2016 (3) TMI 246 - HC - Income Tax

Recovery of demand - attachment of account whereas the appeal was pending - AO refused to grant stay - non deduction of TDS - a proceeding under Section 201(1) read with Section 201(1A) - Held that - In the light of the proviso to Clause (b) of subsection (1) of Section 201 of the Act, there can be no escape from the conclusion that if the person, who fails to deduct, whole or part of the tax, at source, shall not be deemed to be an assessee in default if in respect of such tax, the deductee has furnished his return of income under Section 139 of the Act and, while furnishing the return, has taken into account such sum for computing income in such return of income and has paid the tax due on the income declared by him in such return of income coupled with a certificate to this effect from an accountant in such form as may be prescribed. Having, therefore, regard to the factual aspects of the present case and the law relevant thereto, we are clearly of the view that the respondent No.2, namely, Commissioner of Income Tax (Appeals)-II, Patna, is duty bound to take up the appeal at the earliest and if it is found that the taxes, which were to be deducted, at source, by the present petitioner while making payment to the said two Corporations, have been paid by the said two Corporations as deductees, the impugned demands, raised by the respondent No.2, namely, Commissioner of Income Tax (Appeals)-II, Patna, shall be set aside and the attachment of the account of the petitioner, maintained with the Government Treasury, Patna, shall be vacated without delay.

Summary

Issues:
1. Failure to deduct income tax at source on payments made to government corporations.
2. Rejection of stay application by Assistant Commissioner of Income Tax.
3. Legality of demand raised and account attachment by the tax department.
4. Interpretation of Circular No.275/201/95-IT(B) regarding enforcement of demands.
5. Application of Section 201(1) and the proviso to Clause (b) of subsection (1) of the Income Tax Act.

Analysis:
1. The judgment pertains to a case under Section 201(1) of the Income Tax Act where the petitioner, a department of the State Government responsible for road and bridge construction, failed to deduct income tax on payments to two government corporations. The tax department raised substantial demands for the unpaid taxes for the years 2012-13, 2013-14, and 2014-15. The petitioner contended that the payments were fund allotments and not subject to tax deduction under Section 194(1) of the Act.
2. The petitioner appealed against the demands and applied for a stay, which was rejected by the Assistant Commissioner of Income Tax, leading to the attachment of the petitioner's account. The petitioner filed a writ petition under Article 226 of the Constitution challenging the demand notice issued by the tax department.
3. The High Court refrained from expressing an opinion on the legal questions raised but emphasized that if the corporations had paid the taxes as per their assessments, the tax department should not pursue the petitioner under Section 201(1) of the Act. The court noted that the Circular No.275/201/95-IT(B) prohibits enforcing demands if taxes have been paid by the deductee.
4. The court highlighted the importance of the Circular, which absolves the deductor from liability if the deductee has paid the taxes due. Citing a Supreme Court case, the judgment clarified that proceedings under Section 201(1) cannot continue if the tax has been paid by the deductee. The proviso to Section 201(1) further outlined conditions where the deductor is not deemed in default if the deductee meets certain criteria.
5. Consequently, the High Court directed the Commissioner of Income Tax (Appeals)-II to promptly consider the appeal and vacate the demands and account attachment if the taxes were indeed paid by the corporations. The judgment concluded by instructing the petitioner to appear before the appellate authority for resolution within a specified timeframe, ensuring compliance with the law and logical conclusion of the dispute.