Case Law Details

Case Name : Sri Teki Venkata Ramana Rao Vs ITO (ITAT Visakhapatnam)
Appeal Number : I.T.A.No.151/Viz/2017
Date of Judgement/Order : 10/08/2018
Related Assessment Year : 2012-13

Sri Teki Venkata Ramana Rao v. ITO (ITAT Visakhapatnam)

In the instant case deductor is the resident and the recipient is the non resident and the payment is covered by section 195 of the Act and the concessions given in respect of exceptions as per proviso to section 20 1(1) are not extended to the non-residents covered by section 195 of the Act. Sub section 2 of section 195 allows the beneficiary to obtain the certificate from the assessing officer to submit the non deduction certificate in case the deductee is not liable for tax. Though Sub section 2 of section 201 enable the AO to hold charge on all the assets of the person in the case of second situation of deduction of tax at source but not remittance to government account, it does not bar the deductor to treat the assessee in default for the principal amount. Sub section 2 of section 201 cannot be read in isolation and both the sections 201(1) and 201(2) must be read harmoniously. Conjoint reading of section 201(1) and 201(2) establish that if the ass essee failed to deduct the tax at source and does not remit to the Government account and tax deducted but not remitted to government account covers both the situations and makes the assessee deemed to be assessee in default in respect of the principal amount as well as interest u/s 201(1) and 201(1A) of the Act except the cases covered by proviso. Sub section 2 deals with the charge on assets of the person who fails to make payment of tax deducted but not the treatment of assessee in default. Therefore, the rigors of section 201(1) are clearly applicable in the case of assessee.. The Ld.CIT(A) considered the decision of Hon’ble Gujarat High Court in the case of Commissioner of Income Tax Vs. Ranoli Investment Pvt. Ltd. and others reported in 235 ITR 433 and held that if no deduction is made and the deducted amount is not paid, the person whose duty it was to deduct the tax at source and to pay is to be treated as ‘assessee in default’ in respect of the taxes and no penalty is to be charged u/s 221 on such person if the ITO is satisfied that such failure to deduct the tax had occurred due to good and sufficient reasons.

FULL TEXT OF THE ITAT JUDGMENT

This appeal is filed by the assessee against the order of the Commissioner of Income Tax (Appeals) [CIT(A)]-10, Hyderabad vide I.T.A.No.0459/CIT(A)-10/2015-16 dated 30.09.2016 for the assessment year 2012-13.

2. The assessee raised six grounds in this appeal as under:

1. The Ld. AR is not at all correct and the Ld. CIT (Appeals) is not correct in treating the assessee as an assessee in default for non deduction of tax at source under section 195 when it is very much acknowledged by the Ld. AO himself that all the three non-residents have filed their return of income in India for the relevant assessment year declaring nil capital gains from the transfer of immovable property to the assessee. This is contrary to the decision of the Honourable Supreme Court..

2. The liability to tax if any has to be determined in the hands of the non-resident sellers and collected from them once they have filed their returns of

3. The Ld. AO is not at all correct in treating the assessee as an assessee in default for non deduction of tax at source under section 195 for the principal amount of tax of Rs.9,83,538/-. In view of the clear mandate of sub-section (2) of section 201 that such a charge can be created only when tax was deducted and not paid to the Government and not when tax was not

4. The Ld. AO is not at all correct in the computation of long term capital gains by adopting an estimated value of the property as on 01.04.1981 without reference to any comparable cases.

5. All the above grounds are mutually exclusive and without prejudice to one another.

6. The appellant craves leave to add to, amend, alter all or any of the above grounds of appeal.

7. During the appeal hearing, the Ld.AR did not press ground No.1,4,5 and 6 therefore ground No.1,4,5 and 6 dismissed as not pressed.

3. Ground No.2 and 3 are related to the non-deduction of tax at source as required u/s 195 of Income Tax Act, 1961 (hereinafter to as ‘Act’), consequently the assessee is treated as assessee in default for the tax liability u/s 201(1) and 201(1A) of the Act.

4. The assessee purchased property admeasuring 560 sq.yards in survey No.779, Kakinada on 22.06.2011 from 5 persons vide registered document No.6930/2011 for a consideration of Rs.65,12,000/-. The Assessing Officer(AO) noted from the sale deed that out of 5 sellers, 3 sellers are non-residents and the remaining 2 sellers are residents and details of the sale consideration received by the sellers of the property are as under :

S.No. Name of the Seller Residential Status Sale Consideration received
1. Sri Podila Sita Rama Rao Non Resident Rs.35,12,000/-
2. Sri Podila Murali
Krishna
Non Resident Rs.10,00,000/-
3. Ms. Podila Mrudula Non Resident Rs.10,00,000/-
4. Smt.G.Venkata Ramalakshmi Resident Rs. 5,00,000/-
5. Smt.Podila Sarada Resident Rs.5,00,000/-
Total Sale Consideration Rs.65,12,000/-

The assessee is required to deduct the tax at source and remit to Government account on the payments made to the non-residents and the assessee failed to deduct the tax at source as required u/s 195 of the Act. Therefore, the AO treated the assessee as assessee in default and accordingly raised the demand of Rs.9,83,538/- u/s 201(1) of the Act and also levied the interest u/s 201(1A) of the Act at Rs.5,21,275/-.

5. Aggrieved by the order of the AO, the assessee went on appeal before the CIT(A) and the Ld.CIT(A) partly allowed the appeal and directed the AO to ascertain the tax liability of the deductees as per CBDT Instruction No.2/20 14 and treat the assessee as the assessee in default to the extent of actual tax liability of the non residents.

5.1. The assessee also challenged the order of the AO in respect of the principal amount of Rs.9,83,538/- in the light of the provisions of section 201(2) of the act. The Ld.CIT(A) decided the issue against the assessee and dismissed the appeal. Therefore, the assessee is in appeal before this Tribunal.

6. During the appeal hearing, the Ld.AR argued that the assessee cannot be treated as ‘assessee in default’ for the principal amount as per section 201(1) of the Act, since, the assessee failed to deduct the tax at source. The AR contended that as per sub-section 2 of section 201, if the assessee fails to deduct the tax at source, the assessee would be responsible for payment of interest u/s 201(1A) but not the principal amount of tax, thus the assessee cannot be held to be assessee in default. Only in the case of having deducted the TDs but not remitted to the Government account then the assessee required to be treated as assessee in default for the principal amount as well as the interest u/s 201(1A). The Ld.AR further argued that if the deductor does not deduct tax at source, the amount cannot be recovered from the deductor, but the same should be recovered from the deductee. The assessee relied on the decision of Hon’ble Allahabad High Court in the case of Jagran Prakashan Ltd. Vs. DCIT (TDS) 209 Taxmann 0092.

7. On the other hand, the Ld.DR supported the orders of the Ld.CIT(A).

8. We have heard both the parties and perused the material placed on record. In this case, the assessee made the payments to the non residents but not deducted the tax at source as required u/s 195 of the I.T.Act. The assessee also did not obtain the non-deduction certificate from the concerned assessing officer. Consequences for failure to deduct the tax at source are enshrined in section 201 of the act and as per section 201(1) of the act, the assessee would be deemed to be assessee in default in respect of such tax. For ready reference, we extract relevant part of section 201(1) of the Act which reads as under :

“201. (1) Where any person, including the principal officer of a company,—

(a) who is required to deduct any sum in accordance with the provisions of this Act; or

(b) referred to in sub-section (1A) of section 192, being an employer, does not deduct, or does not pay, or after so deducting fails to pay, the whole or any part of the tax, as required by or under this Act, then, such person, shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default in respect of such tax:

Provided that any person, including the principal officer of a company, who fails to deduct the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid to a resident or on the sum credited to the account of a resident shall not be deemed to be an assessee in default in respect of such tax if such resident—

(i) has furnished his return of income under section 139;

(ii) has taken into account such sum for computing income in such return of income; and

(iii) has paid the tax due on the income declared by him in such return of income,

and the person fur nishes a certificate to this effect from an accountant in such form as may be prescribed4:

Provided further that no penalty shall be charged under section 221 from such person, unless the Assessing Officer is satisfied that such person, without good and sufficient reasons, has failed to deduct and pay such tax.”

8.1. The Ld.AR argued that as per section 201(2) of the Act, the assessee would be liable for principal amount of tax only when tax was deducted but not paid to the Government account and not in a situation when the tax was not deducted. Plain reading of section 201(1) clearly shows that if the assessee fails to deduct the tax at source and does not pay after deducting, the assessee would be deemed to be assessee in default in respect of the tax that is to be deducted at source. The section contemplates to treat the assessee in default in both the situations of non-deduction and non remittance and deduction but non remittance to government account. The section also gives same concessions in the case of resident assesses as per proviso. In the instant case deductor is the resident and the recipient is the non resident and the payment is covered by section 195 of the Act and the concessions given in respect of exceptions as per proviso to section 20 1(1) are not extended to the non-residents covered by section 195 of the Act. Sub section 2 of section 195 allows the beneficiary to obtain the certificate from the assessing officer to submit the non deduction certificate in case the deductee is not liable for tax. Though Sub section 2 of section 201 enable the AO to hold charge on all the assets of the person in the case of second situation of deduction of tax at source but not remittance to government account, it does not bar the deductor to treat the assessee in default for the principal amount. Sub section 2 of section 201 cannot be read in isolation and both the sections 201(1) and 201(2) must be read harmoniously. Conjoint reading of section 201(1) and 201(2) establish that if the assessee failed to deduct the tax at source and does not remit to the Government account and tax deducted but not remitted to government account covers both the situations and makes the assessee deemed to be assessee in default in respect of the principal amount as well as interest u/s 201(1) and 201(1A) of the Act except the cases covered by proviso. Sub section 2 deals with the charge on assets of the person who fails to make payment of tax deducted but not the treatment of assessee in default. Therefore, the rigors of section 201(1) are clearly applicable in the case of assessee.. The Ld.CIT(A) considered the decision of Hon’ble Gujarat High Court in the case of Commissioner of Income Tax Vs. Ranoli Investment Pvt. Ltd. and others reported in 235 ITR 433 and held that if no deduction is made and the deducted amount is not paid, the person whose duty it was to deduct the tax at source and to pay is to be treated as ‘assessee in default’ in respect of the taxes and no penalty is to be charged u/s 221 on such person if the ITO is satisfied that such failure to deduct the tax had occurred due to good and sufficient reasons. The assessee relied on the decision of Hon’ble High court of Calcutta in Jagran Prakashan Ltd. Vs. DCIT (supra) delivered in response to writ petition and the payment in respect of 194H and the writ petition is filed by the company for non deduction of tax at source u/s 194H of the Act. The deduction of tax at source is not in respect of the non residents and it was in respect of the residents. 194H deals with the deduction of tax at source in respect of residents in respect of payments made for commission or brokerage. In respect of the non-residents, the deduction of tax at source is more stringent since the person who receives the payment would be leaving the country and the recovery of tax is impossible or remotely possible. There is a clear distinction between the residents and the non residents. That is the reason why section 195(2) allows the assessee to furnish non deduction certificate and the Board has come up with instruction No.2/2014. Proviso to Section 201 also allows exceptions on sums paid to residents in different situations not to treat the assessee default for the principal amount in the following situations whereas the said concessions are not extended to the non-residents.

(i) has furnished his return of income under section 139;

(ii) has taken into account such sum for computing income in such return of income; and

(iii) has paid the tax due on the income declared by him in such return of income, and the person furnishes a certificate to this effect from an accountant in such form as may be prescribed 

Therefore, the case law relied upon by the assessee which is dealing with the residents is not applicable in respect of the payments made to non-residents u/s 195 of the Act. Hon’ble ITAT, Bangalore in 26 taxmann.com 6 considered the similar issue of TDS u/s 195 and held that the AO has rightly held the as assessee in default for non deduction of tax at source u/s 201(1) of the Act. For ready reference we extract the relevant Para of the ITAT’s order which reads as under:

7.3. We have heard both parties and carefully perused and considered the material on record and the relevant judicial decisions. The assessee’s case is that the Assessing Officer should have quantified the tax to be deducted at source at the rates specified on the capital gains arising out of this transaction and not on the amount of sale consideration of Rs. 61,62,500 for a better appreciation of the issue the provisions of section 195 are extracted here below :

“195.(1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries” shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force :

Provided that in the case of interest payable by the Government or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of  tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode :

Provided further that no such deduction shall be made in respect of any dividends referred to in section 115-O.

Explanation 1—For the purposes of this section, where any interest or other sum as aforesaid is credited to any account, whether called “Interest payable account” or “Suspense account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.

Explanation 2.—For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction thereunder applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has—

(i) a residence or place of business or business connection in India; or

(ii) any other presence in any manner whatsoever in India.

(2) Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine, by general or special order], the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable.

(3) Subject to rules made under sub-section (5), any person entitled to receive any interest or other sum on which income-tax has to be deducted under subsection (1) may make an application in the prescribed form to the Assessing Officer for the grant of a certificate authorising him to receive such interest or other sum without deduction of tax under that sub-section, and where any such certificate is granted, every person responsible for paying such interest or other sum to the person to whom such certificate is granted shall, so long as the certificate is in force, make payment of such interest or other sum without deducting tax thereon under sub-section (1).”

7.3.1. From a plain reading of section 195(1) and as held by us in para 6.4 of this order (supra), it is clear that the assessee was liable to deduct tax at source at the specified rates (i.e. 20% plus surcharge 10% and education cess 2%) from out of the sale consideration paid by him to the seller of the said flat purchased by him as she was an NRI. If the assessee (i.e. the person responsible for paying such sum to the NRI seller) was of the view that the whole or part of such sum viz. the sale consideration, would not be income chargeable in the hands of the recipient (i.e. in this case the seller, an NRI), Section 195(2) of the Act required him to make an application to the Assessing Officer under section 197 r.w.s. 195(2) to determine the amount chargeable and upon such determination deduct tax on such sum so determined. Similarly section 195(3) of the Act provides such a safeguard to the recipient of such sum, which in this case is the seller who is an NRI. From a perusal of the record and also as noted by the learned CIT (Appeals) in his order at page 6 thereof, we find the assessee failed to make an application under section 197 r.w.s. 195(2) of the Act to the Assessing Officer and therefore he should have deducted tax at the specified rates from the sale consideration to be paid. In coming to this view of the matter, we find support from the decision of the Hon’ble Apex Court in the case of Transmission Corpn. of A.P. Ltd. v. CIT [1 999] 239 ITR 587/105 Taxman  742 wherein the Hon ‘ble Court has held –“the purpose of sub-section(1) of section 195 is to see that on the sum which is chargeable under section 4 of the Act, for levy and collection of income tax, the payer should deduct income tax thereon at the rates in force, if the amount is to be paid to a non-resident. The said provision is for tentative deduction of income tax thereon subject to regular assessment and by the deduction of income tax, the rights of the parties are not, in any manner, adversely affected. Further, the rights of the payee or recipient are fully safeguarded under section 195(2), 195(3) and 197. The only thing which is required to be done is to file an application for determination by the Assessing Officer that such sum would not be chargeable to tax in the case of the recipient, or for determination of the appropriate proportion of such sum so chargeable, or for grant of a certificate authorizing the recipient to receive the amount without deduction of tax, or deduction of income tax at any lower rate. On such determination, tax at the appropriate rate could be deducted at the source. If no such application is filed, income tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such ‘sum’ to deduct tax thereon before making payment.”

The Hon ‘ble Apex Court has held that if the assessee failed to make an application under section 195(2) r.w.s 197 of the Act to the Assessing Officer for lower deduction of tax, then income tax on such ‘sum’ is to be deducted and it is the statutory obligation of the person responsible for making such payment of such ‘sum’ to deduct tax thereon before making payment. In the instant case of the assessee, the legal position is clear in as much as not having made the application under section 197 r.w.s. 195 of the Act to the Assessing Officer for lower or no deduction of tax, he was statutorily duty bound to have deducted tax at the specified rate on the ‘sum’ i.e. the sale consideration, before making payment to the seller who was an NRI. Consequently, the assessee’s claim that TDS was to have been made by him on the Long Term Capital Gains which he worked out at 20% of Rs. 9,29,793 does not hold any water. In this view of the matter, we are of the considered opinion that the quantification of the TDS deductible by the assessee under section 195 of the Act was correctly made by the Assessing Officer under section 201(1) of the Act and rightly upheld by the learned CIT (Appeals) at Rs. 13,82,870 being 20.4% of the sale consideration of Rs. 61,62,500 and consequently dismiss this ground of the assessee.

Since the facts identical respectfully following the view taken by the coordinate bench we hold that the AO has rightly treated the assessee in default and accordingly,we dismiss the appeal of the assessee on this ground and uphold the order of the Ld.CIT(A).

9. The next issue is giving effect to the order of the Ld.CIT(A) which was argued by the Ld.AR in this case. The Ld.CIT(A) has directed the AO to compute correct tax liability of the non residents and treat the assessee in default for the tax liability of the non residents as per CBDT Instruction No. 2/2014. The Instruction No. 2/2014 was issued by CBDT for the benefit of the non residents who could not approach the AO for short deduction of tax at source or for the non-deduction of tax at source u/s 195(2) of the Act. In such cases, the Board has directed the AOs to compute the tax liability and make the deductor responsible only for the tax as per the actual liability and treat the assessee’s in default u/s 201(1) to the extent of the tax liability in respect of assesses. In this case, the non-resident assessees have filed the returns of income with ITO International Taxation which was verified by the AO. Though the Ld.CIT(A) has directed the AO to verify the tax liability of the assessees and determine the assessees liability u/s 201(1), the AO determined the tax liability of the Non residents on estimation which is not correct. Since the assessees have filed the returns of income, the assessments must be completed u/s 143(3) or have been accepted u/s 143(1) and determined the tax liability. Therefore, we direct the AO/ITO international Taxation to treat the assessee in default to the extent of actual tax liability instead of estimation. Accordingly, the appeal of the assessee is partly allowed.

10. In the result, appeal ofa the assessee is partly allowed for statistical purpose.

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