2008 (7) TMI 475 - AT - Income Tax

Failed to deduct tax under s. 192 - Perquisite u/s 17(2) - 'Assessee-in-default' under s. 201 because of Explns. 1 to 4 in s. 17(2) of the Act inserted by Finance Act, 2007 with retrospective effect? - liablity for interest under s. 201 (1A) - assessees resisted and stated that just because the employee was paying a rent which is less than 10 per cent or 7.5 per cent of the salary, it could not be said that there was a 'concession in the matter of rent' and hence r. 3 had no application - HELD THAT - As per the provision of s. 200 the tax deduction at source is a mode of payment of tax on the income of the person on whose income it is deducted i.e., employees in this case. The credit of this deduction at source is given against the tax liability of the employee as provided in s. 199 of the Act. Therefore in our opinion when the time prescribed for deduction had expired the employer cannot be asked to deduct tax and pay it to the Government. The term 'at source' also suggests that the deduction has be at that time, namely, when the payment is made or the perquisite is granted and if the source time had expired and at that time there was no liability to deduct tax, there cannot be a liability to deduct tax afterwards in absence of the source at which it was to be deducted. Retrospective amendment is to deem the value of perquisite and not to deduction of tax which was to be made at the time of payment or granting the perquisite. This liability in our opinion cannot relate back as one cannot go back in the matter of time nor the wheels of time can be retrieved. The observation of the CIT(A) that these cases are not applicable because they were dealing with a penal levy and not to the valuation of perquisite which was not penal in nature, has therefore little force. Also because, insofar as, the assessee was concerned, it could not have deducted tax, because under s. 192, it is required to be deducted when there was payment of the salary or when the salary and perquisite became due during the relevant previous year. It could also have been not paid because the year has already ended, and it would be impossible to deduct tax retrospectively. It may be stated that retrospective amendment was to deem the difference in specified rent and rent charged as perquisite and not to deduct tax at source under s. 192. If that be so, there was a reasonable cause not to deduct tax at source, at the particular point of time, and to ask the assessee to bear responsibility for such liability with retrospective effect, cannot be justified. At the time of such payment, as per the law existing at that time, the assessee was not required to deduct the tax for accommodation provided to its employees as there was no concession and r. 3 had no applicability as also affirmed by the Supreme Court in the case of Arun Kumar Ors. 2006 (9) TMI 115 - SUPREME COURT . Thus there was no default on the part of the assessee to deduct tax while making payment of salary. Merely because the law has been amended with retrospective effect, the assessee cannot be held to be assessee-in-default retrospectively. It would now be impossible on the part of the appellant to deduct tax from the salary of the employees for that year in accordance with the amended s. 17(2) of the Act, for which salary has already been paid in that year. Remedy available to assessee to recover the tax from its employees had lapsed and now it is impossible to deduct tax from the salaries of the employees as per the amended s. 17(2) of the Act. Even if the amendment has been brought into with retrospective effect, the assessee cannot be treated as assessee-in-default retrospectively and interest under s. 201(1A) cannot be charged on a liability which came into existence by a retrospective amendment. The assessee has all along acted in a bona fide manner and in accordance with the law which existed as on the date on which TDS was to be deducted. Further merely for the reason that the law has been changed retrospectively, the assessee cannot be treated in default for no fault of its own and cannot be charged with interest which is penal in nature. The Andhra Pradesh High Court in P.V. Rajagopal Ors. vs. Union of India 1998 (4) TMI 127 - ANDHRA PRADESH HIGH COURT held that the Department could not coerce the employer to deduct tax at source on an amount which was in dispute as a perquisite by the employer. Even where there is a difference of opinion due to which tax has not been deducted, s. 201/201 (1A) cannot be invoked; it would apply with greater force where there is no perquisite on the date of deduction of TDS. Thus, even on this count, the order under appeal is bad in law, since the applicability of s. 17(2)(ii) of the Act in the present case was highly debatable and accordingly, the order passed by the AO treating the assessee-in-default for not deducting TDS on such alleged perquisite is not in accordance with the law. The fact that retrospective amendment was brought in s. 17(2) also fortifies the same. Hence, the principle laid down by the Andhra Pradesh High Court squarely applies to the present case. No liability is created on the employer to deduct tax at source by any retrospective legislation, like that of deeming perquisite. The deeming in valuation of perquisite was not there at the time the assessee was required to deduct tax and therefore, there was no liability to deduct tax on such deemed value of perquisite and consequently the assessee cannot be treated in default retrospectively. The contention on behalf of the assessee that the object of this deeming section was not to treat the difference as perquisite and it would still be open to show that there was no concession in the matter of rent has no force. It would amount to permit your imagination to boggle when it comes to the inevitable corollaries of the deemed state of affairs and also reading something which is prohibited by the fiction as not there in the provisions. Because of the fiction, even if the specified rate is not the real market rent of the accommodation provided to the employees, it has to be assumed so. The fiction is to assume the position that the difference was a concession it has to be perquisite to an employee. It is because by virtue of deeming fiction one has to assume that there is a concession in the matter of rent and that, consequently it has to be a perquisite. The argument that specified rate is not the determining criterion for finding a concession in the matter of rent has the effect of and would amount to ignoring the fiction created in the provision and therefore has no force hence and cannot be accepted. The legal fiction however is to be restricted to the field of definite purpose for which it is created. See CIT vs. Amarchand N. Shroff 1962 (10) TMI 51 - SUPREME COURT ; CIT vs. Mother India Refrigeration Industries (P) Ltd. 1985 (8) TMI 2 - SUPREME COURT . Again a retrospective amendment is not to apply to action which is barred by efflux of time within which it was to be carried out. It cannot have a greater retrospective operation than its language renders necessary. Retrospective operation is not given to a statute so as to impair the existing right or obligation Govindas Ors. vs. ITO 1975 (12) TMI 144 - SUPREME COURT . The liability to deduct tax was there on payment or on grant of perquisite and ended after that period was over as at that time there was no perquisite by way of concession in the matter of rent as there was no deeming of the difference in rent as perquisite by the statute as it was given effect to by the Expln. 1 to s. 17(2) of the Act under the Finance Act, 2007 with retrospective effect from 2001. Retrospective effect is given to treat it as perquisite and not extended to create the liability on the employer to deduct tax and treat him as an assessee-in-default retrospectively. Therefore so far the assessee as employer is concerned he is not hit by the retrospective insertion of Expln. 1 to s. 17(2) thereto in absence of any such extension of the retrospective effect either in s. 192 or s. 201 of the Act. In the result, the appeals are allowed.

Summary

Issues Involved:
1. Existence of perquisite under section 17(2)(ii) of the Income Tax Act.
2. Valuation under Rule 3 in the absence of perquisite.
3. Failure to deduct tax under section 192 of the Income Tax Act.
4. Assessee-in-default status under section 201 due to retrospective effect of explanations to section 17(2).
5. Liability for interest under section 201(1A) of the Income Tax Act.

Analysis of the Judgment:

1. Existence of Perquisite under Section 17(2)(ii) of the Income Tax Act:
The Tribunal examined whether the accommodation provided by the assessees to their employees constituted a "perquisite" under section 17(2)(ii) of the Income Tax Act. The term "perquisite" includes the value of any concession in the matter of rent respecting any accommodation provided by the employer. The Tribunal noted that the assessees had charged rent based on government norms without any concession. Citing the Supreme Court's decision in Arun Kumar & Ors. vs. Union of India, the Tribunal emphasized that a "concession" must be established before section 17(2)(ii) can be invoked. The Tribunal concluded that there was no concession in the matter of rent, and hence, no perquisite existed under section 17(2)(ii).

2. Valuation under Rule 3 in the Absence of Perquisite:
The Tribunal addressed whether Rule 3 of the Income Tax Rules could apply if no perquisite existed. Rule 3 provides the method for valuing perquisites, including accommodation provided to employees. The Tribunal referred to various High Court decisions, including the Uttaranchal High Court in CIT vs. Chief Officer, State Bank of India, which held that if standard rent is uniformly charged, there is no concession, and Rule 3 does not apply. The Tribunal concluded that since there was no concession in the matter of rent, Rule 3 could not be applied for valuation.

3. Failure to Deduct Tax under Section 192 of the Income Tax Act:
The Tribunal examined whether the assessees failed to deduct tax under section 192 due to the non-inclusion of perquisites in the salary. Section 192 mandates tax deduction at the time of salary payment, including perquisites. The Tribunal noted that at the time of salary payment, the law did not require the inclusion of the alleged perquisite (concession in rent) as there was no concession. Therefore, the assessees could not be held liable for failing to deduct tax under section 192.

4. Assessee-in-Default Status under Section 201 Due to Retrospective Effect:
The Tribunal considered whether the assessees could be deemed "assessee-in-default" under section 201 due to the retrospective effect of explanations to section 17(2) inserted by the Finance Act, 2007. The Tribunal referred to the Supreme Court's decision in Arun Kumar & Ors., which clarified that a "concession" must be established for section 17(2)(ii) to apply. The Tribunal held that the retrospective amendment could not impose a liability on the employer to deduct tax retrospectively, as it would be impossible to comply with the retrospective requirement.

5. Liability for Interest under Section 201(1A) of the Income Tax Act:
The Tribunal addressed whether the assessees were liable for interest under section 201(1A) due to the alleged failure to deduct tax. The Tribunal referred to various judicial decisions, including the Supreme Court in CIT vs. Hindustan Electro Graphites Ltd., which held that interest could not be charged retrospectively on a liability created by a retrospective amendment. The Tribunal concluded that the assessees could not be held liable for interest under section 201(1A) as the liability to deduct tax did not exist at the time of salary payment.

Conclusion:
The Tribunal allowed the appeals, holding that there was no perquisite under section 17(2)(ii), Rule 3 could not be applied for valuation, the assessees were not liable for failing to deduct tax under section 192, could not be deemed "assessee-in-default" under section 201 due to retrospective effect, and were not liable for interest under section 201(1A).