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Associated Pigment Ltd. v. Income-Tax Officer

Calcutta High Court

Jun 19, 1970

Judgment

Subsequent
References

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Structured Summary of the Provided Opinion

Factual and Procedural Background

The petitioner had allotted 33 fully paid-up shares of the face value of Rs. 16,500 to a Japanese company pursuant to an agreement that required further remittances. The petitioner applied to the Reserve Bank of India (Exchange Control Department) for permission to remit US$1,050 out of a balance of US$2,450 payable to the Japanese concern. The Reserve Bank required a certificate from the Income-tax Department stating that the proposed payment did not attract tax under the Indian Income-tax Act.

By application dated 3 June 1965 the petitioner applied to the Income-tax Officer (H-Ward, Companies District II) for the necessary certificate. After sending several reminders, the Income-tax Officer by letter dated 4 January 1966 informed the petitioner that remittances to the Japanese company represented income accruing or arising in India and that tax should have been deducted at source under Section 18(3B) of the Income-tax Act, 1922 in respect of earlier remittances and the value of the shares issued. The petitioner was asked to show cause why it should not be treated as an assessee in default under Section 18(7). The Officer further indicated that Section 195(1) of the 1961 Act applied to the proposed remittance and required a show-cause why tax should not be deducted before making that remittance.

By a second letter dated 19 January 1966 the Income-tax Officer requested payment of tax on the remittances already made and the value of the shares and again requested that tax be deducted and paid for the proposed remittance to Japan. In response the petitioner obtained a rule dated 24 March 1966 seeking to quash the impugned letters dated 4 January and 19 January 1966 and to restrain the respondents from enforcing the demands in those letters.

Legal Issues Presented

Whether the respondent could treat the petitioner as an assessee in default and demand tax in respect of past remittances to the Japanese company under Section 18(3B) and Section 18(7) of the 1922 Act (and corresponding provisions of the 1961 Act), having regard to the time-limits for assessment established by Section 34(3) of the 1922 Act.
Whether proceedings for recovery of tax in respect of those past remittances were barred by the limitation in Section 46(7) of the 1922 Act (and the corresponding provision in the 1961 Act, Section 231), so that no recovery proceedings could be commenced in 1966 for remittances made in earlier years.
Whether the two impugned letters themselves amounted to the commencement of recovery proceedings (so as to engage limitation under Section 46(7)), or were only preliminary communications (show-cause/demand) prior to any formal initiation of recovery steps.
Whether the petitioner was obliged to deduct tax before making any future remittance to the Japanese company under Section 195(1) of the 1961 Act.

Arguments of the Parties

Petitioner's Arguments (Dr. Pal)

The petitioner argued that an order under Section 18(3B) (treating a person as an assessee in default for non-deduction at source) is effectively an order of assessment and therefore must be made within four years from the end of the relevant accounting year under Section 34(3) of the 1922 Act. In this case four years had elapsed for the accounting years in which the remittances occurred, so no valid order could be made in 1966.
Dr. Pal relied on the Bombay High Court decision in S.M. Modi v. Commissioner of Income-tax [1958] 33 I.T.R. 529 (Bom) to support the proposition that a determination under the relevant provision must be made within the statutory assessment period to be appealable and valid.
He also contended that even if tax were recoverable under Section 18(7), recovery proceedings were barred by Section 46(7) of the 1922 Act because no proceedings for recovery could be commenced after the expiration of one year from the last date of the financial year in which any demand could be made. Thus, in 1966 recovery could not be commenced for remittances made in 1954, 1956 and 1960.
He pointed to corresponding limitation language in the 1961 Act reinforcing the bar on commencing recovery proceedings after the specified period.
Dr. Pal conceded he could not challenge that parts of the impugned letters dealing with future remittances and requiring deduction under Section 195 of the 1961 Act were not open to attack in these proceedings; the appropriate remedy for future remittances lay under Section 195 of the 1961 Act.

Department's Arguments (Mr. Chowdhury)

Mr. Chowdhury did not dispute Dr. Pal's submission that no recovery proceedings under Section 18(3B) could be commenced for the past remittances (i.e., agreed there was a limitation issue for assessment/determination under that provision).
He submitted that the department's right to recover arrears by a civil suit is not affected by the statutory recovery provisions; he relied on the 1961 Act (section cited in the text as section 232 or 231) for the proposition that a suit remains available to the department to recover arrears.
He argued the impugned letters did not constitute the commencement of recovery proceedings under the Income-tax Act but were communications requesting the petitioner to show cause; actual recovery proceedings would only follow after a determination. The second letter's request for payment was characterized as a notice of demand and, if necessary, formal recovery steps would be initiated thereafter.
He relied on the Madras High Court decision in General Commercial Corporation P. Ltd. v. Second Additional Income-tax Officer, Madras, [1960] 40 I.T.R. 506 (Mad.) for the proposition that Section 46(7) contemplates commencement of recovery proceedings only when the income-tax department initiates an action (for example, issuing a certificate of arrears under Section 46(2)), and that preliminary demand letters do not themselves start recovery proceedings.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
S.M. Modi v. Commissioner of Income-tax, [1958] 33 I.T.R. 529 (Bom)	Supports the proposition that a determination under the relevant provision (analogue of Section 18(3B)) must amount to an adjudication/assessment which is subject to appeal and must be made within the statutory assessment period (four years under Section 34(3)).	The court accepted the principle drawn from this decision to hold that a determination under Section 18(3B) must be made within the period prescribed by Section 34(3), and consequently no valid demands could be made in 1966 in respect of remittances for which the four-year period had already elapsed.
General Commercial Corporation P. Ltd. v. Second Additional Income-tax Officer, Madras, [1960] 40 I.T.R. 506 (Mad.)	Interprets Section 46(7) as referring to the commencement of recovery proceedings by the income-tax department (e.g., issuance of a certificate under Section 46(2)) and that preliminary departmental actions short of initiating recovery proceedings do not trigger the limitation bar.	The court acknowledged the department's reliance on this authority to argue that the two letters did not commence recovery proceedings. The court found Mr. Chowdhury technically correct on that narrow point but nonetheless ruled that limitation barred recovery under the statutory recovery provisions in the circumstances of this case.

Court's Reasoning and Analysis

The court proceeded in stages, applying the statutory text and the authorities cited by the parties to the facts before it.

On the question of whether the respondent could treat the petitioner as an assessee in default for past remittances, the court accepted the petitioner's contention (as supported by the S.M. Modi authority) that a determination under Section 18(3B) must be an adjudication equivalent to an order of assessment and must therefore be made within the period specified by Section 34(3) (four years from the end of the accounting year in which the income was first assessable). Because more than four years had elapsed in respect of the accounting years in which the remittances were made, the court held that no valid determination or demand could be made in 1966 treating the petitioner as an assessee in default for those past remittances.
On the question of recovery proceedings, the court considered the petitioner's contention under Section 46(7) of the 1922 Act (and the corresponding provision in the 1961 Act) that proceedings for recovery could not be commenced after the expiry of the statutory period. The court agreed that, as a matter of law, recovery under the statutory recovery provisions was barred in the present circumstances by the limitation provisions of Section 46(7) (and Section 231 of the 1961 Act).
The court noted the department's submission (and the Madras High Court authority) that the impugned letters did not show that recovery proceedings had actually been commenced and may have been merely preliminary demands or show-cause communications. The court accepted that the letters did not, on their face, demonstrate that formal recovery proceedings had been instituted by the Income-tax Officer.
Nonetheless, the court observed that the letters did contain demands for payment in respect of arrear remittances. Given the court's earlier conclusion that no valid determination under Section 18(3B) could have been made in 1966 because of the statutory assessment limitation, the court concluded that no statutory recovery proceedings under the Income-tax Act could properly be taken in respect of those past remittances. The court therefore held that recovery under the Income-tax Act was barred by limitation, although the departmental right to sue in a civil court to recover arrears was not affected by that statutory bar.
Because the department had maintained that no formal recovery proceedings had been started, and because the petitioner conceded that the portion of the letters dealing with deduction of tax on future remittances under Section 195 of the 1961 Act could not be challenged in this proceeding, the court found it unnecessary to quash or cancel any part of the two impugned letters. The court confined its relief accordingly.

Holding and Implications

Core Ruling: DISPOSED OF — The rule obtained by the petitioner was disposed of in accordance with the court's observations.

Direct consequences and implied legal effects drawn from the opinion (limited to what is stated in the text):

The court held that no valid determination under Section 18(3B) (treating the petitioner as an assessee in default for non-deduction at source in respect of past remittances) could be made in 1966 because the statutory period prescribed by Section 34(3) had expired; thus recovery under the statutory recovery provisions of the Income-tax Act in respect of those past remittances was barred by limitation (Section 46(7) of the 1922 Act and Section 231 of the 1961 Act).
The department's statutory route for recovery under the Income-tax Act is therefore closed for those past remittances; however, the court recorded that the department is not debarred from instituting a civil suit to enforce its claim for arrears (i.e., recovery by suit remains available, as stated in the opinion).
The court did not quash the two impugned letters in their entirety because the department contended no recovery proceedings had been commenced and because the petitioner conceded it could not challenge the letters' directions requiring deduction of tax before making future remittances (remedies for future remittances lie under Section 195 of the 1961 Act).
The interim order (if any) was discharged and there was to be no order as to costs.

Note: This summary is based exclusively on the content of the provided opinion and does not add or infer information beyond what the opinion itself contains.

Show all summary ...

33 fully paid up shares of the face value of Rs. 16,500 allotted to the Japanese company.

2. As under the said agreement the petitioner had to make further remittances to the Japanese company it applied to the Reserve Bank of India, Exchange Control Department, for permission to remit $1,050 out of the balance of $2,450 still payable to the Japanese concern but the Reserve Bank wanted a certificate from the income-tax department to the effect that the proposed payment does not attract any tax under the Indian Income-tax Act. By its application dated the 3rd June, 1965, the petitioner applied to the first respondent, the Income-tax Officer, H-Ward, Companies District II for the necessary certificate m order to enable it to obtain the permission from the Reserve Bank for remittances to the Japanese concern. Several reminders were thereafter sent to the respondent No. 1 and also to the Inspecting Assistant Commissioner of Income-tax, Range II, and ultimately, by one of the impugned letters dated the 4th January, 1966, the respondent-Income-tax Officer, informed the petitioner that remittance to the Japanese company represented income of that concern accruing or arising in India and as such tax should have been deducted at source under Section 18(3B) of the Income-tax Act, 1922, on the remittances already made and on the value of the shares issued to that concern. The petitioner was requested to show cause in writing why it should not be treated as a defaulter in respect of the tax under Section 18(7) of that Act. Regarding the proposed remittance the respondent was of the opinion that Section 195(1) of the 1961 Act was applicable and the petitioner was, therefore, required to show cause why necessary deduction of tax should not be made before making any such remittance. By the second impugned letter dated the 19th January, 1966, the respondent-Income-tax Officer requested the petitioner to pay tax on the remittances already made and the value of the shares issued to the Japanese company without further delay. The petitioner was also requested to deduct tax and pay the same for the proposed remittance to Japan. This rule was obtained by the petitioner on the 24th March, 1966, requiring the respondents to show cause why the impugned letters dated the 4th January and the 19th January, 1966, should not be quashed and why the respondents should not be directed to forbear from enforcing or giving any effect to the demand contained in the aforesaid letters.

3. Dr. Pal for the petitioner has raised two main contentions against the legality of the demand by the respondent-officer for tax in respect of the remittances already made to Japan. He has referred me to the provisions of Sections 18(3B) and 18(7) as well as Sections 34(3) and 46 of the 1922 Act and to the corresponding provisions of the 1961 act for his contention that an order under Section 18(3B), being an order of assessment, must be made within four years from the end of the relevant accounting year under Section 34(3), and as in this case four years have long elapsed since the end of the respective accounting years in which the remittances had been made no order under Section 18(3B) treating the petitioner as an assessee in default could be made by the respondent. For this proposition he has relied on a decision of the Bombay High Court in S.M. Modi v. Commissioner of Income-tax, [1958] 33 I.T.R. 529 (Bom), where on the analogous provision of Section 18(3A) of the 1922 Act, the Bombay High Court held that unless there was a determination under that sub-section the assessee would be deprived of its right of appeal against that order under Section 30 and therefore there must be an adjudication which would be appealable under Section 30. Section 18 provides for payment by deduction at source. Sub-section (3A) requires any person responsible for paying to a person not resident in the taxable territories or to a company which is neither an Indian company nor a company which has made the prescribed arrangement for the declaration and payment of dividends within India any sum chargeable under the provisions of that Act to deduct at the time of the payment, unless he was himself liable to pay income-tax and super-tax thereon as an agent, to deduct income-tax and super-tax at the prescribed rates. Sub-section (3A) which has since been repealed, provides for similar deductions in respect of payment of salary to nonresident persons. Section 18(7) enacts that if any person or the principal officer of a company does not deduct tax or after deducting fails to pay the sums deducted as required by or under that section, he or the company as the case may be, shall, without prejudice to any other consequences which he or it may incur, be deemed to be an assessee in default in respect of the tax. Section 34(3) provides that no order of assessment 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. If a person is to be held responsible for payment of tax on the ground that he had failed to deduct such tax when making payment to a non-resident and for that purpose must be deemed to be a defaulter, it would obviously follow that any order directing him to pay any such amount must be, an order of assessment or must be a determination which is equivalent to an order of assessment so as to entitle him to appeal against such determination. The decision of the Bombay High Court relied on by Dr. Pal leaves no room for doubt on this question. If a determination under Section 18(3B) is to be a determination of liability which attracts tax, such determination must be made within the period prescribed under Section 34(3), i.e., within four years from the end of the accounting year in which the amount was assessable. In this case the petitioner became liable as an assessee in default as and when remittances were made without deduction of tax and it must be held that so far as the past remittances are concerned four years have already elapsed from the end of the respective accounting year when the impugned letters were issued by the respondent and no demands could be made on the petitioner by the said letters.

4. The next contention of Dr. Pal is also of substance. He has submitted that Chapter VI of the 1922 Act deals with recovery of tax and penalties. Section 46 lays down the various modes for the recovery of tax when an assessee is in default in making payment. These various modes are prescribed in Sub-sections (2), (3), (4), (5), (5A) and (6). Section 46(7) enacts that no proceedings for the recovery of any sum payable under the Act shall be commenced after the expiration of one year from the last date of the financial year in which any demand is made under this Act. Dr. Pal contends that, even assuming that the tax in respect of the amounts remitted in the past to Japan were recoverable from the petitioner under Section 18(7), no proceedings for the recovery of such tax could be commenced as one year from the last day of the financial year in which any demand could be made had expired in each case. The financial year in which any demand could be made is the year in which the petitioner failed to deduct tax under Section 18(3B) and was to be deemed to be an assessee in default. No recovery proceedings could be commenced in 1966 for the remittances made in 1954, 1956 and 1960. The position is made even more clear by the corresponding provisions in the 1961 act which, in addition to the words used in Section 46(7) of the repealed Act, goes on to provide that "in the case of a person who is deemed to be an assessee in default under any provision of that Act, no recovery proceedings can be commenced after the expiry of one year from the last day of the financial year in which the assessee is deemed to be in default."

5. Dr. Pal conceded that he could not challenge those parts of the two impugned letters where the respondent-Income-tax Officer has directed the petitioner to show cause why necessary deduction of tax should not be made before making any future remittance and demanding that such tax be deducted and paid at the time of such remittance. Dr. Pal agrees that his remedy is to apply under the provisions of Section 195 of the 1961 Act, Mr. Chowdhury, the learned counsel for the department, made no attempt to challenge Dr. Pal's submission that no recovery proceedings could be commenced in respect of the tax under Section 18(3B) for non-deduction at the time of past remittances. He submitted that, apart from the recovery proceedings provided for in the Act the right of the department to recover any arrears of tax by a suit is not affected. section 232 of the 1961 act is a clear authority for this proposition. Mr. Chowdhury submitted that the two impugned letters did not contain any proposals for starting recovery proceedings to realize the tax due from the petitioner in respect of the past remittances. All that was done by the respondent-Income-tax Officer was to ask the petitioner to show cause why it should not be treated as a defaulter under Section 18(3B) in respect of such remittances. The question of recovery would only come when there was a determination as to whether the petitioner was a defaulter and was liable to pay the tax. Similarly, the request contained in the second impugned letter to pay tax on the past remittances was more or less in the nature of a notice of demand for which, if so advised, the department can file suits or take other actions for recovery as provided by law. The respondent-officer was merely giving the petitioner a chance to show cause why necessary proceedings should not be taken for recovery of tax in respect of the past remittances. As such the provision of Section 46(7) of the 1922 Act or of Section 231 of the 1961 Act do not come into operation in this case. For his proposition that no recovery proceedings under Section 46(7) are started until the proceedings for recovery of tax is set in motion, Mr. Chowdhury referred me to the decision of the Madras High Court in General Commercial Corporation P. Ltd, v. Second Additional Income-tax Officer, Madras, [1960] 40 I.T.R. 506 (Mad.). In the first paragraph of the headnote to that report it is stated that what Section 46(7) of the Income-tax Act contemplates as the commencement of a proceeding for the recovery of tax is an action initiated by the income-tax department, which may set in motion other agencies for the actual recovery. The issue of a certificate of arrears of tax to the Collector under Section 46(2) marks the commencement of recovery proceedings. Mr. Chowdhury pointed out that in this case no proceedings for recovery had yet been commenced by the respondent-Income-tax Officer.

6. Mr. Chowdhury may be technically correct in saving that the two impugned letters do not show that any recovery proceedings had actually been commenced by the respondent-Income-tax Officer, but the two letters certainly contain a demand for payment of tax in respect of the arrear remittances. As I agree with Dr. Pal that in 1966 no determination could have been made of the petitioner being an assessee in default in respect of the remittances already made under Section 18(3B), no question of taking any recovery proceeding for such taxes could arise. In any event, such recovery is barred under the provisions of Section 46(7) of the old Act and Section 231 of the new Act. Undoubtedly, the department is not debarred from instituting a suit to enforce its claim for any arrears due from the petitioner but such recovery cannot be made under any of the provisions of the Income-tax Act. In view of the submission made by Mr. Chowdhury for the department that no demand for tax has been made by these two letters it is not necessary for me to quash or cancel any part of these two letters, particularly as Dr. Pal concedes that the demand contained in the latter portion of the two letters that the assessee is not entitled to a clearance certificate until it deducts tax before remittance to Japan could not be impugned in these proceedings. The rule is disposed of in accordance with the observations made above. Interim order, if any, is discharged There will be no order as to costs.