2016 (10) TMI 1067 - HC - Income Tax

TDS on deemed dividend under section 2(22)(e) - liability to pay - Held that - Tribunal in these (TDS) proceedings have held that as the very basis for holding the respondent-assessee liable for failure to deduct tax did not subsist, the TDS proceedings must also fail. This was in view of the orders passed in the case of recipients, i.e., M/s. Siddhivinayak Realities Pvt. Ltd. and Mr. Vikas Oberoi in appeal by the authorities under the Act including this court that they were not liable to any tax as they had not received any deemed dividend under section 2(22)(e) of the Act. Once the foundation is removed, the superstructure falls (sublato fundamento cadit opus). The grievance of the Revenue that in TDS proceedings, one must ignore the orders passed in the hands of the recipients, i.e., M/s. Siddhivinayak Realities Pvt. Ltd. and Mr. Vikas Oberoi but the officers of the Revenue administering the TDS provisions are not outside the scope of the Act and orders passed under the Act in respect of the character of the payment made under the Act are binding upon them. The fact that at the time the order of the Assistant Commissioner of Income-tax (TDS) was passed, there was basis to do so does not mean that orders passed on income in the hands of the recipients will have no bearing in deciding its validity. One must not ignore the fact that this order of the TDS officer is tentative in nature and its existence would depend upon the nature of receipt in the hands of the recipient and subject to the orders passed in respect thereof by appropriate court. - Decided against revenue

Summary

Issues:
- Challenge to the order of the Income-tax Appellate Tribunal regarding assessment for the assessment year 2006-07.
- Whether the respondent-assessee was liable to deduct tax at source under section 194 from the alleged share application money held as deemed dividend under section 2(22)(e) of the Income-tax Act.

Analysis:
1. The appeal under section 260A of the Income-tax Act, 1961 challenged the order passed by the Income-tax Appellate Tribunal related to the assessment for the year 2006-07. The Revenue raised a question regarding the correctness of upholding the order of the Commissioner of Income-tax (Appeals) in not holding the assessee liable to deduct tax at source under section 194 from the deemed dividend share application money under section 2(22)(e) of the Act.

2. The respondent-assessee, engaged in construction business, paid share application money during the assessment year 2006-07. The Assessing Officer added the amount as deemed dividend in the hands of the recipient and its director on substantive and protective bases. Appeals by the recipients against the deemed dividend charge were allowed by the Commissioner of Income-tax (Appeals), upheld by the Tribunal, and further affirmed by the High Court in separate judgments.

3. Subsequently, the Assistant Commissioner of Income-tax (TDS) held the respondent-assessee as an assessee in default for not deducting tax on the deemed dividend. The Commissioner of Income-tax (Appeals) allowed the assessee's appeal, stating that since the addition of income as deemed dividend was deleted in the recipients' hands, no failure to deduct tax arose. The Tribunal upheld this decision, leading the Revenue to appeal.

4. The Revenue contended that the order holding the respondent-assessee as an assessee in default was justified when passed, as the recipients were initially held liable for tax. However, both the Commissioner of Income-tax (Appeals) and the Tribunal held that since the basis for the assessee's liability to deduct tax did not exist, the TDS proceedings must fail. They emphasized that the orders in the recipients' cases were binding on the TDS proceedings.

5. The High Court agreed with the lower authorities, stating that the TDS proceedings could not stand when the foundation of the assessee's liability to deduct tax was removed due to the deletion of deemed dividend in the recipients' hands. The Court held that the TDS officer's order was tentative and subject to the recipients' tax status, and the TDS provisions must align with the orders passed on the income in the recipients' hands.

6. Conclusively, the Court found that the Revenue's proposed question did not raise any substantial legal issue and dismissed the appeal, emphasizing that the TDS proceedings were not valid due to the absence of a basis for the assessee's liability to deduct tax. No costs were awarded in the judgment.