If tax is not deducted under a bonafide belief, payer cannot be treated as ‘assessee in default’ u/s 201(1A) – All HC


CIT v I.T.C. Ltd [IT APPEAL NO. 44 OF 2002 dated 4.09.13] – Allahabad High Court

Background:

Assessee was deducting tax on the estimated income of the employees including the travelling allowance upto January, 1993. For a period of two months, the assessee stopped deducting the amount on the ground that he held discussions with the Income Tax Officer. Assessee was treated as assessee in default u/s 201(1A) and was made liable to pay the interest on the amount of income tax, which was not deducted by the assessee from the conveyance allowance given to its employees under Section 192 (1) of Income Tax Act. 

Assessee’s contentions:

  • The explanation given by assessee that it was under fair and bona fide belief not to deduct the TDS on conveyance allowance.
  • The Assessee had held a meeting with Shri Karan Singh, the then Income Tax Officer (TDS) on 22/27.1.1993 on which the assessee was advised that the conveyance allowance was not taxable.
  • Reliance is placed on rulings of Supreme Court in CIT v. Larsen & Toubro Ltd. [2009] 313 ITR 1; Delhi High Court in CIT v. HCL Info System Ltd. [2006] 282 ITR 263 and in CIT v. Nestle India Ltd. [2000] 243 ITR 435 in which a bona fide explanation is considered to be relevant for not deducting the tax under Section 192.
Tax Authority’s arguments:
  • It was obligatory on the part of company to deduct tax on source on conveyance allowance for which there was no exemption under Section 10 (14) of the Act. 
  • There was no exception nor any explanation, whether bonafide or not, can be entertained to avoid liability of interest under Section 201 (1A).
HELD:
  • ITAT held that: “Section 192 (1) of the Act makes employer responsible for deducting tax at source from salary paid to its employees by estimating the income chargeable under the head “salaries” at average rate of income-tax. Sub section (3) of the same section stipulates that the person responsible for making deduction may increase or reduce the amount to be deducted under this section for the purposes of adjusting any excess or deficiency arising out of any previous deduction Section 201 casts duty on the person deducting tax to deposit the same within the prescribed time. If the tax has not been properly deducted or has not been properly paid after deducting, the person who is responsible is to be deemed to be an assessee in default in respect of the tax. On the perusal of these sections which are relevant to the issue under consideration, it becomes obvious that primarily the employer had to deduct tax from the salary paid to its employees on the basis of the estimated income of such employees. It thus follow that so long as the estimate made by the employer is bonafide, it cannot be faulted for not deducting tax.”
  • The assessee obtained declaration from the employees and on such declaration, the tax was not deducted. 
  • The assessee in its estimation of the income of its employees did not find, in consultation with Income Tax Officer (TDS), in the circumstances accepted by the Tribunal did not find it obligatory to deduct tax on such allowance on source.
  • The assessee-company took up the plea that it had discussions with the Income tax Officer and submitted a proof of letter dated 29.1.1993 in this regard. 
  • On these facts, the findings of the ITAT, that the action of assessee for not deducting the tax at source was based on bonafide belief, is a finding of fact, which does not call for interference in this appeal.

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