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Commissioner Of Income-Tax, West Bengal-Ii, Calcutta v. Eyre Smelting P. Ltd.
Structured Summary of the Opinion
Factual and Procedural Background
This is a consolidated reference under sections 66(1) of the Indian Income-tax Act, 1922, and 256(1) of the Income-tax Act, 1961, made at the instance of the Commissioner of Income-tax, West Bengal-II, Calcutta. The Tribunal framed and referred the question whether proceedings under section 18(7) of the Indian Income-tax Act, 1922, (for assessment years 1960–61 and 1961–62) and under section 201(1) of the Income-tax Act, 1961, (for assessment years 1962–63 and 1963–64) were barred by limitation.
The material facts found and/or admitted in the opinion are:
- W. J. Woodhouse was employed by Eyre Smelting Private Ltd. (the assessee). Personal assessments of Woodhouse for assessment years 1960–61 to 1963–64 were completed in March 1963. Woodhouse thereafter left the assessee's employment and permanently left India.
- On 28 July 1964 the Income-tax Officer served on the assessee a letter addressed to Woodhouse proposing rectification of Woodhouse's assessments on the ground that commission received by him should have been included for the value of rent-free quarters; despite objections, the Income-tax Officer passed orders under section 154 of the Income-tax Act, 1961, on 22 November 1964 amending Woodhouse's assessments and enhancing his tax payable.
- On 26 June 1965 the Income-tax Officer issued a letter to the assessee demanding payment of the enhanced amounts payable by Woodhouse and recorded that the assessee was being treated as a defaulter under section 18(7) of the 1922 Act and/or section 201(1) of the 1961 Act.
- The assessee's appeals against the demand were dismissed by the Appellate Assistant Commissioner, who held that the commission paid to Woodhouse should have been taken into account for deduction at source and that the assessee was liable for the additional taxes. The assessee further appealed to the Tribunal, contending the recovery proceedings were barred by limitation; the revenue contended the default should be deemed to have occurred upon issuance of the impugned letter.
- The Tribunal, relying on the Calcutta High Court decision in Commissioner of Income-tax v. Blackwood Hodge (India) P. Ltd., held that the proceedings were recovery proceedings and, after considering section 46(7) of the 1922 Act and section 231 of the 1961 Act, concluded that the recovery proceedings initiated by the 26 June 1965 letter were time-barred.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the proceedings under section 18(7) of the Indian Income-tax Act, 1922 (for assessment years 1960–61 and 1961–62), and under section 201(1) of the Income-tax Act, 1961 (for assessment years 1962–63 and 1963–64), were barred by limitation?
- Whether, given the repeal of the Indian Income-tax Act, 1922, and the coming into force of the Income-tax Act, 1961, the proceedings should be treated as proceedings under the later Act (relying on section 297(2)(j) of the 1961 Act) and, if so, how the limitation provisions of the later Act apply?
- Whether the assessee's liability (for purposes of limitation) arises at the time the salary/perquisites were paid (the time of the default), or whether the liability arises only when an order (or demand) such as the 26 June 1965 letter is made (in which case limitation would run from the date of that order/demand)?
Arguments of the Parties
Assessee's Arguments (as presented by Dr. Debi Pal)
- The earlier Indian Income-tax Act, 1922 had been repealed and the Income-tax Act, 1961 had come into force by the time proceedings were sought to be initiated on 26 June 1965; no proceeding had previously been initiated under section 18(7) of the earlier Act, and therefore the proceedings must be deemed to have been taken under the new Act under section 297(2)(j).
- Following the principle in Third Income-tax Officer v. M. Damodar Bhat, the assessee must be proceeded against under the recovery and collection provisions applicable to him under the Act in force; therefore the old Act had no relevance to the limitation question.
- The default (if any) in not deducting tax at source occurred in the relevant accounting years (the years in which salary and perquisites were paid), and the recovery letter dated 26 June 1965 was long after the statutory period of limitation for those defaults.
Revenue's Arguments (as presented by Mr. Suhas Sen)
- The assessee should be deemed to have committed a default on the date the Income-tax Officer issued the impugned letter (the opinion quotes a 26 July 1965 date in one place, and the factual chronology elsewhere identifies the relevant letter as dated 26 June 1965); the revenue contended that issuance of that letter extended the date of payment and that recovery proceedings were therefore initiated within the time prescribed (relying on section 46(7) of the 1922 Act and the proposition that liability can arise from the order/demand itself).
- The revenue relied on the position, as drawn from Blackwood Hodge (India) P. Ltd., that the liability of the assessee in such a case can arise from the order of the Income-tax Officer (the demand letter), so the assessee would be deemed in default only in the financial year in which such an order was made and limitation should run from the date of that order.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court in this Opinion |
|---|---|---|
| Commissioner of Income-tax v. Blackwood Hodge (India) P. Ltd., [1971] 81 ITR 807 (Cal) | The case discussed whether an order under section 18(7) of the 1922 Act was an order of assessment; this court (in that case) followed M.M. Parikh to hold that such an order was not an order of assessment and that liability under section 18(7) arises from the order itself by legal fiction. | The Tribunal had relied on this decision to treat the impugned communication as creating a liability from the date of the letter. The present court considered that decision but concluded that default occurs when salary is paid, not when an order is made, and therefore recovery proceedings initiated by the 26 June 1965 letter are time-barred to the extent they initiated recovery. |
| Third Income-tax Officer v. M. Damodar Bhat, [1969] 71 ITR 806 | Principle that proceedings must be taken under the recovery/collection provisions applicable to the person to be proceeded against under the relevant Act. | Relied upon by the assessee (Dr. Pal) to argue that the new Act's provisions should apply and the old Act was irrelevant; the court considered this argument in assessing how the limitation rules of the 1961 Act (including section 231) applied to deemed assessees in default under the 1961 Act. |
| Associated Pigment Ltd. v. Income-tax Officer, [1971] 80 ITR 631 (Cal) | Addressed letters calling upon an assessee to show cause and demands where recovery was held to be barred under the provisions of section 46(7) of the earlier Act and section 231 of the later Act. | Cited by Dr. Pal in support of the assessee's contention that recovery proceedings in similar factual circumstances would be barred by limitation; the present court referred to the decision as supporting the limitation outcome. |
| M.M. Parikh v. Navanagar Transport and Industries Ltd., [1967] 63 ITR 663 (SC) | Held that an order under section 18(7) is not an order of assessment (thus distinguishing between orders that assess income and orders that deem a person an assessee in default). | This Supreme Court authority was followed in the Blackwood Hodge decision; the present court refers to that line of authority in explaining the legal character of orders under section 18(7) but ultimately reasons that the fiscal default for non-deduction occurs at the time of payment. |
Court's Reasoning and Analysis
The court's analysis proceeded in a sequence tied closely to statutory text and the facts:
- Identification of the relevant statutory framework: the court set out key provisions of the 1922 Act (section 18(1), (2) and (7); section 46(7)) and of the 1961 Act (sections 192, 200, 201(1), 231, and the repeal/savings provision section 297(2)(j)). Explanation 2 of section 231 (that recovery proceedings are deemed to have commenced if some action is taken to recover the sum within the period) was important to the analysis.
- Characterisation of the assessee's duty and timing of default: the court emphasized that an employer's duty to deduct tax at source arises at the time of payment of salary/perquisites (the years relevant here were from 1959 to 1963). Accordingly, a default in deduction and payment of tax occurs when those payments were made, not when an order or demand is later made.
- Application of limitation provisions: under the later Act (section 231) recovery proceedings in the case of a person deemed to be an assessee in default shall not be commenced after the expiration of one year from the last day of the financial year in which the assessee is deemed to be in default. Because the defaults (if any) occurred in the earlier financial years (1959–1963), recovery proceedings initiated by the 26 June 1965 letter were, in the court's view, beyond the period permitted and therefore barred to the extent that that letter initiated recovery action.
- Treatment of the 26 June 1965 letter: the court held that the letter both recorded that the assessee was in default under section 18(7) and/or section 201(1) and called upon the assessee to make payment. Under Explanation 2 of section 231 this calling upon to pay amounted to initiation of recovery proceedings; because the default had occurred earlier, those recovery proceedings were time-barred.
- Limited survival of the characterization of default: the court noted that while the recording in the letter that the assessee was in default under the cited sections may not be itself barred, in practical terms more than four years had passed since issuance of that letter, and further recovery proceedings also appeared to be barred.
- Consideration of repeal/savings arguments: the court addressed the assessee's submission based on section 297(2)(j) and the authority of Third Income-tax Officer v. M. Damodar Bhat, acknowledging that the later Act's recovery provisions govern but concluding that the timing of the default (at payment) controls when limitation begins to run under the applicable provision (section 231).
The court therefore reconciled the authorities that discuss the legal character of orders under section 18(7) (including Blackwood Hodge and M.M. Parikh) with the statutory rule that the employer's duty to deduct arises at payment; it concluded that limitation must be measured from the time of the default (payment), not solely from the issuance of a later order or demand.
Holding and Implications
Holding: The court answered the referred question in the affirmative and in favour of the assessee: recovery proceedings initiated by the Income-tax Officer's letter of 26 June 1965, insofar as that letter initiated recovery action, were barred by limitation.
Implications and consequences:
- Direct effect on the parties: the court's decision means that the recovery proceedings against the assessee, to the extent they were initiated by the 26 June 1965 letter calling for payment, are time-barred and cannot be pursued. The court observed that while the letter's recording that the assessee is in default may not itself be time-barred, as more than four years have elapsed since that letter further recovery proceedings also appear to have become barred.
- No costs were awarded: the court expressly stated "There will be no order as to costs."
- Scope as precedent: the opinion rests on statutory interpretation of when default occurs (at payment) and on the application of the limitation provisions in the 1961 Act (section 231) and the 1922 Act analogues. The court did not purport to lay down an expansive new principle beyond the specific statutory application addressed; the decision resolves limitation on the facts presented and in the context of the cited authorities.
Note: The opinion records that C.K. Banerji, J. agreed with the judgment.
The Judgment of the Court was delivered by
Sen, J.:— This is a consolidated reference under sections 66(1) of the Indian Income-tax Act, 1922, and 256(1) of the Income-tax Act, 1961, at the instance of the Commissioner of Income-tax, West Bengal-II, Calcutta. The Tribunal has drawn up a case and referred the following question:
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the proceedings under section 18(7) of the Indian Income-tax Act, 1922, for the assessment years 1960–61 and 1961–62, and under section 201(1) of the Income-tax Act, 1961, for the assessment years 1962–63 and 1963–64, respectively, were barred by limitation?”
2. The facts found and/or admitted are that one W.J Woodhouse had been employed by the Eyre Smelting Private Ltd., the assessee, at the material time. After the personal assessments of Woodhouse for the assessment years 1960–61 to 1963–64, were completed in March, 1963, he left the employment of the assessee and finally left India permanently. Thereafter, the Income-tax Officer served on the assessee a letter dated the 28th July, 1964, addressed to Woodhouse stating, inter alia, that the tax in respect of his income had been under-charged for the said assessment years inasmuch as the commission received by him should have been included for the determination of the value of rent-free quarters allotted to him. Accordingly, the Income-tax Officer proposed to rectify the said assessments. In spite of objections of the assessee to the proposed rectification the Income-tax Officer passed orders under section 154 of the Income-tax Act, 1961, on the 22nd November, 1964, and amended the assessments of Woodhouse enhancing the tax payable by him.
3. Thereafter, on the 26th June, 1965, the Income-tax Officer issued a letter to the assessee demanding the payment of the enhanced amounts payable by Woodhouse for the said assessment years. It was also recorded in the said letter that the assessee was being treated as a defaulter under section 18(7) of the Indian Income-tax Act, 1922, and/or section 201(1) of the Income-tax Act, 1961.
4. The assessee filed appeals against the decision of the Income-tax Officer contained in the said letter. The Appellate Assistant Commissioner held that the commission paid to Woodhouse had to be taken into account along with his salary for the purpose of making deduction at source, and such deduction not having been made, the assessee was liable for payment of the additional taxes. The demands raised by the Income-tax Officer were confirmed and the appeals were dismissed.
5. Further appeals were preferred by the assessee before the Income-tax Appellate Tribunal, and it was contended that the proceedings under section 18(7) of the earlier Act or section 201(1) of the later Act, were barred by limitation inasmuch as the default, if any, on the part of the assessee in not deducting this tax at source from the salary and perquisites payable to Woodhouse occurred in the relevant accounting years and the recovery proceedings initiated by the letter dated the 26th June, 1965, were long after the statutory period of limitation.
6. It was urged on behalf of the revenue that the assessee would be deemed to have committed a default on the 26th July, 1965, when the Income-tax Officer issued the impugned letter which had the effect of extending the date of payment of taxes of Woodhouse. Accordingly, it was submitted that the recovery proceedings were initiated within the time prescribed under section 46(7) of the Indian Income-tax Act, 1922.
7. Relying on the decision of the Calcutta High Court in the case of Commissioner of Income-tax v. Blackwood Hodge (India) P. Ltd., [1971] 81 ITR 807 (Cal), cited before it, the Tribunal held that the proceedings in issue were recovery proceedings. After consideration of section 46(7) of the earlier Act and section 231 of the later Act the Tribunal took the view that no proceedings for recovery of any sum payable under the Acts could be commenced after the expiry of one year from the last day of the financial year in which any demand would be made under the said Acts. The proceedings having been initiated by the said letter dated the 26th June, 1965, were beyond the said period of one year and were time-barred.
8. In order to appreciate the controversy in this reference it is necessary to consider the relevant statutory provisions.
9. Section 18 of the Indian Income-tax Act, 1922, inter alia, provides as follows:
“18. Payment by deduction at source.— (1)………
(2) Any person responsible for paying any income chargeable under the head ‘Salaries’ shall, at the time of payment, deduct income-tax and super-tax on the amount payable at a rate representing the average of the rates in force for the financial year in which he is required to deduct the tax which are applicable to the estimated total income of the assessee under this head: ……
(7) 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 this 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:……”
10. Section 46 of the 1922 Act, inter alia, provides as follows:
“46. Mode and time of recovery.:—………
(7) Save in accordance with the provisions of sub-section (1) of section 42, or of the proviso to section 45, 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 any demand is made under this Act:……
Explanation.— A proceeding for the recovery of any sum shall be deemed to have commenced within the meaning of this section, if some action is taken to recover the whole or any part of the sum within the period hereinbefore referred….”
11. In the later Act we have to consider section 192, the relevant portion whereof is as follows:
“192. Salary.— (1) Any person responsible for paying any income chargeable under the head ‘Salaries’ shall, at the time of payment, deduct income-tax on the amount payable at the average rate of income-tax computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year………”
12. Section 200 reads as follows:
“200. Duty of person deducting tax.— Any person deducting any sum in accordance with the provisions of sections 192 to 194, section 194A, section 194B, section 194C, section 194D and section 195 shall pay within the prescribed time, the sum so deducted to the credit of the Central Government or as the Board directs.”
13. The relevant part of section 201 is set out as follows:
“201. Consequences of failure to deduct or pay.— (1) If any such person and in the cases referred to in section 194, the principal officer and the company of which he is the principal officer does not deduct or after deducting fails to pay the tax as required by or under this Act, he or it 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……”
14. Section 231 of the later Act provides, inter alia, as follows:
“231. Period for commencing recovery proceedings.— Save in accordance with the provisions of section 173 or sub-section (7) of section 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 2.— A proceeding for the recovery of any sum shall be deemed to have commenced within the meaning of this section, if some action is taken to recover the whole or any part of the sum within the period hereinbefore referred to.”
15. Dr. Debi Pal, learned counsel for the assessee, contended at the hearing that in the instant case when the proceedings were sought to be initiated by the letter dated the 26th June, 1965, the earlier Act, that is, the Indian Income-tax Act, 1922, had been repealed and the Income-tax Act, 1961, had come into force. It is the admitted case that no proceeding had been initiated against the assessee under section 18(7) of the earlier Act and, therefore, the proceedings must be deemed to have been taken under the new Act under section 297(2)(j) of the Act which reads as follows:
“297. Repeals and savings.— (1) The Indian Income-tax Act, 1922 (XI of 1922), is hereby repealed.
(2) Notwithstanding the repeal of the Indian Income-tax Act, 1922 (XI of 1922) (hereinafter referred to as the repealed Act),—…
(j) any sum payable by way of income-tax, super-tax, interest, penalty or otherwise under the repealed Act may be recovered under this Act, but without prejudice to any action already taken for the recovery of such sum under the repealed Act.”
16. Dr. Pal submitted further that following the principle laid down by the Supreme Court in the case of Third Income-tax Officer v. M. Damodar Bhat, [1969] 71 ITR 806, the assessee must be proceeded against under the sections relating to the recovery and collection as applicable to him and, therefore, the old Act had no relevance.
17. The clear provision of the later Act is that recovery proceedings in the case of a person who is deemed to be an assessee in default under any provision of the Income-tax Act, 1961, shall not be commenced after the expiration of one year from the last day of the financial year in which the assessee is deemed to be in default.
18. The duty of the assessee as an employer in the instant case was to deduct the salary in the financial years relevant to the assessment years in question, that is, from 1959 to 1963. The assessee must be deemed to be in default in those years and by June, 1965, recovery proceedings in respect of all the said financial years against the assessee had become barred.
19. In support of his contentions Dr. Pal cited a decision of this court in the case of Associated Pigment Ltd. v. Income-tax Officer, [1971] 80 ITR 631 (Cal). The facts in this case were that by an agreement in writing dated the 21st December, 1953, entered into by and between the assessee and a Japanese company, the assessee undertook to make certain payments and to allot certain of its shares to the Japanese company in consideration of the latter providing the assessee with technical assistance and “know-how”.
20. Pursuant thereto, the assessee allotted 33 fully paid-up shares of the face value of Rs. 16,500 to the Japanese company on the 3rd December, 1955, and in the years 1954–1956 and 1960, respectively, remitted U.S dollars 7,000, 3,500 and 1,050 to the Japanese company. The matter being brought to the notice of the income-tax department at the instance of the Reserve Bank a letter dated the 4th January, 1966, was issued by the Income-tax Officer concerned informing the assessee that remittances to the Japanese company represented income of the Japanese concern on which tax should have been deducted at source under section 18(3B) of the Indian Income-tax Act, 1922, and the assessee was required to show cause why it should not be treated as a defaulter in respect of such tax under section 18(7) of the Act. This letter was followed by another letter dated the 19th January, 1966, whereby the Income-tax Officer called upon the assessee to pay tax on the remittances already made and on the value of the shares issued.
21. The petitioner applied under article 226 of the Constitution challenging the said letters dated the 4th January and the 19th January, 1966. On these facts a Constitution Bench of this court consisting of a single judge held that recovery in such a case would be barred under the provisions of section 46(7) of the earlier Act and section 231 of the later Act.
22. Dr. Pal has also drawn our attention to Blackwood Hodge (India) P. Ltd.'s case, [1971] 81 ITR 807 (Cal). The facts of this case were that a company in the United Kingdom sublet some land in New Delhi to the assessee and the assessee in consideration therefor paid to the foreign company a sum in the assessment year 1956–57. The Income-tax Officer took the view that the assessee would 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 and accordingly he directed the assessee to pay the amount of tax. The Appellate Assistant Commissioner set aside the order of the Income-tax Officer on the ground that the payment was in the nature of rental and as such was a gross earning in the hands of the non-resident company. The Tribunal dismissed the further appeal of the revenue on the ground that the order passed under section 18(7) was an order of assessment and having been made beyond a period of four years from the end of the assessment year concerned, was barred by limitation under the provisions of section 34(3) of the Indian Income-tax Act, 1922. On these facts, the following question was referred to this court:
“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 the Act?”
23. This court, following the decision of the Supreme Court in the case of M.M Parikh v. Navanagar Transport and Industries Ltd., [1967] 63 ITR 663 (SC), held that the order was not an order of assessment, which would mainly assess the income and determine the charge in accordance with the charging sections of the Act. It was held further that under section 18(7) the person responsible for deduction of the tax and payment thereof was deemed to be not merely an assessee, but also an assessee in default, and, therefore, by a legal fiction it would be assumed in an order passed under that section that the three stages of imposition of tax, viz., determination of the liability to pay tax, computation of tax payable and the recovery of tax, were over and there was a failure on the part of the assessee to comply with a notice of demand. An order under section 18(7) was not an order of assessment and the liability to pay tax under such an order would arise from the order itself.
24. The main contention of Mr. Suhas Sen, learned counsel for the revenue, has been that, as laid down in the case of Blackwood Hodge (India) P. Ltd., [1971] 81 ITR 807 (Cal), the liability of the assessee in the instant case arose from the order of the Income-tax Officer contained in his letter dated 26th June, 1965. This was not an Order of assessment and brought into existence a liability of the assessee which was not in existence earlier. Therefore, the assessee would be deemed to be in default only in the financial year in which such an order was made. Even if this letter is construed to be the initiation of recovery proceedings, the same cannot be held to be barred by limitation as the period of limitation would run from the 26th June, 1965, the date of the letter itself.
25. In our view, the letter dated the 26th June, 1965, records that the assessee is in default under section 18(7) of the Indian Income-tax Act, 1922, or section 201(1) of the Income-tax Act, 1961. The said letter also calls upon the assessee to make payment of the outstanding tax demand. Under Explanation 2 of section 231, this would amount to an initiation of recovery proceedings. In the plain language of the sections an employer is under an obligation to deduct the tax due from the salary which he pays to his employee and if he fails to do so he commits a default. This default occurs when such salary is paid and not when an order is made under section 18(7) of the earlier Act or under section 231 of the later Act. Therefore, the said letter dated the 26th June, 1965, to the extent it can be considered to initiate recovery proceedings by calling upon the assessee to pay the outstanding tax is barred by limitation. To the extent the said letter records that the assessee is in default under sections 18(7) and/or 201(1) of the said Acts the same may not be barred. But as more than four years have passed since the issue of even this letter, further recovery proceedings also appear to have become barred.
26. To the extent as indicated above, we answer the question in the affirmative and in favour of the assessee. There will be no order as to costs.
C.K Banerji, J.:— I agree.
provisions of section 46(7) of the earlier Act and section 231Alert