2014 (4) TMI 277 - HC - Income Tax

Court Decision: Conveyance allowance taxed as salary, interest payments exempt

The court ruled that conveyance allowance paid to employees for commuting to and from work should be considered as part of the salary and taxable under ... Scope of salary for the purpose of TDS – Conveyance allowance - Whether conveyance allowance is given for coming from house to office/factory and back instead of providing a vehicle for transportation is liable to be treated as salary for the purpose of deduction of tax at source – Held that:- The Tribunal rightly was of the view that the amount that is paid not being of wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment of profit - The conveyance allowance paid to defray expenses connected with journeys from residence to office and back cannot be treated as an allowance paid for defraying expenses wholly, necessarily and exclusively in the performance of the duty - amounts are being paid on a lump sum fixed basis without there being any correlation to the expenses actually incurred. Relying upon Dr. Reddy Laboratories Ltd. v. ITO [1995 (12) TMI 93 - ITAT HYDERABAD-A] - the conveyance allowance paid to defray expenses connected with journeys from residence to office and back, cannot be termed as an allowance paid for defraying expenses 'wholly, necessarily and exclusively' in the performance of the duties - it is only to the extent such expenses are actually incurred, that exemption would be available under section 10(14) in respect of even an allowance notified by the Central Government in that behalf - the conveyance allowance is clearly taxable under the head 'Salary' and as such the assessee could not have excluded the conveyance allowance paid, while computing the tax deductible at source, from the salaries paid by it to its employees – Decided against Assessee. Interest debited to recoup the interest - Whether in a case where interest is debited to the account of an Indian company by bank to recoup the interest charged to it by the discounting bank would it entail deduction of tax at source u/s 195 of the Act by the Indian company – Held that:- The assessee had privity of contract only with the Allahabad Bank and the amounts were paid to Allahabad Bank - It cannot be said that the assessee had any obligation to the American Express Bank and in that view of the matter it cannot be said that the transaction would fall within section 9(1)(5) of the Act - In the circumstances there was no obligation on the assessee to make TDS deduction under section 195 of the Act – Relying upon GE India Technology Centre P. Ltd. v. CIT [2010 (9) TMI 7 - SUPREME COURT OF INDIA ] - the obligation to deduct the tax with respect to the foreign remittances would arise only when the sum paid is chargeable under the provisions of the Act - there was no payment by the assessee, in the facts of the case neither section 9 nor section 195 of the Act itself has no application – Decided in favour of Assessee. Payment of tax and interest u/s 201 of the Act - Whether items which are subject matter of dispute, controversy and legal interpretation could at all be considered for the purpose of passing order under section 201 of the Income-tax Act demanding payment of tax and interest – Held that:- There was no reference of section 201 of the Act in case of short payment - The first circular No. 685, dated June 17, 1994 categorically states that it is the satisfaction of the disbursing authority whether to take into consideration the conveyance allowance for the purpose of tax deduction at source - satisfaction of disbursing authority is liable for security by the Income-tax Officer during regular assessment proceedings - in the second Circular speaks about interest liability under section 201(1A) of the Act, apart from proceedings under section 221 or prosecution under Chapter XXII of the Act – Relying upon PV. Rajagopal And Others Versus Union of India And Others [1998 (4) TMI 127 - ANDHRA PRADESH High Court] - for the purpose of payment of tax no proceedings u/s 201 of the Act could have been made – Decided against Assessee. Issues Involved:1. Whether conveyance allowance for commuting to and from work is liable to be treated as salary for tax deduction purposes.2. Whether interest debited to an Indian company's account by a bank for recouping interest charged by a discounting bank requires tax deduction at source under section 195 of the Income-tax Act.3. Liability of the appellant for interest payment under section 201 of the Income-tax Act concerning royalty payments when tax was paid after ascertaining the quantum of royalty.4. Consideration of disputed items for passing orders under section 201 of the Income-tax Act demanding tax and interest.Detailed Analysis:Issue 1: Conveyance Allowance as SalaryThe assessee contended that conveyance allowance paid to employees for commuting to and from work should not be considered part of the salary. The claim was that such allowances qualify for exemption under section 10(14) of the Income-tax Act. However, the authorities and the Tribunal rejected this claim, stating that the allowance was not incurred wholly, necessarily, and exclusively in the performance of duties. The Tribunal noted that the payments were made on a lump sum fixed basis without correlation to actual expenses incurred. The Tribunal's decision was based on the precedent set in Dr. Reddy Laboratories Ltd. v. ITO.The court upheld the Tribunal's reasoning, noting that the allowance paid to defray commuting expenses does not meet the criteria for exemption under section 10(14). It was emphasized that such allowances are taxable under the head 'Salary' and should be included in the computation for tax deduction at source. Consequently, this issue was decided against the assessee and in favor of the Revenue.Issue 2: Interest Payment and TDS under Section 195The assessee paid amounts to Allahabad Bank, which arranged letters of credit (L.C.) for their suppliers. The bank debited sums that included interest charges by American Express Bank. The authorities treated the assessee as in default for not deducting tax at source under section 195 on these interest payments.The court considered whether the assessee had any obligation to American Express Bank. It was determined that the assessee's contract was solely with Allahabad Bank, and any payments made to American Express Bank were part of L.C. charges. The court referenced the decision in GE India Technology Centre P. Ltd. v. CIT, which clarified that TDS obligations arise only when the sum paid is chargeable under the Act. Since the payments were part of L.C. charges and not direct interest payments to American Express Bank, the court ruled that section 195 did not apply. This issue was decided in favor of the assessee.Issue 3: Interest Payment under Section 201The learned counsel for the assessee did not press this issue, and therefore, the court declined to answer it.Issue 4: Applicability of Section 201 for Disputed ItemsThe assessee argued that section 201, at the relevant time, did not cover short deduction or short payment of tax. The court examined the language of section 201 before and after its amendment and noted that the provision for short deduction or short payment was not included initially. The court referenced the judgment in P. V. Rajagopal v. Union of India, which held that section 201 does not apply to cases of short deduction.The court also reviewed relevant circulars, which supported the view that section 201 did not apply to short deductions. The circulars indicated that satisfaction of the disbursing authority regarding conveyance allowance was subject to scrutiny during regular assessment proceedings, not under section 201.Given the bona fide dispute over whether conveyance allowance constituted part of the salary, the court ruled that section 201 could not be invoked in this context. This issue was decided in favor of the assessee.Conclusion:- Issue 1: Decided against the assessee and in favor of the Revenue.- Issue 2: Decided in favor of the assessee and against the Revenue.- Issue 3: Not answered.- Issue 4: Decided in favor of the assessee and against the Revenue.The appeal was disposed of with no order as to costs.