2023 (12) TMI 91 - AT - Income Tax

TCS order under section 206C(1) quashed as four-year limitation period expired before show cause notice issued

Nisarahmed Abdulsattar, Shaikh Versus The I TO, TDS-2, Ahmedabad

Nisarahmed Abdulsattar, Shaikh Versus The I TO, TDS-2, Ahmedabad - [2023] 107 ITR (Trib) 233 (ITAT [Ahm]) ISSUES PRESENTED AND CONSIDERED 1. Whether amounts received from sale of metal/CRC sheets characterized as 'defective sheets' fall within the statutory definition of 'scrap' so as to attract liability to collect tax at source under section 206C. 2. Whether proceedings and orders initiated and passed under section 206C(6A)/206C(1) and demand of TCS and interest under section 206C(7) are time-barred where taken after four years from the end of the relevant financial year. 3. Whether interest under section 206C(7) and penalty under section 271CA remain leviable where the substantive order under section 206C is quashed as barred by limitation. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of section 206C to sales of defective/CRC sheets (Legal framework) Legal framework: Section 206C requires collection of tax at source on sale of 'scrap' as defined in the statute - meaning waste and scrap produced by manufacturing or mechanical working which is not usable as such. Precedent treatment: The Tribunal considered authorities that interpret the scope of 'scrap' and whether trading in usable defective sheets amounts to sale of scrap; those authorities have been relied upon by parties in support of differing contentions. (See cross-reference to reasoning on limitation where precedential approach to similar provisions is discussed.) Interpretation and reasoning: The Tribunal examined the statutory definition emphasizing that 'scrap' connotes material not usable as such without further processing and arising from manufacturing/mechanical working. The assessee's case, as recorded, was that the traded items were defective sheets that remained usable as such and not the product of manufacturing scrap; therefore they did not fall within the statutory concept of 'scrap'. The lower authorities treated the sales as scrap and levied TCS. Ratio vs. Obiter: The Court did not finally decide the substantive characterization dispute on its merits because the Tribunal disposed of the appeal on limitation grounds (see Issue 2). Accordingly, any observations regarding the characterization of the goods as scrap are obiter in the context of the present decision. Conclusion: No operative conclusion on the substantive applicability of section 206C to the transactions was reached because the substantive demand was quashed on limitation grounds; thus the question remains unadjudicated in ratio and any comment is non-binding obiter. Issue 2 - Limitation for initiating proceedings under section 206C (Legal framework) Legal framework: Section 206C does not prescribe an explicit time-limit for initiation of proceedings to levy TCS/assess defaults; principles of limitation applicable to analogous TDS/TCS proceedings have been considered by higher fora. Where no specific limitation is provided, a reasonable period for initiation has been judicially recognized. Precedent treatment (followed): The Tribunal followed established higher-forum jurisprudence holding that, in the absence of a prescribed limitation, a reasonable period for initiating prosecution or proceedings under provisions akin to sections dealing with TDS/TCS is four years from the end of the relevant financial year. That four-year benchmark has been treated as applicable to orders for failure to collect tax at source where no special limitation is prescribed. Interpretation and reasoning: Applying the four-year reasonable-period principle, the Tribunal computed the limitation from the end of the financial year concerned. For the assessment year in question the four-year period expired before issuance of the show-cause notice and before the order under section 206C was passed. The Tribunal held that the Assessing Officer's show-cause notice and subsequent order were therefore beyond the reasonable period and lacked legal sustainment. Ratio vs. Obiter: This finding is ratio decidendi for the adjudication of the appeal because it disposes of the appeal on a pure question of law - the maintainability of the order for want of limitation - and is the operative basis for quashing the demand. Conclusion: Proceedings and order under section 206C(6A)/206C(1) taken after the four-year period from the end of the relevant financial year are time-barred; the Tribunal quashed the order and demand on that ground. Issue 3 - Consequences for interest under section 206C(7) and penalty under section 271CA when substantive order is quashed (Legal framework) Legal framework: Interest under section 206C(7) and penalty under section 271CA are consequential on the substantive establishment of a TCS liability or default. Precedent treatment: Where the substantive demand or order is set aside as invalid (for example, for being barred by limitation), ancillary demands such as interest and penalties founded on that order lose their legal basis and fall with the principal order. Interpretation and reasoning: The Tribunal observed that, since the substantive order under section 206C was quashed as barred by limitation, the interest levied under section 206C(7) and the penalty imposed under section 271CA had no independent footing and could not survive independently of the principal order. Ratio vs. Obiter: The conclusion that consequential interest and penalty fall when the principal demand is quashed is part of the operative ratio in so far as it follows directly from the Tribunal's primary finding on limitation. Conclusion: Interest under section 206C(7) and penalty under section 271CA were dismissed as having no legs to stand once the principal order under section 206C was quashed for being time-barred. Cross-references and ancillary procedural point The Tribunal addressed delay in filing an appeal against the penalty and applied the pandemic-period exclusion of time from national jurisprudence to hold there was no delay; this procedural finding enabled adjudication on merits of the penalty appeal without rejecting it on limitation grounds. However, ultimate dismissal of the penalty was on substantive/consequential grounds tied to quashing of the principal order.