2019 (5) TMI 1373 - AT - Income Tax

TDS u/s 192 - Default u/s 201(1) and 201(1A) - TDS liability on the payments made to employee on the Death cum Retirement Gratuity (DCRG), Commutation of Pension and leave salary after allowing exemption provided u/s. 10(10)(iii), 10(10A)(ii) and 10(10AA)(ii) - assessee's plea of bonafide belief - AO rejected the arguments of the assessee that the assessee is covered under the definition of State - Assessee submitted that the provisions of section 201(1) and 201(1A) not attracted in the present case because non-deduction of tax at source by the university is based on a bonafide estimate of the tax liability of its employees HELD THAT - In Part II if the Mahatma Gandhi University statutes 1997, the employees belonging to Classes I and II shall have the status of Gazetted Officers of the Kerala Government Service and accordingly, the pay of the employees of the university is fixed and also revised in accordance with and at par with pay revision of the state government employees. The employees of this university are also governed by the Kerala Government Pension Rules. These Rules are the same as the Central Civil Services (Pension) Rules 1972 CCS Pension Rules 1972). The salary, pension and retirement benefits are paid from the consolidated fund of the state government and the grant for payment of salary and retirement benefits are provided by the Legislature through the budget of the State. The amount is specifically provided under the head 'salaries' in the state budget which was placed on record. Thus, there exists an employer employee relationship between the 'payer' and 'payee' i.e. the government and the employee. In our opinion, the employees of the assessee are found to be holding civil posts under the State Government, therefore, the provisions of section 10(10)(i), 10(10A) and 10(10AA) are fully attracted. Once the assessee falls under the above provisions of the Act, the same cannot be subject to TDS. We, therefore hold that payments made by the assessee to its employees towards death cum retirement gratuity, commutation of pension or leave salary shall not be liable for TDS to the extent permitted under the provisions of section 10(10)(i), 10(10A) and 10(10AA) Facts and circumstances of the present case are identical to the case of Indian Institute of Science vs. DCIT 2015 (2) TMI 1272 - ITAT BANGALORE wherein held reliance placed by the AO on the expression actually incurred found in Sec. 10(5) and proviso (iv) to Sec. 17(2), in our view cannot be sustained. In any event, the interpretation of the word actually paid is not relevant while ascertaining the Quantum of tax that has to be deducted at source u/s.192. As far as the Assessee is concerned, his obligation is only to make an estimate of the income under the head salaries and such estimate has to be a bonafide estimate. In the present case, as pointed out by the Ld. AR, there has been no observation by the Assessing Officer with regard to estimate of salary made by the assessee. Further, the assessee has deducted tax on the basis of bona fide estimate of the salary to its employees. The various case laws cited by the assessee also supports the contentions of the assessee - if tax is deducted based on a bonafide estimate or if there is no observation that the estimate is not honest or fair, the deductor cannot be held to be assessee in default u/s. 201(1). Thus, in our opinion, deduction of tax at source by an employer is always a tentative deduction of income-tax subject to regular assessment in the hands of the payee/recipient. Accordingly, the Cross Objections filed by the assessee are allowed.

Summary

Issues Involved:
1. Whether the university employees are to be considered as government employees and eligible for exemptions under sections 10(10)(i), 10(10A)(i), and 10(10AA)(i).
2. Whether the university is part of the "State" for the purposes of the Income Tax Act.
3. Applicability of TDS provisions under sections 201(1) and 201(1A) of the Income Tax Act.
4. Bona fide estimate of salary for TDS purposes under section 192 of the Income Tax Act.

Detailed Analysis:

1. University Employees as Government Employees:
The main contention was whether university employees should be considered government employees and thus eligible for exemptions under sections 10(10)(i), 10(10A)(i), and 10(10AA)(i) of the Income Tax Act. The CIT(A) held that university employees are to be treated as holding civil posts under the State, thereby qualifying for the exemptions. The CIT(A) relied on the decision of the ITAT, Delhi in the case of Ram Kanwar Rana, which interpreted section 10(10) to include university employees under the definition of civil posts under a State. This interpretation was based on the fact that the university was established by a State Act, and the employees were governed by the same rules as state government employees, including the Kerala Service Rules and the Kerala Government Pension Rules.

2. University as Part of the "State":
The CIT(A) and the Tribunal considered whether the university falls under the definition of "State" as per Article 12 of the Constitution of India. The Tribunal noted that the Mahatma Gandhi University was established under a State Act, and the Government of Kerala exercises direct control over its financial and administrative matters. The Governor of Kerala, as the Chancellor, appoints the Vice-Chancellor, and the university's funding is provided through the state budget. The Tribunal concluded that the university is an instrumentality of the State and thus falls under the definition of "State" for the purposes of the Income Tax Act.

3. Applicability of TDS Provisions:
The Assessing Officer had raised a demand under sections 201(1) and 201(1A) of the Income Tax Act, contending that the university failed to deduct TDS on payments made to its employees. The CIT(A) overturned this decision, holding that the university employees are entitled to exemptions under sections 10(10)(i), 10(10A)(i), and 10(10AA)(i), and thus, the university was not liable to deduct TDS on these payments. The Tribunal upheld this view, confirming that the payments made by the university towards death cum retirement gratuity, commutation of pension, and leave salary are not liable for TDS to the extent permitted under the relevant sections of the Income Tax Act.

4. Bona Fide Estimate of Salary for TDS:
The Tribunal also addressed the issue of whether the university made a bona fide estimate of the salary for TDS purposes under section 192 of the Income Tax Act. The university argued that it had made a bona fide estimate of the salary, considering its employees as state government employees and thus exempt from TDS on certain payments. The Tribunal agreed with this contention, citing various case laws that support the view that if an employer makes a bona fide estimate of the salary, it should not be held liable under sections 201(1) and 201(1A). The Tribunal noted that there was no observation by the Assessing Officer that the estimate was not honest or fair, and thus, the university could not be treated as an assessee in default.

Conclusion:
The Tribunal dismissed the appeals of the Revenue and allowed the Cross Objections of the assessee. It held that the university employees are to be considered as holding civil posts under the State, making them eligible for exemptions under sections 10(10)(i), 10(10A)(i), and 10(10AA)(i). Consequently, the university was not liable to deduct TDS on the payments made to its employees towards death cum retirement gratuity, commutation of pension, and leave salary. The Tribunal also recognized the bona fide estimate made by the university for TDS purposes, thereby quashing the proceedings under sections 201(1) and 201(1A).