Andhra HC (Pre-Telangana)
P.V. Rajgopal And Ors. vs Union Of India And Ors. on 21 April, 1998
Equivalent citations: 1998(4)ALD268, [1998]233ITR678(AP)
Author: T.N.C. Rangarajan
Bench: T.N.C. Rangarajan
ORDER T.N.C. Rangarajan, J.
1. This batch of writ petitions relate to the question of deduction of tax at source with reference to the income chargeable under the head 'Salaries'.
Pleadings :
2. Writ Petition No.27804/1995 has been filed by the Officers in the Research and Development Division of Bharat Heavy Electricals Limited. (A Government of India Undertaking). They obtained House Building Advance from H.D.F.C., L.I.C., and other Financial Institutions in respect of which monthly instalments are deducted from their salary. The difference between the rate of interest charged by the Financial Institutions and the rate of interest at which the House Building loans are generally sanctioned by the Company was reimbursed to the petitioners. On 23-3-1995, the Central Board of Direct Taxes (for short 'C.B.D.T.') informed the Chief Commissioner of Income-tax, Hyderabad that where the employer directly bears a part of the interest burden of the employees by reimbursing a portion of the interest payable by the employee in respect of building loans, such reimbursement is taxable as income from 'Salaries' under Section 17(2)(iii) of the Income-tax Act. This was forwarded to the Deputy Commissioner of Income-tax of each zone and circulated to the Company. This writ petition challenges that letter by claiming that the interest on reimbursement is not a perquisite and prays for a declaration that the said letter is illegal and ultra vires the provisions of the Income-tax Act.
3. Writ Petition No.26797/1997 has been filed by the trade union of the workers of Bharat Heavy Electricals Limited. It is stated that an order under Section 201 was passed on 21-3-1995 against the Company for the assessment years 1989-90 to 1993-94 raising a demand of Rs.1,61,16,601/-with penalty of Rs.72,94,881/-. Consequently, the Company issued a Circular on 5-7-1995 intimating the employees that the interest subsidy will be treated as a perquisite for deducting the tax at source. It is stated that a similar order for earlier year was set aside in revision and yet the Income-tax Department was persisting and for that reason it is prayed that there should be a direction not to treat the interest subsidy as a perquisite while deducting the tax at source.
4. Writ Petition No.35660/1997 has been filed by the Executive Association of BHEL for the same relief.
5. Writ Petition No.27328/1995 has been filed by the Electronics Corporation of India Limited Officers Association. It is stated that for the assessment year 1990-91, the Income-tax Officer treated the interest subsidy as a perquisite and passed an order under Section 201 for the assessment year 1990-91 treating the' ECIL as an asscssec in default for not treating interest subsidy as perquisite for deduction of tax at source. ECIL filed a revision to the Commissioner of Income-tax under Section 264 which was allowed on 20-3-1992 and that order became final. It is also stated that in the case of Hindustan Aeronauticals Limited, the Karnataka High Court allowed the Writ Petition No.8726/1993 on 13-1-1994 holding that interest subsidy is not a perquisite and consequently the Commissioner, Income-tax, Bangalore, issued a letter dated 24-2-1995 to the H.A.L., stating that interest subsidy need not be treated as perquisite while deducting the tax at source in respect of salaries. A similar letter was issued by the Income Tax Officer, Ward-4, TDS, Hyderabad to HAL, Hyderabad. But for the assessment years 1991 -92 to 1993-94 an order under Section 201 was passed by the Income-tax Officer, Ward 5(7), Hyderabad, in respect of ECIL raising a demand for Rs.35,64,652/-and penalty of Rs. 10,02,108/-. The appeal was rejected by the Commissioner of Income-tax (Appeals). Consequently, the ECIL informed the employees that the tax will be deducted at source on interest subsidy inasmuch as further proceedings by ECIL against the appellate order was getting delayed. In this situation, this writ petition has been filed for a direction not to treat the interest subsidy as perquisite while deducting the tax at source.
6. Writ Petition No.8217/1997 has been filed in respect of assessment year 1995-96.
7. Writ Petition No.21832/1997 has been filed by the trade union of the ECIL employees for the assessment years 1995-96 and 1996-97 for the same relief.
8. Writ Petition No.20647/1997 has been filed by the ECIL Officers Association for the assessment years 1996-97 and 1997-98 for the same relief.
9. Writ Petition No.24932/1997 has been filed by the Association of the Officers employed by Mishra Dhatu Nigam Limited (for short 'MIDHANI') (a Government of India Undertaking). It is stated that on 24-3-1995, an order under Section 201 of the Act was passed against the Company for the assessment year 1993-94. Consequently, the Company issued a circular on 24-9-1997 proposing to take into account the interest subsidy for deducting the tax at source. Hence, this writ petition has been filed for a direction not to do so.
10. Writ Petition No.288/1998 has been filed by the Employees Association of Bharat Dynamics Limited, a Government .of India Undertaking. It is pointed out that for the assessment year, in the case of ECIL, the Commissioner of Income-tax had accepted that the interest subsidy is not a perquisite and yet for the subsequent years the Department was treating it as a perquisite. Consequently, this writ petition also prays for the same relief.
Arguments for the Petitioner :
11. The learned Counsel for the petitioner submitted that the interest subsidy is not a perquisite as held by the Karnataka High Court in the case of P. Krishna Murthy v. C.I.T., (1997) 224 ITR 183 and consequently in the case of Employees of Bharat Electronics Limited such interest subsidy was not treated as a perquisite for deduction of tax at source. It is stated that the position is the same in respect of HAL also. Secondly, it was submitted that it is discriminatory on the part of the Department to treat such interest subsidy as perquisite in the cases of identically placed assessees, and even employees of the same company working in different States. Thirdly, it was submitted that there was no machinery for adjudicating this issue at the time of deduction of tax at source whereby the petitioners, who were the employees and who were ultimately to bear the burden, were driven into expensive and unnecessary litigation for getting the relief to which they were entitled. It was submitted that in these circumstances, there should be a declaration that the interest subsidy should not be treated as a perquisite for deduction of tax at source.
Arguments for the Revenue :
12. The learned Standing Counsel for Revenue vehemently opposed this claim of the petitioners. He took us through the relevant provisions of the Act and stated that the interest subsidy will be a perquisite and that the decision relied on by the petitioners requires reconsideration. In order to appreciate this argument, we have to go into the history of the legislation in this regard.
Statutory Provisions :
13. Section 15 charges, salaries to income-tax. Section 17 defines salary as including any fees, commissions, perquisites or profits in lieu of, in addition to any salary or wages. Sub-section (2) defines perquisites to include the listed items :
"(2) "Perquisite" includes -
(i) the value of the rent free accommodation provided to the assessee by his employer;
(ii) ....
(iii) the value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases.
(a) by a Company to any employee who is a director thereof;
(b) by a Company to an employee being a person who has a substantial interest in the Company;
(c) by any employer (including a Company) to an employee to whom the provisions of paragraphs (a) and (b) of this sub-clause do not apply and whose income under the head "Salaries" (where due from, or paid or allowed by, one or more employers), exclusive of the value of all benefits or amenities not provided for by way of monetary payment, exceeds twenty-four thousand rupees.
Explanation : For the removal of doubts, it is hereby declared that the use of any vehicle provided by a Company or an employer for journey by the assessee from his residence to his office or other place to his residence, shall not be regarded as a benefit or amenity granted or provided to him free of cost or at concessional rate for the purposes of this sub-clause.
(iv) any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee;
(Rest of the sub-clauses arc not relevant for this case).
Sub-section (3) defines profit in lieu of salary.
"(3) Profits in lieu of salary" includes -
(i) the amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his employment or the modification of the terms and conditions relation thereto.
(ii) any payment other than any payment referred to in clause (10), clause (10A), clause (10B), clause (11), clause (12), clause (13) or clause (13A) of Section 10, due to or received by an assessee from an employer or a former employer or from a provident or other fund not being an approved superannuation fund, to the extent to which it does not consist of contributions by the assessee or interest on such contributions."
The Fact Situation :
14. The Facts in respect of which these provisions are to be applied arises from a welfare measure by the Central Government for providing funds for acquisition of houses by its employees. As far as the Central Government employees arc concerned house building loans are sanctioned by the Government at a concessional rate. As far as the Public Sector Undertakings owned by the Government arc concerned, similar schemes were in vogue. It was found that the Public Enterprises had to use the available funds in their own enterprises and their internal resources were not large enough to meet the weeds of the employees for housing loans. At the same time, Financial Institutions were also granting loans for building houses but at a rate which was higher than the rate at which the Government was granting house building advances. The Ministry of Industry considered this situation and by icltcr dated 2 (37)/85/ BPE (WC) dated 12-11-1986 decided that the Public Enterprises should adopt a scheme of interest subsidy to pay the difference between the rate of interest charged by specialised agencies and the rate of interest charged by the Central Government under House Building Advance Rules. Consequently, large Public Sector Undertakings framed their own rules providing for granting subsidy to the employees who had taken loans from other Financial Institutions instead of being granted loans by the Public Sector Undertaking itself.
The Legal Position :
15. The question whether the grant of house building advances at a rate of interest below the market rate is a perquisite had been debated and the view of the Government itself was that the statutory provisions did not treat it as aperquisite. Consequently, Taxation Laws (Amendment) Act, 1984, introduced an amendment with effect from 1-4-1985 inserting sub-clause (vi) to include as a perquisite, the amount of interest where the loan is given interest free and the amount of difference between the interest charged and the notified rate where the loan is given at a rate less than the notified rate prescribed for Central Government House Building Advance. This generated an adverse reaction from the salaried class as it amounted to taking back by way of tax what is given as a welfare measure. Consequently, even before the amendment could take effect, the Finance Act, 19,85 withdrew the said amendment. This was explained by the memorandum explaining the provisions of the Finance Act, 1985 by Circular No.421, dated 12-6-1985 (1956 1TR Statute 138), hi spite of this legislative history, an attempt was made to tax the interest subsidy and the Calcutta High Court in C.I.T. v. Oberioi (P.R.S.), (1990) 183 ITR Cal., clearly held that such interest subsidy cannot be taxed. Later, flic CBDT issued Circular No.701, dated 23-3-1995 (4) consolidating the list of the exemptions available to the employees, but remained silent about this, leaving the field officers to again attempt the taxation of interest subsidy as perquisite. The matter came up once again before the Karnataka High Court in the case of P. Krishna Murthy v. C.I.T. . The Karnataka High Court referred to the Circular of the CBDT explaining the introduction and withdrawal of sub-clause (vi) in Section 17(2) as well as its own decision in C.I.T. v. K. Vaidya, (1997) 224 ITR 185, and held that such subsidy cannot be taxed. Following that decision, circulars have been at issued by the Chief Commissioners at Karnataka and Hyderabad to HAL not to treat the interest subsidy as perquisite while deducting the tax at source. But in respect of other similarly placed employees of Public Sector Undertakings, action has been taken under Section 201 against the employers for failing to treat the interest subsidy as perquisite while deducting the tax at source in the case of ECIL a revision has been allowed by the Commissioner of Income-tax, whereas in the case of BHEL, an appeal was dismissed by the Commissioner (Appeals) and it is stated that a second appeal was also dismissed by flic Appellate Tribunal.
Is interest subsidy part of "salary" as such :
16. The Revenue argued that the word "salary" being denned in an inclusive manner, any amount paid by the employer falls within its scope, whatever its character. He referred to various dictionaries to support this contention. The word "salary" as such is not defined in the Act. Words in a statute dealing with the matters relating to general public are presumed to be used in their popular sense. The Supreme Court observed in State of Orissa v. Titaghur Mills Co. Ltd., ."
"The dictionary meaning of a word cannot be looked at where the word is statutorily defined or judicially interpreted. But when there is no such definition or interpretation, the Court may take aid of dictionaries to ascertain the meanings of a word in common parlance, bearing in mind that a word is used in different senses according to its context and the dictionary gives all the meanings of a word and the Court lias, therefore, to select a particular meaning which is relevant to the context in which it has to interpret the word."
We find that the word "salary" according to Chambers Dictionary is:
"A periodical payment (usually at longer intervals than a week) for services other than mechanical According to Ramanatha Iyer it is "Salary is a periodical allowance made as compensation to a person, for his official or professional services or for his regular work, an agreed compensation for services, payable at regular intervals; the periodical compensation due to men in official and other situations; an annual or periodical payment for services, a stipulated periodical recompense; a stipend wages; hire; an allowance. A fixed sum paid to a person for his services, yearly, half yearly, or quarterly; stipend; wages; annual or periodical wages or pay; hire; fixed regular wages, as by the year, quarter, or month.
Salary is strictly an agreed compensation for service payable at regular intervals."
17. Hence, the common understanding is that it is the periodical payments and does not include other special payments even though they may be from an employer to an employee and also because of that relationship. It is only with a view to bringing in such other payments into the scope of that word "salary" that it is defined to include perquisites and profits in lieu of salary. Thus, the context itself shows that the meaning of the word 'salary' is confined to what in the popular parlance is the monthly payment for service rendered and cannot include interest subsidy.
Is interest subsidy a perquisite under Section 17 (2)(iv) ?
18. The learned senior Standing Counsel for the Revenue sought to make a distinction between the cases where loans are given by the employer free of interest or at a lower rate of interest, from cases where the difference between interest paid by the employee to a Financial Institution and the rate of interest chargeable in respect of Central Government House Building Loan arc reimbursed to the employee. He submitted that the cases cited by the petitioners did not relate to such reimbursement which alone can be called a subsidy directly paid in cash by the employer to the employee. According to him this subsidy was never meant to be included in sub-clause (vi) which was introduced and withdrawn from Section 17(2) and therefore, the legislative history pertaining to the abortive sub-clause will not cover this issue. He submitted that it would fall under sub-clause (iii) of 17(2) as the value of any benefit or amenity granted to the employee if not under sub-clause (iv) as any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assesscc. However, it is well understood that clause (iv) relates to the payment by the employer to a third party in respect of an obligation undertaken by the employee such as club subscription and not payments to the employee direct. This argument is therefore rejected.
Is Interest subsidy a benefit within Section 17 (2) (in) ?
19. It was then submitted that the interest subsidy would fall under sub-clause (Hi) as the value of the benefit or amenity granted to the employee. According to him, since the definition of perquisite was an inclusive definition, we can go the meaning of the word 'perquisite' itself to cover such interest subsidy. He cited the decision of the House of Lords in Owen v. Pook (Inspector of Taxes), 74 ITR 147, for the proposition that a reimbursement of an expenditure is a perquisite if it involves a personal advantage. In that case a doctor, who was on call, was reimbursed travelling expenses to make the visits on duty. The House of Lords held that reimbursement of that expenditure may amount to perquisite but for the fact that that expenditure was incurred as part of his duty. The second case cited is the decision of the Madras High Court in C.I.T. v. C. Kulandaivelu Konar, 100 ITR 629 where the unauthorised use of funds of the Company was treated as a perquisite of a director as conferring a benefit on him. This decision followed the case of C.I.T. v. A.R. Adaikappa Chettiar (Madras), , where the advantage taken by the director in view of his position was treated as a benefit or perquisite obtained. The same view was expressed in the Madras High Court in Addl. C.I.T. v. Late A.K. Lakshmi, (1978) 113 ITR 368). These cases refer to certain benefits enjoyed by the position held by the assesscc and do not relate to cash payments by the employer. On the contrary, in respect of actual cash payments, such as reimbursement of medical expenses, this Court held in C.I. T. v. Vazir Sultan Tobacco, 160 ITR 73, that it cannot be treated as a perquisite. The Special Leave Petition Nos.SLP (Civil Nos. 14760 and 16796/1991 were dismissed by the Supreme Court. Again, in C.I.T. v. Warner Hindustan Ltd, , as well as C.I.T. v. Andhra Bank Limited R.C.No.5/79 dated 7-8-1989 and C.IT. v.Coromandal Fertilizers l.T.C.No. 8/1994 dated 24-12-1984, this Court held that cash payments to employees cannot be treated as a perquisite because there is no question of convertible into money where cash is paid. Special Leave Petition Nos.SLP (Civil) No.12383 of 1983, 11655-11655A of 1985 and 3483 of 1988 were dismissed. It may be noted that under Section 40-A(v) any expenditure incurred by a Company for provision of a perquisite to an employee, was subject to a ceiling whether convertibility into money or not. It is in that context, that these decisions were rendered and the Supreme Court also took the same view in C.I.T. v. Indian Engineering and Commercial Corporation, . Sub-clauses (iii)(c) also refers to all benefits or amenities not provided by way of monetary payments as the items to be excluded for the purpose of ascertaining the minimum salary that employee must get before they can be valued and ordered as a perquisite.. Thus, the scheme of the Act did not envisage the addition of cash payment as a perquisite in the nature of the benefit or amenity.
Is interest subsidy a profit in lieu of 'salary ?
20. The Revenue then sought to bring the interest subsidy within the expression of "profit in lieu of salary" in Section 17(3). hi this context, he cited Hochstrasser v. Mayes, 1960 AC 376, where the employee was compensated for the loss incurred by selling his house due to his company transferring him to another factory. The house of Lords held that though the fact that the employment was causa sine qua non, it was not causa causans of the payment, and therefore, the compensation was taxable. The context, however, is the provisions of Section 156(2) of the Income-tax Act 1952 in England where the tax is charged on the profits and gains arising from any office or employment. But the present context is quite different as can be seen by a plain reading of Section 17(3) itself This provision was intended only to apply to all terminal benefits, the idea being that the employers should not camouflage salary or profits in lieu of salary, as terminal benefits. The items mentioned, are therefore, items which are paid on the termination of employment and they are exempted to the extent that they actually relate to the terminal benefits, and therefore, capital receipts. The Revenue submitted that this view of the Section was not shared by this Court in the case of M. Krishna Murthy v, C.I.T.. 152 1TR 163, where it was pointed out that the House Rent Allowance exempted under Section 10 (13-A) is mentioned in this Section and such House Rent Allowance is not a terminal benefit, and therefore, it would otherwise fall within the ambit of definition of profits in lieu of salary. That observation was, however, made for the purpose of treating leave encashment as "profits in lieu of salary", to understand the scope of that expression. We notice that Section 13-A was introduced in Section 17(3) simultaneously with its introduction in Section 10. Obviously, the draftsmen wanted to ensure that if it is not otherwise exempt under Section 10, it would be taxable under Section 16, for which, instead of inserting in Section 17(1), it has been inserted in Section 17(3). Such a mistaken insertion for the purpose of exclusion, cannot, in our considered opinion, change the meaning of the expression 'profit in lieu of salary'. Salary itself has been defined in Blacks Dictionary 'as a reward for recompense for services performed. In a more limited sense, a fixed compensation paid for services rendered. A stated compensation paid periodically as by the year, month, or other fixed period, in contrast to wages which are normally based on an hourly rate.' It is obvious that interest subsidy is not a reward or a periodically payment for services rendered. Nor is it paid in lieu of salary. We are, therefore, convinced that the interest subsidy which was given as a welfare measure to treat the employees of Public Sector Undertakings on par with the Central Government servants was never intended to be taxed.
Is interest subsidy a perquisite as such ?
21. It was then argued that interest subsidy may be a perquisite as commonly understood without reference to the sub-clauses of Section 17(2) just as in the case of salary, the definition of 'perquisite' in Section 17(2) is an inclusive definition. It is, therefore, necessary to ascertain the popular meaning of that word. Chambers Dictionary gives the meaning as :
"A casual profit anything left over that a servant or other has by custom a right to keep : a tip expected upon some occasions."
Ramanatha Iyer gives the meaning as :
"Perquisites. 'Perquisites means emolument, fee or profit attached to the office or position of an addition to salary or wages."
22. Therefore, one possible view is that interest subsidy is a perquisite because the employee gets it only because of his employment as incidental to his service conditions. But, the same benefit given indirectly has not been treated as a perquisite by the Revenue. If the employer takes a loan at a higher rate and advances it to the employee at a lower rate of interest, the difference is admittedly not treated as a perquisite. But where the loan is taken by the employee and the difference is reimbursed to the employee, it is sought to be treated as a perquisite. The Revenue submitted that the form makes a difference to the substance. But on the facts of the present case the benefit to the employee is the same whether given directly or indirectly. So when it is not taken as a perquisite in the first situation, it has to be considered in the same way in the second situation as otherwise it will be discriminatory. Even if two views are possible the one in favour of taxpayer has to be adopted as charging provisions have to be construed strictly.
Declaration by Chairman CBDT :
23. This position had been made clear by the Chairman of the CBDT by his letter dated 13-7-1990 to the Chairman of the Standing Conference of Public Enterprises in the following words :
"The question of taxation of public sector Undertakings has been examined in great detail by the Board as well as by various other organisations and for a variety of reasons, the view that has emerged is that there is no reason or justification to distinguish or discriminate between public and private sector in the matter of direct taxation.
Wherever an employer has advanced any loan to its employee for the purpose of building a house or purchase of a house or site, the question of taxing any 'subsidy' by way of lower interest charged than that at which the employer itself might have taken loans from financial institutions like HDFC, does not arise. In this connection, 1 would draw your attention to sub-clause (vi) of clause (2) of Section 17 which was inserted by the Taxation Laws (Amendment) Act, 1984, w.e.f 1st April, 1985 but was subsequently deleted by the Finance Act, 1985 w.e.f. the same date. If any Assessing Officer has actually treated such a differential as a perquisite or taxable income he is clearly in error. If this is happening on a large scale, the Board will also consider issuing suitable instructions in this regard."
24. It is very strange that the Revenue should persist in contesting the issue inspite of such an unequivocal declaration.
Technical Objections of the Revenue A. Maintainability :
25. Finding that mere is no merit in the case of the Revenue and no justification for the action taken by the Department, the learned senior Standing Counsel raised various technical objections. He submitted tliat the Writ Petition No.27084/1995 been filed against an interdepartmental correspondence to which the petitioner could not have any access and since it is neither an order nor a statutory notice, the question of challenging the same cannot arise. We find that the said letter was the basis of the action taken by the employer to the detriment of the employees. The employers are coerced to deduct the tax at source by the penal action under Section 201. In the present case, unfortunate that even though such demands have been cancelled in one year, similar demands have been upheld by the Commissioner (Appeals) and the Appellate Tribunal in the subsequent years. The petitioners have also placed before us individual letters sent to the employees merely raising (he demand without any assessment. Such chaotic functioning of the Department works havoc on the salaried class which forms part of captive tax payers. In this situation, if the writ petition cannot be entertained to direct the Department to give proper guidance to the employers, the actual tax payers will be left without any speedy or effective remedy.
B. Writ not a proper remedy :
26. It was then submitted that since it is the individual employees who are liable to tax, the proper remedy for them is to file a return and get a refund after adjudicating the issue whether the interest subsidy is taxable or not. He submitted that by filing the writ petition, the Revenue is denied the opportunity of properly adjudicating the issue after verifying the facts such as whether there is a scheme in the company for giving interest subsidy and the terms thereof. This is actually the crux of the case, namely, that the person, who is ultimately liable to pay the tax, is not given an opportunity to contest the liability before the tax is levied by deduction of tax at source. The alternative remedy can be an application for certificate under Section 197. But this will involve a great burden on the Income-tax Officer if thousands of employees were to make applications for such certificates as each employee has to make such individual applications. The burden is now placed on the employer to decide whether a particular amount paid is taxable or not and in view of the attitude of the Department with reference to Section 201, the employer is bound to decide the issues against the employees. In this case, itself we could see that having failed in the appeal against the order under Section 201, the employer indicated the intention to deduct the tax at source thus deciding the issue against the person liable to pay the tax. The remedy suggested by the Revenue that after deduction, the employee should file a return and seek refund would again involve thousands of appeals and long delay in granting refund by which a section of salaried class will be deprived of a portion of the salary due to them for a considerable time without any recompense. The scheme of deduction of tax at source is intended to be of benefit to the tax payer as well, apart from regularly collecting the tax painlessly. But such a scheme cannot be abused by collecting more than the tax leviable and driving the asscssees to wait indefinitely for refunds.
C. Inconsistent claim :
27. It was submitted that in some of the returns filed by the employees, the entire amount paid as interest to the financial institutions has been claimed as a deduction under Section 24 which cannot be justified if the interest subsidy is not to be treated as a perquisite. The learned Counsel for the petitioners denied this. Even if in certain cases, the individual employees have made such a claim by mistake or otherwise, we do not think that a claim that the subsidy received is deductible under Section 24, will make it a perquisite under Section 17. The learned Senior Standing Counsel also pointed to the Regulations of ECIL wherein para 10.11 it was stated that :
"the amount of interest subsidy paid by the Company becomes part of the income of the individual employee and lie/she is liable for income tax."
He submitted that this proved that both the employer and employee considered it as part of taxable salary. The question of taxability cannot be decided with reference to the assessee's approach. The Supreme Court in Kedarnath Jute Manufacturing Co. Ltd, 116 ITR 1 SC, observed :
Whether the assessec is entitled to a particular deduction or not will depend on the provisions of laws thereto and not on the view which the asscssee might take of his right..."
Hence, this objection is also without any merit.
D. Plea not supported by evidence :
28. The learned senior Standing Counsel submitted that the schemes of the several companies paying the interest subsidy was not available and even if a plea is taken, unless evidence is also put in the affidavit, it cannot be adjudicated. He relied on the decision of the Supreme Court in Bharat Singh v. State of Hatyana, . In that case, the Supreme Court pointed out that if a point which is ostensibly a point of law is required to be substantiated by facts, the petitioner must plead and prove such facts which must appear from the writ petition and the Court need not entertain that point if either the pleading or the evidence is not given. Though it is a salutary principle, we are of the view that it has no application to the facts of the present case. The respondent here is the Central Government represented by its officers and the petitioners have pleaded that they are employees of Central Government Undertakings governed by a notification issued by the Industries Ministry advising the Undertakings to evolve the interest subsidy Scheme. The relevant documents have been filed along with the writ petitions. Nothing prevented the respondents from calling for the information from the employer who is another respondent in the case. This objection is an after-thought and cannot be entertained.
E. Cause of Action absent :
29. The Revenue contended that there is no cause of action at all as there was no question of jurisdiction and hence the writ petitions are not maintainable. This is also an argument which is to be stated only to be rejected. When an action is taken by the employer ostensibly for administering a statute adverse to a person at the instance of the Department a cause of action certainly arises to dispute the same.
F. Joint petition not maintainable :
30. It was contended that a joint writ petition cannot be filed. This is contrary to the decision of this Court in the case of M. Krishna Murthy v. C.I.T., .
G. Writ by Trade Union not maintainable :
31. The Revenue also submitted that a trade union cannot file a writ petition relating to tax matters of a member of the union. It was argued that it is none of the business of the trade union to interfere in the income-tax matters of the workers as the trade union was concerned only with the dispute between the workers and the management. This argument ignores the fact that this is really a dispute between the workmen and the management initiated by the Department. The management would not have been averse to treating the interest subsidy as not a perquisite but for the insistence of the Department that it should be treated as a perquisite. The deduction of tax at source reduced the take home pay, and hence, affects the workmen with reference to their service conditions. The objects of a trade union is to protect the interest of the workmen. If the action of the employer at the behest of the third party adversely affects the workmen, a trade union is certainly entitled to intervene. Section 15 of the Trade Union Act enables the trade union to spend its funds for the prosecution of any legal proceeding for the purpose of securing or protecting any rights arising out of the relations of any member of the union with any employer. Here the employer is acting as the agent of the revenue and is also an instrumentality of the State and the alleged violation of the Income-tax Act certainly involves the services conditions of the employees. We are convinced that the trade unions are entitled and justified in filing the writ petitions.
H. Loopholes cannot be plugged by Court :
32. The learned senior Standing Counsel submitted that if there was a lacuna in the Act with reference to adjudication of a perquisite at the time of the deduction of tax at source, it will not grant jurisdiction to the Court to interfere. In order to see whether there is any such lacuna, we have to consider the scheme of the Income-tax Act with reference to the deduction of tax at source. The collection and recovery of tax is governed by Chapter XVII of the Income Tax Act by way of deduction of tax at source and advance payment.
33. Sections 192 to 194, 194-A, B, BB, C, D, E, EE, F, G, H, I, J, K. Sections 196A, B, C and D provided for deduction of tax at source in respect of various kinds of income.
34. Section 200 imposes a duty on the person deducting the tax to pay it within the prescribed time to the credit of the Central Government.
35. Section 201 provides that if the person so obliged to deduct, docs not deduct or, after deducting fails to pay the tax, he shall be deemed to be an assessee in default and liable to penalty under Section 221 as well as penal interest under 201 (1A).
36. Section 203 provides for the issue of a certificate for tax deducted which is to be given credit and Section 205 bars direct demand on the assessee in respect of the tax so deducted.
37. Section 207 provides for advance payment of tax. The advance tax is calculated as the tax payable on the total income computed on the total estimated income of the previous year computed in accordance with the provisions of the Act reduced by the amount of the income tax which is deductible at source. Such advance tax is payable in three instalments under Section 211. Section 234-B provides for interest on defaults in payment of advance tax and Section 234-C for interest for deferment of advance tax at the rate of 1 1/2 per cent per month. If we look at these Sections, it will be apparent that an assessee has to calculate his advance tax and pay it in time taking into account the tax deducted at source. If less tax is deducted at source, he will have to pay more advance tax as otherwise, he will be liable to pay interest for deferment of advance tax inasmuch as advance tax is determined after reducing the tax deductible at source. The person who deducts the tax at source will be liable only if he fails to remit the tax after deducting the same. The Department appears to be under a misapprehension that where there is a shortfall in the deduction of tax at source, the employer can be treated to be an assessee in default and charged with penalty and interest. We may now read the provisions of Section 201.
"Section 201 : Consequences of failure to deduct of pay :
(1) If any such person and in the cases referred to in Section 194, the principal officer 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 oiher consequences which he or it may incur, be deemed to be an assessce in default in respect of the tax :
Provided that no penalty shall be charged under Section 221 from such person, principal officer or Company unless the Assessing 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 docs 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 fifteen per cent per annum on the amount of 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 subsection (1 A) 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)."
38. This Section has two limbs, one is where the employer does not deduct the tax and the second where after deducting, the tax fails to remit it to the Government. There is nothing in this Section to treat the employer as the defaulter where there is a shortfall in the deduction. The Department assumes that where the deduction is not as required by or under the Act, there is a default. But the fact is that this expression 'as required by or under this Act' grammatically refers only to the duty to pay the tax that is deducted and cannot refer the duty to deduct the tax. Since this is a penal section, it has to be strictly construed and it cannot be assumed that there is a duty to deduct the tax strictly in accordance with the computation under the Act and if there is any shortfall due to any difference of opinion as to the taxability of any item the employer can be declared to be an asscssee in default.
39. A reference to the provisions of Section 192 clarifies this issue further :
"Section 192 : 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 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."
40. Therefore, the deduction of tax at source is not on any adjudicated figure, but on an estimated figure of salary income. Generally, there would be no need to make an estimate except where there may be some changes during the course of the year with reference to the salary payable. But a case of disputed liability could also fall within this estimate. Unfortunately, the section or the rules do not spell out the manner in which tills estimate has to be made and it is assumed by one and all and that it is the employer who has to decide the salary income that should be subject to deduction of tax at source, This assumption has led to all kinds of queries by distracted salary earners, as a casual glance at any tax advise columns of newspapers and magazines will reveal. The real position, however, is that it is for the employee to inform the employer about the estimated salary income that is liable for deduction at source. This can be gathered from the fact sub-section (2B) provides that where the employee is in receipt of other income, he may send to the employer, a verified statement to take that also into account for deduction of tax at source. There is no reason why such a verified statement should not be given for the purpose of reducing the salary income liable for deduction of tax at source. In doing so, the employee will be taking a great responsibility because if the income is otherwise taxable, he will be liable to pay larger advance tax and for default or deferment, such advance tax, will be liable to pay interest under Section 234-B and C. A reference to other Sections such as 197A indicates a common pattern of allowing the assesses to determine the liability for deduction of tax at source. Under Section 197A, no tax is to be deducted at source if the assessee gives a declaration in writing that his estimated total income will not be liable to tax. This stands to reason because it is the assessee who has to declare his taxable income and not the employer or the payer.
41. The alternate remedy is for an assessee to apply to the Income-tax Officer for a certificate under Section 197 that the amount presumably is not subject to deduction of tax at source or should be subject to deduction at a lower rate. This Section may work well in the case of the unusual or extraordinary payments. But in the case of an interest subsidy payable to thousands of employees it would be meaningless to suggest that each employee should approach the Income Tax Officer for a certificate under Section 197. Some employees may be able to get it in time, some may not be able to get it. Some Income-tax Officers may grant certificates and some as in the present case deny certificates under some misunderstanding about the scope of the Section or the taxability of the amount in question. It must be remembered that the deduction of tax at source in respect of salary is done every month by averaging the tax that is payable for the entire year. This exercise is guided by a Circular of CBDT issued every year, (see 1992 ITR St. 226). The circulars of the relevant period do not contain any information about treatment of the interest subsidy as a perquisite. The CBDT is well aware of the fact that Public Sector Undertakings have been granting the interest subsidy under the directions of the Government of India as could be seen from the letter of the Chairman, CBDT dated 13-7-1990. It is unfortunate that the circulars do not give specific instructions about the excluding interest subsidy is computing the salary income liable for deduction of tax at source. It is quite significant that these circulars do not contain any warning about short deduction or action under Section 201 for that though they specifically mention the need to revise the amounts of deduction in case of pay revision as well as the action under Section 201 for failure to deduct any tax or pay the deducted tax in time. This indicates that the revenue is very well aware of the position that Section 201 docs not apply to a case of deduction of tax at a lesser amount. Moreover, the circulars advise the Drawing and Disbursing Authority to satisfy itself that the computation of taxable salary income is in order with reference to deduction available to the employee. This does not convert him into an Income Tax Officer or an adjudicating authority as many erroneously believe. All that it means is that the assessee must declare his claim so that with reference to Section 201 proviso he can say that he had good and sufficient reasons not to deduct tax at source in respect of any income to avoid imposition of penalty. It is to be noted that the deduction is in respect of income computed under the head "salary" and not in respect of each component of it. Any difference of opinion about the computation has to be resolved by the employee at the risk of his paying interest under Section 234 B & C and not by the employer as Section 201 cannot be utilised to compel any such adjudication by him. Yet a misunderstanding of the provisions by the field officers and reluctance of the CBDT to clarify the matter has led to a situation where the employers have to carry on litigation in several High Courts or transfer the unnecessary burden to the employees who can hardly bear them. In our considered opinion the action taken under Section 201 was wholly illegal and not authorised by the statute. It amounted to an unreasonable coercion which has to be resisted only by invoking the extra-ordinary jurisdiction of this Court. There is thus no loophole which requires to be plugged. Perhaps, a better solution may be evolved. In this background, the contention of the learned senior Standing Counsel for the Revenue that there is an alternate remedy by way of assessment procedure is unacceptable.
A Possible Solution :
42. It would have been really marvellous if the Department could have taken this as an occasion to reform the system on this question. The problem has arisen because the tax is deducted by the employer and the payee has no means to dispute the adjudication as to his liability to be taxed which is a sine quo non for the deduction of tax at source. The postponement of such adjudication to the time of assessment after filing a return involves considerable delay and loss of compensation for the amount due to the payee but withheld if it turns out to be wrongful. If taxes were not deducted at source, the Revenue would be, of course, put in a disadvantageous position of having to take separate steps to collect the same. Perhaps, a better solution would be to shift the stage of deduction to the hands of the payee. For instance, all payments can be made to a declared bank account of the payee where 10 per cent of the balance can be frozen until the assessment is made and an amount equal to the tax determined then transferred to the Department by the Bank. Such a scheme would benefit the taxpayer and the Revenue as well as the employees. As far as the taxpayer is concerned, the money will be in his account earning interest until a correct adjudication is made as to the liability and he does not have to lose it and seek refund. As far as Revenue is concerned, there will be a guaranteed security for the payment of tax until adjudication takes place. The employers can also be relieved of the unpaid burden of acting as the agent of the Government for collecting tax at source. It may not be realised that it involves a lot of paper work and manpower and the risk of being penalised on the one hand and the risk to the government and the employees of being defrauded by unscrupulous employers deducting tax and not remitting the same. It will also have the added advantage of encouraging the banking habit and the frozen funds will be available to the Banks for lubricating the economy. Such a scheme can be evolved even on a pilot basis and operated by the CBDT itself by invoking provisions of Section 197(2A) without even the need for legislation and later extended to all kinds of other income. It would then relieve the uninitiated such as house owners from liability such as Section 194-1 and also widen the tax net by gathering data relating to total receipts in the hands of each recipient.
43. The learned senior Standing Counsel submitted relying on the decision in R.K. Garg v. Union of India, 133 ITR 239, that even though there is an unintended disadvantage to the taxpayer in the present system it is for Parliament to intervene and not for the Court. That is the reason way, we are making this suggestion for Government to do some lateral thinking and solve the problem by legislation or otherwise.
Attitude of the Department to this litigation :
44. The learned senior Standing Counsel argued this case vehemently and it should therefore be presumed that he has been instructed to do so. Advocates who are designated as senior Counsel have a duty to the Court higher than the duty to the client in the sense that they are expected to assist the Court in laying down the correct law even if it affects the interest of the client. They are also expected to advise the clients to follow the correct law and not to contest the matters where they arc concluded by precedents so that needless litigation is avoided and Courts are not burdened. In the present case, there are three decisions of the High Court against the Revenue and it has not been shows that any of them have been taken to the Supreme Court. When we sought information about it, we were told that such information is not available There was a practice in the Department to publish departmentally a list of decisions of the High Courts accepted by the Department so that the field officers may not rake up the subject again involving the Department in needless litigation. We are told that such a system has now been abandoned. Our own reference to the Judis Computer data bank indicates that no appeal is pending in the Supreme Court with reference to the interest subsidy. It is unfortunate that the Revenue should instruct the senior Standing Counsel to argue this matter in spite of having accepted the decision of the High Courts and in spite of the Chairman of the CBDT having issued a letter assuring action against officers acting to the contrary.
45. In this context, we may refer to the decision of the Supreme Court in the case of Oil and Natural Gas Corporation, 61 ELT 3, where it was held that disputes between the Government and Government Undertakings should not be taken to Court. The Revenue would have been well advised to sort out this matter by a discussion with the Undertakings. As it appears that such a discussion had taken place and the Chairman, CBDT had given an assurance in this regard on 13-7-1990. hi spite of that, the Department had proceeded to instruct the employers on 23-3-1995 to treat the interest subsidy as a perquisite for deducting the tax at source. The comprehensive circular No.701 relating to TDS subsequently issued on 23-3-1995 being silent on this point, we have to appreciate the senior Standing Counsel for actually performing a public service by forcefully bringing out the internal contradiction between the letter of the Chairman dated 13-7-1990 given in conformity with the directions of the Supreme Court and the impugned letter of the CBDT dated 23-3-1995.
Directions :
46. In the circumstances there shall be a direction to the respondents not to treat the interest subsidy as a perquisite while deducting the tax at source in respect of income under the head 'salaries' under Section 192 of the Income-tax Act.
47. The first respondent-Finance Secretary is directed to place this judgment before the Union Finance Minister so that he is apprised of the need for reform in the area of 'deduction of tax at source.'
48. The writ petitions are allowed with costs of Rs.1,000/- each.