Income Tax Appellate Tribunal - Delhi
Ongc Ltd. Cpf Trust vs Income Tax Officer on 29 June, 2005
Equivalent citations: (2005)98TTJ(DELHI)1111
ORDER
G.S. Pannu, A.M.
1. These four appeals are directed against the orders of the CIT(A), dt. 30th Sept., 2002 pertaining to financial years 1997-98 to 2000-01. The grounds of appeal, which are common in all the four years, read as follows :
"1. That the learned CIT(A)-II, Dehradun, has erred both on facts and in law in confirming the order made under Sections 201 and 201(1A) of the IT Act.
2. The CIT(A) has erred in holding that the assessee-trust was obliged in law to have deducted the tax at source, in respect of employees of ONGC who had since retired but admittedly remained its members.
3. That the CIT(A) has completely overlooked the factual substratum of the case as also the detailed written submissions furnished by the assessee, dt. 19th Sept., 2002 and further submissions dt. 20th Sept., 2002, wherein it was explained in detail that there are no income chargeable to tax had accrued to the members of the trust and as such sum being outside the scope of total income, there was no obligation to deduct the tax at source.
4. That the CIT(A) has further overlooked that the amounts of interest credited by the appellant in respect of the balances outstanding to the account of retired employees of M/s ONGC was not in the nature of income and as such, the provisions of Section 194A of the IT Act could not be invoked so as to conclude that the assessee had credited any income by way of interest to such of the accounts of the retired employees of M/s ONGC.
It is, therefore, prayed that it be held that the order of the CIT(A) is erroneous being unsustainable in law. It be thus held that the order made under Sections 201 and 201(1A) of the IT Act is vitiated being bad both on facts and in law. It be thus held that the amount allegedly required to have been deducted at source along with the interest aggregating to Rs. 58,74,456 be held in respect of which the assessee could not be held to be in default as unsustainable."
2. Although the appellant has preferred multiple grounds of appeal but the only grievance is with regard to the action of the CIT(A) in sustaining the order of the AO holding the assessee in default under Section 201/201(1A) of the IT Act, 1961 (hereinafter referred to as the 'Act'). The appellant-trust is claimed to be an exempt organization under Employees Provident Fund and Miscellaneous Provisions Act, 1952. It enjoys recognition from CIT, Meerut, under Rule 3(1) of Part A of the Fourth Schedule to the IT Act, 1961. It is constituted for welfare of employees of all the units, establishments and institutions under the control of M/s Oil & Natural Gas Corporation Ltd. ("ONGC" in short). The trust is a provident fund wherein subscriptions are received from all employees of ONGC and the same is held on their individual accounts along with any contributions and any interest or increment accruing on such subscriptions, deposits or contributions made under regulations of the fund. The ITO (TDS) found that the assessee was retaining the amounts of many employees who had retired or ceased to be in employment with ONGC since long and the interest was being credited on their accumulated balances. The said interest was not treated as exempt under Section 10(12) of the Act by the AO. He held that in terms of Section 194A, the assessee was liable to deduct tax at source in respect of interest credited on the accumulated balances of the employees retained after their retirement. Since the assessee had not deducted the taxes under Section 194A, it was treated as an assessee in default under Section 201/201(1A) and tax/interest amounting to Rs. 58,74,456, Rs. 67,34,898, Rs. 1,02,18,652 and Rs. 1,04,19,594 for asst. yrs. 1997-98, 1998-99, 1999-2000 and 2000-01, respectively, was imposed. Aggrieved with the order of the AO, assessee carried the matter in appeal before the CIT(A). In appeal, the main contentions of the assessee were as follows. That the amount of interest credited to the account of retired employees was outside the scope of total income as contemplated under Section 10(12) of IT Act. With regard to the membership, the contents of Clause 18 of regulation of the fund were referred, which read as under :
"Retention of membership : A member of the fund shall continue to be a member until he withdraws the amount standing to his credit in the fund" to argue that the membership of the retiring employees continued post-retirement unless withdrawn by the employee. With regard to the objection of the AO that the assessee had not obtained a consent in writing from the retiring employees to retain the amounts, as required under Rule 5 of Part A of Fourth Schedule, it was argued that although no request was received in writing as required under Rule 5(3) of Part A of the Fourth Schedule, yet it was a regular feature to retain the credit of the retired employees with the fund from year to year; as the retired employees did not press for the withdrawal of the accumulated balance, the same be construed as a request having been made in writing. It was also submitted that the purported non-compliance of not obtaining a consent in writing to retain the amount as required, was a mere technical and venial breach of a rule. The retention was indeed permissible in terms of Clause 18 of the regulations.
3. The assessee also argued that the trust was a recognized provident fund and it credited the interest received by it from the investment of its funds and as such the amount credited to the account of employees was merely an application of the income of the trust. As the income in the hands of the trust fund was not otherwise taxable, it was argued that the action of taxing the same on the part of ITO was not justified. The assessee made detailed written submissions before the CIT(A), copy of which is placed in the paper book filed before us. The CIT(A), after considering the submissions and arguments of the assessee, has since sustained the order of the AO. According to the CIT(A), the interest credited by the assessee on the accumulated balance due to employees after cessation of their employment was not eligible for exclusion from total income as per provisions of Section 10(12) and that such interest was liable to tax. It was, therefore, concluded by the CIT(A) that since the assessee had not deducted the tax at source under Section 194A, it was rightly held by the AO to be an assessee in default. Not being satisfied by the order of the CIT(A), the assessee is in appeal before us,
4. Before us, the learned Counsel, Shri C.S. Aggarwal appearing on behalf of the appellant-trust has reiterated the submissions made before the CIT(A), which we have narrated in the earlier paragraphs. The stand of the assessee was articulated by the learned Counsel on the following lines. That the sum credited to the account of the employees who cease to be in employment is not a sum chargeable to tax in view of the statutory provisions of Section 10(12) of the Act read with the provisions contained in Part A of the Fourth Schedule to the Act since the said employees continued to remain members of the fund. In view of Clause 18 of the regulations of the trust, which provides that an employee could retain his balance with the fund till he withdrew the sum and in view thereof, till the money is withdrawn, there is an in-built provision of there being a request in writing of retaining the amount with the trust. Such employees continued to be the members of the trust. Thus, on the interest credited to the accounts of such employees, there was no obligation to deduct the tax at source since such income was exempt in the hands of the employees. That the appellant is a provident fund, which is since recognized. That the purported non-compliance of non-obtaining of consent in writing to retain the balance from the retiring employees and construing it as a non-compliance of Rule 5 of Part A of the Fourth Schedule is not justified. It is thus submitted that the assessee has complied with all the rules prescribed both under the Act and the Rules.
5. It was also argued that the AO, while passing orders under Section 201/201(1A) of the Act has exceeded his jurisdiction inasmuch as he has travelled beyond the approval granted by the CIT and held that since the assessee had failed to obtain declaration in writing, the interest paid was income in the hands of the assessee and, therefore, the appellant-trust was obliged to deduct tax at source under Section 194A of the Act. It was further submitted that there was no requirement as such of obtaining a request in writing as per Rule 5(3) of Part A of the Fourth Schedule to the Act as such a request in writing may not be in black and white on a paper, and could also be gathered from the conduct of the parties. The learned Counsel further submitted that in any case such violation is a technical violation and argued that having regard to the decision of the apex Court in the case of Collector, Land Acquisition v. Mst. Katiji and Ors. , a liberal approach should be adopted. The learned Counsel submitted that such employees have not been assessed to tax in respect of this interest income as it has been considered exempt in the hands of such ex-employees of ONGC within the meaning of Section 10(12) of the Act. The action of the lower authorities in treating the appellant as an assessee in default for its alleged failure to deduct tax at source under Section 194A of the Act on the interest credited to the account of the retired employees is unjustified. Reliance was placed on the following judicial pronouncements :
(i) CIT v. Divisional Manager, New India Assurance Co. Ltd.
(ii) Gwalior Rayon Silk Co. Ltd. v. CIT
(iii) CIT v. Kannan Devan Hill Produce Co. Ltd.
(iv) CIT v. Rishikesh Apartments Co-operative Housing Society Ltd.
(v) IAC v. Tata Chemicals Ltd. (1999) 64 TTJ (Mumbai) 26 : (1999) 68 ITD 205 (Mumbai) 232,
6. The learned Counsel has pressed into service the principle of mutuality as follows. That the trust fund had received the contribution by way of provident fund from the various employees and also from the employer ONGC. All such amounts were invested in accordance with rules and such income was not taxable. The income so earned was merely applied for the benefit of the employees; the participants and contributors remained the same, thus, no income could be held to be chargeable to tax on the principles of mutuality and thus there was no liability to deduct tax at source.
7. It was also submitted that the position canvassed by the appellant had duly been accepted by the Revenue since inception till the financial year 1997-98. As such it was submitted that the AO was not justified in changing his opinion and upsetting the settled situation. The learned Counsel also made an alternative submission that in the event it is held that the assessee was liable to deduct tax at source on the interest income so credited, then too there was no justification for the AO to have held that the assessee was in default in having failed to deduct tax at source under Section 194A of the Act. It is submitted that at best the AO could be justified to make an order under Section 194 of the Act when payment is made to such employees by the trust treating such payments as salaries. Our attention was invited to Rules 8, 9 and 10 of Part 'A' of the Fourth Schedule in this regard. Reliance was also placed on the decision of the Hon'ble Madras High Court in the case of M.C. Muthanna v. CIT in this regard. It was accordingly pleaded that the assessee was not, in law, required to deduct tax at source under Section 194A of the Act in respect of interest credited to the account of the members of the fund who have ceased to be in employment of ONGC.
8. On the other hand, learned Departmental Representative has defended the orders of the lower authorities. According to the learned Departmental Representative, much emphasis has been laid by the assessee in relation to Clause 18 of its regulations to submit that the retiring employees could continue to remain members of the trust. According to the learned Departmental Representative, the existence or otherwise of Clause 18 does not deviate from the fact that the assessee was required to deduct tax on such interest income credited to the account of the employees who had ceased to be in employment.
The learned Departmental Representative referred to the provisions of Section 10(12) to argue that the exemption from tax is available on the accumulated balance to the extent provided in Rule 8 of Part A of the Fourth Schedule to the Act. Therefore, it follows that Section 10(12) of the Act does not envisage a blanket exemption and the aforesaid proposition is reinforced after reading the contents of Rule 8 of Part A of the Fourth Schedule which provides for certain conditions to be adhered to before the accumulated balance due to the employees can be considered as exempt. Learned Departmental Representative emphasized that any accumulated balance due to the account of the member-employee after cessation of the employment cannot be regarded as accumulated balance as envisaged under Rule 8 of Part A of the Fourth Schedule and, therefore, the same would not qualify for exemption under Section 10(12). With regard to the plea of the assessee that once the trust fund has been recognized by the CIT, the impugned action of the AO would negate the same, it was contended that the recognition granted by the CIT(A) does not absolve the assessee from complying with the provisions of tax deduction at source as provided in Chapter XVIII-B of the Act. The learned Departmental Representative also argued in detail that the Provident Fund Rules provided in Part A of the Fourth Schedule also envisage the deduction of tax at source on certain payments as can be inferred from the reading of Rule 10 thereof. The learned Departmental Representative also assailed the other arguments of the learned Counsel for the assessee. According to him, whether a particular income is liable to be taxed or not in the hands of the recipient does not determine the liability of the deductor to deduct the prescribed tax at source if the relevant provisions so provide.
9. We have considered the rival submissions, perused the orders of the lower authorities along with the other material placed before us and the authorities cited at Bar carefully. The appellant before us is a recognized provident fund. The short point is whether the assessee-fund was liable to deduct the tax at source in respect of the credits made to the account of the members of the fund who ceased to be the employees of ONGC. The Revenue holds the assessee-fund liable for deduction of tax at source on such credits under Section 194A of the Act as interest on account of the fact that such income is not exempt under Section 10(12) of the Act. Before we proceed to answer the above question, it would be appropriate to refer to the relevant provisions of the Act, which we do hereinafter.
10. Section 10(12), which provides for exemption of the accumulated balance payable to an employee, reads as under :
"the accumulated balance due and becoming payable to an employee participating in a recognized provident fund, to the extent provided in Rule 8 of Part A of the Fourth Schedule."
11. Rule 8 of Part A of the Fourth Schedule, which provides the extent and conditions for excluding the accumulated balance payable to an employee from total income, reads as under :
"8. The accumulated balance due and becoming payable to an employee participant in a recognized provident fund shall be excluded from the computation of his total income--
(i) if he has rendered continuous service with his employer for a period of five years or more, or
(ii) if, though he has not rendered such continuous service, the service has been terminated by reason of the employee's ill-health, or by the contraction or discontinuance of the employer's business or other cause beyond the control of the employee, or
(iii) if, on the cessation of his employment, the employee obtains employment with any other employer, to the extent the accumulated balance due and becoming payable to him is transferred to his individual account in any recognized provident fund maintained by such other employer."
12. It would also be appropriate to refer to the definition of the expression "accumulated balance due to an employee" provided in Rule 2(f) of Part A of the Fourth Schedule, which reads as under :
"'accumulated balance due to an employee' means the balance to his credit, or such portion thereof as may be claimable by him under the regulations of the fund, on the day he ceases to be an employee of the employer maintaining the fund;"
13. Part A of the Fourth Schedule to the IT Act provides the rules governing the recognized provident funds. Admittedly, the assessee before us is a recognized provident fund. Section 10(12) provides that the accumulated balance due to an employee is exempt from tax subject to the condition that such balance conforms to the extent provided in Rule 8 of Part A of the Fourth Schedule to the Act. Rule 8 of Part A of the Fourth Schedule provides that the accumulated balance due and becoming payable to an employee participating in a recognized provident fund is to be excluded from his total income if any of the three conditions enumerated in Clauses (i), (ii) and (iii) thereof are fulfilled. The existence of the expression "the accumulated balance due" is noteworthy and having regard to the definition of the expression "accumulated balance due to employees" as provided in Rule 2(f) which means the balance due or claimable by the employee on the day he ceases to be an employee of the employer maintaining the fund, it can be safely deduced that it refers to the balances in the account of employees during the currency of their employment. In the instant (case), it is an admitted position that the impugned credits have been made to constitute the accumulated balance due to the employees after such members have ceased to be the employees of the ONGC Ltd., the employer, who is maintaining the assessee-fund. Even Clauses (ii) and (iii) of Rule 8 which deal with cessation or termination of employment do not envisage the present situation. Clause (ii) provides that the benefit would be available if the services have been terminated by reason of the employee's ill-health or by the contraction or discontinuance of the employer's business or for any other reason beyond the control of the employee. Similarly, in terms of Clause (iii), such accumulated balance is to be excluded if on the cessation of his employment, the employees obtains employment with any other employer and the accumulated balance due and becoming payable to such employee is transferred in the recognized provident fund maintained by the subsequent employer. The above situations, which have been envisaged under Rule 8, are admittedly not attracted to the instant case. In the case before us, the credits have been made to employees who have since retired or in other words have ceased to be in employment. It is also not the case of the assessee that the cessation of such members is on account of their ill-health or by contraction or discontinuance of the employer's business or for any other cause beyond their control. Further, there is also no case made out that on the cessation of the employment with ONGC, such retiring employees have obtained employment with any other employer and the accumulated balances due and becoming payable have been transferred to another provident fund. Therefore, it would not be unjustified to infer that the interest credited by the assessee to the account of such persons does not fall within the parameters as provided for in Rule 8. In other words, on a combined operation of Section 10(12) with Rule 2(f) and Rule 8 of Part A of the Fourth Schedule, the impugned amounts credited in the account of the members of the trust who have ceased to be the employees of the ONGC Ltd. are not exempted from tax. It follows, therefore, that the assessee-fund was obliged to deduct the tax at source on such credits. The provisions of Chapter XVII-B envisaging the deduction of tax at source are also not alien to various sums which are payable to the assessee from a recognized provident fund. In fact, Rule 9 of Part A of the Fourth Schedule provides that where accumulated balances due to an employee is includible in the total income owing to the provisions of Rule 8 not being applicable, then in such a situation as per Rule 10 thereof, the trustees of the provident fund or any other person authorized to make payment of the accumulated balance due to employees, shall deduct tax at source on such payment and that all the provisions of Chapter XVII-B shall apply as if the accumulated balance were income chargeable under the head "Salaries".
14. This brings us to the next issue raised by the assessee to the effect that if at all such interest was to be subjected to withholding tax, the same should be considered as taxable under the head "Salaries" and, therefore, the withholding tax should have been governed by the provisions of Section 192 of the Act. We are unable to accept the said argument of the assessee. It is indeed a correct proposition that the interest credited by the trustees of the provident fund to the accounts of the members does partake the character of "salary" under the provisions of the Act. However, the same is in the background of such members continuing in the employment of the employer who has constituted such provident fund. In cases where there is a cessation in certain situations as envisaged under Clauses (ii) and (iii) of Rule 8 of Part A of Fourth Schedule, the interest so credited would also qualify to be a part of salary. Significantly, situations in Clauses (ii) and (iii) envisage continuity of employment, which allows the concerned employee to continue his membership of the provident fund constituted by the concerned employer. However, if the membership is continued in the absence of the employment with the entity who constitutes and maintains the provident fund and neither of the conditions in Clauses (ii) and (iii) of Rule 8 are fulfilled, any payment due from such a provident fund would not acquire the character of "salaries" for the purpose of the Act. Such amount of interest, therefore, is not liable to be taxed under the head 'Salaries'. It is in this background that we approve of the action of the AO in holding the assessee in default for not having deducted tax at source in terms of Section 194A of the IT Act. Section 194A of the IT Act provides for deduction of tax at source on payment made by a person, not being an individual or an HUF, of any income by way of interest in the manner prescribed therein. The amount credited by the fund is nothing but interest.
15. Now, regarding the reliance placed by the learned Counsel for the assessee on the judgment of the Hon'ble High Court of Madras in M.C. Muthanna (supra) for the proposition that interest credited to the account of the members partook the character of salary under the provisions of the Act and, therefore, tax deduction at source, if at all, has to be effected under Section 192 and not Section 194A, as contended by the Revenue. We have perused the judgment of the Hon'ble High Court of Madras. The facts were that the assessee was a member of a recognized provident fund, he received interest in excess of the rate prescribed in Clause (b) of Rule 6 of Part A of the Fourth Schedule. Assessee claimed deduction under Section 80L with respect to such excess. The Revenue denied the said claim.
The Hon'ble High Court affirmed the stand of the Revenue. In doing so, the Hon'ble High Court held that the interest payment received by the assessee would partake the character of salary having regard to the application of Rule 6(b) of Part A of the Fourth Schedule and Section 17(1)(vi) of the Act. In our view, the decision of the Hon'ble High Court does not aid the stand of the assessee inasmuch as the Hon'ble Court was dealing with the situation where the assessee therein was an employee of the employer-company and was a member 6f the approved provident fund, which was constituted by such company. In the case before us, we are dealing with a situation where the employees have since ceased to be in employment of the company, which has constituted the appellant provident fund. Therefore, in the situation before us, the employment of the assessee cannot be considered the source of the impugned amounts. Thus, on facts, the said decision of the Hon'ble High Court of Madras is not attracted to the facts of the instant case.
16. The appellant has taken other arguments narrated by us in the earlier paras. In our view, the same are also devoid of merit in the face of legal position discussed above by us. The plea that on account of the principle of mutuality no amount received by the members of the fund is taxable is not acceptable. The 'mutuality' principle cannot be extended to taxing of amounts in the hands of the individual recipients. Further, another plea of the appellant that such interest has been considered exempt in the hands of ex-employees and the same has not been assessed, thus absolving the assessee of its liability under Section 194A, is also not tenable. This is for the reason that amounts credited to the account of the members of the fund in excess of Rule 8 of Part A of the Fourth Schedule does not enjoy exemption under Section 10(12). Secondly, we also notice that there is no evidence led by the assessee in support of the above. Thus, the aforesaid plea is also not maintainable. The plea that the impugned default was merely of a technical nature and that the Department has accepted such position in the past are arguments which would not distract from the factum of the assessee having defaulted in deducting tax at source as required under Chapter XVII-B.
17. In the result, we affirm the conclusion of the CIT(A) that the assessee-fund was liable for deduction of tax at source under Section 194A of the Act in respect of the credits made to the account of the members of the fund who ceased to be the employees of ONGC and thus, the assessee is in default under Section 201/201(1A) for all the financial years under consideration.
18. In the result, all the appeals of the assessee are dismissed.