2011 (1) TMI 1472 - HC - Income Tax

Assessee in default u/s 201(1) - liability to pay interest on TDS amount u/s 201(1A) - Payments of interest on the amount of tax to be deducted from the date of deduction till 1st Nov., 2004 under section 201(1A) - assessee in default - HELD THAT - From the judgment in COMMISSIONER OF INCOME-TAX, NEW DELHI VERSUS ELI LILLY COMPANY (INDIA) PVT. LTD. 2009 (3) TMI 33 - SUPREME COURT and the Explanation to section 191, it is clear that once the payee acknowledges the receipt of the sale consideration, files a return assessing the said amounts in his hands and pays tax, which is accepted by the Department, the payer ceases to be an assessee in default . He is not liable to pay tax under s. 201(1) of the Act. However, that does not absolve his liability to pay interest on TDS amount which he has not deducted. Therefore in order to foist the liability of payment of tax under s. 201(1A) it is not necessary that on the date when the demand is made, the assessee should be an assessee in default . As held by the apex Court, both these sections are independent and mutually exclusive. They could be operated independent of each other. In that view of the matter, the Tribunal was justified in holding that on payment of tax due by the payee, the liability of the payer under s. 201(1) ceases, he ceases to be an assessee in default . But he has to pay interest under s. 201(1A) of the Act. Appeal dismissed.

Summary

Issues:
- Challenge to Tribunal's order canceling demand under s. 201 and directing interest payment under s. 201(1A)
- Interpretation of liability to deduct tax under s. 191/195 of the Act
- Applicability of s. 201(1) and s. 201(1A) in the context of the case

Analysis:
The case involved a dispute where the Revenue challenged the Tribunal's decision upholding the CIT(A)'s cancellation of the demand under s. 201 and directing interest payment under s. 201(1A). The appellant, representing the Revenue, argued that the assessee should be deemed an 'assessee in default' for not deducting tax at source, making them liable to pay tax and interest. However, the Tribunal found that once the payee paid the tax, the liability of the assessee ceased, as per the provisions of s. 201(1). The appellant contended that this finding was incorrect, but the court referred to the apex Court's decision in CIT vs. Eli Lilly & Co., emphasizing the independent consideration of s. 201(1) and s. 201(1A). The court highlighted that interest under s. 201(1A) is a compensatory measure for withholding tax and is mandatory, even if there is no tax liability. The liability to deduct tax at source is vicarious, with the primary liability on the taxable person. The court clarified the elements for computing interest under s. 201(1A, including the quantum, rate, and period of default.

Moreover, the court referenced the Explanation to s. 191 by the Finance Act of 2008, emphasizing that once the payee acknowledges receipt of sale consideration, files a return, and pays tax accepted by the Department, the payer ceases to be an 'assessee in default' under s. 201(1). However, this does not absolve the liability to pay interest on the undeducted TDS amount. The court reiterated that the liability under s. 201(1) and interest under s. 201(1A) are independent and mutually exclusive, allowing separate operation. Therefore, the Tribunal's decision to relieve the assessee from tax liability under s. 201(1) upon payee's tax payment while enforcing interest payment under s. 201(1A) was deemed legally valid. Ultimately, the appeal challenging the Tribunal's decision was dismissed, upholding the reasoning and findings of the appellate authority.