Chief Treasury Officer v. Union Of India And Others

Prakash Krishna, J.:— The Chief Treasury Officer, Agra, the petitioner, by means of the present petition filed under article 226 of the Constitution of India has questioned the legality and validity of the order passed by the Income-tax Officer (TDS), Agra, passed under section 221(1)/221(1A) of the Income-tax Act whereby the Chief Treasury Officer has been held as the assessee in default having failed to deduct and pay the tax under section 194H of the Income-tax Act, 1961, from commission. A tax liability along with interest amounting to Rs. 2,77,648 has been created by the order dated March 31, 2002.

2. The background facts may be noticed in brief. On October 29, 2003, the Income-tax Department conducted a survey in the office of the petitioner under section 133A of the Income-tax Act and thereafter proceeding was initiated under section 221(1)/221(1A) of the Act on the allegations that the petitioner sells general stamp papers, court fee stamps, copy stamps and other stamps either to the public directly or through licensed stamp vendors at a price less than 1 per cent, of the value of such stamps which amounts to “commission” within the meaning of section 194H of the Act. The petitioner having failed to deduct the tax at source on the said “commission amount” to which it was obliged under section 194H of the Act, is the assessee in default. The case of the petitioner in brief is that the petitioner is not giving any commission to the stamp vendors. But the sales are made at discount of one per cent, on cash purchases of stamp papers, etc., by the licensed vendors as per the provisions of rule 157 read with rule 161 of the U.P Stamp Rules, 1942. It has been stated in paragraph 4 of the writ petition that the petitioner, on the instructions of the Income-tax Officer (TDS)/respondent No. 3 collected the tax from the licensed vendors pertaining to the financial years 2001-02, 2002-03 and 2003-04 and deposited the same with the respondent-Department. The petitioner further states that a similar issue was came up for consideration before the Commissioner of Income-tax (Appeals)-II, Kanpur, with respect to the Chief Treasury Officer, Kanpur, and it was held that the Chief Treasury Officer is not required to deduct the tax at source on the sale of stamp papers, etc., to the licensed vendors as per the U.P Stamp Rules, 1942. Therefore, the impugned order is illegal and void.

3. The stand of the respondent-Department in the counter-affidavit is that the impugned order dated February 17, 2004, has been passed after careful consideration and the petitioner has been rightly held as the assessee in default for not deducting the tax as per the provisions of section 194H. In paragraph 7 of the counter-affidavit-in-reply to the plea that under the circumstances the Commissioner of Income-tax (Appeals) has held that section 194H is not attracted on the sale of stamp paper, etc., by the petitioner, it is stated, is wholly irrelevant.

4. Heard Sri S.P Kesarwani, Additional Chief Standing Counsel on behalf of the petitioner and Shri Shambhu Chopra, learned standing counsel for the Department.

5. The learned counsel for the petitioner mainly submits that the stamp vendors are not agents of the State Government; under the relevant statute, the stamp vendors are granted licence to sell stamp papers, etc. The U.P Stamp Rules provides that only authorised persons can sell the stamp papers and no other persons, except revenue stamps of 10 naya paisa. A mechanism for selling the stamp papers, etc., has been provided in the said Rules. There are two classes of vendors, namely, (a) ex-officio vendors, (b) licensed vendors. The licensed vendors under rule 161 purchase non-judicial, court fee or copy's stamps from the Government treasury on payment of ready-money at a discount of 1 per cent, on the face value of the stamps. This discount is not “commission” within the meaning of section 194H of the Income-tax Act. The other argument is that the sale of stamp paper, etc., to the licensed vendor at a discount of 1 per cent, is sale on principal to principal basis and there is no element of agency in between the petitioner and the licensed vendor. Reliance has been placed on a judgment of the Gujarat High Court in Ahmedabad Stamp Vendors Association v. Union of India, [2002] 257 ITR 202 (Guj) as also on Jagran Prakashan Ltd. v. Deputy Commissioner Of Income-Tax (Tds)), [2012] 345 ITR 288 (AH).

6. In reply, Sri Shambhu Chopra, learned counsel for the Department, supports the impugned order and submits that as a matter of fact, the discount of 1 per cent, is in the nature of “commission” and there exists a relationship of principal and agent in between the petitioner and the licensed vendors.

7. Considered the respective submissions of the learned counsel for the parties and perused the record. Section 194H came in the statute book by the Finance Act, 2001, with effect from June 1, 2001. The section provides for deduction of tax at source in respect of payment of “commission or brokerage”. For the purposes of this section “commission or brokerage” has been defined in Explanation (i) to section 194H. The said Explanation reads as follows:

“(i) ‘commission or brokerage’ includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities.”

8. The words “by a person acting on behalf of another person” the element of agency must be present in all such services or transactions in order to fall within the expression “commission and brokerage” under this Act. To find out as to whether the relation of licensed stamp vendors vis-a-vis the petitioner, is of principal and agent or it is sale of stamp paper, etc., on principal to principal basis, it is necessary to have a look to the relevant statutory provision, i.e, the U.P Stamp Rules, 1942, which govern the relationship of the petitioner with the stamp vendors.

9. The court was taken through the various provisions of the Rules, i.e, rules 150, 151, 155, 157, 161, 167. Heading of Chapter IV of the said Rules is “Sale of Stamps”. Its rules 150, 151, 155, 157, 161, 167 read as follows:

“150. Only authorized persons to sell stamps: Exceptions.— No person, who is not duly authorized in the manner hereinafter provided, shall be entitled to sell stamps of any description other than then naye paise revenue stamps. This prohibition shall not apply:—

(i) to a legal practitioner or a banker, who buys a stock of stamps for use in his own business, and affixes them, when occasion requires, to the documents he has to draw up in the course of that business, the cost of the stamps being recovered from his client or customer with the rest of his charges:

Provided that every court-fee label affixed by a legal practitioner to a document shall be enfaced by him in the name of the client on whose behalf the document is presented to the court. A label once so enfaced shall not be enfaced a second time.

(ii) to Government offices or incorporated companies or other body corporate in respect of stamped paper used for printed forms of instruments for use by the persons concerned with the business of that office, company or body, the cost of the stamp being recovered from those persons.

151. Classes of vendors.— There shall be two classes of vendors, namely (a) ex officio vendors and (b) licensed vendors.

(a) The following persons shall be deemed to be ex officio vendors:

(i) the treasurer of each district, with his salaried assistant or the agent of the treasurer approved on his behalf by the Collector. When the treasurer's approved agent is appointed as ex officio vendor, the treasurer shall remain in every respect responsible as surety for the said agent;

(ii) the tahsildar of each tahsil;

(iii) any salaried vendor who may be appointed by the Provincial Government;

(iv) the officer-in-charge of every post office at which letters are received for despatch (for the sale of adhesive revenue stamps of ten naye paise denomination only);

(b) The Collector may grant a licence for vend to any of the following persons, namely:—

(i) lambardars of villages;

(ii) bakshis in towns under the provisions of the United Provinces Town Areas Act, 1914 (II of 1914);

(iii) pound-keepers;

(iv) kurk amins;

(v) Postmasters at places other than the headquarters of a district or a tahsil;

(vi) village school masters;

(vii) the nazir, head copyist or other responsible official attached to a civil, criminal or revenue court at which no salaried vendor has been appointed and where there is no other licensed vendor;

(viii) an official on the staff of a Presiding Officer of a court in camp;

(ix) patwaris in the districts of Almora, Naini Tal and Garhwal; and

(x) any other person deemed by the Collector to be a fit and proper person for the sale of stamps:

Approval to appointment required in certain cases.— Provided that in the case of the appointment of postmasters and school masters the previous approval of the ‘Postmaster-General’ and the “Chairman of the Education Committee of the District Board” respectively shall be obtained.

1151A Period of licence and fee.— (1) Licence for vend of stamps shall be granted for a financial year.

(2) A licence granted during the course of a financial year shall terminate on March 31, next following.

(3) The Collector may on a written application of the licensed vendor to that effect, moved within a period of one month prior to the date on which the licence expires, renew the licence for the succeeding financial year:

Provided that if the application for renewal of licence is moved and the renewal is not granted till the expiry of the period of licence, the licence granted shall remain valid till the same is renewed or renewal is refused.

(4) A licence fee of one hundred rupees for every financial year for which the licence is granted or renewed shall be paid to the Government through the Collector concerned:

Provided that if a new licence is applied for during a financial year the licence fee for the remainder period of that financial year shall be calculated at the rate of twenty-five rupees for each quarter or part of a quarter.

(5) If a licence is lost, destroyed, defaced, tom or becomes illegible, a licensed vendor shall forthwith apply to the Collector for grant of a duplicate licence. The Collector may, on being satisfied that the issue of duplicate licence is justified, issue a duplicate licence on payment of twenty-five rupees. Every such duplicate licence shall be stamped ‘duplicate’.

151-B. Licence for more than one financial year.— Notwithstanding anything contained in rule 151A, a licence for vend of stamps may be granted for a period of five financial years on payment of a lump sum licence fee of two hundred and fifty rupees.

155. Duties of ex officio vendors.— Ex officio vendors shall supply stamps to the public and to licensed vendors and shall allow discount to the latter at the rates and under the conditions hereinafter prescribed.

157. Method of supply of stamps to licensed vendors.— Licensed vendors shall obtain stamps from ex officio vendors at local and branch depots on payment of ready money (less the discount hereinafter prescribed):

Provided that persons in the service of the Crown licensed under rule 151(b) may obtain stamps as an advance, without payment, in accordance with rule 158.

161. Discount.— Every licensed vendor who purchases non-judicial, court fee or copy stamps from the Government treasury by payment of ready money shall receive the same at a discount of Rs. 1.00 per cent, of the face value of the stamps.

If the discount permissible contains a fraction of a rupee, any such fraction, in excess of the nearest lower multiple of five paise shall be ignored:

Provided that no discount shall be allowed:

(a) on any stamps supplied on any material furnished by the purchaser himself;

(b) unless stamps of an aggregate value of not less than Rs. 5 are purchased at one time;

(c) on the fraction of only one rupee; and

(d) on account of purchase of adhesive revenue stamps.

167. Stamps to be delivered on demand by Collector.— Every licensed vendor shall, at any time, on the demand of the Collector deliver all stamps, or any class of stamps, remaining in his possession together with his registers.”

10. A fair reading of these rules do support the petitioner's stand. The stamp vendors are purchasers of the stamps, etc., from the treasury on payment of ready money in cash. They sell stamps, etc., to the public not on behalf of the State Government but in their own account. section 182 of the Indian Contract Act, 1872, defines “agent and principal” in the following manner:

“182. ‘Agent’ and ‘principal’ defined.— An ‘agent’ is a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done, or who is so represented, is called the ‘principal’.”

11. The rule as to agency is expressed in maxim qui facit per alium, facit per se. It is founded on a contract, express or implied, by which one of the parties confides to the other, the management of some business to be transacted in his name or on his account and by which the other assumes to do the business and renders an account of it. A Division Bench of this court had occasion to consider section 182 of the Indian Contract Act in the case of Loon Karan Sohan Lal v. Firm John and Co. reported in AIR 1967 All 308. The following was laid down in paragraphs 5 and 6:

“The court must examine the true nature of the agreement and the subsequent dealings between the parties, and then decide whether it established a relationship of agency under the law. It is common experience that the word ‘agent’ is frequently used to describe a relationship which is not an agency in law. In several cases, a person described as an agent in the agreement or his letter of appointment was held to be not an agent according to law. Some of these cases are cited in Halsbury's Laws of England, third edition, volume 1, page 146, in a footnote to the following observation:

‘351. Agency depends on true nature of relationship.— In order to ascertain whether the relation of agency exists, the true nature of the agreement or the exact circumstances of the relationship between the alleged principal and agent will be regarded and if it is found that such agreement in substance contemplates the alleged agent acting on his own behalf, and not as an agent in the agreement, the relation of agency will not have arisen.’

The cases cited in the footnote are: Re Nevill, Ex parte White, [1871] 6 Ch App 397; Towle (John) and Co. v. White, [1873] 29 LT 78; Livingstone v. Ross, [1901] AC 327; Micheline Tyre Co. v. Macfarlane (Glasgow) Ltd., [1917] 55 Sc L.R 35; Kitson v. P.S King and Son, Ltd., [1919] 36 TLR 162 and W.T Lamb and Sons v. Goring Brick Co., [1932] KB 710.

I have examined these cases except the one reported in 55 Sc. L.R 35 which is not available. They establish the principle that in determining legal nature of relationship between the alleged principal and agent the use or omission of the word ‘agent’ is not conclusive. American law is similar:

‘the manner in which the parties designate the relationship is not controlling, and if an act done by person on behalf of another is in its essential nature one of agency, the one is the agent of such other notwithstanding he is not so called. Conversely the mere use of the word by agent in the contract cannot have to be held the effect of making one agent, who, in fact is not such.’

American Jurisprudence, second edition volume 3, page 431. The footnote on this page refers to a case in which it was held that the use of the words ‘agency agreement’ and ‘agent’ by the parties in a contract does not necessarily establish a relationship of agency in the legal sense. McCarty v. King County Medical Service Corp., 26 Wash 2d 660; 175 P2d 653. The law in India is the same. It has been held in several decisions that the fact that the parties have called their relationship an agency is not conclusive, if the incidence of this relationship, as disclosed by evidence does not justify a finding of agency, and that the court must examine the true nature of the relationship and the functions and responsibilities of the alleged agent: Benares Bank Ltd. v. Ram Prasad, AIR 1930 All 573, Phool Chand v. B.M Agarwal and Co., AIR 1938 Lahore 814; Suryaprakasaraya v. Matheson's Coffee Works, [1913] 14 Mad LT 249. What is the real nature of the relationship created between the plaintiff and the Government of Assam under the so-called agreement of agency Ex. C-1. Before analysing this agreement, it is necessary to state the essential characteristic of an agency in law. Section 182 of the Contract Act defines an agent as ‘a person employed to do any act for another or to represent another in dealings with third person’. The section defines a principal as ‘the person for whom such act is done or who is so represented.’ According to this definition, an agent never acts on his own behalf but always on behalf of another. He either represents his principal in any transaction or dealing with a third person, or performs any act for the principal. In either case, the act of the agent will be deemed in law to be not own but of the principal. The crucial test of the status of an agent is that his acts bind the plaintiff.”

12. A Division Bench of the Madras High Court in the case of P. Krishna Bhatta v. Mundila Ganapathi Bhatta, AIR 1955 Mad 648, laid down the following in paragraph 36:

“36… Looked at from this point of view, an agency is a contract of employment for the purpose of bringing another in legal relation with a third party or in other words, the contract between the principal and agent is primarily a contract of employment to bring him into legal relation with a third party or to contract such business as may be going on between him and the third party. An agent is thus a person either actually or by law held to be authorised and employed by any person to bring hint into contractual or other legal relations with a third party. He is a representative vested with authority, real or ostensible, to create voluntary primary obligations for his principal by making promises or representations to third persons calculated induce them to change their legal relations. Representative character and derivative authority may briefly be said to be the distinguishing features of an agent.”

13. The apex court in the case of Chairman, Life Insurance Corporation v. Rajiv Kumar Bhasker reported in [2005] 126 Comp Cas 809 (SC); (2005) 6 SCC 188 had occasion to consider various sections of Indian Contract Act including sections 182, 186 and 187. The apex court in the said case held that an agency can be created expressly or by necessary implications. Followings were laid down in paragraphs 26, 27 and 28:

“26. The definition of ‘agent’ and ‘principal’ is clear. An agent would be a person employed to do any act for another, or to represent other in dealings with third parties and the person for whom such act is done or who is so represented is called the principal. It may not be obligatory on the part of the corporation to engage an agent in terms of the provisions of the Act and the rules and regulations framed thereunder, but indisputably an agent can be appointed for other purposes. Once an agent is appointed, his authority may be express or implied in terms of section 186 of the Contract Act.

For creating a contract of agency, in view of section 185 of the Indian Contract Act, even passing of the consideration is not necessary. The consideration, however, so far as the employers are concerned as evidenced by the scheme, was to project their better image before the employees.

It is well-settled that for the purpose of determining the legal nature of the relationship between the alleged principal and the agent, the use of or omission of the word “agent” is not conclusive. If the employee had reason to believe that his employer was acting on behalf of the corporation a contract of agency may be inferred.”

14. In Bhopal Sugar Industries Ltd. v. STO, [1977] 40 STC 42 (SC); (1977) 3 SCC 147 : AIR 1977 SC 1275, the Supreme Court has held as follows:

“It is well settled that while interpreting the terms of the agreement, the court has to look to the substance rather than the form of it. The mere fact that the word ‘agent’ or ‘agency’ is used or the words ‘buyer’ and ‘seller’ are used to describe the status of the parties concerned is not sufficient to lead to the irresistible inference that the parties did in fact intend that the said status would be conferred. Thus the mere formal description of a person as an agent or buyer is not conclusive, unless the context shows that the parties clearly intended to treat a buyer as a buyer and not as an agent. In a contract of sale, title to the property passes on to the buyer on delivery of the goods for a price paid or promised. Once this happens the buyer becomes the owner of the property and the seller has no vestige of title left in the property. The concept of a sale has, however, undergone a revolutionary change, having regard to the complexities of the modem times and the expanding needs of the society, which has made a departure from the doctrine of laissez faire by including a transaction within the fold of a sale even though the seller may by virtue of an agreement impose a number of restrictions on the buyer, e.g fixation of price, submission of accounts, selling in a particular area or territory and so on. These restrictions per se would not convert a contract of sale into one of agency, because in spite of these restrictions the transaction would still be a sale and subject to all the incidents of a sale. A contract of agency, however, differs essentially from a contract of sale inasmuch as an agent after taking delivery of the property does not sell it as his own property but sells the same as the property of the principal and under his instructions and directions. Furthermore, since the agent is not the owner of the goods, if any loss is suffered by the agent he is to be indemnified by the principal. This is yet another dominant factor which distinguishes an agent from a buyer—pure and simple.”

15. In the aforesaid case, the Supreme Court has relied upon the following observations made in Gordon Woodroffe and Co, (Madras) Ltd. v. Shaikh M.A Majid and Co., AIR 1967 SC 181:

“The essence of sale is the transfer of the title to the goods for price paid or to be paid. The transferee in such case becomes liable to the transferor of the goods as a debtor for the price to be paid and not as agent for the proceeds of the sale. On the other hand, the essence of agency to sell is the delivery of the goods to a person who is to sell them, not as his own property but as the property of the principal who continues to be the owner of the goods and who is therefore liable to account for the proceeds.”

16. In Sri Tirumala Venkaleswam Timber and Bamboo Firm v. CTO, [1968] 21 STC 312 (SC); AIR 1968 SC 784, the distinction between a contract of sale and a contract of agency was pointed out with reference to the Sales of Goods Act. The essence of a contract of sale is the transfer of title to the goods for a price paid or promised to be paid. The transferee in such a case is liable to the transferor as a debtor for the price to be paid; and not as agent for the proceeds of the sale. The essence of agency to sell is the delivery of the goods to a person who is to sell them, not as his own property but as the property of the principal who continues to be the owner of the goods and will, therefore, be liable to account for the sale proceeds.

17. In the light of the propositions of law as delineated above, if we examine the issue in the light of the facts of the present case, relationship of the petitioner with the licensed vendor is not that of agency. It is not a contract of employment, as contract between the principal and the agent is primarily contract of employment to bring a legal relation with a third party or contract to such business as may be governed between them and the third party. The U.P Stamp Rules, 1942, leave no room for doubt that the title to the stamp papers, etc., is passed on immediately to the licensed dealer on payment of ready-money. There is nothing in the said rule to indicate that even after the sale of stamp papers, etc., by the petitioner to the licensed vendor, the title/ownership of the stamp papers, etc., continues with the petitioner. At least no such rule could be pointed out by the learned standing counsel for the Department. The rule is silent if stamp paper, etc., is lost from the custody of the stamp vendor. It does not provide that in any such eventuality it will be loss to the State. The scheme of such Rules gives fair indication that the licensed vendors are purchasers of non-judicial court fees, etc., in their account, as per rule 161, and the word “purchase” herein has been used in its ordinary sense as commonly understood as transfer of ownership in the goods sold.

18. The scheme of the U.P Stamps Rules, 1942, negates any such relationship of agency in between the petitioner or the stamp vendor. Grant of licence to sell the stamps, etc., is only for the purposes of regulation and modulating the conduct of the stamp vendors, so that stamps, etc., are made available to the public on their face value easily and hassle free. Sale and purchase transaction takes place in between the petitioner and the stamp vendor for consideration by payment of ready money. Section 19 of the Sale of Goods Act, 1930, provides that the property in the ascertained goods is transferred to the buyer when the contract intends it to be transferred. In the absence of any thing otherwise, in the said Rules, the property passes from the date of sale (Peare Lal-Kishan Prasad…Plaintiff v. Diwan Singh-Ganeshi Lal…Defendant ., AIR 1930 All 661). They have gone to the extent that the term of contract denotes that no delivery shall take place till the entire purchase money is paid, but the incorporation of this term does not per se postpone the title of the purchaser.

19. In Hoe Kim Seing v. Maung Ba Chit, AIR 1935 PC 182, it has been laid down that even it is intended that the sale consideration shall be paid later on and the goods are specified and ascertained, the property in ascertained goods is transferred to the buyer immediately.

20. In Ahmedabad Stamp Vendors Association v. Union of India, [2002] 257 ITR 202 (Guj), a similar set of Rules was came up for consideration with reference to section 194H of the Income-tax Act wherein, after discussion, the court has held as follows (page 215):

“Applying the aforesaid definitions and the judicial pronouncements to the facts of the present case and in backdrop of the aforesaid rules, it is clear that although the Government has imposed a number of restrictions on the licensed stamp vendors regarding the manner of carrying on the business, the stamp vendors are required to purchase the stamp papers on payment of price less the discount on the principal to principal basis and there is no contract of agency at any point of time.”

21. Respectfully following the aforesaid decision we are also of the view that in the State of U.P in the light of the Rules, 1942, the sale of stamp papers by the petitioner to the licensed vendor is a sale on principal to principal basis and there does not exist a relationship of agency in between them.

22. The central theme of the impugned order dated December 16, 2003, is that as the stamp papers, etc., have been sold at a discounted price, it is nothing but payment of commission to stamp vendors by the petitioner. The impugned order proceeds on the ignorance of the scheme of the U.P Stamp Rules as also the difference in between the commission and discount. A similar kind of controversy was came up for consideration before this court in the case of Jagran Prakashan Ltd., [2012] 345 ITR 288 (All). It was a case of publisher of newspaper engaged in the business of printing and publishing newspapers Dainik Jagran and Eye Next from different places across the country. It was giving trade discount to the advertisers who used to bring advertisements for the newspapers. The newspaper publisher used to charge less advertisement charges from a category of persons who are the members of the Indian Newspapers Society. The Income-tax Department treated the newspaper Dainik Jagran as the assessee in default as it failed to deduct the tax at source on the differential amount which, according to the Department, was commission paid to such advertisers. This court on the consideration of various judgments of the apex court has held that such type of discount is trade discount and it is not commission.

23. By applying the ratio of the aforesaid decision and keeping in mind that the nature of the transaction discount under rule 161 is not payment of commission directly or indirectly but it is a discount. We are, therefore, of the opinion that the impugned order has been passed without taking into consideration the relevant facts and is illegal. We also find that in similar set of facts the Commissioner of Income-tax (Appeals)-II, Kanpur, has held that the provisions of section 194H are not attracted in the case of the stamp vendors, deserves for acceptance and this decision should have been followed in the absence of any material otherwise by respondent No. 2 who is below the rank of the Commissioner of Income-tax (Appeals).

24. In the result, the writ petition succeeds and is allowed. The impugned orders dated February 17, 2004 (annexure 2), the order dated November 16, 2004 (annexure 5) and the notice dated December 3, 2007 (annexure 9) are hereby quashed. But no order as to costs.