2006 (5) TMI 50 - HC - Income Tax

Recovery proceeding on 26.2.83 for the amount non-deducted at source for the F.Y. ending 31 March 75 to 31 March 82 are time-barred Interest is not required to be imposed if recovery of principal amount is time-barred penalty unjustified as revenue not proved reasonable cause

Summary

Issues Involved:

1. Limitation for recovery proceedings under Section 231 of the Income-tax Act, 1961.
2. Levy of penalty under Section 221 for non-deduction of tax at source.
3. Levy of interest under Section 201(1A) for non-deduction of tax at source.

Issue-wise Detailed Analysis:

1. Limitation for Recovery Proceedings under Section 231:

The primary issue was whether the recovery proceedings initiated on February 26, 1983, were barred by time under Section 231 of the Income-tax Act, 1961. Section 231, which was omitted from the statute with effect from April 1, 1989, provided that recovery proceedings could not be commenced after the expiration of three years from the last day of the financial year in which the assessee is deemed to be in default. The Tribunal concluded that the recovery proceedings for the sums not deducted at source for the financial years ending on March 31, 1981, were barred by time as the notices were issued after the expiration of the limitation period. The High Court upheld this view, stating that no recovery proceedings could have been initiated after the expiry of one year from March 31, 1981, even for the assessment year 1981-82.

2. Levy of Penalty under Section 221:

The second issue was whether the penalty under Section 221 for non-deduction of tax at source was justified. The Tribunal had deleted the penalty, holding that the assessee had bona fide reasons for not deducting tax at source, as the sub-contractors did not have taxable income. The High Court agreed with the Tribunal, emphasizing that the Revenue failed to prove that the assessee's default was without good and sufficient reasons. The Court noted that the Assessing Officer did not bring any material on record to show that the assessee had defaulted without good and sufficient reasons. Therefore, the Tribunal was justified in deleting the penalty.

3. Levy of Interest under Section 201(1A):

The third issue was whether interest under Section 201(1A) was leviable for non-deduction of tax at source. The Tribunal had held that interest could not be charged as the Income-tax Officer did not provide any material to controvert the assessee's assertion of having good and sufficient reasons for non-deduction. The High Court upheld this view, stating that if the recovery of the principal sum was barred by time, the recovery of interest, which is ancillary to the principal sum, was also barred by time. The Court emphasized that interest is only an adjunct to the principal sum and cannot be recovered independently if the principal sum itself is not recoverable.

Conclusion:

The High Court affirmed the Tribunal's decision, holding that the recovery proceedings for the sums not deducted at source were barred by time under Section 231. Consequently, the levy of interest under Section 201(1A) was also barred by time. Additionally, the Court upheld the Tribunal's decision to delete the penalty under Section 221, as the Revenue failed to prove that the assessee's default was without good and sufficient reasons.

The High Court answered the referred questions in favor of the assessee and against the Revenue, concluding that the Tribunal was justified in its findings.