2008 (4) TMI 182 - HC - Income Tax

Failure to deduct tax at source but assessee paid the required interest without disputing its liability AO passed an order u/s 201(1) & 201(1A) treating the assessee as being in default held that acceptance of liability will not by itself extend period of limitation - Held that action must be initiated within period of 4 years, where no limitation is prescribed as in section 201 - initiation of proceedings in 1999 in respect of the A.Y. 1990-91, is barred by limitation

Summary

Issues:
1. Validity of orders passed under section 201(1) and 201(1A) of the Income-tax Act, 1961.
2. Time limitation for initiating proceedings against an assessee in default.

Issue 1: Validity of Orders under Section 201(1) and 201(1A):
The case involved an appeal by the Revenue against an order passed by the Income-tax Appellate Tribunal concerning the assessment year 1990-91. The dispute arose from the deduction of tax at source by a Government-company of a foreign country for its employees in India. The company paid Indian employees in Indian rupees and also provided a "global salary" to employees in the home country without deducting tax at source. A survey conducted by the Revenue in 1998 revealed this discrepancy. The company admitted its liability for tax deduction on the global salary and paid the due tax and interest. The Assessing Officer treated the company as an assessee in default under section 201 of the Act, leading to potential penalties. The Tribunal, however, held that the Revenue did not initiate proceedings within a reasonable period, questioning the validity of the orders under sections 201(1) and 201(1A).

Issue 2: Time Limitation for Initiating Proceedings:
The key question was whether there was a time limit for initiating proceedings against an assessee in default under section 201 of the Act. The Tribunal, supported by relevant case laws, emphasized the need for a reasonable time frame for the Revenue to commence such actions. While the Act did not specify a limitation period, the Tribunal determined four years as a reasonable period for initiating proceedings in cases where no specific limit was prescribed. This decision was based on the principle that the time limit for initiating proceedings should align with or be less than the period allowed for completing assessments. The Court upheld the Tribunal's decision, highlighting that the concept of knowledge or voluntary tax payment by the assessee did not extend the period of limitation for the Revenue to act. The judgment clarified that the liability to pay tax ultimately rested with the deductee, and the deductor's failure to deduct tax did not absolve the deductee of this responsibility. Consequently, the Court ruled in favor of the assessee, holding that the initiation of proceedings against them for the assessment year 1990-91 was indeed barred by limitation, affirming the Tribunal's decision.

In conclusion, the judgment addressed the issues of the validity of orders under sections 201(1) and 201(1A) of the Income-tax Act, 1961, and the time limitation for initiating proceedings against an assessee in default. The Court upheld the Tribunal's decision, establishing a four-year reasonable period for initiating such actions in the absence of a specific limitation period in the Act.