2018 (5) TMI 583 - AT - Income Tax

Assessee in default - non deduction of tds on payments made to retirement employees towards unutilized leave period where such payment was made in excess of ₹ 3 lacs - bonafide estimate of the salary - proceedings against the Assessee u/s.201(1) 201(1A) - assessee's contention that its employees were employees of the State Government and therefore the entire payment to its employees towards unutilized leave period on retirement was exempt u/s.10(10AA)(i) Held that - As decided in ACIT Vs. Infosys BPO Ltd. 2013 (9) TMI 205 - ITAT BANGALORE held that the plea of the Assessee that it made a bona fide estimate of employee s salary by valuing the perquisites in the form of residential accommodation provided to the employees by valuing the same as if employees were employees of Central Govt. has to be accepted. It is clear from the records that the position with regard to the assessee not being a Central govt. was brought to its notice by the department only in the proceedings initiated in 2013. Even thereafter, the Assessee has been taking a stand that its employees or employees of Central Govt. Obligation of the Assessee is only to make a bonafide estimate of the salary. Assessee has made such an estimate. The Assessee s obligation u/s.192 is therefore properly discharged and hence proceedings u/s.201(1) 201(1A) of the Act have to be quashed and are hereby quashed As in present case the circumstances explained by the KPTCL assessee regarding the manner of formation of KPTCL and the action of the revenue in not questioning KPTCL s action in the past several years after its formation and the manner of exercise of control and affording protecting to employees of KPTCL by the State Government were definitely factors which weighed with KPTCL when it made estimate of its employees income under the head Salaries . There is no reason for them to think that its estimate of employee s income under the head Salaries was incorrect as the belief it entertained was that its employees were to be regarded as employees of State Government and that its employees are entitled to exemption of the entire sum of unutilized leave encashment u/s.10(10AA)(i) of the Act. - Decided in favour of assessee

Summary

Issues Involved:
1. Whether KPTCL can be considered as "Assessee in Default" under Section 201(1) of the Income Tax Act, 1961 for not deducting tax at source.
2. Whether KPTCL is liable to pay interest on tax not deducted at source under Section 201(1A) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Assessee in Default under Section 201(1):

The core issue revolves around whether KPTCL, by not deducting tax at source on payments made to its employees towards unutilized leave period exceeding ?3 lakhs, can be deemed as an "Assessee in Default" under Section 201(1) of the Income Tax Act, 1961.

KPTCL contended that its employees should be considered as employees of the State Government, thereby making the entire payment towards unutilized leave period exempt under Section 10(10AA)(i) of the Act. However, the revenue argued that KPTCL is a statutory corporation and not a State Government entity, thus its employees cannot be regarded as State Government employees. Consequently, only ?3 lakhs of the unutilized leave period payment is exempt under Section 10(10AA)(ii), and KPTCL should have deducted tax at source on the excess amount.

The Tribunal referred to previous decisions, including the case of Central Food Technological Research Institute Vs. The ITO, where it was held that employees of statutory corporations cannot be regarded as employees of the State or Central Government. Hence, the Tribunal concluded that KPTCL’s employees do not qualify as State Government employees, and KPTCL should have deducted tax on the amount exceeding ?3 lakhs.

2. Liability to Pay Interest under Section 201(1A):

The Tribunal examined whether KPTCL is liable to pay interest on the tax not deducted at source under Section 201(1A). KPTCL argued that it acted under a bonafide belief that its employees were State Government employees, and thus, the entire payment towards unutilized leave period was exempt from tax.

The Tribunal acknowledged the historical context under which KPTCL was formed and the consistent treatment of its employees as State Government employees in the past. It noted that KPTCL's belief was based on the historical background and the assurances provided to its employees during the transition from Karnataka State Electricity Board (KEB) to KPTCL.

The Tribunal referred to the decision in the case of Indian Institute of Science Vs. DCIT, where it was held that if the estimate of income under the head "Salaries" made by the employer is bonafide, then the employer has discharged its obligation under Section 192, and proceedings under Section 201(1) & 201(1A) should be quashed. Applying this rationale, the Tribunal concluded that KPTCL made a bonafide estimate of its employees' income, believing them to be State Government employees, and thus, it discharged its obligation under Section 192.

Conclusion:

The Tribunal held that KPTCL has discharged its obligation under Section 192 by making a bonafide estimate of its employees' income. Consequently, the proceedings under Section 201(1) & 201(1A) of the Act were quashed. All the appeals of KPTCL were allowed, and it was concluded that KPTCL should not be considered as an "Assessee in Default" and is not liable to pay interest on the tax not deducted at source.

Order Pronouncement:

The order was pronounced in the open court on 2nd May, 2018, allowing all the appeals of the assessee (KPTCL).