2011 (10) TMI 17 - HC - Income Tax

Non deduction of TDS or less deduction of TDS on salary - Valuation of perquisite - Assessee in default - Interest u/s 201 - In view of the AO Assessee had committed a default by lower deduction of TDS from the total salary and was thus liable to be treated in default under Section 201(1) and liable for interest under Section 201(1A) of the Income Tax Act, 1961. - Held that - TDS has been deducted on estimated income of the employee, and the employer was not expected to step into the shoes of the AO and determine the actual income. - on the basis of the accounts maintained by the Assessee, the cost of education was less than Rs. 1,000/- per month per child and, therefore, the Assessee was also entitled to the benefit of the proviso to Rule3(5) of the Rules, 1962. - ITAT was correct in coming to the finding that these were not fit cases for passing orders under Section 201(1) and consequently levying interest under Section 201(1A) of the Act.

Summary

Issues:
Interpretation of Rule 3(5) of the Income Tax Rules, 1962 regarding TDS deduction for educational facilities provided by an Assessee School. Assessment of Assessee's liability under Section 201(1) and interest under Section 201(1A) of the Income Tax Act, 1961.

Analysis:

Issue 1: Interpretation of Rule 3(5) of the Income Tax Rules, 1962
The Assessing Officer (AO) held the Assessee School in default under Section 201(1) and liable for interest under Section 201(1A) for lower deduction of TDS from the total salary due to providing free educational facilities. However, the AO overlooked the latter part of Rule 3(5) which requires determining the cost of education in a similar institution in or near the locality. The Commissioner of Income Tax (Appeals) (CIT(A)) interpreted "cost of education" as the amount actually paid, not general fees charged, and held that perquisites are not taxable if the cost per child does not exceed Rs. 1,000 per month. The CIT(A) favored a purposive interpretation over a literal one, concluding that the Assessee was not in default.

Issue 2: Assessment of Assessee's Liability under Section 201(1) and 201(1A)
The Income Tax Appellate Tribunal (ITAT) observed that the purpose of TDS deduction is to estimate income and facilitate tax recovery, not to compute tax accurately. The ITAT emphasized the need for a bona fide estimate by the Assessee, citing precedents like Gwalior Rayon Silk Co. Ltd. and Nestle India Ltd. The ITAT held that the Assessee's estimation of Rs. 1,000 per child per month, even if incorrect, did not make them defaulters. The ITAT concluded that the Assessee acted honestly and fairly, thus not liable under Section 201(1) or 201(1A). The High Court upheld the ITAT's decision, dismissing the Income Tax Department's appeals and permitting the Assessee's appeals to be withdrawn, as the Assessee was not in default.

In summary, the High Court ruled in favor of the Assessee, determining that the Assessee School was not in default under Section 201(1) and not liable for interest under Section 201(1A) of the Income Tax Act, 1961. The judgment highlighted the importance of a bona fide estimate for TDS deductions and emphasized the need for a purposive interpretation of tax rules to determine liability accurately.