Citation Codes

Equivalent Citations

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Case Number

I.T.R No. 303 of 1980

Advocates

For the Appellant: P.K.R. Menon

Judges

Kochu Thommen
Radhakrishna Menon, JJ.

Acts

S. 46(7) of the Indian Income-tax Act, 1922 (the old Act)
Rule 30 of the Income-tax Rules, 1962,
S. 195(1) of the Income-tax Act, 1961.
Rule 30. S. 201

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Smart Summary

Concise Analytical Summary of the Opinion (Kocbu Thommen, J.)

Factual and Procedural Background

During the year relevant to assessment year 1973–74 the assessee paid a sum to the representative of the General Engineering Company (Radcliffee) Ltd., U.K., for services rendered in India. The opinion text records the sum as Rs. 43,403/- at one place and later refers to Rs. 45,403/-. The assessee did not deduct tax at source under S.195 of the Income-tax Act, 1961.

The Income-tax Officer (ITO) issued an order dated 25-2-1977 purportedly under S.201 computing tax payable on the said sum (the order computed tax at Rs. 35,973/-). The assessee appealed. The Appellate Assistant Commissioner (I.A.C.) allowed the appeal, accepting the assessee's contention that no tax was liable to be deducted at source. The revenue appealed to the Income-tax Appellate Tribunal (ITAT), which held that tax was deductible at source and that the assessee was liable to pay the tax demanded.

Before the Tribunal the assessee further contended that recovery of the sum was barred by limitation under S.231 (which prescribes a one-year period from the last day of the financial year in which the assessee was deemed to be in default). The Tribunal allowed the assessee to raise the point, but on the merits held that the period of limitation did not begin to run until an order was made deeming the assessee to be in default. The Tribunal therefore referred the following question to the High Court:

“Whether, on the facts and in the circumstances of the case, the order passed by the Income-tax Officer under S. 201 on 25-2-1977 was barred under S. 231 of the Income-tax Act, 1961?”

Legal Issues Presented

Whether the order passed by the Income-tax Officer under S. 201 on 25-2-1977 was barred by limitation under S. 231 of the Income-tax Act, 1961.
Subsidiaryly: When does the period of limitation under S. 231 begin to run in the context of tax deductible under S. 195 and payable under S. 200 — (a) from the last day of the financial year in which the default (failure to deduct or to pay deducted tax) occurred, or (b) from the last day of the financial year in which an order under S. 201 deeming the person to be an assessee in default is made?

Arguments of the Parties

Assessee's Arguments

The liability to pay the tax arose automatically on expiry of the period within which the assessee was required to deduct tax at source and pay it to the credit of the Central Government; no separate order under S.201 is necessary to fasten the liability.
The statutory liability arises de hors (independently of) any order: it flows from the default itself (failure to deduct under S.195 or failure to pay deducted tax under S.200). Accordingly, time for recovery began to run from the last day of the financial year in which that default occurred (relevant to AY 1973–74 in this matter), and therefore the ITO's order dated 25-2-1977 was beyond the one-year limitation period under S.231.

Revenue's Arguments

No liability for recovery in respect of tax deductible under S.195 and payable under S.200 arises until an order is made under S.201 treating the person responsible as “an assessee in default”.
The ITO's order of 25-2-1977 under S.201 is an order creating the person responsible to be an assessee in default, and therefore the period of limitation runs from the last day of the financial year in which that S.201 order was made.
The revenue also resisted the limitation argument on procedural grounds before the ITAT (that it had not been raised earlier), but the Tribunal allowed the issue to be argued and decided on the merits.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
M.M. Parikh v. Navangar Transport & Industries Ltd., (1967) 63 I.T.R. 663, 671 (S.C.)	Illustrates that in a regular assessment the liability to pay tax is ambulatory and becomes fixed only upon completion of assessment and service of a notice of demand under S.156.	The Court used this authority to contrast regular assessment liability (ambulatory until demand) with the immediate statutory liability that arises under Ss. 195, 200 and 201 on default; M.M. Parikh supports the proposition that the character of liability under S.195/200 is different from a regular assessment.
C.I.T. v. Dunlop Rubber Co. (India) Ltd., (1980) 121 ITR 476 (Cal.)	Recognised the view that limitation under the present S.231 runs from the last day of the financial year in which the default occurred (i.e., when the person is deemed to be in default by operation of law).	The High Court said it was fortified in its conclusion by the view expressed by the Calcutta High Court in this case and respectfully agreed with that approach.
Bal Kishan Dass v. C.I.T., (1976) 103 ITR 625 (Del.)	Expressed a similar view to Dunlop that the period of limitation begins when the person is deemed to be in default (i.e., when the statutory event of default occurs), not when an S.201 order is made.	The Court relied on and respectfully agreed with this decision as supportive of its conclusion that limitation runs from the financial year in which default occurred.
Mettur Chemicals & Indl. Corpn. Ltd. v. I.A.C., (1984) 150 I.T.R. 341 (Mad.)	Adopted a contrary view (according to the High Court's description) that suggests limitation should run from the financial year in which an S.201 order is made.	The High Court explicitly disagreed with the contrary view expressed by the Madras High Court in this case.

Court's Reasoning and Analysis

The Court examined the relevant statutory provisions as they appear in the text: S.195 (requirement to deduct tax at source on certain payments to non-residents), S.200 (duty of the person deducting tax to pay sums so deducted within the prescribed time), Rule 30 of the Income-tax Rules, 1962 (prescribing the time for payment of sums deducted), S.201 (consequences of failure to deduct or pay — deeming a person an assessee in default; interest; charge on assets), and S.231 (period for commencing recovery proceedings).

The Court's legal analysis proceeded as follows:

It identified the statutory mechanism: where a person liable under S.195 fails to deduct tax or, having deducted, fails to pay it as required by S.200 (within the time prescribed by Rule 30), S.201 deems that person to be an "assessee in default".
The Court emphasised that the liability under Ss. 195/200/201 is different in character from liabilities arising from a regular assessment. Relying on the reasoning cited in M.M. Parikh, it explained that a regular assessment's liability is ambulatory until fixed by assessment and demand; by contrast, the liability created by failure under S.195 or S.200 arises immediately upon occurrence of the statutory event (the default) and is not dependent on any further order for its creation.
From this characterisation the Court concluded that the statutory failure itself (failure to deduct or failure to pay deducted tax) casts the person with the liability of an assessee in default by operation of the statute, not by virtue of an administrative act. That is, the event of default itself creates the status of "assessee in default".
The Court then turned to S.231, which prescribes limitation for commencement of recovery proceedings. S.231 contains two limbs: one for liabilities that arise only upon demand (limitation runs from the last day of the financial year in which the demand is made), and another for persons who are "deemed to be an assessee in default under any provision of this Act" (limitation runs from the last day of the financial year in which the assessee is deemed to be in default).
Because the assessee's liability under Ss.195/200/201 arises by operation of the statute at the time of default (and not only when an order under S.201 is made), the Court interpreted the second limb of S.231 as commencing the one-year limitation period from the last day of the financial year in which the default occurred.
The Court supported this interpretation by reference to the Select Committee report explaining the legislative intent to ensure that the period of limitation could not be extended merely by postponing the issue of notice — the report replaced language so that the deeming event would be the assessee being deemed to be in default rather than contingent upon an action by the Income-tax Officer.
Applying those principles to the facts of the case, the Court found that the one-year limitation period began to run from the last day of the financial year relevant to assessment year 1973–74 (the year in which the default occurred). Consequently, the ITO's order dated 25-2-1977 was long after the expiry of the one-year limitation period, and therefore it was barred by S.231.
The Court noted and adopted the view expressed by the Calcutta High Court in C.I.T. v. Dunlop Rubber Co. (India) Ltd. and by the Delhi High Court in Bal Kishan Dass v. C.I.T., and expressly disagreed with the contrary view taken by the Madras High Court in Mettur Chemicals & Indl. Corpn. Ltd. v. I.A.C.

Holding and Implications

The Court's core holding: The order passed by the Income-tax Officer under S.201 on 25-2-1977 was barred by limitation under S.231 of the Income-tax Act, 1961.

Direct consequences and directions given in the opinion:

The question referred was answered in favour of the assessee and against the revenue.
The Court directed that the parties bear their respective costs in this Tax Referred Case.
The Court directed that a copy of the judgment under the seal of the High Court and the signature of the Registrar be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.

The opinion does not state that it is laying down a general precedent beyond the legal reasoning applied; it expressly aligned with earlier High Court authorities (Calcutta and Delhi) and disagreed with a contrary High Court view (Madras). The immediate effect of the decision is the invalidation, on limitation grounds, of the ITO's S.201 order of 25-2-1977 in this matter.

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Traco Cables Co. Ltd. v. Commr. Of Income Tax

Kocbu Thommen, J.:— The following question has been, at the instance of the assesses, referred to us by the Income-tax Appellate Tribunal, Cochin Bench:

“Whether, on the facts and in the circumstances of the case, the order passed by the Income-tax Officer under S. 201 on 25-2-1977 was barred under S. 231 of the Income-tax Act, 1961?”

2. During the year relevant to the assessment year 1973–74, the assessee paid a total sum of Rs. 43,403/- to the representative of the General Engineering Company (Radcliffee) Ltd., United Kingdom for certain services which he rendered to the assessee in India. The assessee did not deduct income-tax on the said amount in terms of S. 195(1) of the Income-tax Act, 1961. The income-tax Officer computed the tax payable on the said sum at Rs. 35,973/- by his order dated 25-2-1977 which was purportedly made under S. 201. The assessee preferred an appeal against this order. The Appellate Assistant Commissioner, accepting the contention of the assessee that ho tax was liable to be deducted by it at source, allowed the appeal. On appeal by the revenue, the Tribunal held that tax was deductible at source and that the assessee was, therefore, liable to pay the tax demanded. The assessee had contended before the Tribunal that, in any view, the sum demanded as tax was no longer payable as recovery of the same had become barred by limitation by virtus of S. 231 which prescribed a period of one year from the last day of the financial year in which the assessee was deemed to be in default. Although the revenue resisted the contention on the ground that it had not been raised before the Appellate Assistant Commissioner, the Tribunal allowed the assessee to urge the same. Dealing with the merits of the contention, the Tribunal, however, held that the period of limitation did not begin to run in terms of S. 231 until an order was made deeming the assessee to be in default.

3. The sole question which arises for consideration is whether recovery proceedings in respect of the tax deductible and payable by the assessee are barred in terms of S. 231. Counsel for the assessee, Mr. M. Ramachaadran, submits that the liability arose on the expiry of the period within which the assessee was liable to deduct tax at source and pay the same to the credit of the Central Government. He refers to the relevant provisions and contends that no order is contemplated under S. 201 to fasten liability’ upon the person responsible for the deduction under S. 195, for the liability does not depend on any order. The liability arises de hors an order and on account of the default in the deduction of the tax and/or payment of the same as required by the statute. Time for recovery, therefore, began to run, according to him, from the last day of the financial year in which the default occurred. Counsel for the revence on the other hand submits that no liability for recovery arises in respect of the tax deductible under S. 195 and payable under S. 200 until an order is made under S. 201 treating the person responsible for the deduction to be “an assessee ia default”. The order of the Ieceme-tax Officer in question is, accoiding to him, not an order of recovery, but an order Creating the person responsible to be an assessee in default in terms of S. 201, and time for recovery began to run only from the last day of the financial year in which that order was made.

4. We shall read the relevant provisions in so far as they are material. Section 195 says:

“195. Other sums. (1) Any person responsible for paying to a non-resident, not being a company, or to a company which is neither an Indian company nor a company which has made the prescribed arrangements for the declaration and payment of dividends within India, any’ interest, not being Interest on securities’, or any other snm, not being dividends, chargeable under the provisions of this Act, shall, at the time of payment, unless he is himself liable to pay any income-tax thereon as an agent, deduct income-tax thereon at the rates in force:

Provided……………………

Provided further………………

…………………………………………

5. Admittedly the sum of Rs. 45,403/- had been paid by the assessee and he was cot the agent of the payee. It is no longer disputed in the present proceeding that Income-tax was deductible on the said sum in terms of S. 195. S. 200 reads:

“200. Duty of person deducting tax. Any person deducting any sum in accordance with the provisions of………S. 195 shall pay within the prescribed time the sum so deducted to the credit of the Central Government or as the Board directs”.

6. The time has been prescribed under Rule 30 of the Income-tax Rules, 1962, the relevant portion of which reads:

“in any other case, within one week from the last day of the month in which the deduction is made…”

7. Section 201 reads:

“201. Consequences of failure to deduct or pay. (1) If any such person………does not deduct or after deducting fails to pay the tax as required by or under this Act, he………shall, without prejudice to any other consequences which he………may incur, be deemed to be an assessee in default in respect of the tax.

Provided that no penalty shall be charged under S. 221 from such person ………unless the Income-tax Officer is satisfied that such person………, has without good and sufficient reasons failed to deduct and pay the tax.

(1A) Without prejudice to the provisions of sub-s. (1), If any, such person……does not deduct or after deducting fails to pay the tax as required by or under this Act, he shall be liable to pay simple interest at fifteen per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid.

(2) Where the tax has not been paid as aforesaid after it is deducted, the amount of the tax together with the amount of simple interest thereon referred to in sub-s. (IA) shall be a charge upon all the assets of the person……referred to in sub-s. (1)”.

8. This Section, read with Ss. 195 and 200, would indicate that a person responsible for deduction of tax at source in terms of S. 195 is deemed to be in default if be does not either deduct the tax at source, or having deducted it, does not pay it as required by S. 200 within the time prescribed under Rule 30. S. 201 further shows that the failure of such a person makes him an assessee in default, although he would not, but for the default, be an assessee in respect of the sum referred to in S. 195. It is his failure to discharge his statutory obligation that visits him with the liability of “an assessee in default”. This liability is cast upon him under the aforesaid provisions, net because of any order or notice of demaad, but because of the operation of the statute itself. This is quite unlike a regular assessment under which tax becomes payable only upon service of a notice of demand under S. 156. The reason is that no liability arises in such a case until service of notice of demand, because the liability to pay tax, until determined by means of a proper assessment, remains merely ambulatory, and becomes fixed only upon the completion of the assessment and demand: (See M.M Parikh v. Navangar Transport & Industries Ltd., (1967) 63 I.T.R 663, 671 (S.C)). On the other hand, Ss. 195, 200, and 201 deal with a liability which is at no time ambulatory, but which is attracted immediately upon the happening of an event, namely, payment and failure to deduct under S. 195 or failure to credit the sum deducted as required by S. 200. As soon as such failure occurs, the liability arises once and for all, and there is go further requirement of computation or assessment. Once the liability is incurred, no further demand is necessary to recover the tax and the interest due thereon, unless the revenue were to initiate proceedings for imposition of penalty in terms of the proyiso to S. 201(1) read with S. 221. In the present case, no penalty is sought to be imposed. We shall now consider the question of limitation. S. 231 reads:

“231. Period for commencing recovery proceedings. Save in accordance with the provisions of S. 173 or sub-s. (7) of S. 220, no proceedings for the recovery of any sum payable under this Act shall be commenced after the expiration of one year from the last day of the financial year in which the demand is made, or, In the case of a person who is deemed to be an assessee in default under any provision of this Act, after the expiration of one year from the last day of the financial year in which the assessee is deemed to be in default.

Explanation 1: …………

Explanation 2: …………”

9. The main body of the Section has two limbs. The first limb refers to taxes directly payable by the person who has earned the income and whose liability to pay the same arises only upon demand. The period of limitation for recovery referable to such liability begins to run from the last day of the financial year in which the demand is made. The second limb refers to the statutory liability of a person de hors notice of demand. Where a person is deemed to be an assessee in default under any provision of the Act, the liability of such a person having arisen by operation of the law and not by reason of any demand, the period of limitation for recovery respecting such liability begins to run, not with reference to any notice of demand, but from the last day of the financial year in which the default has occurred by reason of the failure to deduct tax as warranted by S. 195 or to pay the tax deducted as required by S. 200.

10. In this connection we will refer to S. 46(7) of the Indian Income-tax Act, 1922 (the “old Act”) which corresponds to S. 231 of the present Act. That Section, in so far as it is material reads:

“46(7). Save in accordance with the provisions of sub-s. (1) of S. 42, or of the proviso to S. 45, no proceedings for the recovery of any snm payable under this Act shall be commenced after the expiration of one year from the last day of the financial year in which any demand is made under this Ad:

Provided ……………”

(emphasis supplied)

11. In terms of this sub-section, the period of limitation runs only with reference to the demand, that is, from the last day of the financial year in which the demand is made. The second limb contained in S. 231 of the present Act is absent in S. 46(7) of the old Act. The decisions of courts with reference to the eld Act in regard to limitation must therefore be understood in that light. We shall in this context refer to the objects and reasons of S. 231 of the present Act, as extracted from the report of the Select Committee (see AIR. Manual, Vol. XXII, page 203):

“The existing wording of the clause would seam to permit an Income-tax Officer to avail himself of a longer period for initiating recovery proceedings by the simple expedient of postponing the issue of notice regarding default. The Committee, therefore, consider that the words ‘Income-tax Officer sends an intimation in writing to such person to the effect that he is deemed to be an assessee in default’ should be replaced by the words ‘the assessee is deemed to be in default’.” S.C.R

12. This report is a true indication of the legislative intent and leads considerable support to what we have stated above in regard to the period of limitation.

13. In the instant case, the period of limitation of one year began to run from she last day of the financial year (relevant to the assessment year 1973–74) in which the default occurred. The order made by the Income-tax Officer on 25-2-1977 was therefore long after the expiry of the period of limitation. We are fortified in this conclusion by the view expressed on she paint by the Calcutta High Court in C.I.T v. Dunlop Rubber Co. (India) Ltd, (1980) 121 ITR. 476 (Cal.) and by the Delhi High Court in Bal Kishan Dass v. C.I.T, (1976) 103 ITR. 625, 831 (Del.), and we respectfully agree with that view. With respect, we disagree with the contrary view expressed by the Madras High Court in Mettur Chemicals & lndl. Corpn. Ltd. v. I.A.C, (1984) 150 I.T.R 341 (Mad.). In the circumstances, we answer the question in favour of the assessee and against the revenue.

14. We direct the parties to bear their respective costs in this Tax Referred Case.

15. A copy of this judgment under the seal of the High Court and the sign ature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.

Traco Cables Co. Ltd. v. Commr. Of Income Tax

Concise Analytical Summary of the Opinion (Kocbu Thommen, J.)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's Arguments

Revenue's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Traco Cables Co. Ltd. v. Commr. Of Income Tax

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