1998 (9) TMI 41 - HC - Income Tax

Summary

Issues:
Recovery of tax under section 194A, Commissioner's decision on liability, Question of limitation, Definition of interest under section 2(28A), Payment to a bank and tax deduction.

Recovery of tax under section 194A:
The judgment revolves around the recovery of tax under section 194A of the Income-tax Act. The case involved an assessee who failed to deduct tax on interest and penalty paid to the principal. The Assessing Officer raised a demand for the tax amount not deducted by the assessee. The key argument was whether the assessee was liable to pay the demanded tax amount.

Commissioner's decision on liability:
The assessee applied to the Commissioner under section 264 of the Act, challenging the demand. The Commissioner rejected the revision petition, holding that the assessee was indeed liable to pay the tax demanded. The Commissioner ruled that the amount described as penalty by the assessee's principal was considered additional interest and that the Commissioner lacked the power to waive tax recovery. The issue of limitation was not raised before the Commissioner.

Question of limitation:
During the hearing, the counsel for the assessee raised the question of limitation as a point of law. The judgment analyzed the period of limitation for commencing recovery proceedings against an assessee deemed in default. It was observed that the demand notice issued was beyond the prescribed period of one year from the relevant financial years, rendering the recovery proceedings unlawful.

Definition of interest under section 2(28A):
The judgment delved into the definition of interest under section 2(28A) of the Act, which includes any service fee or charge related to borrowing or debt incurred. The penalty amount in question was deemed as interest due to non-payment of goods' value, necessitating tax deduction. However, since the recovery proceedings were initiated after the limitation period, they were deemed illegal.

Payment to a bank and tax deduction:
The counsel for the assessee argued that since the amounts were paid to a bank, tax deduction was not required. However, it was clarified that the bank acted as an agent for the principal, and the payment did not exempt the assessee from tax deduction obligations under section 194A of the Act.

In conclusion, the judgment declared the proceedings for tax recovery as illegal due to the failure to treat the assessee as in default within the prescribed limitation period. The orders demanding tax payment from the assessee were deemed unsustainable in law and set aside.