2016 (8) TMI 509 - HC - Income Tax

Validity of the action initiated under Sections 201(1) and 201(1A) - non-deduction of tax at source for periods earlier than four years prior to 31st March, 2011 - Held that - Circular 5 of 2010 of CBDT clarifying that the proviso to Section 201(3) of the Act was meant to expand the time limit for completing the proceedings and passing orders in relation to pending cases . The said proviso cannot be interpreted, as is sought to be done by the Department, to enable it to initiate proceedings for declaring an Assessee to be an Assessee in default under Section 201 of the Act for a period earlier than four years prior to 31st March, 2011. Consequently, the notices impugned in the present petitions issued by the Department seeking to initiate proceedings against the Petitioners for declaring them to be Assessees in default under Section 201(3) of the Act are hereby quashed.

Issues Involved:
1. Validity of the action initiated by the Income Tax Department under Sections 201(1) and 201(1A) of the Income Tax Act, 1961 for non-deduction of tax at source (TDS) for periods earlier than four years prior to 31st March, 2011.
2. Interpretation of the proviso to sub-section (3) of Section 201 of the Income Tax Act, inserted with effect from 1st April, 2010.
3. Applicability of Section 194H regarding deduction of TDS towards commission or brokerage in transactions between the petitioner and its channel partners.
4. Examination of the constitutional validity of Section 201(3) of the Income Tax Act and its proviso.

Detailed Analysis:

1. Validity of Action under Sections 201(1) and 201(1A) for Periods Earlier than Four Years Prior to 31st March, 2011
The court examined whether the Income Tax Department could initiate proceedings under Sections 201(1) and 201(1A) for non-deduction of TDS for periods earlier than four years prior to 31st March, 2011. It was noted that before the amendment introduced by the Finance (No. 2) Act, 2009, there was no time limit for initiating such proceedings. The court referred to the decision in CIT vs. NHK Japan Broadcasting Corporation, which established a four-year limitation period for initiating action where no limitation is prescribed by the statute. The court upheld this limitation period, noting that the law explained in NHK Japan Broadcasting Corporation has not changed by the introduction of the proviso to sub-section (3) of Section 201 by the Finance (No. 2) Act, 2009.

2. Interpretation of the Proviso to Sub-section (3) of Section 201
The court analyzed the proviso to sub-section (3) of Section 201, which was inserted with effect from 1st April, 2010. The proviso provided a time limit for passing orders in pending cases by 31st March, 2011. The court referred to Circular No. 5 of 2010 issued by the CBDT, which clarified that the proviso was meant to expand the time limit for completing proceedings and passing orders in relation to pending cases. The court concluded that the proviso could not be interpreted to permit the Department to initiate proceedings for periods earlier than four years prior to 31st March, 2011.

3. Applicability of Section 194H
The court examined whether Section 194H concerning the deduction of TDS towards commission or brokerage applied to transactions between the petitioner and its channel partners. The petitioner argued that the transactions were on a principal-to-principal basis and not subject to TDS under Section 194H. The court referred to the Karnataka High Court's decision in Bharti Airtel Ltd. Vs. Deputy Commissioner of Income-Tax, which held that no TDS is recoverable from payments made by cell phone companies to distributors where the products sold were pre-paid cards. The court found this reasoning applicable to the petitioner's case, supporting the argument that Section 194H did not apply.

4. Examination of Constitutional Validity of Section 201(3)
The petitioners challenged the constitutional validity of Section 201(3) and its proviso but did not press for this relief in view of the court's acceptance of their interpretation of the provision. Consequently, the court did not address the constitutional validity issue in detail.

Conclusion
The court quashed the notices issued by the Income Tax Department seeking to initiate proceedings against the petitioners for declaring them to be assessees in default under Section 201(3) of the Act. The writ petitions were allowed, and all pending applications were disposed of without orders as to costs.

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