No interest levy despite short deduction of taxes if reasons are bona fide and the shortfall is nominal

IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH “D” AHMEDABAD

Before S/Shri Bhavnesh Saini, JM and D.C.Agrawal, AM

 

Madhya Gujarat Vij Co. Ltd., (erstwhile Gujarat Electricity Board) Division Office Petlad, Nr. Railway Crossing Petlad.	Vs.	Income-tax Officer, Ward 3(4) & TDS, Petlad.
(Appellant)	..	(Respondent)

 O R D E R

Per D.C. Agrawal, Accountant Member.

This is an appeal filed by the assessee raising following ground :-

(1) The ld. CIT(A) has erred in law and facts in confirming the interest of Rs. 22460/- levied under section 201(1A) on the ground that the appellant has failed to deduct and pay tax at average rate during each month on estimated income of its employees.

2. Thus the only issue involved in the appeal is about charging of interest of Rs. 22,460/- u/s 201(1A).

3. The AO had passed order u/s 201(1A) by noticing on scrutiny of the annual return of TDS in Form No.24 that deduction of taxes at source from the payment of salary to the employees were made late. The assessee was treated to be in default u/s 201(1). A show cause notice to the assessee was issued but no reply was received and accordingly he had charged interest u/s 201(1A) at Rs.22,460/-.

4. The ld. CIT(A) confirmed the charging of interest by observing as under :-

“4.3 I have carefully considered the facts of the case, the submissions of the appellant. The matter before me relates to interest demand of Rs.22,460/- u/s 201(1A). The various pleas raised by the appellant are pertinent to demand raised u/s 201(1) for which separate appeal lies and are thus not relevant for the present appeal. In regard to the interest u/s 201(1A) it has been held in many court decisions like Bennet Coleman & Co. Ltd. vs. . V.P. Damle, Third ITO (1986) 157 ITR 812 (Bom), CIT vs. Dhanalakshmy Weaving Works (2000) 245 ITR 13 (Ker), CIT vs. K.K. Engg. Co. (2001) 116 Taxman 390 (Ker), CIT vs. Assam Small Industries Development Corporation (1996) 219 ITR 324, CIT vs. Prem Nath Motors (P) Ltd. (2002) 120 Taxman 584 (Delhi) that the interest u/s 201(1A) is compensatory and mandatory in nature. Thus the AO is justified in levying interest u/s 201(1A) of the Act. Ground is dismissed.”

5. In the written submission the assessee submitted that it had deducted TDS on the projected salary of each month. Such projections were made on the basis of salary of the immediately preceding month. The payments of over-time which were also subject to TDS could not be estimated with accuracy. Further there were several employees and the liability of tax was very less and hence no TDS was made in the initial months. The employer i.e. the assessee is empowered to increase or reduce the amount to be deducted for the purpose of adjusting any excess or deficiency arising out of any previous deduction. The tax finally required to be deducted on the actual amount of salary was deducted at the end of Financial Year. In any case, the issue is directly covered by the decision of the Tribunal in the case of ITO vs. Cadila Laboratories (P) Ltd. 56 TTJ 156 wherein the Tribunal has observed as under :-

“The task of interpretation of a statutory enactment is not a mechanical task. It is more than a mere reading of mathematical formulas because few words possess the precision of mathematical symbols. The AO has adopted too technical an approach by number of months in a year i.e. 12 and finding out the average. Such an approach runs contrary to the express provisions of section 192(3). The amounts of salaries paid to employees in a large organization like that of the assessee cannot remain constant as these vary from month to month depending upon a number of factors like periodical increment in salary, enhancement of dearness allowance, arrears of salary and allowances and special incentives received by the employees and the like from time to time. Hence the provisions of section 192(2) will squarely apply to the facts of the assessee ’s case. In the instant case there is no dispute that the tax was deducted from the salary of employees whose income was liable to be taxed every month it was paid to the credit of the Central Government and the shortfall, if any, was made good and paid to the credit of the Central Government within the financial year. Hence in view of the expressed provisions of section 192(3) there is no justification for charging of interest under section 201(1A).”

The assessee further referred to the decision of the Tribunal, Jaipur Bench in the case of Secretary, Board of Secondary Education, Rajasthan vs. ITO 93 TTJ 256 wherein it has been held that interest u/s 201(1A) cannot be charged on account of unequal deduction of tax u/s 192 in different months once the person responsible for deduction of tax has made good the deficiency before close of the Financial Year. Similar view was taken by ITAT Delhi Bench in the case of ITO vs. Asian Hotels Ltd. 41 TTJ 28.

6. On the other hand, the ld. DR submitted that assessee has not deducted the tax in accordance with the provisions of the Act. He had made short deduction from salary payment but had made lump sum deduction at the end of the year. Such lump sum deduction at the end of the year making good the deficiency in earlier months cannot be said to be deductions in accordance with the provisions of the Act and, therefore, the assessee is in default and, therefore, it is liable for interest u/s 201(1A).

7. We have considered the rival submissions and perused the material on record. The undisputed facts are that assessee has not deducted the tax regularly from the payments of salary at the average rate during each month on estimated income of the employees and it has finally made good the deficiency in the deduction by deducting the balance at the end of the Financial Year. The question is whether assessee is liable for interest u/s 201(1A). In this regard we refer to sections 201(1) and 201(1A) as under:-

Sections 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 the penalty shall be charged under section 221 from such person unless the AO is satisfied that such person, without good and sufficient reasons, has failed to deduct and pay such tax]

[(1A) Without prejudice to the provisions of sub-section (1), if any such person, principal officer or company as is referred to in that sub-section does not deduct (the whole or any part of the tax) or after deducting fails to pay the tax as required by or under this Act, he or it shall be liable to pay simple interest as (one per cent for every month or part of a month) on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid (and such interest shall be paid before furnishing (the statement) in accordance with the provisions of sub-section (3) of section 200].

An assessee would be in default if he does not deduct tax in accordance with the provisions of the Act. Thus where assessee, as an employer, is required as per section 192, to deduct the tax from the payment of salary but fails to do so, then he would be an assessee in default. For such default assessee is liable to be charged with penalty u/s 201(1) and also interest u/s 201(1A). Penalty u/s 201(1) may not be charged if after giving an opportunity of being heard to the assessee AO finds that there are good and sufficient reasons for not deducting the tax as per section 192. However, charging of interest u/s 201(1A) is mandatory as the word used therein is “shall”. The meaning and effect of the word “shall” used in section 201(1A) is the same as the use of the word “shall” in section 234A, 234B & 234C. It has been held by Hon. Supreme Court in the case of CIT vs. Anjum M.H. Ghaswala (2001) 252 ITR 1(SC) that charging of interest u/s 234A,234B & 234C is mandatory. Similar view has to be held in respect of charging of interest u/s 201(1A) when similar words are used in this section also. Hon. Karnataka High Court in the case of Urban Infrastructure Development Finance Corporation vs. CIT (2009) 308 ITR 297 (Karnataka) held that if tax is not deducted u/s 195 of the Act, the assessee is bound to pay interest as section 201(1A) is mandatory provision. The AO has a discretion to drop the penalty proceedings u/s 201(1) but assessee cannot escape the liability to pay the interest u/s 201(1A). Both the sections 201(1) and 201(1A) are independent and they are not interlinked. They cannot be read conjunctive as levy of interest and levy of penalty are two different proceedings. Hon. Calcutta High Court in the case of West Bengal State Electricity Board vs. DCIT (2005) 278 ITR 218 (Cal) held that scheme of sub-section (1A) of section 201 does not leave of any scope of ambiguity and makes it clear that an assessee in default is liable to pay simple interest for the period stipulated in sub-section (1A). The interest payable under section 201(1A) is mandatory and can neither be waived nor can the rate be reduced. However, principles of natural justice have to be read in the provision, meaning thereby that assessee is given an opportunity of being heard before levy of interest. In an earlier decision in Canoi Industries (P) Ltd. vs. ACIT (2003) 261 ITR 488 Hon. Calcutta High Court had held that chargeable of interest u/s 201(1A) is mandatory and automatic. Similar view was held by Hon. Madras High Court in Viswapriya Finance General Securities Ltd. vs. CIT (2002) 258 ITR 496 (Mad).

8. The initial phrase in section 201(1A) “without prejudice to the provisions of sub-section (1)” means that in addition to levy of penalty u/s 20 1(1) assessee is liable for interest. The words “without prejudice to” have been interpreted by Honourable Calcutta High Court in Satis Kapoor vs. CIT (2004) 265 ITR 673 (Cal). It held in the co-text of sub-section (4) and sub-section (1) of section 273A, that use of the words ‘without prejudice to’ in sub-section (4) of section 273A makes it clear that sub-section (4) is not a provision over-riding the provisions of sub-section (1) and is clearly a provision in addition to sub-section (1). The phrase “without prejudice to” was also used in section 143(1)(a) of the Income-tax Act, 1961 when Legislature used the words “without prejudice to the provisions of section 143(2)”. Honourable Delhi High Court in CIT vs. Punjab National Bank (2001) 249 ITR 763 (Del) held that the use of expression “without prejudice to the provisions of section 143(2)” in section 143(1) means that the right of the AO to proceed u/s 143(2) despite intimation to the assessee of the sum payable as tax or interest is preserved and not taken away. From these interpretations it follows that whether action u/s 201(1) is taken or not taken action u/s 201(1A) can be taken independently, either in addition to, or separately. The powers conferred under two sub-sections are, therefore, independent and can be exercised by the AO simultaneously together, or independent of each other, or one after another. Therefore, for the purpose of charging of interest u/s 201(1A) it is not necessary that AO should have first taken the recourse to section 201(1) meaning thereby that assessee should have been first declared as assessee in default and only thereafter penalty u/s 201(1) or interest u/s 201(1A) can be levied. Declaring assessee in default is a condition precedent for levy of penalty u/s 20 1(1) but because of use of the expression “without prejudice to the provisions of sub-section (1)” in sub-section (1A) makes it clear that condition laid down for levy of penalty u/s 201(1) cannot be necessarily brought into play for charging interest u/s 201(1A). In other words the AO has only to see whether the conditions laid down u/s 201(1A) are satisfied. If they are so, he can charge interest u/s 201(1A) irrespective of whether assessee has been declared as in default or penalty u/s 201 has been levied on him. The conditions laid down for charging interest u/s 201(1A) are –

(1) The payer does not deduct the whole or any part of the tax;

(2) Or, after deducting, fails to pay the tax as required by, or under the Act;

On the other hand, conditions laid down u/s 20 1(1) for levy of penalty are that –

(1) Payer does not deduct tax in accordance with the provisions of the Act; or

(2) Assessee being an employer does not deduct or does not pay or after deducting fails to pay whole or part of the tax.

9. Thus in our considered view conditions laid down for levy of penalty and charging of interest are different. Assessee would be liable for penalty if tax is not deducted in accordance with the provisions of the Act but interest could be charged only when payer does not deduct whole or any part of the tax or after deducting fails to pay the tax. It is because what we find is that the expression “required to deduct any sum in accordance with the provisions of the Act” is missing from section 201(1A). Therefore, a situation where a payer does not, in equal instalment deduct the tax in accordance with the provisions of the Act, can be condition for declaring an assessee in default and consequently for levy of penalty u/s 201(1) but due to absence of this expression in subsection (1A), this situation would not automatically become condition precedent for charging of interest. On the other hand, section 192(3) enables the employer to make adjustment of any excess or deficiency arising out of any previous deduction or failure to deduction during the Financial Year. For the sake of convenience we reproduce section 192(3) as under :-

Section 192(3)- The person responsible for making the payment referred to in sub-section (1)[or sub-section (1A)] [or sub-section (2) or subsection (2A) or subsection 2B)] may, at the time of making any deduction, increase or reduce the amount to be deducted under this section for the purpose of adjusting any excess or deficiency arising out of any previous deduction or failure to deduct during the financial year.

The above sub-section of section 192(3) clearly empowers an employer –

(1) to increase or reduce the amount of deduction of tax u/s 192, sub-section (1), sub-section (1A), sub-section (2), sub-section (2A), sub-section 2B) thereof;

(2) the purpose of such increase or reduction is to adjust an excess or deficiency in any previous deduction;

(3) the purpose of increase or reduction is also to adjust failure to deduct during the Financial Year.

In other words if tax is not regularly deducted as per sub-section (1) at the average rate of income-tax computed on the basis of rates in force in the Financial Year then section 192(3) would enable the employer to make good the deficiency. Similarly a failure to deduct during any month of the Financial Year can be made good in next deduction. Therefore in the same way as excess or deficiency arising out of a previous deduction is made good then failure to deduct from any earlier payment can also be made good by increasing the deduction from the next payment. Therefore, it may not be necessary to apply exact expression used in sub­section (1) to find out whether assessee was in default or not. If there were bona fide reasons in deducting a lesser tax during the earlier months of Financial Year and is made good immediately after noticing such short-fall, then section 192(3) would save the employer from liability of making payment of interest. Therefore, in our considered view what is required to be seen by the AO in respect of short deduction, or failure of deduction of tax by the employer u/s 192(1) is that whether, while making the payment of salary to the employee, there was a bona fide belief in making the lesser deduction in a particular month and it was made good immediately after noticing the deficiency. If there is a finding by the AO that employer has taken the deduction casually during the earlier months of the Financial Year, by not deducting the tax correctly as required u/s 192(1), but had resorted to lump sum deduction of tax at the end of the Financial Year, then one can infer that employer has not deducted the whole or any part of the tax as required by or under the Act; being the condition to be satisfied before charging interest u/s 201(1A). Accordingly the AO has to see what was the deficiency in different months from deduction of tax i.e. what was actually required to be deducted as per section 192(1), and what has been actually deducted, whether the deficiency is substantial and continues to percolate in subsequent months. It would indicate apparently, that approach in deduction of tax was casual and deficiency in deduction of tax in earlier month was not made good in the immediately subsequent months. Under this situation onus would be on the assessee employer to show his bona fides. And if no such bona fide is shown then he would be liable to pay interest u/s 201(1A) for the deficiency so continued. The intention of section 192(3) is not that employer can casually take deduction of tax from payments of salary in different months and resorts to lump sum deduction at the end of the Financial Year for making good the deficiency. The employer has to find out immediately at the time of subsequent payment to the employee whether there was deficiency of deduction of tax in the preceding month. He has to make good such deficiency in the subsequent following month or otherwise has to show his bona fide. We, therefore, restore the matter to the file of AO for finding out whether there was a bona fide in not deducting the tax regularly from the payment of salary in each month and if not, assessee would be liable to pay interest. If there was bona fide and shortfall in every month was nominal which was made good at the end of the year then, no mala fide need to be seen. As a result, we restore the matter to the file of AO for considering the above matter afresh. As a result, the appeal is allowed but for statistical purposes.