2006 (10) TMI 252 - AT - Income Tax

Summary

Issues Involved:
1. Charging of additional tax under section 201 of the Income-tax Act.
2. Interest under section 201(1A) of the Income-tax Act.

Issue-wise Analysis:

1. Charging of Additional Tax Under Section 201 of the Income-tax Act:

The primary issue revolves around the assessee's failure to deduct tax at source (TDS) on certain allowances paid to employees, which the assessee claimed were reimbursements for business expenses. The Assessing Officer (AO) contended that these allowances were part of the salary and thus subject to TDS under section 192 of the Income-tax Act. The AO computed additional tax at 40% on the amount of these allowances, treating them as part of the salary to avoid TDS provisions.

The assessee argued that these allowances were reimbursements for expenses incurred by employees for business purposes and thus exempt under section 10(14) of the Act. The Commissioner of Income-tax (Appeals) [CIT(A)] upheld the AO's decision, leading the assessee to appeal to the Tribunal.

The Tribunal found that the nature of the business required employees to incur certain expenses for news gathering, reading materials, and telephone usage, which were reimbursed by the company. The Tribunal noted that the issue of whether these payments were reimbursements or perquisites forming part of the salary was debatable. Citing various judgments, the Tribunal concluded that the assessee had a bona fide belief that these were reimbursements and not subject to TDS. The Tribunal referenced the case of Sol Pharmaceuticals Ltd. v. ITO [2003] 79 TTJ (Hyd.) 319, which held that if the assessee did not deduct TDS under an honest belief that the allowances were exempt, the assessee could not be held in default under section 201.

2. Interest Under Section 201(1A) of the Income-tax Act:

The Tribunal examined the applicability of section 201(1A) concerning the interest charged for non-deduction of TDS. It observed that section 201, before its amendment by the Finance Act, 2002, deemed an assessee in default only if no tax was deducted at all, not for short deduction. The amendment, effective retrospectively from 1-4-1962, was not known to the assessee during the relevant financial years (1996-97 and 1997-98). The Tribunal referenced the case of Excel Industries Ltd. [2006] 5 SOT 235 (Mum.), which held that section 201 is a penal section and should be strictly construed. The Tribunal concluded that the assessee could not be deemed in default for short deduction of tax under the pre-amended section 201.

The Tribunal also considered the argument that if the allowances were taxed in the hands of employees, the same tax could not be collected again from the employer. The Tribunal noted the lack of evidence from both parties on whether the allowances were taxed in the employees' assessments. However, it referred to the case of Gwalior Rayon Silk Co. Ltd. v. CIT [1983] 140 ITR 832 (MP), which held that once the tax is paid by the employee, the employer cannot be held liable under section 201.

Conclusion:

The Tribunal concluded that the assessee had a bona fide belief that the allowances were reimbursements and not subject to TDS. It held that the assessee could not be deemed in default for short deduction of tax under the pre-amended section 201. Consequently, the additional tax and interest under section 201(1A) were deleted, and the appeals of the assessee were allowed.