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Issues involved: Determination of whether the recovery proceedings for tax payable by the assessee were barred under section 231 of the Income-tax Act, 1961.
Summary: The case involved a dispute regarding the liability of the assessee to deduct income tax on a sum paid to a non-resident for services rendered in India. The Income-tax Officer computed the tax payable by the assessee and issued an order under section 201. The Appellate Assistant Commissioner allowed the appeal, but the Tribunal held that tax was deductible at source. The assessee contended that the recovery of tax was barred by limitation under section 231. The key argument was whether the liability arose immediately upon default or only upon the order deeming the assessee to be in default. The court analyzed sections 195, 200, and 201 of the Income-tax Act, which establish the liability of a person responsible for deduction of tax at source. It was noted that the liability arises immediately upon failure to deduct or pay tax as required, without the need for a formal order or notice of demand. The liability is triggered by the statutory provisions and not by any specific order. Regarding the question of limitation, the court examined section 231, which sets the period for commencing recovery proceedings. The section distinguishes between taxes directly payable upon demand and liabilities arising by operation of law. The period of limitation for recovery in the latter case begins from the financial year in which the default occurred, not from the date of demand. The court referred to the legislative intent behind section 231 and previous court decisions to support its interpretation. Ultimately, the court held in favor of the assessee, ruling that the recovery proceedings were barred by limitation. The decision aligned with views expressed by other High Courts on similar matters. In conclusion, the court answered the question in favor of the assessee and directed the parties to bear their respective costs.
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