Calcutta High Court
British Airways vs Commissioner Of Income-Tax. on 5 September, 1989
Equivalent citations: (1992)92CTR(CAL)227, [1992]193ITR439(CAL), [1992]54TAXMAN470(CAL)
JUDGMENT
SUHAS CHANDRA SEN J. - The Tribunal has referred the following question of law under section 256 (1) of the Income-tax Act, 1961 ("the Act") :
"Whether, on the facts and in the circumstances of the case,
(i) the Tribunal was right in law in holding that the assessee had failed to comply with the relevant provisions of section 192 and section 200 of the Income-tax Act, 1961, and consequently attracting the provisions of section 201 (1A) of the Act ?
(ii) the Tribunals decision that the levy and collection of interest under sub-section (1A) of section 201 is not hit by the limitation prescribed in section 231 of the Income-tax Act, 1961, is sustainable in law ?"
In this case, the assessment year involved is 1970-71 for which the corresponding accounting period is the year ending on March 31, 1970.
The facts as found by the Tribunal are as under :
The assessee, an employer-company, has six expatriate (contract) employees during the financial year in question to whom the company paid certain tax-free salaries including tax-free perquisites on account of rent-free quarters. It has been stated by the employer that, in accordance with the approval of the Board, these employees were enjoying tax-free salaries and perquisites, but the employer had to pay tax on such amount of tax-free salary and perquisites. From the statement filed by the employer-company on February 27, 1979, it appeared that the company deposited Rs. 11,29,918 towards tax due on the salary and perquisites in respect of the contract staff on different dates. This statement, however, revealed that, although these deposits were made by the employer-company on a monthly basis, yet the quantum of deposits had not been uniform throughout the year. Particularly, for the months of February and March, 1971, the deposits on account of contract staff were Rs. 1,69,760 and Rs. 7,54,760, respectively. It further transpired that the employer-company paid the net amount of salary to the contract staff at a uniform monthly rate, but the deposit of the tax on account of this salary had not been uniform, particularly, in the last two months of the financial year as mentioned above. Obviously, therefore, the employer had failed to comply with the relevant provisions of sections 192 and 200 read with the relevant provisions of the rules thereunder. Thus, the default and irregularities on the part of the employer-company attracted the provisions of section 201 (1A) of the Act. The Income-tax Officer, after allowing the assessee an opportunity of being heard and rejecting the explanation offered by the assessee, charged interest of Rs. 28,471 under section 201 (1A) on March 31, 1976. That order was set aside by the Tribunal by its order dated August 30, 1978 in Income-tax Appeal No. 1167/(Cal) of 1977-78 with a direction for remaking a self-contained order. Consequently, the Income-tax Officer passed the order under section 201 (1A) again on June 1, 1979, charging interest of Rs. 46,008.47.
Before the Appellate Assistant Commissioner, the assessee raised the following points :
(i) the obligation to deduct tax under section 192 is confined to the salary actually paid; salary due but not paid does not quality for deduction of tax at source;
(ii) where the salary is tax-free, the tax element of the salary representing a perquisite is not payable to the employee and, therefore, only the net salary paid to the employee should suffer tax deduction. However, the Income-tax Officer has calculated the tax liability in respect of the gross salary which included the element of salary not due to the employees and not payable to him. This is contrary to the provisions of the law;
(iii) tax in respect of the net salary actually paid to the employees has been correctly deducted and paid and any delay in payment is of less than one month and, as provide in rule 119A of the Income-tax Rules, 1962, the Income-tax Officer should not have charged any interest on such delay; and
(iv) the proceeding for the recovery of the interest is barred by limitation as prescribed in section 231 of the Act.
The assessee relied on the decision in the case of CIT v. Dunlop Rubber Co. (India) Ltd. [1980] 121 ITR 476 (Cal) in support of its contention. The Appellate Assistant Commissioner held "having gone through the facts of the case, I hold that, on merits as also under the limitation provided by section 231, the demand is bad in law and not recoverable as being barred by limitation".
The Income-tax Officer appealed to the Tribunal. The contention of the Department before the Tribunal was that identical issues had been gone into and decided by the Tribunal in the case of Grindlays Bank Ltd. (Income-tax Appeal No. 424/(Cal) of 1981, dated November 30, 1982). Following that decision, the Tribunal upheld the action of the Income-tax Officer charging interest under section 201 (1A).
Dr. D. Pal appearing on behalf of the assessee has contended that tax can only be deducted from the salary which is actually paid. He has argued that the value of rent-free accommodation may be treated as a perquisite at the time of making assessment of the income of the employee. But the employer had no legal duty to deduct the tax at source on the value of the perquisite given to the employee.
In support of this contention, reliance has been placed upon a circular issued by the Board on July 9, 1951, with regard to deduction of tax at the time of payment of salary to Government servants. There, the question was whether the disbursing officer should take into account the value of rent-free accommodation for computation of the salary from which the deduction of tax has to be made. In that circular, it was stated that there was no statutory obligation on the disbursing officer to deduct tax at source in respect of the value of the rent-free accommodation. It was argued that, following the principle of law recognised in that circular, it should be held that the value of perquisites like rent-free accommodation cannot be taken into account at the time of deduction of tax. Deduction can only be made out of the actual amount that was paid by way of salary.
I am unable to uphold this argument of Dr. Pal for two reasons. This point was not raised before the Appellate Assistant Commissioner nor before the Tribunal. The only point that was taken before the Appellate Assistant Commissioner and the Tribunal was whether the assessee-company which was paying tax-free salary to its employees was under a legal obligation to deduct at source on the net amount that was actually being paid to the employee or on the gross amount, i.e., the salary actually paid plus an amount equivalent to the tax which would otherwise have been payable by the employee.
I have already referred to the controversy that was raised before the Appellate Assistant Commissioner. There was no argument at all advanced by the assessee in respect of house rent allowance. The controversy was specifically limited to the question whether the obligation to deduct tax was confined to the salary actually paid and did not extent to "salary due but not paid". A point was specifically taken that, where salary is paid tax-free, the tax element of the salary representing the perquisite was not payable to the employee. Therefore, the tax liability could not be added to the amount of salary actually paid.
Moreover, the circular of the Board on which reliance has been placed by Dr. Pal was issued on July 9, 1951, and was in respect of Government officers only. In this case, we are concerned with the assessment for the assessment for the assessment year 1970-71 for which the corresponding accounting period was the year ending on March 31, 1970. Dr. Pal has not made any attempt to show that the provisions of the 1961 Act in the relevant accounting period was identical with or substantially the same as the corresponding provisions of the Indian Income-tax Act, 1922.
The Tribunal noted the facts that were brought on record by the Income-tax Officer. The Tribunal also noted the controversy before the Appellate Assistant Commissioner in the following manner :
The assessee appealed to the Appellate Assistant commissioner and contended that the obligation to deduct tax under section 192 was confined to the salary actually paid and salary due but not paid did not qualify for deduction of tax at source, that where the salary was tax-free, the tax element of the salary representing a perquisite was not payable to the employee and, therefore, only the net salary paid to the employee should suffer tax deduction. However, the Income-tax Officer had calculated the tax liability in respect of the gross salary which included an element of salary not due to the employee and not payable to him. This was contrary to the provisions of the law. It was contended that tax in respect of the net salary actually paid to the employees had been correctly deducted and paid and any delay in payment was of less than one month, and as provided in rule 119A, the Income-tax Officer should not have charged any interest for such delay, and, therefore, the proceeding for the recovery of the interest was barred by limitation as prescribed in section 231 of the Act.
From the order of the Tribunal, it does not appear that any controversy was raised about the liability of an employer to include the value of rent-free accommodation provided to an employee for making an estimate of his salary for the purpose of making deduction of tax at source.
Although the fact that the employees enjoyed perquisites in the shape of rent-free quarters was noted in the order of the Income-tax Officer, no controversy was raised as to the includibility of the value of perquisites in the salary of the employees for the purpose of deduction of tax at source under section 192. The assessee also did not think it fit to pursue this point either before the Appellate Assistant Commissioner or before the Tribunal. When the assessee made the application for reference under section 256 (1), a summary of necessary facts was given for the purpose of drawing up the statement of case by the Tribunal. The alleged controversy about the rent-free accommodation was not even mentioned in that summary statement of facts given by the assessee.
Both the questions raised are prefaced by the phrase "on the facts and in the circumstances of the case". The facts and circumstances of the case go to show that the assessee did not call upon the Income-tax Officer, the Appellate Assistant Commissioner or the Tribunal to go into and decide the question that is not sought to be raised. This question cannot be allowed to be agitated for the first time before this court. The Tribunal cannot be said to have erred on a point which it was not called upon to decide and which was not necessary for it to decide.
The next question is about the scope of section 192. It should be noted that this question also has not been specifically raised. But since there was a controversy on another aspect of this matter before the Tribunal and since the question that has been referred has been broadly framed, we have allowed Dr. Pal to argue this point. The contention of Dr. Pal is that, at the time of payment of salary, the company was under a legal obligation to deduct income-tax on the amounts payable to the employees. The amount payable in this case was the amount of tax-free salary. The element of tax could not be included as a part of the salary paid to the employee. It was argued by Dr. Pal that the amount actually handed over to an employee is the amount which could be considered as salary for the purpose of deduction of tax. Great emphasis was put on the phrase "at the time of payment" in section 192 and it was argued that the amount that is actually handed over to the employees will be subjected to deduction at source and nothing else.
Section 192 is as under :
"Salary. - (1) 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...
(3) The person responsible for making the payment referred to in sub-section (1) may, at the time of making any deduction, increase or reduce the amount to be deducted under this section for the purpose of adjusting any excess or deficiency arising out of any previous deduction or failure to deduct during the financial year.
(4) The trustees of a recognised provident fund, or any person authorised by the regulations of the fund to make payment of accumulated balances due to employees, shall, in cases where sub-rule (1) of rule 9 of Part A of the Fourth Schedule applies, at the time an accumulated balance due to an employee is paid, make therefrom the deduction provided in rule 10 of Part A of the Fourth Schedule.
(5) Where any contribution made by an employer, including interest on such contributions, if any, in an approved superannuation fund is paid to the employee, tax on the amount so paid shall be deducted by the trustees of the fund to the extent provided in rule 6 of Part B of the Fourth Schedule.
(6) For the purposes 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."
The scheme of the section is quite clear, -
(1) it will apply to any person responsible for paying income chargeable under the head "Salary";
(2) the obligation of such person is to deduct income-tax on the amount payable;
(3) the deduction shall be 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;
(4) the amount of tax shall be calculated on "the estimated income of the assessee" under the head "salaries" for the relevant financial year financial year; and (5) the time of deduction is the time when the payment of salary is to be made The obligation of an employer under section 192 is to "... deduct income-tax... at the average rate of income-tax computed on the basis of the rates in force... on the estimated income of the assessee..." That means that an estimate of the income under the head "salaries" for the financial year in which the payment has been made will have to be made and it is on the basis of that estimate that the amount of tax payable will have to be arrived at. At the time of payment of salary, income-tax will have to be deducted from the amount payable. The rates of tax and the estimate of income will have to be calculated on an annual basis and whatever is to be included under the head "Salaries" will have to be taken into consideration for the purpose of making this estimate.
Sections 15, 16 and 17 of the Act deal with assessment of income from "Salaries". Section 15 declares that salary due from or salary paid by an employer or a former employer shall be chargeable to income-tax under the head "Salaries". Section 16 enumerates items of deduction that are allowable for computing the income under the head "Salaries". Section 17 lays down that, for the purpose of sections 15 and 16 and also 17, "salary" would include various items like annuity, pension and perquisites. Under section 17 (2) which defines "perquisite", various benefits given to the employees by an employer have been included. The list of perquisites, inter alia, includes the value of rent-free accommodation provided by the employer, the value of any benefit or amenity granted or provided free of cost or at a concessional rate in certain cases and also any sum paid by the employer in respect of any obligation which, but for such payment, would have been paid by the employee. Therefore, at the time of making the estimate of salary income for the purpose of making deduction under section 192, the employer is under an obligation to take into consideration not only the actual sum of money that has to be paid to the employee but the total amount of "salary" as defined in section 17 and calculated in the manner provided in the Act.
Section 206 of the Act requires a person paying salary to furnish a return of deduction made from the salaries of its employees :
"206. Persons deducting tax to furnish prescribed returns. - (1) The prescribed person in the case of every office of the Government, the principal officer in the case of every company, the prescribed person in the case of every authority or other public body or association, and every private employer shall prepare, and within thirty days from the 31st day of March in each year, deliver or cause to be delivered to the Income-tax Officer in the prescribed form and verified in the prescribed manner, a return in writing showing -
(a) the name and, so far as it is known, the address of every person who was receiving on the 31st day of March, or has received or to whom was due during the year ending on that date, from the Government, company, authority, body, association or private employer, as the case may be, any income chargeable under the head Salaries of such amount as may be prescribed;
(b) the amount of the income so received by or so due to each such person, and the time or times at which the same was paid or due, as the case may be;
(c) the amount deducted in respect of income-tax from the income of each such person."
It is to be noted that an employer is required to give particular of "any income chargeable under the head Salaries, that means, whatever is includible under the head Salaries under sections 15, 16 and 17 of the Act will have to be shown in the return.
The position has been made clear also by the Rules framed for this purpose. Under rule 32 of the Rules, an employer is under an obligation to send a monthly return in Form No. 21 to the Income-tax Officer where payment is made by way of income chargeable under the head "Salaries". In form No. 21, it has been specifically laid down that particulars of all benefits and allowances and also other income chargeable under the head "Salaries" will have to be given. In Note No. 1 to the Form, the scope of "Salary" has been indicated as under :
"1. Salary includes wages, annuities, pensions, gratuities, fees, commissions, perquisites or profits in lieu of or in addition to salary and wages including payments made at or in connection with the termination of employment and advance of salary, etc., paid or due during the month. It also includes leave salary or allowance paid outside India, periodical cash allowances like house rent allowances (exclusive of the amount exempt under section 10 (13A)), entertainment allowance, value of rent-free accommodation or concession in rent, value of perquisite of free conveyance, employers contribution to a recognised provident fund in excess of 10 per cent. of salary and interest credited to the employees account in the recognised provident fund in excess of 1/3rd of the salary or in excess if the prescribed rate if interest. For further details, see sections 15 to 17 of the Income-tax Act, 1961."
Note No. 1 to Form No. 21 does not leave any room for doubt that the estimate of salary income will not be confined only to the amount of money actually handed over to an employee monthly but will also include various other things including perquisites and the estimate is to be made in accordance with the provisions contained in sections 15, 16 and 17. The deduction of income-tax may have to be made at the time of payment of salary but the calculation of the tax deductible will have to be made on the estimated salary income of the employee for the relevant financial year, according to the provisions of the Act and the Rules framed for this purpose. There is no warrant for the proposition that the amount of income-tax deductible will be calculated only on the amount that is actually handed over to the assessee.
That apart, when an employer undertakes to pay tax-free income to an employee, what he undertakes is to pay an agreed sum of money plus the tax payable on that amount. The employee enjoys the benefit of the amount of tax which is paid on his account to the treasury. By this process, the employer discharges the statutory financial obligation of the employee. Therefore, the total salary of the employee must be the amount that is actually paid to him as also the amount of tax which was otherwise payable by him but which has been paid on his account by the company. Otherwise, there will not be any difference between an amount of salary which is liable to be diminished by taxation and the same amount of salary which is paid free of tax. The burden of income-tax liability cannot be shifted by agreement. By undertaking to pay tax-free salary, the employer has really agreed to discharge the tax burden of the employee. The amount of tax that is paid by the employer is for and on behalf of the employee.
The implication of payment of tax-free salary was examined by the courts in England in a number of cases. In the case of North British Railway Co. v. Scott [1922] 8 TC 332 (HL), it was held that the contract to pay the salaries free of income-tax constituted in effect an agreement to pay the salaries plus the tax thereon and that the Schedule E assessments has been correctly computed by reference to the amount of salaries actually paid plus the tax thereon borne by the company. The question was dealt with by Lord Wrenbury in the following manner (at p. 341) :
"If the salary which the officer is to receive net is $ 100, the salaries, fees, wages, perquisites or profits whatsoever which form the reward of his service, are the $ 100 and the contractual benefit that when the company has paid the tax due for his income-tax (whose payment is imposed upon the company by the statute), they will not deduct it against him as they might. This is a further valuable consideration or profit accruing to the officer by reason of his office and is a factor, in arriving at his assessable income for income-tax purposes. His total profit and gains are the aggregate of these sums. The appellants say that by such an assessment the Revenue takes tax on tax. Certainly so, it does. But every one who pays 5s. in the pound income-tax pays tax, not only on the 15s. which he retains, but also on the box of 5s. which he has to pay. The question for the opinion of the court is, therefore, to be answered by saying that the sums paid by the appellants as income-tax on the officers profit and gains form part of the officers income for income-tax purposes."
In the case of Hartland v. Diggines [1926] 10 TC 247 (HL), in accordance with its customs, the employer-company paid the income-tax in respect of the salary of its accountant, though there was no oral or written agreement between the company and the accountant in this regard. The sums paid as income-tax were allowed as deduction in computing the companys profit. In the case of the assessment of the accountant, it was contended that the income-tax was paid by the company not on behalf of the assessee as an individual but in respect of the office held by him in the company. The payment was not a money or a payment convertible into money and formed no part of his salary or income and was, therefore, not assessable to tax. This contention was rejected by Viscount Cave L. C. in the following words : (at p. 262) :
"But is it a profit, a perquisite, or an emolument ? That the payment is voluntary makes no difference; that appears plainly from the case of Blakiston v. Cooper [1909] AC 104. But it is said - and this is the main argument used behalf of the appellant - that the sum is not an emolument because it was not paid to the appellant or at his request, although in fact it was paid regularly over a series of years. I do not agree with that argument. There was that continuity in payment to which reference was made in the case of Blakiston v. Cooper [1909] AC 104 and the effect of the payment was in practice and in fact to relieve the appellant year after year from his liability for the payment of the tax. It is true that the appellant did not receive cash in his hands, but he received moneys worth year after year. This being so, I cannot resist the conclusion that the payment was in fact a part of his profits and emoluments as an officer of the company for which he has been properly assessed to tax."
The principles laid down in the aforesaid two decisions of the House of Lords were applied by the Kerala High Court in the case of CIT v. C. W. Steel (No. 1) [1972] 86 ITR 817. It was observed by K. K. Mathew J. that rule 24A of the Rules defines the word "salary", and that is an inclusive definition. There, it includes pay. The income-tax paid by the employer is really part of the salary of the assessee within the meaning of the definition of the term in rule 24A and that it must included in the income of the assessee for the purpose of finding out the value of the rent-free accommodation.
The Madras High Court, in the case of CIT v. I. G. Mackintosh [1975] 99 ITR 419, held that the word "salary", in its natural import, would comprehend within it taxes paid by the employer on behalf of the employee.
A Division Bench of this court also took the same view in the case of Satyanarayan Rungta v. CIT [1978] 115 ITR 382. That case related to an employee of a company who had received Rs. 23,900 and Rs. 27,667 by way of salary for the assessment years 1963-64 and 1964-65. The salary was certified by the employer-company as tax-free. In the assessment proceedings, the Income-tax Officer added the amounts payable as tax to the aforesaid salary income and computed the salary at Rs. 46,857 for the assessment year 1963-64 and at Rs. 41,292 for the assessment year 1964-65.
The appeals filed against the aforesaid two assessments were dismissed by both the appellate authorities. The questions referred by the Tribunal to this court were (at p. 383) :
"1. Whether, on the facts and in the circumstances of the case and on a proper interpretation of the provisions of section 200 of the Companies Act, 1956, and the various provisions of the Income-tax Act relating to deduction of tax at source from income under the head salaries, the Appellate Tribunal was justified in holding that the salary received by the assessee was rightly grossed up ?
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that no credit of tax could be given to the assessee for the difference between the salary income taken for the purposes of assessment and the net tax-free salary received by the assessee from his employer ?"
one of the arguments of Dr. Pal for the assessee was that the company could not lawfully agree to pay any tax-free salary to its employee in view of the provision of section 200 of the Companies Act, 1956, and, therefore, the agreement to pay tax-free salary was illegal. The could did not accept the contention advanced by the assessee and answered both the questions in favour of the Revenue.
The effect of deduction of tax at source from the income of an assessee was also considered by a Division Bench of the Mysore High Court in the case of Tokyo Shibaura Electric Co. Ltd. v. CIT [1964] 52 ITR 283. In that case, under an agreement between A, a non-resident company, and B, a resident company, it was provided that, inter alia, "all payments to be made shall be made without deductions for taxes or other charges assessed in India, which shall be assumed by B" (the resident company).
The implication of a receipt of "tax-free income" was explained by Hegde J. in that case in the following words (p. 289) :
"The royalty due to the assessee has to be paid at Tokyo. Further, in view of clause D, the same should be paid without deduction of taxes or other charges assessed in India, which shall be assumed by Remco. To put those words in the language of Somervell L. J. in Jaworski v. Institution of Polish Engineers in Great Britain Ltd. [1951] 1 KB 768 (CA), the remuneration is to be X plus whatever sum is necessary to leave that available to me after you have borne the taxes. As under the law, the tax is suffered by deduction, it means such a sum as will, after deduction, leave X. Distinction between tax-free income and the "XX" income on which tax should be paid by the employer is well brought out in Simons Income-tax, Second edition, volume II, at page 710. This is what is stated therein :
Where remuneration is paid to an employee free of income-tax or the employer pays his employees income-tax, the gross emoluments of the employee must be arrived at by adding the amount to the tax paid by the employer to the net payment. This was established by North British Railway Co. v. Scott [1923] AC 37 (HL), where the company had contracted to bear the income-tax in question and Hartland v. Diggines [1926] AC 289 (HL), where there was no such contract, the arrangement being simply customary."
In the case of R. B. D. D. Datar v. CIT [1952] 21 ITR 558 (Nag.), one of the contentions made on behalf of the assessee, an employee, was that no tax should be levied on income which was paid free of tax by the employer. This contention was rejected by the Division Bench of the Nagpur High Court. It was observed by R. Kaushalendra Rao J. (pp. 564, 565) :
"17. There is no force in the contention of the assessee that the All India Reporter having already paid the tax on Rs. 85,000, the same sum could not be subject to taxation twice by being taken into account in the income of the assessee. The substance of the matter is that what the assessee received is not merely the sum of Rs. 85,000 but also the immunity from tax on that sum. That being so the actual sum received was rightly treated as Rs. 1,24,361, see North British Railway Co. v. Scott [1922] 8 T. C. 332, at p. 341 (HL) and Hartland v. Diggines [1926] 10 TC 247, at p. 256 (HL) allowing credit or the sum already paid towards the tax under subsection (5) of section 18."
In view of the aforesaid judgments, we hold that the amount of tax payable on the salary income of the employee which was borne by the company should be treated as part of the "salary" of the employee for the purpose of making an estimate of the income of the employee under section 192.
Dr. Pal next contended that, in any event, the employer being a company, it was under no obligation to deduct tax at source from the salary of an employee. His argument was that the person who actually handed over the salary to the employee is the person who should have deducted the tax and any proceeding for levy of penalty or imposition of interest could only be initiated against such person who was responsible for making the payment. Strong emphasis was placed on the language of section 192 and, in particular, on the phrase "any person responsible for paying any income under the head Salaries".
This argument was not advanced at any stage before the Income-tax Office or the Appellate Assistant Commissioner or the Tribunal. This question does not really arise for consideration in this case at all.
In any event, this argument is without any merit. The person responsible for paying the salary of an employee is the employer himself. In the instant case, the company is the employer. It has to pay the salaries of its employees. An officer or a clerk of the company may be engaged to actually hand over the pay cheque or the pay packet to the employees. But, such payments are made for and on behalf of the company. The person responsible for payment of the salary is the employer itself.
The position has been made abundantly clear by section 204 (i) of the Act, where "person responsible for paying" has been defined to mean -
"Meaning of person responsible for paying. - (i) in the case of payments of income chargeable under the head Salaries, other than payments by the Central Government or the Government of a State, the employer himself or, if the employer is a company, the company itself, including the principle officer thereof."
The next argument of Dr. Pal is on the controversy that was actually raised before the Tribunal. The question is whether levy and collection of interest under sub-section (1A) of section 201 is barred by limitation on the facts of this case. Under the scheme of deduction of tax at source, an obligation has been cast upon the person deducting tax to pay the amount of tax deducted within the prescribed time to the credit of the Central Government in accordance with the procedure laid down for the purpose. This obligation has been cast by section 200. If there is any failure to deduct tax in the manner laid down in sections 192 to 194, section 194A, section 194B, section 194C, section 194D and section 195, the person responsible for such failure will be treated as an assessee in default under the provisions of section 201 which is as under :
"Consequences of failure to deduct or pay. - (1) If any such person and in the case referred to in section 194, the principal office 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 :
Provided that on penalty shall be charged under section 221 from such person, principal officer or company unless the Income-tax Officer is satisfied that such person or principal officer or company, as the case may be, has without good and sufficient reasons failed to deduct and pay the tax.
(1A) Without prejudice to the provisions of sub-section (1), if any such person, principal officer or company as is referred to in that sub-section does not deduct or after deducting fails to pay the tax as required by or under this Act, he or it shall be liable to pay simple interest at twelve per cent. per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid.
(2) Where the tax has not been paid as aforesaid after it is deducted, the amount of the tax together with the amount of simple interest thereon referred to in sub-section (1A) shall be a charge upon all the assets of the person, or the company, as the case may be, referred to in sub-section (1)."
The contention raised on behalf of the assessee is that, in the facts of this case, even though the company could be treated as an assessee in default, the recovery of the tax due was barred by limitation. If the recovery of the principal amount was barred by limitation, there was no question of payment of interest under the provisions of sub-section (1A) of section 201.
In our view, the basic premise of this argument is fallacious. One of the consequences of failure to deduct or pay tax in accordance with the provisions of this Act is that the principal officer and the company shall be deemed to be an assessee in default in respect of the tax under the provisions of section 201.
If an assessee is in default or deemed to be in default, the recovery of the tax due may be made under the procedure specifically laid down for that purpose under the Act. The recovery can also be made by any other procedure.
Section 222 of the Act lays down that, when an assessee is in default or is deemed to be in default in making a payment of tax, the Income-tax Officer may forward to the Tax Recovery Office a certificate under his signature specifying the amount of arrears due from the assessee, and the Tax Recovery Officer, on receipt of such certificate, shall proceed to recover from such assessee in default, the amount specified in the mode of recovery in accordance with the rules laid down in the Second Schedule of the Act.
Section 222 (2) makes it clear that such certificate may be issued notwithstanding the fact that proceedings for recovery of the arrears have been initiated in any other manner.
Section 226 (1) lays down :
"Other modes of recovery. - Notwithstanding the issue of a certificate to the Tax Recovery Office under section 222, the Income-tax Officer may recover the tax by any one or more of the modes provided in this section."
Sections 231 and 232 lay down :
"231. Period for commencing recovery proceedings. - Save in accordance with the provisions of section 173 or sub-section (7) of section 220, no proceedings for the recovery of any sum payable under this Act shall be commenced after the expiration of one year from the last day of the financial year in which the demand is made, or, in the case of a person who is deemed to be an assessee in default under any provision of this Act, after the expiration of one year from the last day of the financial year in which the assessee is deemed to be in default.
232. Recovery by suit or under other law not affected. -The several modes of recovery specified in this Chapter shall not affect in any way -
(a) any other law for the time being in force relating to the recovery of debts due to Government; or
(b) the right of the Government to institute a suit for the recovery of the arrears due from the assessee;
and it shall be lawful for the Income-tax Officer the Government, as the case may be, to have recourse to any such law or suit, notwithstanding that the tax due is being recovered from the assessee by any mode specified in this Chapter."
This period of limitation laid down by section 231 is confined to recovery proceedings under the Act. This provision of limitation cannot curtail the power of the Government to file a suit to recover the outstanding amount of tax payable by any other process of law. The outstanding amount of tax can be recovered like any other debt due to the State. Even after the period of limitation laid down in section 231 is over, it is open to the Government to file a suit to recover the outstanding amount of tax subject to the provisions of the Limitation Act.
In the case of Raja Jagadish Pratap Sahi v. State of Uttar Pradesh [1973] 88 ITR 443, it was laid down by the Supreme Court that, even where a taxing statute provides for a summary mode of recovery, it would be open to the State to have recourse to other modes open to it under the general law. It was specifically held in that case that the modes of recovery laid down under section 232 were not exhaustive and that the State could institute a suit to recover the outstanding amount of tax. When a suit is filed for recovery of outstanding tax, the provisions of the Limitation Act will apply and not the period of limitation as prescribed in section 231 of the Act.
In that view of the matter, the very basic premise of Dr. Pals argument that the amount of tax deducted at source has become irrecoverable being barred by limitation cannot be sustained.
In the instant case, a chart was prepared by the Income-tax Officer to show that there was delay in making deduction and payment of tax as required by section 192. It has been pointed out that the deductions were not made in a regular and systematic manner and the quantum of tax that has been deposited has also varied from time to time. The Tribunal has not found any fault in the calculation made by the Income-tax Officer.
Therefore, the consequences of the company being an assessee in default will follow, that is to say, the provision of sub-section (1A) of section 201 will apply. The company, being the defaulting employer, is deemed to be an assessee in default and is liable to pay interest at the prescribed rate from the date of the default up to the date of actual payment of the tax due.
There is another aspect of the case. The liability to pay tax is of the recipient of the income. Deduction of tax at source is only a method of realising that tax. The tax that is paid by the employer is on behalf of the employee and the amount of tax deducted has to be credited to the account of the employee and is treated as the income of the employee. Even if the employer does not deduct and pay the tax, the employee will be liable to pay the tax in the usual course on the full amount of salary. The interest that is payable under section 201 (1A) is only up to the date on which such tax is actually paid. The interest will stop running when the amount of tax which should have been deducted at source is actually paid by the employer or by the employee. Section 202 makes it clear that deduction of tax at source is only one mode of recovery of tax and is without prejudice to any other mode of recovery. The amount which the employer has failed to deduct and pay to the treasury may be recovered from the employer by treating him as an assessee in default or from the employee himself.
It has not been shown how the recovery of the amount of tax which was deductible at source by the company and thereafter, payable to the treasury has become barred by limitation. In the premises, both the question are answered in the affirmative and in favour of the Revenue.
There will be no order as to costs.
BHAGABATI PRASAD BANERJEE J. - I agree.