Bona fide reliance on court orders barred assessee-in-default treatment and consequential tax demand on interest for enhanced compensation.

A deductor was not liable to be treated as an assessee in default for failing to deduct tax at source from interest paid on enhanced compensation where the omission was made in bona fide obedience to prevailing court orders and directions of superior revenue authority based on legal advice. On those facts, no fault could be attributed to the deductor, and the consequential demand and interest liability were unsustainable. The impugned assessment and recovery orders were therefore quashed, with refund directed if any amount had already been deposited, together with interest.

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Issues: (i) Whether the petitioner was liable to deduct tax at source on interest paid on enhanced compensation under the land acquisition law and could be treated as an assessee in default under the Income-tax Act, 1961. (ii) Whether consequential liability to interest and demand could be sustained when the non-deduction was based on court orders and legal advice.

Issue (i): Whether the petitioner was liable to deduct tax at source on interest paid on enhanced compensation under the land acquisition law and could be treated as an assessee in default under the Income-tax Act, 1961.

Analysis: The dispute turned on whether the land acquisition officer acted unlawfully in not deducting tax from interest paid on enhanced compensation. The record showed that, during the relevant period, the officer followed judicial orders that had restrained deduction of tax at source and also acted on directions of the superior revenue authority based on legal opinion. The Court accepted that the officer did not act on a unilateral or arbitrary view, but under a genuine belief supported by contemporaneous court protection against deduction. In these circumstances, no fault could be attributed to him for non-deduction of tax.

Conclusion: The petitioner was not liable to be treated as an assessee in default for non-deduction of tax on the interest paid on enhanced compensation.

Issue (ii): Whether consequential liability to interest and demand could be sustained when the non-deduction was based on court orders and legal advice.

Analysis: The principle that no party should suffer because of an act of the Court was applied. Since the non-deduction arose from obedience to prevailing judicial orders and official directions grounded in legal advice, the consequential demand and interest could not be sustained as wrongful conduct on the part of the petitioner. The Court held that penal consequences under the assessment and recovery order were unjustified in these facts.

Conclusion: The demand and consequential interest liability were unsustainable and were set aside.

Final Conclusion: The writ petitions succeeded, and the impugned assessment and recovery orders were quashed, with refund directed if any amount had already been deposited along with interest.

Ratio Decidendi: A deductor acting in bona fide obedience to prevailing court orders and superior authority directions cannot be fastened with assessee-in-default liability or consequential demand for non-deduction of tax.

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