Itta/331/2003 Of Commissioner Of Income Tax-Ii v. M/S. U.b.electronic Instruments Ltd

HON’BLE SRI JUSTICE L. NARASIMHA REDDYANDHON’BLE SRI JUSTICE CHALLA KODANDA RAM I.T.T.A No. 331 OF 2003 12-11-2014 BETWEEN Commissioner of Income Tax – II, Hyderabad …Appellant And M/s. U.B. Electronic Instruments Ltd., Hyderabad …..Respondent HON’BLE SRI JUSTICE L. NARASIMHA REDDYAND HON’BLE SRI JUSTICE CHALLA KODANDA RAM I.T.T.A No. 331 OF 2003 JUDGMENT:(per the Hon'ble Sri Justice L. Narasimha Reddy) The respondent is a company and an assessee under theIncome Tax Act, 1961 (for short, ‘the Act’). It has been submittingreturns year after year disclosing the relevant informationpertaining to the income, expenditure, deductions etc. As a part ofits activity, the respondent raised loans from its associatecompanies of the UB Group. For some period, it was payinginterest. When it started incurring losses, the respondent is saidto have requested the creditors to waive the interest. Stating that the loanees have waived the interest, it did not make anydeduction of tax at source on the component of interest for theassessment years 1989-90, 1990-91 and 1991-92. An audit report under Section 44AB of the Act was obtainedin the assessment year 1991-92. The assessing officer took theview that amounts of Rs.1,88,301, Rs.6,15,208 and Rs.1,57,563for the three assessment years referred to above ought to havebeen paid as interest and since the tax at source on the saidinterest was not deducted or paid as required under Section 201 ofthe Act, notice was issued. The respondent submittedexplanation stating that the occasion to effect deduction of tax atsource did not arise. Not satisfied with the explanation, theassessing officer passed an order dated 31-03-1999 under Section201(1A) of the Act not only demanding tax but also levying interestfor the amounts referred to above. The respondent filed appeals before the Commissioner ofIncome Tax (Appeals) V (Central), Hyderabad. The appeals weredismissed on 25-08-2000. Aggrieved by that, the respondent filedITA Nos.702 to 704/Hyd/2000 before the Hyderabad Bench ‘B’ ofthe Income Tax Appellate Tribunal, Hyderabad (for short, ‘theTribunal’). The appeals were allowed through order dated 19-08-2002. Hence, this appeal. Heard Sri S.R. Ashok, learned Senior Standing Counsel forthe appellant. Section 201 of the Act imposes an obligation on not only an assessee but also any person including the principal officer of acompany to deduct tax at source on any amount that is paid bythem to another. Failure to effect such deduction and remittanceof the same to the department exposes them to the obligation notonly for payment of the same on demand but also to pay theinterest. The respondent no doubt was paying interest to its sisterconcerns on the loans borrowed by it year after year. However,for the three assessment years 1989-90, 1990-91 and 1991-92 itdid not deduct any tax on the ground that it did not pay any interestat all. In the relevant assessment years, non-deduction of tax atsource was not found fault with. It was only at a subsequent stagethat a notice was issued proposing action under Section 201 of theAct. The defence of the respondent was that it did not effectdeduction since the creditors have acceded to its request to waiveinterest on the ground that it incurred losses. The assessing officer did not accept the contention of therespondent, and so did the Commissioner. The Tribunal howeverexamined the matter from the point of view of limitation. It did takenote of the fact that Section 201 of the Act or other analogousprovisions did not prescribe any limitation for recovery of theamount representing deduction of tax at source. However, ittreated four years period as constituting limitation for initiatingsteps under that provision. For various steps that are required to be taken under theAct, the Parliament has prescribed the limitation. For example,Section 149 of the Act stipulates a period of four years from the The assessing officer did not accept the contention of therespondent, and so did the Commissioner. The Tribunal howeverexamined the matter from the point of view of limitation. It did takenote of the fact that Section 201 of the Act or other analogousprovisions did not prescribe any limitation for recovery of theamount representing deduction of tax at source. However, ittreated four years period as constituting limitation for initiatingsteps under that provision. For various steps that are required to be taken under theAct, the Parliament has prescribed the limitation. For example,Section 149 of the Act stipulates a period of four years from the end of the relevant assessment year for the purpose of initiatingproceedings under Section 148 of the Act where any income hasescaped the assessment. Similarly, the power of suo moturevision can be exercised by a Commissioner against an order ofassessment under sub-section (2) of Section 263 not beyondexpiry of two years from the end of the financial year in which theorder sought to be revised was passed. The examples can bemultiplied. If for important and substantial proceedings like thoseunder Section 148 of the Act and the suo motu proceedings underSection 263 of the Act limitation prescribed is four years and twoyears respectively, an ordinary and inconsequential step relatingto deduction of tax at source cannot be permitted to be initiatedbeyond the period so stipulated. By and large, four years is treated as the period withinwhich any penal action can be initiated against an assessee. Failure to initiate steps within that period would disable thedepartment to proceed against the assessee. The reason is notdifficult to be discerned. With each passing year, the assessee isrequired to adjust his or her own affairs in such a way that theactivity undertaken by it goes on smoothly. In case, liability forthe preceding one or two years is fastened, there can be scope formaking adjustment thereof in the activities of the subsequentyears. However, if fairly long gap intervenes, it becomes difficultfor making such adjustments, particularly when the activity iscommercial in nature. In the instant case, the assessment years are 1989-90, 1990-91 and 1991-92. It was nearly seven years thereafter that anotice was issued. For an assessee to be required to pay theamount, even if due five or six years preceding the demand, wouldbe a serious problem. Several developments take place over theperiod, and the nature of relations undergoes change. Obviously, because there was no precedent handed out byany High Court or Supreme Court, the Tribunal referred to an orderpassed by the Bombay Bench ‘D’ of the Tribunal in Raymond Woollen Mills Ltd. vs. ITO[[1]]. The relevant portion was extracted in detail and it was demonstrated that the same situation obtains inthe present case also. We are in full agreement with the viewtaken by the Tribunal and accordingly, the following questionsframed in the appeal, viz., “1. Whether the Appellate Tribunal is justified inroping in the theory of reasonable period for passing theorders U/s.201(A) of the I.T. Act, in the absence of time limitbeing specified in the I.T. Act? 2. Whether the finding that the levy of interest U/s.201 (1A) cannot be said to be within the reasonable time islegal and valid in spite of continuous breach or defaultcommitted by the assessee? 3. Whether the finding of the Appellate Tribunal thatthe levy cannot be said to be within the reasonable time isbased on material on record?” are answered against the department and in favour of theassessee. There shall be no order as to costs. 12-11-2014 ksNote:LR Copy to be marked. B/O ks [1]57 ITD 536 ___________________________ L. NARASIMHA REDDY, J ____________________________ CHALLA KODANDA RAM, J