Gwalior Rayon Silk Co. Ltd. v. Commissioner Of Income-Tax, M.P-I

1. This order shall govern the disposal of Miscellaneous Civil Case No. 262 of 1980 as both these references arise out of a common order.

2. By these references under Section 256(1) of the I.T. Act, 1961 (hereinafter referred to as "the Act"), the Income-tax Appellate Tribunal, Indore Bench, has referred the following questions of law to this court for its opinion :

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the ITO, SC (TDS), Bhopal, had jurisdiction over the assessee-company under Section 201 of the I.T. Act, 1961 ?

(2) Whether, on the facts and in the circumstances of the case, the ITO, SC (TDS), Bhopal, had the powers to adjudicate and determine the correctness of the estimated chargeable income of each employee for whom the return was filed under Section 206 of the Act ?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the order of the ITO, SC(TDS), Bhopal, giving direction to charge interest under Section 201(1A) of the I.T. Act, 1961, on the basis of recomputation of the chargeable income of each employee made by him after the receipt of the return under Section 206 of the I.T. Act, 1961?

(4) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that interest under Section 201(1A) of the I.T. Act, 1961, was chargeable even in respect of those employees whose regular assessments had been completed and the tax assessed had been paid by them?"

3. In M.C.C. No. 262 of 1982 :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that where regular assessment of an employee has been completed and the amount of tax fully paid by him, the ITO (TDS) has no jurisdiction under Section 201 of the I.T. Act, 1961, to demand further tax from the employer in respect of the tax short deducted relating to such employee ?"

4. The material facts giving rise to these references, as set out in the statement of the case, briefly are as follows :

For the assessment year 1977-78, the assessee filed before the ITO, Salaries Circle (TDS), Bhopal, annual returns of salary income in respect of its employees showing the amount of tax deductible under Section 192 of the Act, in compliance with the provisions of Section 206 of the Act. The ITO, Salaries Circle (TDS), Bhopal, examined the returns and found, after making some controversial additions, that the tax deductible under Section 192 was not properly deducted by the assessee in respect of some of its employees. The additions made by the ITO, Bhopal, related to valuation of perquisites relating to accommodation and furniture, disallowance of claim for exemption of leave travel concession and reduction of the standard deduction to Rs. 1,000 on the ground that the employees were in receipt of conveyance allowance. The ITO, Salaries Circle (TDS), Bhopal, therefore, recomputed the chargeable income in the case of each employee and by his separate orders under Section 201 of the Act, demanded extra tax as well as interest under Section 201(1A) of the Act from the assessee. Aggrieved by that order, the assessee preferred an appeal before the Commissioner (Appeals), and contended that the ITO, Salaries Circle (TDS), Bhopal, had no jurisdiction in the matter. This contention was upheld by the Commissioner, who held that the orders passed by the ITO, Salaries Circle (TDS), Bhopal, under Section 201 of the Act were without jurisdiction. The assessee also contended that if the employer had made a bona fide estimate of the income chargeable under the head "Salaries" and deducted the tax accordingly, he had discharged his obligation under the law and hence Section 201 of the Act did not empower the ITO to treat it as an assessee in default. It was further contended before the Commissioner that where the assessment of an employee had been completed and the resultant tax realised from him, no tax could be realised from the employer under the provisions of the Act. The Commissioner upheld all these contentions, but he held that in spite of separate assessments of the employees and recovery of full tax from them, interest under Section 201(1A) of the Act would still be leviable on the assessee. Aggrieved by the decision of the Commissioner, the Department as well as the assessee preferred appeals before the Tribunal. On the question of jurisdiction of the ITO, Salaries Circle (TDS), Bhopal, the Tribunal reversed the finding of the Commissioner and held that the ITO, Salaries Circle (TDS), Bhopal, had jurisdiction to proceed against the assessee under Section 201 of the Act. On merits, the Tribunal held that if the salary income of any employee was not correctly estimated by the employer, the ITO, TDS, could demand additional tax from the employer under the provisions of Section 201 of the I.T. Act. As regards the finding of the Commissioner (Appeals) that where full taxes had been realised from the employees, no demand can be made under Section 201 of the Act, the Tribunal upheld that finding with some modifications. The Tribunal further held that interest under Section 201(1A) of the Act was correctly leviable in the circumstances of the case. The appeals filed by the assessee and the Department were disposed of accordingly. Aggrieved by the order passed by the Tribunal, the assessee and the Department both sought a reference. The applications for reference submitted by the assessee and the Department were allowed by the Tribunal and that is how the aforesaid questions of law have been referred to this court for its opinion.

5. As regards the question referred to in Misc. Civil Case No. 262 of 1980, learned counsel for the parties conceded that the matter was governed by our judgments in Miscellaneous Civil Case No. 157 of 1980 (CIT v. Manager, M.P. State Co-operative Development Bank Ltd.) ([1982] 137 ITR 230) and Misc. Civil Case No. 201 of 1980 (CIT v. Divisional Manager, New India Assurance Co. Ltd.) ([1983] 140 ITR 818), where a similar question directly came up for consideration. We see no good reason to take a view different from that taken in those decisions. Our answer to the question referred in Miscellaneous Civil Case No. 262 of 1980 is, therefore, in the affirmative and against the Department.

6. Regarding question No. 2, referred to in Misc. Civil Case No. 261 of 1980, that question in our opinion does not bring out the real controversy between the parties. We, therefore, reframe that question as follows :

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the employer was an assessee In default in terms of Section 201(1) of the Act.

Now, the liability of an employer to deduct income-tax on the amount of salary payable to his employee arises by virtue of Section 192(1) of the Act, which reads as under :

"192. Salary.--(I) 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."

7. A perusal of the aforesaid provision would make it clear that the liability of the employer is to deduct tax on the estimated income of the employee. Section 200 of the Act further casts a duty on the employer to pay within the prescribed time, the sum so deducted to the credit of the Central Govt. or as the Board directs.

8. In the instant case, the employer had deducted and paid tax on the amount of salary income of its employees by estimate. The ITO has not found that the estimate by the employer was not fair or honest. The Commissioner (Appeals), while dealing with this matter, found that the estimate made by the employer was bona fide. The Tribunal has not reversed that finding. The Tribunal has merely held that the employer did not correctly estimate the salary income in accordance with the provisions of the Act, the Rules and the instructions issued by the Central Govt. from time to time. The Tribunal has thus not found that the estimate of the income of its employees, for the purpose of deducting tax from their salary, made by the employer, was not fair or honest. The question, then, that arises for consideration is whether, in such a case, the employer could be held to be an assessee in default in terms of Section 201(1) of the Act.

9. The provisions of Section 201 of the Act are attracted in the case of an employer only when that employer does not deduct or, after deducting, ' fails to pay the tax as required by the Act. We have already seen that the Act requires an employer to deduct and pay tax on the estimated income of his employee. A duty is cast on an employer to form an opinion about the tax liability of his employee in respect of the salary income. While forming this opinion, the employer is undoubtedly expected to. act honestly and fairly. But if it is found that the estimate made by the employer is incorrect, this fact alone, without anything more, would not inevitably lead to the inference that the employer has not acted honestly and fairly. Unless that inference can be reasonably raised against an employer, no fault can be found with him. It cannot be held that he has not deducted tax on the estimated income of the employee.

10. In the instant case, the Tribunal has found as stated in the statement of the case, that the ITO (TDS), made some controversial additions, such as valuation of perquisites relating to accommodation and furniture. The ITO disallowed the claim for exemption of leave travel concession and reduced the standard deduction to Rs. 1,000 on the ground that the employee was in receipt of conveyance allowance. That the estimate made by the employer was not honest and fair has not been found by the ITO or by the Tribunal. In point of fact, the finding of the Commissioner (Appeals) that the estimate was bona fide has not been set aside by the Tribunal. The employer deducted tax from the salary of the employees on the salary income honestly estimated by it and has also paid that tax, as required by Section 200 of the Act. As the employer has thus deducted and paid tax, as required by Sections 192 and 200 of the Act, the employer cannot be held to be an assessee in default in respect of the tax. Our answer to question No. 2, reframed by us is, therefore, in the negative and against the Dept. In this view of the matter counsel for the parties agreed that it would not be necessary to answer question No. 1.

11. As regards questions Nos. 3 and 4 referred to us, learned counsel for the parties conceded that if our answer to question No. 2 was, that under the provisions of Section 201(1) of the Act, the employer could not be held to be an assessee in default, then the provisions of Sub-section (1A) of Section 201 were not attracted. Our answers to questions Nos. 3 and 4, therefore, are in the negative and against the Department.

12. Reference answered accordingly.

13. In the circumstances of the case, parties shall bear their own costs of this reference.