2008 (4) TMI 182 - HC - Income Tax

Proceedings under section 201(1)/201(1A) time-barred after unreasonable delay beyond four years; deductor's liability vicarious, assessee favored

HC held that initiation of proceedings under section 201(1)/201(1A) was time-barred where commenced beyond a reasonable period of four years. The court ... Failure to deduct tax at source - Assessee in default - Validity of orders passed u/s 201(1) and 201(1A) - time barred - vicarious liability - HELD THAT:- In so far as the Income-tax Act is concerned, our attention has been drawn to section 153(1) (a) thereof which prescribes the time limit for completing the assessment, which is two years from the end of the assessment year in which the income was first assessable. It is well known that the assessment year follows the previous year and, therefore, the time limit would be three years from the end of the financial years. This seems to be a reasonable period as accepted under section 153 of the Act, though for completion of assessment proceedings. The provisions of reassessment are under sections 147 and 148 of the Act and they are on a completely different footing and, therefore, do not merit consideration for the purpose of this case. Even though the period of three years would be a reasonable period as prescribed by section 153 of the Act for completion of proceedings, we have been told that the Income-tax Appellate Tribunal has, in a series of decisions, some of which have been mentioned in the order which is under challenge before us, taken the view that four years would be a reasonable period of time for initiating action, in a case where no limitation is prescribed. The rationale for this seems to be quite clear-if there is a time limit for completing the assessment, then the time limit for initiating the proceedings must be the same, if not less. Nevertheless, the Tribunal has given a greater period for commencement or initiation of proceedings. the primary liability to pay tax is on the person whose income it is that is the deductee. of course, a duty is cast upon the deductor, that is the person who is making the payment to the deductee, to deduct tax at source but if he fails to do so, it does not wash away the liability of the deductee. It is still the liability of the deductee to pay the tax. In that sense, the liability of the deductor is a vicarious liability and, therefore, he cannot be put in a situation which would prejudice him to such an extent that the liability would remain hanging on his head for all times to come in the event the Income-tax Department decides not to take any action to recover the tax either by passing an order under section 201 of the Act or through making an assessment of the income of the deductee. We are not inclined to disturb the order passed by the Tribunal and, therefore, we answer the question in the affirmative, in favour of the assessee and against the Revenue and hold that the initiation of proceedings under section 201 of the Act against the assessee in respect of the assessment year 1990-91 was barred by limitation having been initialing beyond a reasonable period of time of four years. The appeal is disposed of accordingly. Issues:1. Validity of orders passed under section 201(1) and 201(1A) of the Income-tax Act, 1961.2. Time limitation for initiating proceedings against an assessee in default.Issue 1: Validity of Orders under Section 201(1) and 201(1A):The case involved an appeal by the Revenue against an order passed by the Income-tax Appellate Tribunal concerning the assessment year 1990-91. The dispute arose from the deduction of tax at source by a Government-company of a foreign country for its employees in India. The company paid Indian employees in Indian rupees and also provided a 'global salary' to employees in the home country without deducting tax at source. A survey conducted by the Revenue in 1998 revealed this discrepancy. The company admitted its liability for tax deduction on the global salary and paid the due tax and interest. The Assessing Officer treated the company as an assessee in default under section 201 of the Act, leading to potential penalties. The Tribunal, however, held that the Revenue did not initiate proceedings within a reasonable period, questioning the validity of the orders under sections 201(1) and 201(1A).Issue 2: Time Limitation for Initiating Proceedings:The key question was whether there was a time limit for initiating proceedings against an assessee in default under section 201 of the Act. The Tribunal, supported by relevant case laws, emphasized the need for a reasonable time frame for the Revenue to commence such actions. While the Act did not specify a limitation period, the Tribunal determined four years as a reasonable period for initiating proceedings in cases where no specific limit was prescribed. This decision was based on the principle that the time limit for initiating proceedings should align with or be less than the period allowed for completing assessments. The Court upheld the Tribunal's decision, highlighting that the concept of knowledge or voluntary tax payment by the assessee did not extend the period of limitation for the Revenue to act. The judgment clarified that the liability to pay tax ultimately rested with the deductee, and the deductor's failure to deduct tax did not absolve the deductee of this responsibility. Consequently, the Court ruled in favor of the assessee, holding that the initiation of proceedings against them for the assessment year 1990-91 was indeed barred by limitation, affirming the Tribunal's decision.In conclusion, the judgment addressed the issues of the validity of orders under sections 201(1) and 201(1A) of the Income-tax Act, 1961, and the time limitation for initiating proceedings against an assessee in default. The Court upheld the Tribunal's decision, establishing a four-year reasonable period for initiating such actions in the absence of a specific limitation period in the Act.