The Judgment of the Court was delivered by

C.K Banerji, J.:— These references relate to the assessment of Dunlop Rubber Co. (India) Ltd., Calcutta, for the assessment years 1958–59 to 1964–65, and have been initiated under s. 256(2) of the I.T Act, 1961. The relevant accounting years are the calendar years 1957 to 1963, respectively.

2. The facts found and/or admitted are shortly as under: The assessee had made certain remittances to its parent company, viz. Dunlop Rubber Co, Ltd., U.K, a non-resident company. The ITO was of the view that the said remittances were income chargeable to tax. As the assessee had not deducted tax from the amounts remitted as required under s. 18(3B) of the Indian I.T Act, 1922, which corresponds to s. 195(1) of the I.T Act, 1961, the ITO by a letter dated 1st March, 1965, called upon the assessee under s. 201(1) of the I.T Act, 1961, to pay within a week from the receipt of the said letter a sum of Rs. 87,59,815 being the amount of tax which should have been deducted and paid by the assessee. The assessee appealed against the said order of the ITO before the AAC of Income-tax, and contended that the assessee had no obligation to deduct taxes from the remittances which, though having an element of income or profit, did not constitute chargeable income and that the assessee being an agent within the meaning of s. 163(1) of the Act, was not liable to deduct such tax or to pay the same. The AAC, on a Consideration of the agreement between the assessee and the parent company, came to the conclusion that the payments were in the nature of royalty and rejected the contentions of the assessee.

3. The AAC, however, was of the view that the ITO should have assessed the assessee as an agent of the parent company. He also found that the said order under s. 201(1) of the Act was a proceeding for recovery of tax and thus had become time barred under s. 231 of the Act whereunder recovery proceedings should have been taken by the ITO within one year from each of the last dates of the financial years in which the assessee was deemed to be in default. The AAC also found that the assessee did not make any remittance in 1963, i.e, the assessment year 1964–65, and there was no default in the said assessment year. The AAC, accordingly, cancelled the order of the ITO made under s. 201(1) of the Act.

4. The CIT preferred appeals before the Income-tax Appellate Tribunal from the order of the AAC. The assessee also filed cross-objections as well as appeals. The only question urged before the Tribunal was whether the demand of the ITO under s. 201(1) was within time. The Tribunal held that the proceedings under s. 201(1) were recovery proceedings. For the assessment years 1958–59 to 196.3-64, the Tribunal found that all payments by the assessee were made prior to 9th February, 1963, and defaults were committed thereby. The order under s. 201(1) of the Act initiating recovery proceedings made on the 1st March, 1965, was thus clearly out of time. The Tribunal, therefore, confirmed the order of the AAC including that there was no payment by the assessee in the year 1963 and consequently no default in the assessment year 1964–65.

5. Accordingly, all the appeals of the revenue were dismissed. The cross-objections and appeals of the assessee were held to be infructuous as the merits of the assessee's contentions had not been considered and the matters being decided oh the question of limitation only.

6. On the application of the CIT, this court directed the Tribunal to refer the following questions in respect of Income-tax References Nos. 407 to 413 of 1971:

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the proceedings under section 201(1) of the Income-tax Act, 1961, were recovery proceedings?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the recovery proceedings were initiated by the Income-tax Officer when he passed the order on 1st March, 1965, under section 201(1) of the Income-tax Act, 1961?

3. Whether the Tribunal was justified in holding that the limitation prescribed in section 231 of the Income-tax Act, 1961, is applicable to an order passed under section 201(1) of the said Act?”

7. On the application of the assessee this court directed the Tribunal to draw up a statement of case and refer the following question in Income-tax References Nos. 396 to 402 of 1971:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in not dealing with the grounds and disposing them on merits?”

8. Mr. B.L Pal, learned counsel for the revenue, drew our attention to Chap. XVII of the I.T Act, 1961, which although headed “Collection and recovery of taxes”, is sub-divided into several parts:

(a) Sections 190 and 191 are in Part A and are headed “General”.

(b) Sections 192 to 206 are in Part B and are headed “Deduction at source”

(c) Sections 207 to 219 are in Part C and are headed “Advance payment of taxes”.

(d) Sections 220 to 232 are in Part D and are headed “Collection and recovery”.

(e) Sections 233 and 234 are in Part E and are headed “Taxes payable on provisional assessment”.

9. Mr. Pal submitted that s. 201 is not included in the part which related to collection and recovery, but is included in the part under “Deduction at source”.

10. Mr. Pal submitted that s. 201, therefore, cannot be said to relate to recovery and the proceedings thereunder cannot be said to be recovery proceedings.

11. Mr. Pal further submitted that the letter issued in the instant case under s. 201 was in the nature of a demand notice informing the recipient that its liability to tax has been quantified and called upon it to pay the amount within a certain time. The letter merely imposed liability under s. 201, and only if there was default to pay the amount demanded within the time prescribed recovery proceedings would be started in any of the modes specified in the Act including the modes of recovery under s. 232.

12. In support of his contentions Mr. Pal cited the following decisions:

(a) M.M Parikh, ITO v. Navanagar Transport and Industries Ltd., [1967] 63 ITR 663. In this case, the Supreme Court in considering the scope and effect of s. 23A of the Indian I.T Act, 1922, and in particular whether an order under the said section by the ITO directing payment of additional super-tax was an order of assessment, observed as follows (pp. 669, 670):

“But section 23A does not use the expression ‘assessment’ in the body of clause (1): and to the title of the section after it was amended, viz., ‘Power to assess companies to super-tax on undistributed income in certain cases’, it is impossible to give any exalted meaning so as to convert what is an order directing payment of tax into an order of assessment within the meaning of section 34(3) of the Indian Income-tax Act, 1922. 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 prescribing 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.”

(b) CIT v. Blackwood Hodge (India) P. Ltd., [1971] 81 ITR 807. In this case a Division Bench of this court considered the scope and effect of s. 18(7) of the Indian I.T Act, 1922, which corresponds to s. 201 of the I.T Act, 1961, and observed as follows (page 812):

“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.

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, Delhi v. S. Teja Singh , [1959] 35 ITR 408 (SC). 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.”

13. Dr. Debi Pal, learned counsel for the assessee, contended on the other hand that section 201 is in Chap. XVII of the Act, which deals with collection and recovery of taxes. Section 201 comprises in itself all the provisions of assessment, that is, computation or quantification of the tax payable, implied demand for payment of the same and non-compliance therewith, whereby the person liable to deduct the tax at source and to pay the same to the I.T authorities automatically becomes an assessee in default in respect of the same under the deeming provision of the said section. There was no scope for any further action on the part of the ITO to make the person concerned an assessee in default under the said section.

14. Dr. Pal contended further that from the facts found by the Tribunal it is clear that recovery proceedings as envisaged in the Act in those sections and s. 231 thereof had become barred by limitation. The letter dated 1st March, 1965, clearly recorded that action was being taken to recover the amount alleged to be due.

15. In support of his contentions Dr. Pal relied on an unreported decision of this Bench in Income-tax Reference No. 137 of 1970 intituled CIT v. Eyre Smelting P. Ltd. [since reported in [1978] 114 ITR 51 (Cal)], where it was observed as follows in the context of s. 201 (p. 58):

“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 to section 231, this would amount to an initiation of recovery proceedings.

In the plain language of the section 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 s. 18(7) of the earlier Act or under s. 201 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 section 18(7) and/or section 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.”

16. In the present reference, however, the contention on behalf of the revenue is that the letter dated 1st March, 1965, is not a recovery proceeding at all, but it only quantifies the liability and calls upon the person specified in s. 200 of the Act to pay the taxes within the time specified therein and only in case of his failure to do so he will be in default and recovery proceeding may be started thereafter.

17. The relevant portion of s. 201(1) is 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:……………………”

18. On a plain reading of the section, the argument on behalf of the revenue cannot be accepted. The section itself contains a deeming provision whereby the person referred to in the said section in consequence of his failure to deduct and pay the tax which he was liable to deduct and pay to the revenue authorities becomes an assessee in default. No further action on the part of the ITO is necessary or envisaged under the section to make such person an assessee in default. We are, therefore, unable to accept the arguments of Mr. B.L Pal. Following our decision in Eyre Smelting case, [1978] 114 ITR 51 (Cal), we answer questions Nos. 1, 2 and 3 in Income-tax References Nos. 407 to 413 of 1971 in the affirmative and in favour of the assessee.

19. The question in Income-tax References Nos. 396 to 402 of 1971 has not been pressed by the assessee and, therefore, we decline to answer the same. Before concluding we would like to add that in our decision in the case of Eyre Smelting P. Ltd., [1978] 114 ITR 51 (Cal), as also in the present case, we have confined our discussions to recovery proceedings under the Indian I.T Act, 1922, or the I.T Act, 1961. We did not lay down that the right of the revenue to institute a suit in similar circumstances could also be barred by limitation. The period of limitation for a suit to be instituted by the Government of India is specifically laid down by the relevant article of the Limitation Act, 1963, and none of our observations can or were intended to affect the same. There will be no order as to costs.

Dipak Kumar Sen, J.:— I agree.