2005 (8) TMI 574 - AT - Income Tax

Employer not at fault for conveyance allowance tax belief. Interest and deficit tax demand not upheld.

The Tribunal held that the employer cannot be declared in default for believing conveyance allowance is not taxable. Consequently, the interest under ... Deemed assessee in default - liability under section 201(1A) - penalty under section 221 - exemption under section 10(14) - bona fide estimate for tax deduction at source - requirement of a written order declaring default - inability to raise TDS demand after completion of employees' assessmentsRequirement of a written order declaring default - liability under section 201(1A) - penalty under section 221 - A specific written order declaring the employer as a deemed assessee in default is necessary before interest under section 201(1A) can be charged or penalty under section 221 can be levied. - HELD THAT: - The Tribunal held that interest under section 201(1A) is a consequential obligation that arises only after an assessee has been declared as deemed to be in default under section 201(1). The proviso to section 201(1) and the machinery of section 221 operate differently: the proviso determines liability (charge) while section 221 prescribes the procedure for levying penalty. A mere description of a default in an order is insufficient; a clear, specific declaration of deeming the person as in default is necessary to trigger the consequential powers to charge interest under section 201(1A) or levy penalty under section 221. In the present case no specific deeming order was found, and therefore the levy of interest and invocation of penalty provisions could not stand. [Paras 18, 19, 24, 25]Order under section 201(1) without a specific declaration of deemed default is quashed; interest under section 201(1A) and penalty under section 221 cannot be charged in absence of such written deeming order.Bona fide estimate for tax deduction at source - deemed assessee in default - exemption under section 10(14) - An employer who, acting honestly and fairly, adopts a bona fide view that certain conveyance payments are not taxable (or are exempt under section 10(14)) cannot be declared an assessee in default for non-deduction of tax if there are two reasonable views on taxability. - HELD THAT: - The Tribunal accepted that where two plausible views exist about taxability of an item, an employer is entitled to adopt the view favourable to non-taxability for TDS purposes provided the estimate is honest and fair. Section 201 is penal and must be strictly construed; short or non-deduction arising from a bona fide, reasonable opinion does not of itself make the employer a person in default. Precedents and authorities were applied to conclude that absent mala fides or dishonest estimation, the employer cannot be held liable to interest under section 201(1A) or penalty under section 221 merely because the Department later takes a contrary view. [Paras 15, 16, 21, 24, 25]Where the employer has honestly and fairly estimated employees' taxable income and reasonable contrary views exist on taxability, the employer cannot be declared in default and thus is not liable to interest under section 201(1A) or penalty under section 221.Inability to raise TDS demand after completion of employees' assessments - liability under section 201(1A) - A demand for deficient tax under section 201(1) cannot be validly raised against the employer after the completion of the employees' assessments where credit and adjustment mechanisms make such recovery unworkable; consequently interest under section 201(1A) is also not workable where the deficient tax has not been paid. - HELD THAT: - The Tribunal reasoned that once the regular assessments of concerned employees are completed, the mechanism to give credit for TDS (section 199) and to adjust tax paid breaks down, resulting in potential unjust enrichment of revenue. Therefore, deficient TDS demands should be raised before completion of employees' assessments; after completion the shortfall should ordinarily be recovered from employees. Further, where the deficient tax has not been paid, computation of interest under section 201(1A) (which runs from the date tax was deductible to the date actually paid) becomes impracticable and interest cannot be charged in perpetuity. On these bases the Tribunal held the post-assessment demand and the interest computation to be unsustainable. [Paras 20, 23, 24, 25]Demand of deficient TDS raised against the employer after completion of employees' assessments is not sustainable and interest under section 201(1A) cannot be charged where the deficient tax remains unpaid and the interest computation becomes unworkable.Final Conclusion: The Tribunal set aside the orders under sections 201(1) and 201(1A) insofar as they sought recovery of deficient TDS and interest from the employer: a specific deeming order is required to fasten liability under section 201(1A)/section 221; an employer acting on an honest, fair estimate or on a bona fide view (including reliance on section 10(14)) cannot be declared in default where two reasonable views exist; and deficient TDS cannot be validly demanded from the employer after completion of the employees' assessments. Appeals of the assessee are allowed and those of the revenue are dismissed. Issues Involved:1. Collection of deficit tax under section 201.2. Interest under section 201(1A) on non-deduction of tax at source.3. Taxability of conveyance allowance as perquisite under section 17(2).4. Delay in passing the order under section 201/201(1A).5. Employer's liability for tax deduction at source (TDS) on conveyance allowance.6. Penalty under section 221.Issue-wise Detailed Analysis:1. Collection of Deficit Tax under Section 201:The Assessing Officer (AO) considered conveyance allowance as a taxable perquisite under section 17(2) and held the employer liable for non-deduction of tax at source. The AO ordered the collection of deficit tax of Rs. 4,60,832 under section 201(1). The CIT(A) partially upheld this decision, allowing relief for Rs. 2.96 lakhs paid to workers but confirming the liability for Rs. 18.22 lakhs paid to staff members.2. Interest under Section 201(1A) on Non-Deduction of Tax at Source:Interest of Rs. 3,96,864 was charged under section 201(1A) for failure to deduct tax on conveyance allowance. The Tribunal noted that interest under section 201(1A) is mandatory and compensatory, not penal, and can only be levied if the employer is declared as an assessee in default.3. Taxability of Conveyance Allowance as Perquisite under Section 17(2):The AO and CIT(A) held that conveyance allowance paid for commuting between residence and place of work is taxable. The CIT(A) relied on various judgments, including Dr. Reddy's Laboratories Ltd. and LIC Class-I Officers (Bombay) Association v. LIC of India, which supported the view that such allowances are not exempt under section 10(14).4. Delay in Passing the Order under Section 201/201(1A):The assessee argued that the order under section 201/201(1A) was passed beyond the period of four years, citing decisions like Traco Cable Ltd. v. CIT and Bal Krishna Das v. CIT. However, the CIT(A) did not agree, noting that section 231, which provided for a time limit, was withdrawn w.e.f 1-4-1989 and thus did not apply to the assessment year 1996-97.5. Employer's Liability for TDS on Conveyance Allowance:The Tribunal observed that the employer's estimate of income for TDS purposes should be honest and fair. If there are two views on the taxability of an item, the employer can adopt the view favorable to the employee without being declared in default. The Tribunal cited cases like CIT v. Nestle India Ltd. and CIT v. Oil & Natural Gas Corp. Ltd. to support the view that bona fide belief and honest estimation by the employer should not lead to default.6. Penalty under Section 221:The Tribunal noted that a specific written order declaring the employer as deemed to be in default is necessary for levying penalty under section 221 and charging interest under section 201(1A). In this case, no such specific order was passed. The Tribunal emphasized that penalty and interest can only follow after a clear declaration of default.Conclusion:The Tribunal concluded that the employer-assessee cannot be declared as an assessee deemed to be in default for holding an honest opinion that conveyance allowance is not taxable. Consequently, interest under section 201(1A) and the demand for deficient TDS were not sustainable. The appeals of the assessee were allowed, and the appeals of the revenue were dismissed.