2011 (4) TMI 886 - HC - Income Tax

Court rules employer responsible for tax deduction, absolves assessee from interest under Income-tax Act

Director of Income-tax Versus Maersk Co. Ltd.

The court held that the assessee was not liable to pay interest under section 234B of the Income-tax Act, 1961, for the employer's failure to deduct tax ... Interest u/s 234B - advance tax was not paid - Held that:- Assessee was not liable to pay advance tax under section 208 inasmuch as the tax at source was required to be deducted by the person responsible for paying any income chargeable under the head 'Salaries' at the time of payment u/s 192. The assessee only became liable to pay the tax directly under section 191 since it was not deducted at source. The stage for making payment of tax could only arise at the stage of self-assessment which is to be made in a later assessment year as is clear from section 190, whereas advance tax is liable to be paid in a financial year only and not thereafter. Thus consequently of the view that if the employer fails to deduct the tax at source while paying any income charge-able under the head 'Salaries', would be responsible for payment of interest under section 201(1A). The assessee would not be liable to pay interest under section 234B since he was not liable to pay advance tax under section 208. Since the question of charging of interest under section 234B was remitted to the AO by the appellate authority, the appeals dismissed with the direction to the AO to pass consequential orders on the issue pending before it on the basis of the decision given by this Bench - in favour of assessee as directed. Issues Involved:- Liability to pay interest under section 234B of the Income-tax Act, 1961, when tax is not deducted at source by the employer.Detailed Analysis:Reference to Larger Bench:A Division Bench of the court found itself unable to agree with the decision of another Division Bench and referred the matter to a Full Bench to decide the case.Case Background:In the case of CIT v. Tide Water Marine International Inc., the question was whether the Income-tax Appellate Tribunal erred in holding that interest was not payable by the assessee under section 234B of the Income-tax Act, 1961, even though the income was subject to tax deduction at source. The High Court affirmed that the assessee was not liable to pay interest under section 234B for the employer's failure to deduct tax at source.Division Bench's Contradiction:The Division Bench in the present appeal disagreed with the decision in Tide Water Marine, holding that if the assessee was liable to be taxed in India, it was his obligation to pay advance tax and, if failed, he was liable to pay interest under section 234B. This contradiction led to the matter being referred to a Larger Bench.Facts of the Present Case:The case involved M/s. Maersk Co. Ltd., a non-resident company providing technicians to ONGC. The Income-tax Department treated MCL as an agent of the employees and assessed the income under sections 143(3)/147 and 163 of the Act, holding that the agent company was liable to pay interest under section 234B for non-deduction of tax at source.Arguments by Income-tax Department:The Department contended that section 234B was applicable to income under the head 'Salaries' and that the assessee was liable to pay interest for non-payment of advance tax, even if the employer failed to deduct tax at source. The Department argued that the provisions of section 234B are mandatory, and interest can be imposed on either the employer or the assessee.Arguments by Assessee:The assessee argued that the obligation to pay advance tax does not apply to salaried income as the employer is responsible for deducting tax at source under section 192. If there was a short deduction, the Department should move against the employer under section 201 for recovery of tax and interest. The assessee claimed that section 234B does not apply where income is liable to tax deduction at source.Legal Provisions Considered:- Section 190(1): Tax payable by deduction at source or by advance payment.- Section 191: Tax payable directly by the assessee if not deducted at source.- Section 192(1): Employer's obligation to deduct tax at source on salaries.- Section 201(1A): Interest liability on the person who fails to deduct tax at source.- Section 208: Advance tax payable during the financial year.- Section 209: Computation of advance tax payable.- Section 234B: Interest on failure to pay advance tax.Court's Analysis:The court held that the liability to pay interest under section 234B arises only if the assessee fails to pay advance tax under section 208. For salaried income, the obligation to deduct tax at source lies with the employer under section 192. The assessee cannot foresee the employer's failure to deduct tax. Therefore, the liability to pay interest under section 234B does not extend to the assessee for the employer's default.Precedents:- Sedco Forex International Drilling Co. Ltd.: Held that interest was not payable by the assessee under section 234B for non-deduction of tax at source by the employer.- Halliburton Offshore Services Inc.: Reiterated that interest under section 234B could not be charged when income was subject to TDS.- Madras Fertilisers Ltd.: Held that the person who failed to deduct tax at source was liable to pay interest, not the assessee.- Ranoli Investment P. Ltd.: Concluded that the liability to pay interest is on the payer for non-deduction of tax.Conclusion:The court concluded that the assessee was not liable to pay advance tax under section 208 as the employer was responsible for deducting tax at source under section 192. The employer's failure to deduct tax makes them liable for interest under section 201(1A), not the assessee under section 234B. The court concurred with the decision in Tide Water Marine and disagreed with the Division Bench's order dated December 9, 2010.Final Judgment:The court dismissed the appeals and directed the Assessing Officer to pass consequential orders based on the Full Bench's decision. The assessee is not liable to pay interest under section 234B for the employer's failure to deduct tax at source.