Grindlays Bank Ltd. v. Commissioner Of Income-Tax.

Income-tax Reference No. 154 of 1983

Decided on September 5, 1989

The Judgment of the Court was delivered by

Suhas Chandra Sen, J.:— The Tribunal has referred the following questions of law under section 256(1) of the Income-tax Act, 1961:

“1. Whether, on the facts and circumstances of the case, the Tribunal was justified in holding that it was obligatory on the part of the asses-see to deduct income-tax at source under section 192 of the Income-tax Act, 1961, from furlough pay which was payable in terms of the contract of service and was paid to the expatriate officers of the assessee in sterling in the U.K outside the territories of India?

2. Whether the Tribunal was justified in holding that the fact that the tax could not be recovered from the assessee because of the provisions of section 231 of the Income-tax Act, 1961, would not stand in the way of the liability of the assessee to pay interest under section 201(1A) of the Income-tax Act, 1961, and the proceedings initiated by the Income-tax Officer for levy of interest under section 201(1A) of Act are not barred by limitation?

3. Whether the Tribunal was justified in holding that although the return regarding the deduction of tax in respect of the employees could have been filed to the Income-tax Officer mentioned in the Notification issued by the Central Board of Direct Taxes dated May 13, 1968, under section 126 of the Income-tax Act, 1961, the assumption of jurisdiction to treat the assessee as in default under section 201 and to levy interest under section 201(1A) of the Income-tax Act, 1961, by the Income-tax Officer, H-Ward, Companies Dist. IV, Calcutta, cannot be said to be bad in law?

4. Whether the Tribunal was justified in holding that the jurisdiction of the Income-tax Officer to pass the impugned order could not be challenged by the assessee at the appellate stage because at the most it could be said to be, a case of concurrent jurisdiction and the objection should have been taken earlier?

5. Whether, on the facts and circumstances of the case, the Tribunal was justified in holding that proceedings under section 201 can be initiated and continued and interest under section 201(1A) of the Income-tax Act, 1961, can be recovered from the employer-bank ?.”

2. The facts of the case have been stated by the Tribunal in the statement of case as under:

The assessee-bank had a number of expatriate officers working in India during the year 1973. These officers were entitled to proceed on furlough on completion of a specific period of service in India and while on furlough they were entitled to furlough pay being disbursed outside India. Consequently, furlough pay was disbursed in pound sterling in the U.K According to the Income-tax Officer as the furlough pay was received by the expatriate officers for the period of furlough, to which they were entitled on account of their service rendered in India, such pay was assessable in the hands of the officers under the head “Salary”. The assessee should have, therefore, deducted tax at source on this pay under section 192(1) read with section 192(6) and Section 9(1)(ii) of the Income-tax Act, 1961. Since it had not deducted any tax, it was liable to pay interest under section 201(1A) of the Income-tax Act on the amount thereof. He, therefore, directed the bank to show cause as to why interest should not be levied accordingly. The bank, however, urged that the interest was not leviable and wanted time to verify the statement sent by the Income-tax Officer in this behalf. Therefore it did not take any further steps in the matter. Accordingly, the Income-tax Officer held that the tax on furlough pay was deductible under section 192 of the Income-tax Act and the bank not having done so, interest was chargeable under section 201(1A) and, ultimately, levied a sum of Rs. 1,70,331 as interest and issued a demand notice therefor. The said order was confirmed on appeal by the Commissioner of Income-tax (Appeals).

3. The assessee came in second appeal before the Tribunal before which a number of contentions were raised by the assessee. The Tribunal ultimately rejected the assessee's appeal by its order in question with the following observations:

“To our mind, the entire legislation has to be interpreted harmoniously. If the appellant was not bound to deduct the tax under Chapter XVII payable in respect of the salaries at all, even if it chose to deduct the tax from the salaries of its own, it cannot be said to be strictly a deduction under Chapter XVII. However, it cannot be seriously disputed that the assessee would get the benefit of these payments as deductible amounts notwithstanding section 40(iii) and, therefore, it follows that the mere fact that the amounts in question were payable outside India would not take these payments out of the ambit of Chapter XVII. In this behalf, we may also refer to sub-section (6) of section 192 of the Income-tax Act which provides that for the purpose of deduction of tax on salary payable in foreign currency, the value in rupees of such salary shall be calculated at the prescribed rate of exchange. Though the mere existence of this provision does not mean that Chapter XVII necessarily applied to all these payments! out side India, the fact that it finds place in section 192 shows it was intended to be applicable in case of salary payments.”

4. The Tribunal dealt with the argument that no interest could be charged. It held:

“In the present case, the appellant should be deemed to be in default in the year 1973 and, therefore, no proceedings could be taken after the expiry of one year therefrom. For this purpose, reliance was placed on a decision of the Calcutta High Court in CIT v. Dunlop Rubber Co. (India) Ltd., [1980] 121 ITR 476 (Cal). We are afraid, this argument again does not carry weight. The matter was thoroughly considered by the B-Bench of the Tribunal to which one of us was a party in the assessee's own case in Grindlays Bank Ltd. v. ITO, [1982] 1 ITD 1100 (Cal). Of course, in that case a different question, viz., liability for interest on Sala ries disbursed to resident employees, was involved and there was another question as to when the liability under Chapter XVII arose for the purpose of computation of interest and it was held that the same arose only from the time of payment and not on the date of credit itself. But it was clearly held that for the purpose of levy of interest under sub-section (1A) of sec tion 201 the fact that no recovery could be made from the assessee because of section 231 of the Income-tax Act, was not material inasmuch as interest had to be calculated to the date of actual payment whether by the assessee or by the employees and the provisions of section 201(1A) were without prejudice to the provisions of sub-section (1). Therefore, the mere fact that the tax could not be recovered from the assessee because of section 231 would not stand in the way of its liability under section 201(1A).”

5. The Tribunal went on to observe:

“Lastly, it was argued that the Income-tax Officer had no jurisdiction in this matter. Reference was made in this behalf to Notification No. 12 (F. No. 55/31/68-II(AII)) issued by the Central Board of Direct Taxes on 13th May, 1968, by which covenanted officers of National and Grindlays Bank stationed anywhere in India were to be handled by the Income-tax Officer, E-Ward, Dist. VA, Calcutta. It was argued that the present order was passed by the Income-tax Officer, H-Ward, Comp. Dist. IV, Calcutta, who, therefore, had no jurisdiction to do so. This matter was also taken up by him before the Commissioner of Income-tax (Appeals) who was of the opinion that no specific objection against jurisdiction had been raised during the proceedings. In other words, the assessee had surrendered to the jurisdiction of the Income-tax Officer by way of giving explanation, etc., and, therefore, it was not entitled to raise such a preliminary issue before the appellate authority. The contention of the assessee's representative in this behalf was that the provisions of sub-section (5) of section 124 were not applicable to the present case inasmuch as, according to this subsection, the bar against questioning the jurisdiction of the Income-tax Officer came into operation after the expiry of one month from the date of the return filed under section 139(1) or after the completion of the assessment whichever was earlier or where no return was filed, after the expiry of the time allowed by the notice under section 139(2) or section 148. In the present case, there was no return under section 139(1) or assessment nor was any notice under section 139(2) or section 148 ever issued. Therefore, sub-section (5) was not at all applicable to the case of the present assessee and apart from this there was no bar upon the assessee to challenge the notice in question. It was also contended that the question of jurisdiction is one which cannot be waived by the assessee and if an Income-tax Officer concerned had no jurisdiction, the entire proceedings are bad in law. Reliance was placed upon a decision of the Calcutta High Court in B.K Gooyee v. Commissioner Of Income-Tax, [1966] 62 ITR 109 for the proposition that submission of a return in response to a notice without any objection to jurisdiction is not sufficient relinquishment of the right to take objection to the validity of the notice.”

6. The Tribunal thereafter observed as follows:

“After carefully considering the legal position on the subject, we are of the opinion that the ground raised in this behalf has no substance. While jurisdiction over the employees of the assessee-bank may have been vested in some other Income-tax Officer by the notification in question, the jurisdiction over the assessee itself is that of the Income-tax Officer who has passed the order in question. According to sub-section (7) of section 2, “assessee” means any person by whom any tax or any other sum of money is payable under this Act and clause (c) of this sub-section includes the case of every person who is deemed to be an assessee in default under any of the provisions of this Act. In the present case, the interest is being levied upon the assessee after treating him as an assessee in default under section 201(1) of the Income-tax Act. There is no specific section which gives any particular Income-tax Officer jurisdiction to make an assessment. According to section 124(1), the Income-tax Officers shall perform their functions in respect of such areas or of such persons or classes of persons or of such income or classes of income as the Commissioner may direct. According to section 130, in respect of any function to be performed by an Income-tax Officer under any provision of this Act in relation to an assessee the Income-tax Officer referred to therein shall in a case where only one Income-tax Officer has jurisdiction over such assessee be such Income-tax Officer. Obviously, the Income-tax Officer, Company Circle, Dist. IV, had jurisdiction over the present assessee and, therefore, this case could be dealt with by him. Clause (b) or (c) of this section would not apply inasmuch as no other Income-tax Officer had jurisdiction over this asses-see and the jurisdiction conferred by the notification referred to by the representative of the assessee relates only to the covenanted officers of the assessee-bank and not the bank itself which is an altogether different entity.

Assuming for the sake of argument that the Income-tax Officer referred to in the notification had also concurrent jurisdiction over this assessee, all that can be said for the assessee was that he could have raised an objection to the jurisdiction of the present Income-tax Officer and under sub-section (6) of section 124, the Income-tax Officer if not satisfied with the correctness of the assessee's claim could refer the matter to the Commissioner of Income-tax for determination of the question as to whether he had jurisdiction to make the present assessment. This again would be subject to the provisions of sub-section (5), i.e, it was for the assessee to call in question the jurisdiction of the present Income-tax Officer. It also cannot be argued for the assessee that he had no opportunity to challenge the jurisdiction because a notice was issued by the present Income-tax Officer to the assessee of the proposal to levy interest under section 201(1A) and the views of the assessee were invited in this regard. No objection to the jurisdiction of the Income-tax Officer was taken by the assessee, although a reply was filed to this letter on 5th June, 1978, contending that no interest was at all chargeable. In these circumstances, while it may be correct that the return regarding the deduction of tax in respect of the employees could have been filed to the Income-tax Officer mentioned in the notification referred to by the representative of the assessee, the assumption of jurisdiction to treat the assessee as in default under section 201 and to levy interest under section 201(1A) by the Income-tax Officer cannot be said to be bad in law. At any rate, it cannot be challenged by the assessee at this stage because at the most it can be said to be a case of concurrent jurisdiction and the objection should have been taken earlier.”

7. Thereafter, at the instance of the assessee, the Tribunal referred to this court the five questions of law mentioned hereinbefore. The first question relates to the liability of the employer bank to deduct income-tax at source under section 192 from the furlough pay of some of the employees. The case of the assessee was that this amount was paid in sterling in the United Kingdom outside the territories of India. Therefore, this payment could not come within the ambit of the Income-tax Act. The jurisdiction of the income-tax authorities did not travel beyond India. The payments made by the bank to its employees outside India could not attract the provisions of the Income-tax Act.

8. We are unable to uphold that argument. Section 4 of the Income-tax Act imposes a charge of tax in respect of the total income of the previous year of every person. In sub-section (2) of section 4, it has been made clear that income-tax shall be deducted at source or paid in advance where it is deductible or payable under the provisions of this Act.

9. Section 5(1) lays down:

“5. Scope of total income.—(1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which—

(a) is received or is deemed to be received in India in such year by or on behalf of such person; or

(b) accrues or arises or is deemed to accrue or arise to him in India during such year; or

(c) accrues or arises to him outside India during such year.”

10. Sub-section (2) of section 5 limits the scope of total income of a nonresident to income which is received or deemed to be received in India during such year by or on behalf of such person or accrues or arises or is deemed to accrue or arise to him in India during such year.

11. In this case, the bank is the employer. It pays a portion of the salary to its employees in the United Kingdom. There is no dispute that the employees were residents in India at the material time. Therefore, the entire salary income, which was payable because of the services rendered by the employees in India, accrued or arose in India.

12. It has been argued by Dr. Pal that only that portion of the salary, which was received by the employees in India, came within the scope of “total income” assessable under the Income-tax Act.

13. This argument overlooks the fact that the salary income which was received by the employees outside India arose on account of rendering of services in India. It cannot be said that what was paid in the United Kingdom was without any consideration. In that event, the amount of salary or the furlough pay which was paid in the United Kingdom would become gifts to the employees and not part of their salary income. The only consideration for payment of the furlough pay in the United Kingdom was the rendering of services by the employees in India.

14. Dr. Pal referred me to section 9 of the Act. But section 9 is a deeming section. This section need not be considered in a case where the income in question squarely comes within the ambit of section 5. Section 9 is a deeming provision. Certain types of income which might not come within the ambit of section 5 have been brought within the fold of the definition of “total income” by virtue of the provisions of section 9. Section 9(1) lays down that certain categories of income shall be deemed to accrue or arise in India. The material part of section 9 for the purpose of this case is as under:

“9. Income deemed to accrue or arise in India.— (1) The following incomes shall be deemed to accrue or arise in India—…

(ii) income which falls under the head ‘Salaries’ if it is earned in India;

(iii) income chargeable under the head ‘Salaries’ payable by the Government to a citizen of India for service outside India;…

(2) Notwithstanding anything contained in sub-section (1), any pension payable outside India to a person residing permanently outside India shall not be deemed to accrue or arise in India, if the pension is payable to a person referred to in article 314 of the Constitution or to a person who, having been appointed before the 15th day of August, 1947, to be a Judge of the Federal Court or of a High Court within the meaning of the Government of India Act, 1935, continues to serve on or after the commencement of the Constitution as a Judge in India.”

15. Even if the language of section 9 is considered carefully, it does not come to the aid of the argument advanced by Dr. Pal. Section 9(1)(ii) lays down that income which falls under the head “Salaries”, if it is earned in India, shall be deemed to accrue or arise in India. The question is where was the furlough pay received by the employees in the United Kingdom earned. The earning must have taken place where the services to the bank were rendered by the employees. It is because of services rendered in India that the employees earned their salaries. There may be an arrangement to pay a portion of the salary in the United Kingdom. But that does not mean that the salary was earned in the United Kingdom.

16. The meaning of the word “earn” according to Webster's New International Dictionary of the English Language, Second Edition, Unabridged, is:

(1) To merit or deserve as by labour or service; to do that which entitles one to (a reward whether the reward is received or not); as, to earn a reputation for generosity.

(2) to acquire by labour, service or performance: to deserve and receive as compensation; as, to earn a good living.

17. The labour or the service which entitled the employees to the furlough pay was rendered in India. It is difficult to see how it can be contended that the earning of the furlough pay took place in England. This construction cannot be given except by distorting the meaning of the word “earn” and making it equivalent to “receive”. The amount which was received by the employees in England was not earned in England but was merely paid in England. The employees got it because they had rendered service in India. In other words, they received in the United Kingdom what they had earned in India.

18. I was referred to a judgment of the Gujarat High Court in the case of CIT v. S.G Pgnatale, [1980] 124 ITR 391 (Guj). In that case, it was pointed out by the Gujarat High Court that the word “earned” had two meanings. One is the narrow meaning of rendering of service, etc. The word “earned” is also used in the wide sense of treating income as “earned” only if the assessee has contributed to its accrual or arising by rendering services and in respect of which a debt is created in his favour. Unless there is a debt in favour of the assessee by reason of his rendering services, it cannot be said to be “income earned” in the wide sense.

19. The distinction drawn by the Division Bench of the Gujarat High Court between the narrow meaning and the wide meaning of the word “earned” is of no significance in the present case. The services to the bank were rendered by the employees in India. The liability to pay arose as soon as the services were rendered and such liability arose in India. By agreement of the parties, the liability could be discharged by making payment in England. But that is a matter of discharging a liability that has already arisen by virtue of rendering of services in India. Therefore, even if a portion of the salary was payable in England, it cannot be said that the liability to pay salary had arisen in England because the salary had been earned in England. What has happened in this case is that the salary has been earned in India by rendering services to the bank in India. From the point of view of the bank, the liability to pay has arisen in India because the services have been rendered in India. There was a contract of service which stipulated that services must be rendered in India. Even otherwise if services are rendered by the employees to the employer and there was no intention of rendering such services gratuitously, the bank has a liability to pay for such services already rendered. Looked at from any point of view, the liability of the bank to pay clearly arose in India. If the liability to pay arose in India, whether the liability was discharged in England or somewhere else becomes immaterial for the purpose of deciding whether there was accrual of income in India.

20. The facts of the case that came up for consideration before the Gujarat High Court in the case of CIT v. S.G Pgnatale, [1980] 124 ITR 391 were entirely different from the facts of the instant case.

21. It must, however, be noted that the scope of clause (iii) of section 9(1) is quite different from the scope of clause (ii) of section 9(1). The word “earned” has deliberately not been used by the Legislature in section 9(1)(iii). section 9(1)(iii) is merely confined to payment of salary by the Government to a citizen of India. If the Government pays salary to a citizen of India for services rendered outside India, then even though the income may be earned outside India, by virtue of the deeming provision, it has been brought within the ambit of “total income” as defined by the Income-tax Act. But if income is earned by a person who is not a citizen of India by rendering services outside India, then section 9(1)(iii) will have no application. Similar will be the case if salary is payable to a person by a private organisation for rendering services outside India.

22. Therefore, a narrow meaning cannot be given to the scope of Section 9(1)(ii) by referring to the provision of section 9(1)(iii).

23. The position is abundantly made clear by section 9(2). A pension is earned by a person because of services rendered in the course of employment. When the term of employment comes to an end, it is said that the man has earned his pension. The earning takes place where the services had been rendered. Because of the fact that the provisions of Section 9(1)(ii), if logically extended, would affect the persons who were residing permanently outside India in respect of pension payable to such persons, it had to be specifically provided that such pension payable to persons mentioned in sub-section (2) shall not be deemed to accrue or arise in India.

24. Therefore, the first question must be answered in the affirmative and in favour of the Revenue.

25. The second question has been dealt with at length in the judgment delivered on September 5, 1989, in the case of British Airways v. Commissioner Of Income-Tax. by us in Income-tax Reference No. 212 of 1983 ([1992] 193 ITR 439). In view of that decision, the second question must also be answered in the affirmative and in favour of the Revenue.

26. The third question relates to the jurisdiction of the Income-tax Officer to pass an order under section 201(1A) of the Income-tax Act, 1961. The order was passed by the Income-tax Officer, “H” Ward, Companies District IV. At the time of hearing of the case before the Income-tax Officer, the question of jurisdiction of the Income-tax Officer was not challenged. It was only before the Appellate Assistant Commissioner, for the first time, that the assessee raised the plea of jurisdiction. The Appellate Assistant Commissioner declined to hold in favour of the assessee on this ground. The Tribunal was also of the view that the question of jurisdiction could not be raised at such a belated stage. Moreover, the Tribunal has pointed out that the jurisdiction of the Income-tax Officer is concurrent and it is not a case of lack of inherent jurisdiction. Section 125A of the Income-tax Act lays down categorically that an Income-tax Officer will have concurrent jurisdiction with any other officer.

27. Section 201(1A) of the Act merely makes a declaration that; the person, principal officer or the company, as the case may be, shall be liable to pay simple interest at 12 per cent. per annum on the amount of tax which has not been paid in accordance with law. The amount of such tax has to be deposited with such officer as may be notified. The dispute that has been raised is that in the instant case the proper officer was not the Income-tax Officer assessing and making the assessment.

28. That the Income-tax Officer, H-Ward, District-IV, had the jurisdiction to assess the assessee-company is not in dispute. It also cannot be disputed that the word “assessment” has to be construed in a wide sense. In the case of Kalawati Devi Harlalka v. CIT, [1967] 66 ITR 680 (SC), it was held that the assessment would include every type of computation of income and mostly all liabilities under Chapter IV of the Income-tax Act.

29. Moreover, this is not a question of instrinsic or inherent lack of jurisdiction as has been specified by the statute. It is not that the Income-tax Officer will have no concurrent jurisdiction. The jurisdiction that has been vested in the Income-tax Officer may be exercised in accordance with an administrative order issued by the Board or the Commissioner, as the case may be. These provisions are really provisions of administrative convenience and it is not a case of inherent lack of jurisdiction. Reference may be made in this connection to the case of Wallace Brothers and Co. Ltd. v. CIT, [1945] 13 ITR 39 (FC) at 45, which was followed by the Patna High Court in the case of Raja Bahadur Kamakhya Narain Singh v. Union of India, [1964] 51 ITR 596 (Pat). In the case of Wallace Brothers and Co. Ltd., [1945] 13 ITR 39, the Federal Court observed as under (p. 45):

“These provisions clearly indicate that the matter is more one of administrative convenience than of jurisdiction and that in any event it is not one for adjudication by the court.”

30. This passage was quoted with approval by the Supreme Court in the case of Pannalal Binjraj v. Union of India, [1957] 31 ITR 565 (SC) and also in the case of Rai Bahadur Seth Teomal v. Commissioner Of Income Tax, [1959] 36 ITR 9 (SC). In view of the fact that the assessee did not raise any objection at the time of hearing of the case by the Income-tax Officer or within the period of one month of filing of the return and in view of the clear finding of the Tribunal and the statutory provisions conferring upon the Income-tax Officer concurrent jurisdiction, we are of the view that the Tribunal has taken a correct view of the matter.

31. A point has been made by the assessee that as a result of this deduction, the Department is realising the tax twice on the same income. It does not appear that this point was agitated before the Tribunal. We, however, make it clear that if the amount of tax has already been realised from the employees concerned directly, there cannot be any question of further realisation of tax as the same income cannot be taxed twice. If the tax has been realised once, it cannot be realised once again, but that does not mean that the assessee will not be liable for payment of interest or any legal consequence for their failure to deduct or to pay in accordance with law to the Revenue. Under these circumstances, the third question is answered in the affirmative and in favour of the Revenue. Fourth and fifth questions are also answered in the affirmative and in favour of the Revenue. There will be no order as to costs.

Bhagabati Prasad Banerjee, J.:— I agree.