2024 (12) TMI 30 - AT - Income Tax

Employer protected from TDS interest under section 192(3) when shortfall adjusted within same financial year

The Great Eastern Shipping Co. Ltd., M/s. Kalyaniwalla And Mistry LLP Versus DCIT, TDS Circle – 2 (3) MTNL Bldg, Mumbai

ITAT Mumbai ruled in favor of the assessee regarding interest levy under sections 201(1A) and 220(2). The tribunal held that where an employer has ... Levy of interest u/s 201(1A) - late deduction of tax at source on salaries paid to floating staff members - bonafied reasons in deducting lower tax in the earlier months of financial year - as per AO the assessee has not followed the approach envisaged in sub-section (1) of section 192 of the Income Tax Act which mandates an employer to estimate salary income of the employee for the entire year and deduct monthly TDS on prorate basis HELD THAT:- If there are bonafide reasons in deducting a lower tax in earlier months of financial year and the same is made get immediately after noticing such shortfall, then in the eventuality section 192 sub-section (3) would save the employer from the liability of making payment of interest. Thus, to meet such eventualities sub-section (3) provides for adjustment of excess or deficiency arising out of the any previous months or failure to deduct in the financial year. Any other interpretation would render Sec. 192(3) nugatory and an employer would be put to undue burden of payment of interest for no fault of him. From this analysis, it is apparent that on mere short deduction of tax at source from the salaries paid to the employees, Sec. 201(1A) cannot be invoked, unless the total tax deducted by the end of the year is less than the tax deductable from the salary paid to the employee in that year. Since, in the instance case the assessee has reasonably estimated the income and in view of the above circumstances there was a short deduction of tax at the beginning of financial year which is adjusted in the later months. Therefore in our considered view interest is not chargeable for mere short deduction in the initial months. Thus these grounds raised by the assessee are allowed. Confirming the levy of interest u/s 220 sub-clause (2) of the Act - After having gone through the provisions of Sec. 220 subclause (2) of the Act, we are of the considered view that the same is applicable only where the amounts specified in the notice of demand issued u/s 156 of the Act is not paid within the stipulated period. But in the present case the provisions of Sec. 220 sub-clause (2) of the Act are not applicable as no order or notice of demand was ever issued in respect of the aforesaid assessment year. Therefore, the assessee would not have any liability with regard to levy of interest u/s 220(2) of the Act and therefore the levy of interest u/s 220(2) of the Act stands deleted and this ground raised by the assessee stands allowed. Issues Involved:1. Levy of interest under Section 201(1A) of the Income Tax Act for late deduction of tax at source on salaries paid to floating staff members.2. Determination of the residential status of floating staff members.3. Interpretation of Circular No. 586 concerning the adjustment of TDS within the financial year.4. Consideration of precedents from various High Courts and Tribunals regarding interest levied on late deduction of salaries.5. Levy of interest under Section 220(2) of the Income Tax Act.Issue-wise Detailed Analysis:1. Levy of Interest under Section 201(1A):The primary issue revolves around the levy of interest under Section 201(1A) for the alleged late deduction of tax at source on salaries paid to floating staff members. The assessee, a shipping company, argued that it was unable to determine the residential status of its floating staff, who were deployed on vessels in foreign waters, at the start of the financial year. This uncertainty made it difficult to deduct TDS on a prorata basis as required by Section 192(1). The Tribunal noted that the provisions of Section 192(3) allow for adjustments in TDS deductions throughout the financial year, accommodating any excess or deficiency. The Tribunal found that the assessee acted in good faith and made necessary adjustments by the end of the financial year. Citing precedents, the Tribunal held that interest under Section 201(1A) is not applicable when the total tax is deducted by the end of the year, thus allowing the assessee's appeal on this ground.2. Determination of Residential Status:The assessee contended that determining the residential status of floating staff, who worked both in Indian and foreign waters, was only possible towards the end of the year. The Tribunal acknowledged the practical difficulties faced by the assessee in estimating the residential status of employees who frequently moved between jurisdictions. It was noted that the assessee had a bona fide approach in estimating TDS based on the best available information and adjusted the deductions accordingly by the financial year's end.3. Interpretation of Circular No. 586:The Tribunal addressed the assessee's argument regarding Circular No. 586, which allows for adjustments in TDS within the financial year. The Circular clarifies that shipping companies may adjust TDS deductions if an employee's residential status changes during the year. The Tribunal agreed with the assessee's interpretation that the Circular supports the flexibility provided under Section 192(3) for adjusting TDS deductions to account for changes in residential status.4. Consideration of Precedents:The assessee cited several judgments from High Courts and Tribunals where interest on late TDS deductions was deleted under similar circumstances. The Tribunal considered these precedents, including decisions from the Uttarakhand High Court and the ITAT Mumbai, which supported the view that adjustments made within the financial year, as permitted by Section 192(3), protect the employer from interest liability under Section 201(1A). The Tribunal found these precedents persuasive and consistent with the facts of the case.5. Levy of Interest under Section 220(2):The assessee challenged the levy of interest under Section 220(2), arguing that no notice of demand was issued under Section 156 for the relevant assessment year. The Tribunal agreed, noting that Section 220(2) applies only when a demand notice is issued and not paid within the stipulated period. Since no such notice was issued, the Tribunal held that the interest levy under Section 220(2) was not applicable and deleted the interest.Conclusion:The Tribunal allowed the appeals filed by the assessee, concluding that the interest levied under Sections 201(1A) and 220(2) was not justified given the circumstances and legal provisions. The decision was based on a thorough analysis of the factual situation, relevant legal provisions, and supporting judicial precedents. The Tribunal emphasized the need for a liberal interpretation of the law to achieve substantial justice, particularly in complex cases involving international employment and tax obligations.