The Judgment of the Court was delivered by

Sankar Prasad Mitra, J.:— This is a reference under section 66(1) of the Indian Income-tax Act, 1922. The assessee is a resident-company. The assessment year is 1956-57. In 1955, the Indian Industries Fair was held in New Delhi. Messrs. Auger & Turner Group Ltd., a company in the United Kingdom, was allotted a space in the fair ground. Out of the space so allotted, an area of 5,000 sq ft. was let out by the U.K company to the assessee-company for a consideration of Rs. 50,000. The assessee paid this amount to the U.K company in instalments. During the relevant previous year for the assessment year 1956-57, the assessee paid a sum of Rs. 32,500 to the U.K company.

2. The Income-tax Officer was of the view that the assessee would be deemed to be an assessee in default under section 18(7) of the Indian Income-tax Act, 1922, inasmuch as the assessee had not deducted income-tax and super-tax at the time of payment of the said sum of Rs. 32,500. The Income-tax Officer directed the assessee to pay an amount of Rs. 26,000 after allowing an estimated expense of Rs. 6,500. The Appellate Assistant Commissioner annulled the order under section 18(7) of the Act. His reason was that the amount which the assessee had paid to the non-resident company was in the nature of rental; it was a gross earning in the hands of the non-resident company; and such earning was not a profit from trading receipts taxable under the provisions of the Income-tax Act.

3. The Tribunal was of opinion that the Appellate Assistant Commissioner's view was erroneous by reason of the decision of this court in P.C Ray & Co, (India) Private Ltd. v. A.C Mukherjee [1958] 33 I.T.R 817 Cal... In this reference we are not concerned with this decision of the Tribunal.

4. The Tribunal, however, dismissed the departmental appeal on the ground that the order under section 18(7) was an order of assessment; the order was made on the 17th July, 1961, that is, beyond four years from the end of the assessment year 1956-57; and the assessment was, therefore, barred by limitation under the provisions of section 34(3) of the Income-tax Act, 1922.

5. The following question of law has been referred to us:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the order of the Income-tax Officer under section 18(7) of the Indian Income-tax Act, 1922, was barred by limitation under the provisions of section 34(3) of that Act?”

6. Mr. Debi Pal, learned counsel for the assessee, contends that the income of an assessee attracts the quality of taxability with reference to the rates prescribed by the annual Finance Act; the payability and the qualification of the tax depend upon the passing and the application of the annual Finance Act; an assessment particularises the sum which a person has to pay on the application of the annual Finance Act; and the function of the Income-tax Officer, therefore, is to compute the income and to crystallise the charge on the taxable income. Mr. Debi Pal then says that a non-resident can be assessed either personally or through an agent who is deemed to be the assessee under section 42 of the Act. Apart from this, says Mr. Debi Pal, the tax payable by a non-resident can be recovered from the person who makes a payment to the non-resident when such person is not liable to be treated as an agent under section 42. In the present case, argues Mr. Debi Pal, the assessee has not been treated as an agent under section 42. This leads us, according to Mr. Debi Pal, to a consideration of the provisions of section 18(3C) which, inter alia, provides that when the person responsible for paying any sum chargeable under the Act, to a person not resident in the taxable territories, considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Income-tax Officer to determine the appropriate proportion of such sum so chargeable and upon such determination tax shall be deducted therefrom by the person responsible for making such payment in accordance with the provisions of sub-section (3B). Then comes section 18(7), which says, inter alia, that if any such person does not deduct or after deducting fails to pay the tax as required by or under this section, 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. Mr. Debi Pal has urged that if section 18(7) be read in the context of section 18(3C), it would be apparent that under section 18(7) an order is made by which the income chargeable is computed and the tax leviable at the rate prescribed by the annual Finance Act in respect of such income is determined. And by virtue of that very order the assessee is treated as an assessee in default in respect of the tax payable. In other words, an order under section 18(7) is a composite order. That order involves (a) computation of income; and (b) determination of tax, that is, an assessment, in the first instance, and, thereafter, the assessee is treated as an assessee in default with respect to the very amount that is assessed by reason of a legal fiction. Reliance is placed on the observation of Lord Asquith in East End Dwellings Co. Ltd. v. Finsbury Borough Council, at page 132, which our Supreme Court relied on in M.K Venkatachalam v. Bombay Dyeing & Manufacturing Co. Ltd. [1958] 34 I.T.R 143, at page 146. Lord Asquith said:

“If you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it. One of those in this case is emancipation from the 1939 level of rents. The statute says that you must imagine a certain state of affairs; it does not say that having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs.”

7. Mr. Debi Pal argues that if we apply this observation of Lord Asquith to the legal fiction which section 18(7) has created, that is, the person concerned is to “be deemed to be an assessee in default”, the corollary to be imagined is that he is first an assessee in respect of an assessment and then he has made default in payment of the sum assessed. In other words, according to learned counsel, if you imagine the fiction of an assessee in default as real, you must also imagine the fiction of an assessment as real.

8. Mr. Debi Pal has stated further that an order under section 18(7) is appealable under section 30(???) when the assessee in question denies his liability to be assessed under the Act, and, as such, it should be treated as any other order of assessment.

9. It is well-known that a legal fiction must be limited to the purposes for which it has been created and cannot be extended beyond its legitimate field: Commissioner Of Sales Tax, U.P v. Modi Sugar Mills Ltd. first task in this reference, therefore, is to ascertain the purpose of section 18(7). The purpose of section 18(7) obviously is to recover from a person who has been saddled with the duty of deducting tax under section 18(3B) the amount of tax which he ought to have deducted at the time of making payment to a non-resident at the rate applicable to a company. The fiction in section 18(7) is to be limited to this purpose alone.

10. Now, section 34(3) provides, inter alia, that no order of assessment or reassessment shall be made after the expiry of four years from the end of the year in which the income, profits or gains were first assessable. It is clear, therefore, that the period of limitation prescribed by sub-section (3) of section 34 applies to an order of assessment or an order of reassessment. The question is whether an order under section 18(7) comes within any of these categories. In M.M Parikh v. Navanagar Transport and Industries Ltd., at page 670, the Supreme Court observes:

“Every order which contemplates computation of income for determination of the amount of tax payable is not an order of assessment within the meaning of the Act: nor does precribing of procedure for determining and imposing tax liability make it an order of assessment. The Income-tax Act contemplates making of diverse orders by Income-tax Officers directing payments of sums of money by taxpayers which are of the nature of orders for payment of tax, but which are still not orders of assessment. For instance, under section 18A(1) the Income-tax Officer is entitled to direct advance payment of tax. An order may also be made under section 35(9) where the Income-tax Officer is satisfied that the income-tax payable by a company on its profits and gains out of which the company has declared a dividend has not been paid within three years after the financial year in which the dividend was declared, he may proceed to recompute the amount by reducing it in the same proportion as the amount of income-tax remaining unpaid by the company bears to the amount of income-tax payable by it on such profits and gains. Similarly, under sub-section (10) of section 35, before it was deleted by the Finance Act of 1959, where a rebate of income-tax was allowed to a company on a part of its total income and subsequently the amount on which the rebate of income-tax was allowed was availed of by the company, for declaring dividends in any year, the Income-tax Officer had to recompute the tax by reducing the rebate originally allowed. Again by section 35(11), as added by the Finance Act of 1958, development rebate in respect of a ship, machinery or plant under section 10(2)(vib) could be deemed to have been wrongly allowed if the ship, machinery or plant was sold or otherwise transferred, or the amount credit-ed to the reserve account under that clause was diverted for another purpose within ten years, and the Income-tax Officer had to recompute the income, and levy tax on the footing of such recomputed income. In each of these cases there is computation of income, determination of tax payable and procedure is prescribed for imposing liability upon the taxpayer. But still these are not orders of assessment within the meaning of section 23. The salient feature of these and other orders is that the liability to pay tax arises not from the charge created by statute, but from the order of the Income-tax Officer.”

11. Mr. Debi Pal has said that in the passage cited above the Supreme Court does not deliberately mention section 18(7). It seems to us, however, that whether or not an order of the Income-tax Officer is an order of assessment has to be judged in the light of the tests the Supreme Court had laid down in the above passage. When the liability to pay tax arises not from the charge created by statute, but from the order of the Income-tax Officer the order so made is not an order of assessment. In other words, an order of assessment is one which assumes the income and determines the charge in accordance with the charging sections of the Income-tax Act, as for example, sections 3 and 6.

12. Now, under section 18(7), the person responsible for deduction of tax and payment thereof, is deemed to be not merely an assessee but also an assessee in default. There are three well-known stages of imposition of tax, namely, (a) liability to pay tax; (b) computation of tax payable; and (c) recovery of tax. Keeping these three stages in view, when we come to the expression, “deemed to be an assessee in default”, we have to assume that the following stages are over:

1. Fixation of liability.

2. Assessment or computation of income and the tax payable thereon; and

3. Service of a notice of demand on the assessee calling upon him to make payment.

13. It is only when all these three stages have passed and the assessee fails to comply with the notice of demand that he can become an assessee in default. When, therefore, we are dealing with the legal fiction introduced by the expression, “deemed to be an assessee in default”, it would be necessary to assume all those facts on which alone the fiction can operate: vide Commissioner of Income-tax v. S. Teja Singh. We have to assume that all the three stages mentioned above are over, and there has been a failure on the part of the assessee to comply with a notice of demand. In these premises, an order pursuant to section 18(7) made by the Income-tax Officer cannot be said to be an order of assessment. The liability to pay the tax under such an order arises not from the charge created by the statute but from the order itself.

14. Our reading of the relevant provisions of section 18(7) of the Act of 1922 appears to be in conformity with the specific provisions made in the Act of 1961. Section 201 of the 1961 Act makes provisions for the “consequences of failure to deduct or pay”, similar to those in section 18(7) of the Act of 1922. The same expression “be deemed to be an assessee in default” has also been used in section 201 of the Act of 1961. Then, section 246(1) makes a specific provision for an appeal to the Appellate Assistant Commissioner against an order under section 201. A close examination of the provisions of section 246 of the 1961 Act shows that an order under section 201 has not been treated either as an order of assessment or reassessment or an order against the assessee, “where the assessee denies his liability to be assessed under this Act”. It has been argued before us that in the present reference an appeal was, in fact, made under section 30 of the Act of 1922 on the basis that the assessee was denying his liability to be assessed and that appeal was entertained without any objection by the department. The fact that the appeal has been entertained cannot induce us to give a different meaning to the expression “deemed to be an assessee in default” under section 18(7) of the Act. In such cases, under the 1922 Act, an appeal could be preferred in the circumstances provided for in section 30(1A) which ran thus:

“Any person having, in accordance with the provisions of sub-section (3B) of section 18, read with sub-section (6) of that section, deducted and paid tax in respect of any sum chargeable under this Act other than interest who denies his liability to make such deduction may appeal to the Appellate Assistant Commissioner to be declared not liable to make such deduction.”

15. No doubt, this is a limited right of appeal. Chakravartti C.J in S.K Dutt, Income-tax Officer v. Anglo-India Jute Mills Co. Ltd., observed:

“Under section 30(1A) a person who denies his liability to make a deduction under section 18(3A) and to pay the amount deducted can prefer an appeal only if he has actually deducted and paid the tax.”

16. Counsel for the department has argued before us that it may be that, apart from the limited right of appeal under section 30(1A), the right of appeal under section 18(7) was implied in the sub-section itself; and what was implied in the Act of 1922 had been expressly provided for when the 1961 Act came to be enacted. We do not wish to enter into this controversy in the present reference. Whether an order under section 18(7) shall be regarded as an order of assessment cannot, in our opinion, be judged purely from the standpoint of the appealability of such an order.

17. In order to appreciate section 18(7) in its proper context, we may usefully compare the relevant provisions of section 42 with those of section 18(7). Section 42, inter alia, provides that all income, profits or gains accruing or arising, whether directly or indirectly through or from any business connection in the taxable territories, shall be deemed to be the income accruing or arising within the taxable territories, and where the person entitled to the income, profits or gains is not resident in the taxable territories, shall be chargeable to income-tax either in his name or in the name of his agent, and in the latter case such agent shall be deemed to be, for all these purposes of the Act, the assessee in respect of such income-tax.

18. It appears, therefore, that when a foreigner earns income in India, if he has an agent in India, the income so earned may be chargeable to income-tax in the name of the agent and, for all the purposes of the Act, the agent shall be deemed to be the assessee.

19. Turning our attention now to section 18, we find that section 18(3B), inter alia, casts a duty upon the person responsible for paying any sum to a non-resident chargeable under the provisions of the Act to deduct income-tax at the maximum rate. These provisions indicate that the person who is to deduct the tax at the time of making payment to a non-resident is not an agent and is not to be deemed to be an assessee for all the purposes of the Income-tax Act. The point is that the context of section 18(7) which follows section 18(3B) has nothing to do with an assessment under the Income-tax Act.

20. In Aggarwal Chamber Of Commerce, Ltd. v. Ganpat Rai Hira Lal, the Supreme Court considered the provisions, inter alia, of section 18(3A) and sections 40 and 42 of the Act of 1922. At page 253, the Supreme Court observes:

“Those persons who are bound under the Act to make deduction at the time of payment of any income, profits or gains are not concerned with the ultimate result of the assessment. The scheme of the Act is that deductions are required to be made out of ‘salaries’, ‘interest on securities’ and other heads of ‘income, profits and gains’ and adjustments are made finally at the time of assessment. Whether in the ultimate result the amount of tax deducted or any lesser or bigger amount would be payable as income-tax in accordance with the law in force would not affect the rights, liabilities and powers of a person under section 18 or of the agent under section 40(2) and section 42(1).”

21. These observations of the Supreme Court once again give the indication that an “assessment” under the Act and a “liability to deduct tax” at the time of making payment to a non-resident are not one and the same thing. The actual assessment may take place long after the liability to deduct has arisen. To call an order, therefore, under section 18(7) “an order of assessment” would not be in conformity with the context of section 18(7).

22. Mr. Debi Pal relying on the Supreme Court's decision in Kalawati Devi Harlalka v. Commissioner of Income-tax has argued before us that the word “assessment” has a comprehensive meaning; it includes the entire procedure for imposing liability on the taxpayer; and in this comprehensive sense an order under section 18(7) is an order of assessment. The short answer to this point is that the Supreme Court in this very judgment in Kalawati Devi's case has said, at page 687:

“There is no doubt that the word ‘assessment’ does have, subject to the context, a very wide meaning.”

23. As we have already stated the context of section 18(7) does not suggest to us that an order under this sub-section is an order of assessment at all. It would be useful to quote in this connection the Supreme Court's observations in C.A Abraham… v. Income-Tax Officer, Kottayam…., Kottayam. The Supreme Court has said:

“A review of the provisions of Chapter IV of the Act sufficiently discloses that the word ‘assessment’ has been used in its widest connotation in that chapter. The title of the chapter is ‘Deductions and assessment’. The section which deals with assessment merely as computation of income is section 23: but several sections deal not with computation of income, but determination of liability, machinery for imposing liability and the procedure in that behalf. Section 18A deals with advance payment of tax, and imposition of penalties for failure to carry out the provisions therein. Section 23A deals with power to assess individual members of certain companies on the income deemed to have been distributed as dividend, section 23B deals with assessment in case of departure from the taxable territories, section 24B deals with collection of tax out of the estate of deceased persons, section 25 deals with assessment in the case of discontinued business, section 25A with assessment after partition of Hindu undivided families and sections 29, 31, 33 and 35 deal with the issue of demand notices and the filing of appeals and for reviewing assessment and section 34 deals with assessment of incomes which have escaped assessment. The expression ‘assessment’ used in these sections is not used merely in the sense of computation of income and there is in our judgment no ground for holding, that when, by section 44, it is declared that the partners or members of the association shall be jointly and severally liable to assessment, it is only intended to declare the liability to computation of income under section 23 and not to the application of the procedure for declaration and imposition of tax liability and the machinery for enforcement thereof.”

24. In the context of these observations of their Lordships of the Supreme Court it is interesting to observe that the word “assessment” had not been used in section 18(7) at all. In these premises, there appears to be no scope for considering whether a wide or narrower meaning of “assessment” is contemplated by the section.

25. For all these reasons we are unable to uphold Mr. Debi Pal's contention that, since the word “assessment” in its comprehensive sense includes the whole procedure for imposing liability upon the taxpayer, an order made under section 18(7) is an order of assessment. In the premises aforesaid, our answer to the question referred to us is in the negative. The respondent would pay to the Commissioner the costs of this reference.

26. Question answered in the negative.