Academy of Medical Sciences Vs. CIT (Kerala High Court)
Chapter XVII-B of the Income Tax Act, 1961 deals with deduction and collection of tax at source [with-holding tax]. This chapter is sub survient to section 4 i.e. charging section of the Act.
Section 40(a)(ia) deals with dis-allowance of a portion of expenditure[ which is otherwise deductible] on which TDS is not paid.
Amendments were made to section 40 and 201 by the Finance Act 2012 to relieve a payer from being a defaulter of non payment of TDS if the payee has paid the tax, interest is paid for differential period and some other formalities are complied with.
Brief Facts in this case
The appellant/assessee credited lease rent to one Kerala State Co-operative Hospital Complex and Center for Advanced Medical Services Ltd.
No actual payment was made. The lessor admitted the TDS liability and the same was not paid
The assessee produced form 26A certifying following facts i.e. the three golden conditions to remain out of “assessee in default” are
(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 payer furnishes a certificate to this effect from an accountant in such form as may be prescribed.
Apparently Kerala High Court has erred in taking a view of strict interpretation regarding requirement of (iii) above. The HC rejected the relief stating that as there is not income tax liability, the third condition of payment of tax due is not complied with.
The recipient filed the income tax return belatedly with a loss. Thus there was tax liability. Thus the question of payment was not there.
When it is ascertained that the recipient had no liability towards income tax, enforcing with-holding provisions will amount to firstly deducting tax and after filing the return, refunding the same and that too with interest.
I do-not think this is the intention of the legislature.
One may argue that if above approach of the author is followed, a recipient who is expecting not to have any income tax liability may tell the payer not to do with-holding taxes. Both will file their returns u/s 139, exchange form 26A duly certified by CA and get out of with-holding tax obligations.
But this option is also not without risk. It is so because from the date of transaction till date of obtaining form 26A, the payer will remain an assessee in default. It is less likely that a payer will take this risk because the TDS return has to be uploaded on a quarterly basis and there is significant gap in the date when the return is uploaded and the date when the return u/s 139
Relevant paragraphs of the order
8. As per the first proviso to Section 201(1), when a resident, who receives any sum from an assessee, has furnished his return of income under Section 139 and taken into account such sum for computing income, as also paid the tax due on the income declared by him in such return of income; then assessee would stand absolved from being treated as an assessee in default, despite the fact that the assessee had failed to deduct at source, the whole or any part of the tax in accordance with the provisions of Chapter-XVII-B. When an assessee has failed to deduct tax by virtue of the proviso to Section 201(1), he is not treated as an assessee in default, only when the person from whom tax was to be deducted has paid the tax. The cumulative effect of the second proviso to Section 40(a)(ia) and the first proviso to Section 201(1) would be that on payment of tax by the resident receiver, the assessee who failed to deduct tax under Chapter-XVII-B on any sum paid to the resident receiver, would not be considered as an assessee in default and the additions under Section 40(a)(ia) would also not have to be made in the case of that assessee.
9. However, to avail of the beneficial provisos under Sections 40(a)(ia) & 201(1), there should be (i) return of income under Section 139(ii), with computation of income including such amounts received, as also (ii) payment of tax on such income. Only if all the three conditions are satisfied, would the beneficial provision be applicable to an assessee who failed to deduct tax at source. In the present case, admittedly, resident-receiver to whom the assessee paid or credited the lease rent has filed a return belatedly and not paid any tax due on the income declared. When there is no tax paid on the income declared; even if for reason of a loss return, there cannot be any claim raised by the assessee in default to absolve him from the consequences flowing from Sections 201(1) and 40(a)(ia). He will then be treated as an ‘assessee in default’ and would be liable to pay the amount of TDS with interest as also subject to the expenses being disallowed.
10. There is an additional ground urged on the basis of Section 43(2) of the I.T.Act. The term “paid” has been defined as an amount paid or actually incurred and hence in the case of a loss return, even if there is no actual payment, the loss return, which does not raise a liability to pay, has to be liberally construed is the argument. The definition clause is with reference to ‘income from profits and gains of business’. By the specific words employed in sub-section(2) of Section 43, this is with reference to the method of accounting; which is either on accrual or receipt. There is no ground raised on the basis of the method of accounting of the assessee, herein and the contention is only to be rejected. The definition clause has nothing to do with Section 201(1) or the determination of an ‘assessee in default’.
13. The only question remaining to be considered is as to the liability of the assessee under Section 201(1) being treated as an assessee in default. Hindustan Coca Cola Beverage (P) Ltd. (supra) was in a totally different circumstance, where the resident receiver had paid the tax, and the Honorable Supreme Court relying on a circular of the CBDT allowed the claim of the assessee with respect to the actual TDS applicable. Therein, the assessee had paid amounts to one Pradeep Oil Corporation, on which, tax deduction at source was not effected. The resident-receiver had paid the tax due on the income received from the appellant/ assessee. Relying on the circular, the Supreme Court had held so in para 10:
“10. Be that as it may, the circular No. 275/201/95- IT(B) dated 29th Jan., 1997 issued by the CBDT, in our considered opinion, should put an end to the controversy. The circular declares “no demand visualized under s.201(1) of the IT Act should be enforced after the tax deductor has satisfied the officer-in-charge of TDS, that taxes due have been paid by the deductee- assessee. However, this will not alter the liability to charge interest under s.201(IA) of the Act till the date of payment of taxes by the deductee- assessee or the liability for penalty under s.271C of the IT Act.”
14. It is also pertinent that therein, the Tribunal had reopened its order, specifically considering the question of liability to tax, on an application filed by the assessee, on the ground of payment of tax by the receiver-resident. The reopening had not been challenged and had acquired finality. On consideration of the Tribunal’s order of re-opening, which attained finality, as also the Circular referred to above, it was held that the appellant therein would not be liable to pay the TDS amounts, but only the interest on the tax component, which was to be deducted at source till the date of payment of such tax by the resident-receiver. The facts in the present case are clearly distinguishable and we answer the fourth question also in favour of the Revenue and against the assessee.
Nature of With-holding tax liability
“191. Direct payment.—In the case of income in respect of which provision is not made under this Chapter for deducting income-tax at the time of payment, and in any case where income-tax has not been deducted in accordance with the provisions of this Chapter, income-tax shall be payable by the assessee direct.
Supreme Court has made an elaborate discussion in the decision of Eli Lily
VI. Directions-cum-Conclusion :
36. For the reasons stated herein above, we hold that the TDS provisions in Chapter XVII-B relating to payment of income chargeable under the head “Salaries”, which are in the nature of machinery provisions to enable collection and recovery of tax forms an integrated Code with the charging and computation provisions under the 1961 Act, which determines the assess ability/tax ability of “salaries” in the hands of the employee- assessee. Consequently, section 192(1) has to be read with section 9(1)(ii) read with the Explanation thereto. Therefore, if any payment of income chargeable under the head “Salaries” falls within section 9(1)(ii) then TDS provisions would stand attracted. In this batch of civil appeals, identification of the recipient of salary is not in dispute. In our view, therefore, the tax- deductor- assessee [respondent(s)] were duty bound to deduct tax at source under section 192(1) from the Home Salary/special allowance(s) paid abroad by the foreign company, particularly when no work stood performed for the foreign company and the total remuneration stood paid only on account of services rendered in India during the period in question. As stated above, in this matter, we have before us 104 civil appeals. We are directing the Assessing Officer to examine each case to ascertain whether the employee- assessee (recipient) has paid the tax due on the Home Salary/special allowance(s) received from the foreign company. In case taxes due on Home Salary/special allowance(s) stands paid off then the Assessing Officer shall not proceed under section 201(1). In cases where the tax has not been paid, the Assessing Officer shall proceed under section 201(1) to recover the shortfall in the payment of tax.
37. Similarly, in each of the 104 appeals, the Assessing Officer shall examine and find out whether interest has been paid/recovered for the period between the date on which tax was deductible till the date on which the tax was actually paid. If, in any case, interest accrues for the aforestated period and if it is not paid then the Adjudicating Authority shall take steps to recover interest for the aforestated period under section 201(1A).
Emphasys by underline is that of Author.
With-holding tax provisions are secondary and conditional whereas the liability for payment of tax on income of an assessee is on the assessee itself, primary and absolute.
Provisions of chapter XVII are sub-survenient and are meant to work in aid to section 4 of the Act