 309 ITR 85 (Uttarakhand) and disagree with the order of the Division Bench dated December 9, 2010.
In the light of the aforesaid, we answer the reference that where the assessee’s income is chargeable under the head “Salaries”, the person responsible for paying any income chargeable under the head “Salaries” shall at the time of paying, deduct income-tax at source and failure on his part entails an obligation to pay interest under section 234B of the Act in order to compensate the loss incurred to the Revenue and that upon failure on the part of the employer to deduct tax at source, the assessee only becomes liable to pay the tax directly under section 191 of the Act and does not become liable to pay interest under section 234B of the Act.”:
The Hon’ble Bombay High Court in case of NGC Net Work LLC (supra) and in case of Emilio Ruiz Berdejo (supra) as well as the Special Bench of the Income-tax Appellate Tribunal (Delhi) in case of Motorola Inc (supra) also held a similar view. No decision of any Higher Court contrary to the aforesaid view was brought to our notice. In aforesaid view of the matter, we respectfully follow the ratio laid down by the Full Bench of Hon’ble Uttarakhand High Court in case of Maersk Co. Ltd., (supra) as well as the other decisions referred to hereinabove and hold that since the commission earned by the assessee is in the nature of salary subject to deduction of tax at source u/s 192 of the Act, the assessee is not required to pay advance-tax u/s 208 of the Act. Accordingly, no interest can be levied u/s 234B and 234C of the Act for nonpayment of advance-tax. Thus, ground raised by the assessee is allowed.
11. In the result, the appeals filed by the assessee stand allowed in part.
But on AST system of the I.T. Department, system generating liability of 234 B & 234 C.