2004 (8) TMI 626 - AT - Income Tax

Summary

Issues:
Taxability of conveyance allowance paid to employees under section 201 read with section 192 of the Income-tax Act, 1961.

Analysis:
The judgment by the Appellate Tribunal ITAT Mumbai involved three appeals filed by the assessee against the order passed by the CIT(A) regarding the taxability of conveyance allowance paid to employees. The primary grievance raised in all three appeals was that the CIT(A) erred in upholding the demand raised on the assessee under section 201 read with section 192. The Assessing Officer contended that the conveyance allowance should have been subject to tax deduction at source by the employer. However, the Tribunal noted that the taxability of an allowance in the hands of the recipient does not automatically imply the obligation for the employer to deduct tax at source. The employer's duty is to make a fair estimate of the employee's income and deduct tax accordingly as per section 192 of the Income-tax Act.

The Tribunal emphasized that the employer cannot be considered in default under section 201(1) if a fair and honest estimate of the taxable salary was made and tax was deducted and paid accordingly. Referring to the judgment in the case of Gwalior Rayon Silk Co. Ltd. v. CIT, the Tribunal highlighted that the employer's obligation to deduct tax arises when there is a failure to deduct or pay tax as required by the Act. The Tribunal also cited precedents where it was established that conveyance allowance is not necessarily part of the salary and may not be taxable unless it appears to be a payment of salary in disguise.

The Tribunal further noted that unless the conveyance allowance is excessive or unreasonable, indicating a payment of salary in the guise of an allowance, the employer is not obligated to deduct tax at source. In the absence of evidence to show that the conveyance allowance was de facto a salary payment, the demands raised under section 201 read with section 192 were deemed unsustainable. Consequently, the Tribunal directed the Assessing Officer to delete the demands, thereby allowing all three appeals in favor of the assessee.

In conclusion, the judgment clarified that the taxability of an allowance in the hands of the recipient does not automatically impose a TDS obligation on the employer unless the allowance is deemed to be a disguised salary payment. The Tribunal emphasized the importance of making a fair and honest estimate of the employee's income for TDS purposes and ruled in favor of the assessee, directing the deletion of the demands raised by the Assessing Officer.