1999 (9) TMI 13 - HC - Income Tax

Employer's failure to deduct TDS on employee allowances u/s192/s.201-good-faith belief accepted, default orders quashed, appeal dismissed

Whether the employer could be treated as an assessee deemed in default under s. 201(1) r/w s. 192 for non-deduction of TDS on certain employee allowances ... Deemed assessee in default under section 201(1) - liability to deduct tax at source - bona fide belief of employer - interest under section 201(1A) - appellate jurisdiction under section 260ADeemed assessee in default under section 201(1) - liability to deduct tax at source - bona fide belief of employer - Whether the Tribunal was correct in holding that the assessee could not be held to be a deemed defaulter under section 201(1) on account of a bona fide belief that disputed payments were not taxable and therefore not liable to TDS. - HELD THAT: - The Tribunal found that the Department had not proved mala fides and that the assessee acted under a bona fide belief that the payments were not taxable, a conclusion supported by the Department's earlier initiation but non-pursuit of proceedings for earlier years and by rectification in favour of an employee. The High Court held that a deeming provision which brands an employer a deemed defaulter must be strictly construed and that the Tribunal's conclusion that, on the facts, the assessee honestly believed the payments were not salary was a factual finding not vitiated by error of law. The Court further noted the distinction between the first part of section 201(1), which creates deemed default on failure to deduct, and later stages concerned with penalty; however, on the record the Tribunal legitimately took into account the surrounding circumstances (including prior non-pursuit of notices and rectification) in arriving at its factual conclusion. The High Court declined to enter into a larger principle or reinterpretation of section 201(1), holding that no substantial question of law under section 260A arose from the Tribunal's factual determination.The Tribunal's finding that the assessee was not a deemed defaulter under section 201(1) owing to a bona fide belief was upheld and treated as not raising a substantial question of law.Final Conclusion: The appeals under section 260A are dismissed; the High Court finds no substantial question of law arising from the Tribunal's factual conclusion that the assessee acted bona fide and therefore was not a deemed defaulter under section 201(1). Issues Involved:1. Whether the assessee could be held to be an assessee deemed to be in default u/s 201(1) and thereby cancelling the orders passed by the Assessing Officer u/s 201(1) and 201(1A) of the Income-tax Act, 1961.Summary:Issue 1: Assessee Deemed to be in Default u/s 201(1)The Revenue challenged the order of the Income-tax Appellate Tribunal, which held that the assessee, Gujarat Narmada Valley Fertilizers Company Limited, could not be deemed to be in default u/s 201(1) for not deducting tax at source on certain payments to employees. The Income-tax Officer (TDS) had found that payments such as vehicle allowance, cash canteen assistance, medical reimbursement, and others were made without proper reimbursement and accounting, thus violating section 192 of the Act. Consequently, the assessee was deemed to be in default for a tax amount of Rs. 2,36,45,731 and interest of Rs. 51,72,501 u/s 201(1A).The Commissioner of Income-tax (Appeals) upheld the tax liability but partly allowed the appeal regarding interest. The Tribunal, however, quashed the orders, noting that the assessee had a bona fide belief that the payments were not taxable based on past departmental actions and judicial decisions. The Tribunal found no mala fide intention on the part of the assessee.Revenue's Argument:The Revenue contended that the Tribunal erred in law by not properly construing sections 192, 200, and 201 read with sections 15, 16, and 17 of the Act. It argued that the employer's failure to deduct tax at source automatically made them a deemed defaulter u/s 201(1), irrespective of their intention. The first part of section 201(1) imposes liability for tax and interest, while the second part, dealing with penalties, considers the employer's intention.Assessee's Argument:The assessee argued that the employer's liability to deduct tax depends on whether the payments are taxable. Since the payments were not taxable, there was no obligation to deduct tax. The assessee also highlighted that past departmental actions indicated that such payments were not subject to tax, reinforcing their bona fide belief.Court's Decision:The court held that no substantial question of law arose from the Tribunal's order. The Tribunal's finding of a bona fide belief on the part of the assessee was a factual determination, not subject to challenge u/s 260A. The court emphasized that the liability to pay tax ultimately rests with the employees, and the Tribunal did not err in its judgment. The appeals were dismissed without costs.