2010 (11) TMI 393 - AT - Income Tax

Assessee in default - TDS u/s 195 - The assessee had taken three Air Crafts on wetlease from M/s Caribjet Inc. in December, 1995, it terminated the lease in September, 1996 - it is clear that, the assessee has been prevented from deducting tax at source under section 195 of the Act, despite its best bona fide efforts - The courts of appeal in United Kingdom have not permitted it to comply and on the other hand, by directing the assessee to pay the amount into the escrow account of the solicitors, for which even the RBI permitted and thereafter allowing Caribjet to withdraw the same, made it impossible for the assessee to deduct tax at source and put the issues beyond the control of the assessee - The law of impossibility of performance does not necessarily require absolute impossibility, but also encompass the concept of severe impracticability - when the assessee is prevented from deducting tax under section 195, the question of his not performing the obligation under law does not arise and thus he cannot be held a defaulter - Held that assessee cannot be held to be an assessee in default in terms of section 201 and 201(1A) of the Act - Decided in favour of the assessee

Issues Involved:
1. Whether the assessee can be treated as an assessee in default for failure to deduct tax at source under section 195 of the Income-tax Act, 1961.
2. Whether the payment made under an arbitral award is a judgment debt and not income, thus not subject to tax deduction at source.
3. Whether simultaneous proceedings under section 201 and section 163 of the Income-tax Act can be pursued by the revenue.
4. Whether section 195A applies to the assessee for grossing up the tax amount.

Detailed Analysis:

1. Assessee as an Assessee in Default:
The Tribunal examined whether the assessee could be treated as an assessee in default for failing to deduct tax at source under section 195 of the Income-tax Act, 1961. The assessee argued that it could not be treated as an assessee in default because it did not deduct tax. This argument was dismissed based on the Special Bench decision in Mahindra & Mahindra Ltd. v. Dy. CIT [2009] 30 SOT 374 (Mum.), which clarified that section 201(1) applies to both those who fail to deduct tax and those who fail to deposit the deducted tax. The Tribunal upheld this interpretation, rejecting the assessee's contention.

2. Arbitral Award as Judgment Debt:
The assessee contended that the payment under the arbitral award was a judgment debt and not income, thus not subject to tax deduction at source. The Tribunal referred to the GE India Technology Cen. (P.) Ltd. v. CIT [2010] 193 Taxman 231 (SC), which established that section 195(1) applies only if the payment is chargeable to tax under the Act. The Tribunal found that the first appellate authority erred in not adjudicating whether the payment was chargeable to tax. The Tribunal also noted that the arbitral award had not been confirmed by any Indian court and thus could not be treated as a judgment debt. The Tribunal rejected the argument that the award was a judgment debt, noting that the award had not been made a rule of any court in India.

3. Simultaneous Proceedings under Sections 201 and 163:
The assessee argued that simultaneous proceedings under section 201 and section 163 could not be pursued. The Tribunal examined the decisions in Bunge & Co. Ltd. v. ITO [1971] 79 ITR 93 (Cal.) and CIT v. Premier Tyres Ltd. [1982] 134 ITR 17 (Bom.), which held that sections 160-163 and 195-201 are mutually exclusive. However, the Tribunal noted that the proviso to section 195(1) had been omitted with effect from 1-6-1987, changing the legal position. The Tribunal concluded that the liability to deduct tax at source and the liability to file a return as an agent of a foreign principal are distinct, and both proceedings can occur simultaneously.

4. Applicability of Section 195A:
The Tribunal upheld the first appellate authority's decision that the present case falls under "other arrangement" as per section 195A. The Tribunal rejected the argument that the award was a judgment debt and thus not subject to grossing up under section 195A.

Conclusion:
Despite rejecting all the propositions canvassed by the assessee, the Tribunal concluded that the assessee had made bona fide efforts to comply with the tax deduction order but was prevented by circumstances beyond its control. The Tribunal applied the doctrine of impossibility of performance, holding that the assessee could not be treated as an assessee in default under sections 201 and 201(1A) of the Income-tax Act, 1961. The appeal was allowed, and the assessee was released from the obligation to deduct tax at source.

← Previous Next →