So Far As Question v. Income Tax

HON’BLE SRI JUSTICE G. CHANDRAIAH AND HON’BLE SRI JUSTICE CHALLA KODANDA RAM I.T.T.A. No. 71 OF 2000 ORDER:- (per Hon’ble Sri Justice Challa Kodanda Ram) This appeal is preferred by the assessee, against the orderdated 10.02.2000 in I.T.A. No.1721/Hyd/96 passed by the IncomeTax Appellate Tribunal, Hyderabad Bench “B” (in short “theTribunal”) raising the following four substantial questions of law.The present case is pertaining to the assessment year 1995-1996. 1) Whether conveyance allowance is given for comingfrom house to office/factory and back instead ofproviding a vehicle for transportation is liable to betreated as salary for the purpose of deduction of tax atsource? 2) Whether in a case where interest is debited to theaccount of an Indian Company by bank to recoup theinterest charged to it by the discounting bank would itentail deduction of tax at source u/s. 195 of the IncomeTax Act by the Indian Company? 3) Whether the appellant is liable for payment of interestu/s.201 of the Income Tax Act in respect of royaltyamount when the payment of tax was effected soonafter the ascertainment of the quantum of royaltypayable to the non-resident company in accordance withthe agreement entered into with the non-residentcompany? 4) Whether items which are subject matter of dispute,controversy and legal interpretation could at all beconsidered for the purpose of passing order u/s.201 ofthe Income Tax Act demanding payment of tax andinterest thereof?” 2) So far as question No.1 is concerned, the contention of thelearned counsel for the assessee Sri Y. Ratnakar is that theconveyance allowance is given to the employees of the company in lieu of providing a vehicle for transportation and as such thesame does not form part of the salary. The specific claim beforethe authorities was that the conveyance allowance paid toemployees for coming to office from the residence and returningthereto, qualified under Section 10 (14) of the Income Tax Act,1961 (in short “the Act”). This claim of assessee was rejected bythe authorities concerned and confirmed by the Tribunal. Theauthorities had held that admittedly, the amount that is paid notbeing of wholly, necessarily and exclusively incurred in theperformance of the duties of an office or employment of profit. The conveyance allowance paid to defray expenses connectedwith journeys from residence to office and back cannot be treatedas an allowance paid for defraying expenses wholly, necessarilyand exclusively in the performance of the duty. The Tribunal,authorities had also recorded a finding that amounts are being paidon a lump sum fixed basis without there being any correlation tothe expenses actually incurred. The Tribunal following the ordersin the case of Dr. Reddy Laboratories Ltd., Vs. Income Tax Officer[[1]]in I.T. Appeal No.236 (Hyd) of 1995, disallowed theclaim of the assessee. 3) The learned counsel for the assessee Sri Y. Ratnakar wouldcontend that the amount paid to the employees is in lieu ofproviding transport facility otherwise would not have been part ofsalary. He would draw the attention to Section 17 (2) of the Actand in particular to the explanation to contend that if the asseeseehad provided a vehicle to enable an employer for the journey fromhis residence to his office or other place of work, or from suchoffice or place to his residence, the benefit or amenity granted orprovided to employee at free of cost or at a concessional rate shall not be treated as a perquisite Officer[[1]]in I.T. Appeal No.236 (Hyd) of 1995, disallowed theclaim of the assessee. 3) The learned counsel for the assessee Sri Y. Ratnakar wouldcontend that the amount paid to the employees is in lieu ofproviding transport facility otherwise would not have been part ofsalary. He would draw the attention to Section 17 (2) of the Actand in particular to the explanation to contend that if the asseeseehad provided a vehicle to enable an employer for the journey fromhis residence to his office or other place of work, or from suchoffice or place to his residence, the benefit or amenity granted orprovided to employee at free of cost or at a concessional rate shall not be treated as a perquisite 4) On the other hand the learned counsel for the department SriS.R. Ashok, assisted by Sri S. Seshidhar Reddy, would contendthat the assessee’s claim all along is only under Section 10 (14) ofthe Act and in that view of the matter, the argument advanced forthe first time before this Court that the amount paid would fallwithin the scope of Section 17 (2) of the Act and the explanationcannot be permitted and accepted. He would reiterate that in theabsence of actual expenditure, the amount cannot be allowed asan expenditure wholly, necessarily for the purpose of businessesof the assessee. He would also point out that the amount that isbeing paid to the employees cannot be allowed as an expenditureunder the head “Conveyance Allowance” as such expenses areexpected to be met by the employee and for which the employee isentitled for the standard deduction when his income beingassessed under the head Salary income. 5) We have considered the rival submissions and it maybeuseful to refer to the orders of the Tribunal in Dr.ReddyLaboratories case (1[st] Supra), which was followed by theTribunal. “Para 9: We have considered the rival submissions andperused the orders of the lower authorities and otherpapers filed before us. As regards the conveyanceallowance, we find from the orders of the lowerauthorities and other material papers filed before us thatassessee has been making payment of conveyanceallowance to its employees in fixed sums, with nobearing on the actual expenditure incurred by them andthe same has been paid basically to enable theemployees to perform the journeys to come to the work-place and to go back to their residences. It has been thecontention of the assessee right from the beginning thatthe conveyance allowance paid to employees for coming to office from residence and returning theretodoes qualify for exemption under Section 10(74) of theIncome-tax Act. Provisions of Section 10(14) read asfollows- (i) any such special allowance or benefit, not being in thenature of a perquisite within the meaning of Clause (2) ofSection 17, specifically granted to meet expenseswholly, necessarily and exclusively incurred in theperformance of the duties of an office or employment ofprofit, as the Central Government may, by notification inthe Official Gazette, specify to the extent to which suchexpenses are actually incurred for that purpose; (ii) any such allowance granted to the assessee either tomeet his personal expenses at the place where theduties of his office or employment of profit are ordinarilyperformed by him or at the place where he ordinarilyresides, or to compensate him for the increased cost ofliving, as the Central Government may, by notification inthe Official Gazette, specify, to the extent specified inthe notification; (ii) any such allowance granted to the assessee either tomeet his personal expenses at the place where theduties of his office or employment of profit are ordinarilyperformed by him or at the place where he ordinarilyresides, or to compensate him for the increased cost ofliving, as the Central Government may, by notification inthe Official Gazette, specify, to the extent specified inthe notification; It is not the case of the assessee that the conveyanceallowance paid by it to its employees has been notifiedby the Central Government as exempt under the abovesection. At least no notification to that effect has beenbrought to our notice. Further, as per Clause (i)extracted above, it is only the special allowance grantedto meet expenses 'wholly, necessarily and exclusivelyincurred in the performance of the duties of an office oremployment of profit', that would qualify for exemptionunder Section 10(14). The conveyance allowance paidto defray expenses connected with journeys fromresidence to office and back, cannot be termed as anallowance paid for defraying expenses 'wholly,necessarily and exclusively' in the performance of theduties. Further, it is only to the extent such expensesare actually incurred, that exemption would be availableunder Section 10(14) in respect of even an allowancenotified by the Central Government in that behalf. In thecase on hand, the conveyance allowance paid by theassessee without any relevance or bearing on the actualexpenditure incurred by the employees, cannot comewithin the purview of Section 10(14) and for that matter,since the Standard Deduction granted under Section16(1) is meant to take care of the expenses of anemployee, incidental to his employment, including thejourneys from residence to office and back, the conveyance allowance is clearly taxable under the head'salary' and as such the assessee could not haveexcluded the conveyance allowance paid, whilecomputing the tax deductible at source, from thesalaries paid by it to its employees. 6) The reasoning given by the Tribunal is apt and we do not seeany reason to defer from the same. In that view of the matter, theQuestion No.1 is required to be answered against the assesseeand in favour of the revenue. 7) So far as Question No.2 is concerned, this question ariseson account of the fact that certain amounts were paid by theassessee to Allahabad Bank, who had arranged the Letters ofCredit (in short “L.C.”) in favour of their suppliers M/s TecumschProducts Compnay. The Allahabad bank debited a sum of US $1,16,468-70 + US $ 3457-66 along with certain other payments toM/s. Amex International, which were recouped from theassessee. The amount of US $ 3,457-66 which was collected byAllahabad Bank was treated as paid by the assessee to theAmerican Express Bank towards interest. On such amount, theassessee was treated as assessee in default for non-deduction oftax at source under Section 195 of the Act and was demanded witha sum of Rs.2,78,639/- with further interest of Rs.44,292/-. Allalong, the assessee’s contention was that the assessee had noprevity of the contract with American Express bank and the sumwhich has been paid was only to the Allahabad Bank for thepurpose of arranging the L.C. and at any rate the additional costincurred would only go to the cost of the material which waspurchased by the assessee. Before the Tribunal also theassessee denied that any interest was paid to the AmericanExpress Bank and stated that the payment was made to theAllahabad bank only. As a matter of fact, the Tribunal also recorded the same. recorded the same. 8) Now, the question for consideration is that merely becauseAmerican Express Bank had charged certain sum terming it asinterest on the Allahabad Bank in the process of negotiating theL.C. on behalf of its customer viz., the assessee herein when thesaid amount is recouped by the Allahabad Bank can it be said thatthe assessee had made payment to the American Express Banktowards interest. When one considers the transactions in acommercial world with respect to negotiations of letters of creditany amounts paid in whatever name, they could only be termed asthe L.C. charges. In the present case, admittedly, the assesseehad previty of contract only with the Allahabad Bank and theamounts were paid to Allahabad bank. It is different matter thatAllahabad Bank in turn had made payments to Americanbusiness. In that view of the matter, it cannot be said thatassessee had any obligation to the American Express Bank and inthat view of the matter it cannot be said that the transaction wouldfall within Section 9(1)(5) of the Act. In the circumstances therewas no obligation on the assessee to make TDS deduction underSection 195 of the Act. 9) It may be useful to refer to the decision relied on by theAssessee’s counsel reported in GEIndia Technology Centre P. Ltd., Vs. Commissioner of Income-Tax and Another[[2]]whereinit was held that the obligation to deduct the tax with respect to theforeign remittances would arise only when the sum paid ischargeable under the provisions of the Act. Inasmuch as, in thepresent case, there was no payment by the assessee, in the factsof this case neither Section 9 nor 195 of the Act itself has noapplication. In that view of the matter, the Question No.2 is required to be answered in favour of the assessee and against therevenue. 10) With regard to the Question No.4, the learned counsel for theassessee Sri Y. Ratnakar would submit that Section 201 of the Actat relevant point of time did not deal with the situation of shortdeduction and payment of the tax. He would draw the attention ofthe Court to Section 201 of the Act before and after amendmentwhich reads as under: Before Amendment: Section 201 (1) If any such person and in the casesreferred to in section 194, the principal officer and thecompany of which he is the principal officer does notdeduct or after deducting fails to pay the taxas requiredby or under this Act, he or it shall, without prejudice toany other consequences which he or it may incur, bedeemed to be an assessee in default in respect of theTax: Provided that no penalty shall be charged under section221 from such person, principal officer or companyunless the Assessing Officer is satisfied that suchperson or principal officer or company, as the case maybe, has without good and sufficient reasons failed todeduct and pay the tax. (1A) Without prejudice to the provisions of sub-section(1), if any such person, principal officer or company asis referred to in that sub-section does not deduct or afterdeducting fails to pay the tax as required by or under thisAct, he or it shall be liable to pay simple interest at fifteenper cent per annum on the amount of such tax from thedate on which such tax was deductible to the date onwhich such tax is actually paid. (2) Where the tax has not been paid as aforesaid after itis deducted, the amount of the tax together with theamount of simple interest thereon referred to in sub-section (1A) shall be a charge upon all the assets of theperson, or the company, as the case may be, referred toin sub-section (1). (2) Any person being an employer, referred to in sub-section (1A) of section 192 shall pay, within theprescribed time, the tax to the credit of the CentralGovernment or as the Board directs. (2) Where the tax has not been paid as aforesaid after itis deducted, the amount of the tax together with theamount of simple interest thereon referred to in sub-section (1A) shall be a charge upon all the assets of theperson, or the company, as the case may be, referred toin sub-section (1). (2) Any person being an employer, referred to in sub-section (1A) of section 192 shall pay, within theprescribed time, the tax to the credit of the CentralGovernment or as the Board directs. (3) Any person deducting any sum on or after the 1[st]day of April, 2005 in accordance with the foregoingprovisions of this Chapter or, as the case may be, anyperson being an employer referred to in sub-section (1A)of section 192 shall, after paying the tax deducted to thecredit of the Central Government within the prescribedtime, prepare such statements for such period as maybe prescribed and deliver or cause to be delivered to theprescribed income-tax authority or the personauthorised by such authority such statement in suchform and verified in such manner and setting forth suchparticulars and within such time as may be prescribed. After Amendment: Section 201 (1): Where any person, including theprincipal officer of a company, - (a)who is required to deduct any sum in accordance with the provisions of this Act; or (b)referred to in sub-section (1A) of section 192,being an employer, does not deduct, or does notpay, or after so deducting fails to pay, the whole orany part of the tax, as required by or under thisAct, then, such person, shall, without prejudice toany other consequences which he may incur, bedeemed to be an assessee in default in respect ofsuch tax:being an employer, does not deduct, or does notpay, or after so deducting fails to pay, the whole orany part of the tax, as required by or under thisAct, then, such person, shall, without prejudice toany other consequences which he may incur, bedeemed to be an assessee in default in respect ofsuch tax: provided that no penalty shall be charged under section221 from such person unless the Assessing Officer issatisfied that such person, without good and sufficientreasons has failed to deduct and pay such tax. (1A) Without prejudice to the provisions of sub-section(1), if any such person, principal officer or company asis referred to in that sub-section does not deduct thewhole or any part of the tax or after deducting fails to paythe tax as required by or under this Act, he or it shall beliable to pay simple interest,- By pointing out the difference in language he would submitthat the invocation of section 201 in the facts and circumstancesof the case is not permissible. He would also submit that whenthe assessee under a bonafide impression that the conveyance allowance would not form part of salary for the purpose ofdeduction of tax at source, Section 201 of the Act cannot beinvoked. He would submit that even assuming that conveyanceallowance which was paid to the employees may not qualify for adeduction under Section 10(14) of the Act, in view of the bonafidedispute / controversy, whether the conveyance allowance wouldform part of salary or not, non-deduction of a portion of the salarywould not attract Section 201 of the Act as it then existing. Hewould also rely on the judgment of the Division Bench of this Courtreported in P.V.Rajgopal and Ors. Vs. Union of India and Ors.,[[3]]wherein it was held as follows: allowance would not form part of salary for the purpose ofdeduction of tax at source, Section 201 of the Act cannot beinvoked. He would submit that even assuming that conveyanceallowance which was paid to the employees may not qualify for adeduction under Section 10(14) of the Act, in view of the bonafidedispute / controversy, whether the conveyance allowance wouldform part of salary or not, non-deduction of a portion of the salarywould not attract Section 201 of the Act as it then existing. Hewould also rely on the judgment of the Division Bench of this Courtreported in P.V.Rajgopal and Ors. Vs. Union of India and Ors.,[[3]]wherein it was held as follows: “It is quite significant that these circulars do not containany warning about short deduction or action underSection 201 for that though they specifically mention theneed to revise the amounts of deduction in case of payrevision as well as the action under Section 201 forfailure to deduct any tax or pay the deducted tax in time.This indicates that the revenue is very well aware of theposition that Section 201 docs not apply to a case ofdeduction of tax at a lesser amount. Moreover, thecirculars advise the Drawing and Disbursing Authority tosatisfy itself that the computation of taxable salaryincome is in order with reference to deduction availableto the employee. This does not convert him into anIncome Tax Officer or an adjudicating authority as manyerroneously believe. All that it means is that theassessee must declare his claim so that with referenceto Section 201 proviso he can say that he had good andsufficient reasons not to deduct tax at source in respectof any income to avoid imposition of penalty. It is to benoted that the deduction is in respect of incomecomputed under the head "salary" and not in respect ofeach component of it. Any difference of opinion aboutthe computation has to be resolved by the employee atthe risk of his paying interest under Section 234 B & Cand not by the employer as Section 201 cannot beutilised to compel any such adjudication by him.” 11) We are in agreement with the learned counsel for the assessee Sri Y. Ratnakar that at relevant point of time Section 201of the Act did not provide for a situation where a short deduction orshort payment was made with respect to tax deduction at source. The fact that subsequently, the amended Section 201 of the Acthas specifically provided for the same itself is a proof positiveabout the same. In that view of the matter, it may be appropriateto refer to the judgment of the Division Bench of this Court cited bythe learned counsel for the assessee, wherein it was held asfollows: “Section 201: Consequences of failure to deduct of pay:(1) If any such person and in the cases referred to inSection 194, the principal officer and the Company ofwhich he is the principal officer does not deduct or afterdeducting fails to pay the tax as required by or under thisAct, he or it shall, without prejudice to any otherconsequences which he or it may incur, be deemed tobe an assessee in default in respect of the tax: Provided that no penalty shall be charged under Section221 from such person, principal officer or Companyunless the Assessing Officer is satisfied that suchperson or principal officer or Company, as the case maybe, has without good and sufficient reasons failed todeduct and pay the tax, (1A) Without prejudice to the provisions of sub-section(1), if any such person, principal officer or Company asis referred to in that sub-section docs not deduct or afterdeducting fails to pay the tax as required by or under thisAct, he or it shall be liable to pay simple interest at fifteenper cent per annum on the amount of such tax wasdeductible to the date on which such tax is actually paid. (2) Where the tax has not been paid as aforesaid after itis deducted, the amount of the tax together with theamount of simple interest thereon referred to insubsection (1 A) shall be a charge upon all the assets ofthe person, or the Company, as the case may be,referred to in sub' section (1)." (1A) Without prejudice to the provisions of sub-section(1), if any such person, principal officer or Company asis referred to in that sub-section docs not deduct or afterdeducting fails to pay the tax as required by or under thisAct, he or it shall be liable to pay simple interest at fifteenper cent per annum on the amount of such tax wasdeductible to the date on which such tax is actually paid. (2) Where the tax has not been paid as aforesaid after itis deducted, the amount of the tax together with theamount of simple interest thereon referred to insubsection (1 A) shall be a charge upon all the assets ofthe person, or the Company, as the case may be,referred to in sub' section (1)." 38. This Section has two limbs, one is where theemployer does not deduct the tax and the second whereafter deducting, the tax fails to remit it to theGovernment. There is nothing in this Section to treat the employer as the defaulter where there is a shortfall in thededuction. The Department assumes that where thededuction is not as required by or under the Act, there isa default. But the fact is that this expression 'as requiredby or under this Act' grammatically refers only to theduty to pay the tax that is deducted and cannot refer theduty to deduct the tax. Since this is a penal section, ithas to be strictly construed and it cannot be assumedthat there is a duty to deduct the tax strictly inaccordance with the computation under the Act and ifthere is any shortfall due to any difference of opinion asto the taxability of any item the employer can bedeclared to be an assessee in default.” 12) We have also noticed a Circular No.195 (F.No.275/47/76- ITJ), dated 25.03.1976, wherein it was mentioned as follows: “If the disbursing authority is satisfied that theconveyance allowance granted to the employees arecovered by section 10 (14), then the obligation to deducttax thereon may not arise. In such contingency tax isnot liable to be deducted at source from this allowance. However, at the same time it will have to be ensuredthat a certificate in trims of section 10(14) is endorsedon the tax deduction bills, by the disbursing authority. The employees who are in receipt of conveyanceallowance would also have to furnish the necessarycertificate before the assessing authorities in support ofthe fact that conveyance is only a reimbursement ofexpenses laid out wholly, necessarily and exclusivelyfor the performance of the duties of an office. Suchsatisfaction of the disbursing authority would still beliable for security by the Income-tax Officer (nowAssessing Officer) during regular assessmentproceedings before him.” 13) We may also notice, Circular issued by the Board videCircular No.696, dated 16.12.1994, wherein it is directed asfollows: “Section, Act No : 192 of the Income-tax Act, 1961 Grant of Opportunity to Defaulter U/S 192 to PayProper Tax Along With Interest Liability U/S 201(1A) 1. It has come to the notice of the Board that someemployers are not correctly evaluating the perquisites, allowances or other profits in lieu of or in addition to anysalary or wages (referred to as "salaries" hereinafter) paidto their employees for the purpose of deducting tax atsource under section 192 of the Income-tax Act, 1961.Such defaulters are liable to penalty proceedings undersections 221 and 271C of the Act, and also liable toprosecution under Chapter XXII of the Act. 2. However, before taking stringent measures, the Boardhas decided to grant an opportunity to such defaulters.Even now if they pay the proper tax on "salaries" asenvisaged under section 192 along with interest liabilityunder section 201(1A) of the Act no penalty proceedingsunder section 221 or prosecution under Chapter XXII of theAct shall be initiated provided such payment is made on orbefore February 28, 1995. allowances or other profits in lieu of or in addition to anysalary or wages (referred to as "salaries" hereinafter) paidto their employees for the purpose of deducting tax atsource under section 192 of the Income-tax Act, 1961.Such defaulters are liable to penalty proceedings undersections 221 and 271C of the Act, and also liable toprosecution under Chapter XXII of the Act. 2. However, before taking stringent measures, the Boardhas decided to grant an opportunity to such defaulters.Even now if they pay the proper tax on "salaries" asenvisaged under section 192 along with interest liabilityunder section 201(1A) of the Act no penalty proceedingsunder section 221 or prosecution under Chapter XXII of theAct shall be initiated provided such payment is made on orbefore February 28, 1995. 3. This circular shall also cover such cases which wereearlier covered by Circular No. 685, dated 17th June, 1994,where the facility was extended in respect of salaries andallowances paid abroad or perquisites provided abroad tothe employee for services rendered in India. The time limitof 31st July, 1994, was fixed by Circular No. 685 (whichwas later extended to 31st August, 1994) is now extendedto 28th February, 1995. 4. The contents of this circular may be brought to the noticeof all the assessees especially those responsible fordeducting tax under section 192, so that they can avail ofthis opportunity. It may be emphasised that the Departmentwill initiate coercive steps to recover the due tax, which wasnot deducted at source and/or not paid to the Governmentbefore 28th February, 1995. 5. The circular will apply in respect of the assessmentyears beginning from 1989-90 till the assessment year1994-95.” 14) Reading of both the circulars would reveal there being noreference of Section 201 of the Act in case of short payment. Thefirst circular categorically states that it is the satisfaction of thedisbursing authority whether to take into consideration theconveyance allowance for the purpose of tax deduction at source. Such satisfaction of disbursing authority is liable for security by the Income Tax Officer during regular assessment proceedings(No Section 201 proceedings mentioned). Likewise, in the secondCircular speaks about interest liability under section 201 (1A) ofthe Act, apart from proceedings under Section 221 or prosecutionunder Chapter XXII of the Act. In view of the scheme of the Act asunderstood by the authorities and in the light of the Judgment ofthe Division Bench of this Court reported in P.V.Rajgopal andOrs. (2[nd]Supra), for thepurpose of payment of tax noproceedings under Section 201 of the Act, could have been made. In view of the same, the question is required to be answered in thenegative and in favour of the assessee and against the revenue. 15) So far as Question No.3 is concerned, the learned counseldid not choose to press the same, and as such we decline toanswer the same. 16) In the light of the above discussion Question No.1 isanswered in favour of Revenue and against the assessee andQuestion Nos.2 and 4 are answered in favour of the assessee andagainst the revenue and Question No.3 is declined to beanswered. 17) Accordingly, the appeal is disposed of. No order as tocosts. ______________________ G. CHANDRAIAH,J ____________________________ CHALLA KODANDA RAM, J SSV SSV HON’BLE SRI JUSTICE G. CHANDRAIAHAND HON’BLE SRI JUSTICE CHALLA KODANDA RAM I.T.T.A. No.71 OF 2000 Date: 24.12.2013. [1](1996) 58 ITD 104 (Hyd)(1996) 58 ITD 104 (Hyd) [2](2010) 327 ITR 456 (SC)(2010) 327 ITR 456 (SC) [3](1998) 233 ITR 678 (AP)(1998) 233 ITR 678 (AP)