WHETHER THE ASSESEE WHO BECAME LIABLE TO PAY THE TAX AS IT WAS NOT DEDUCTED AT SOURCE ALSO BECAME LIABLE TO PAY INTEREST UNDER SECTION 234B OF THE INCOME TAX ACT, 1961?

[Mr. M. GOVINDARAJAN]

INTRODUCTION: 

                        Part A of Chapter XVII of the Income Tax Act, 1961 (‘Act’ for short) deals with the general provision for the collection and recovery of tax.   Sec. 190(1) provides that notwithstanding the fact that the regular assessment in respect of any income is to be made in a later assessment year, the tax on such income shall be payable by deduction at source or by advance payment in accordance with the provisions of this Chapter.  Section 191 provides that in case of income in respect of which a provision is not made under this Chapter for deducting income tax at the time of payment and in any case, where income tax has not been deducted in accordance with the provisions of this Chapter, the income tax shall be payable by the assessee directly. 

TAX DEDUCTED AT SOURCE:     

                        Part B of Chapter XVII of the Act deals with deduction of tax at source.  Sec. 192 to 206B of the Act deals the same.  Section 192(1) provides that any person responsible for paying any income chargeable under the head ‘salaries’ shall at the time of payment, deduct income tax on the amount payable at the average rate of income tax computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee under the head for that financial year.  Section 200 provides that the person who deducts tax is required to pay the same to the Central Government within the prescribed period and a certificate for the tax deducted is required to be issued under Section 203 to the person from whom the tax has been deducted. 

                        Section 201 provides that if the person responsible to deduct the tax at source fails to deduct the whole or any part of the tax or after deducting the tax fails to pay the tax as required under the Act, the person responsible would be treated as an assessee in default in respect of the tax.  Section 201(1A) provides that if such person does not deduct the tax or having deducted, failed to pay the tax, he shall be liable to pay simple interest at 15% per annum on the amount of such tax from the date on which it was deductible to the date on which it was actually paid.   Under Section 204 the expression ‘the person responsible for paying’ in the case of payment of income chargeable under the head ‘salaries’ means the employer. 

                        From the combined reading of the above said sections, it is clear that as soon as tax is deducted at source by the person responsible to make the payment, the liability of the assessee to pay the tax gets discharged.   If the tax is not deducted, it remains payable by the assessee directly.  The assessee is required to pay the tax directly which would be at the stage of self assessment and not by way of advance tax.  The liability to pay interest under Section 201(1A) is on the person who fails to deduct the tax at source is absolute and is upon the person responsible for deducting at source till the date it was actually paid. 

ADVANCE PAYMENT OF TAX: 

                        Part C of Chapter XVII of the Act deals with the advance payment of tax.   Section 207 provides that the tax shall be payable in advance during a financial year in accordance with the provisions of Sections 208 to 219 of the Act, in respect of the total income of the assessee which would be chargeable to tax.  Section 208 provides that advance tax is payable during the financial year where the amount of such tax payable by the assessee during that year, as computed in accordance with provisions of this Chapter exceeds the prescribed amount or more.  The amount of advance tax payable by an assessee in the financial year shall be computed in accordance with the method provided under Sec. 209 of the Act.  While computing the advance tax payable under Section 209 the income tax calculated is required to be reduced by the amount of income tax which would be deductible during the financial year in accordance with the provisions of Sections 192 to 194, 194A, 194C, 194D and 195. 

                        Section 234B of the Act provides that where the advance tax paid by an assessee under the provisions of Section 210 is less than 90% of the  assessed tax, the assessee shall be liable to pay simple interest at the rate of one and one fourth per cent for every month or part of a month comprised in the period from the 1^st day of April next following such financial year to the date of determination of total income under Section 143(1) where a regular assessment is made, to the date of such regular assessment on an amount equal to the assessed tax or, as the case may be, on the amount by which the advance tax paid as aforesaid falls short of the assessed tax. 

ISSUE: 

                        The issue taken up for discussion in this article is whether the assessee who became liable to pay the tax as it was not deducted at source also became liable to pay interest under Section 234B of the Act.   The issue will be discussed with decided case laws. 

CASE LAWS:             

                        In ‘CIT V. Madras Fertilizers Limited’ – 1983 -TMI - 27991 – (MADRAS High Court) the Madras High Court held that whenever there was a possibility of deduction of tax at source, the person who had failed to deduct the tax at source was liable to pay interest and not the assessee as otherwise there would be charging of interest twice on payment of tax in relation to the same income. 

                        In ‘CIT V. Ranoli Investment P Limited’ 1998 -TMI - 16558 – (GUJARAT High Court) the High Court held that the liability to pay interest is on the payer for non deduction of tax under Section 215 of the Act and that the assessee was not liable to pay interest. 

                        In ‘Sedco Forex International Drilling Co. Limited’ – 2003 -TMI - 11559 – (UTTARANCHAL High Court) the High Court held that interest was not payable by the assessee under Section 234B of the Act on account of non deduction of tax at source by the employer.   

                        In ‘CIT V. Halliburton Offshore Services Inc.’ 2004 -TMI - 10846 – (UTTARANCHAL High Court) the High court held that the income tax appellate tribunal was justified in holding that interest under Section234B of the Act could not be charged since the entire income of the assessee was subject to TDS whereas interest was chargeable on the assessed tax as defined by Explanation 1 under Section 234 B of the Act. 

                        In ‘CIT V. Tide Water Marine International Inc.’ – 2008 -TMI - 32735 – (UTTARAKHAND HIGH COURT) the assessee was subject to tax deduction at source.  The assessee was a non resident foreign company and was engaged by another non resident company M/s Hundai Heavy Industries Co., Ltd in the business of exploration and production of mineral oils.   The employer M/s Hundai Heavy Industries Co. Ltd. did not deduct the tax at source from the income of the assessee.   The Assessing Officer, while assessing the tax of the assessee on the income shown in its return, directed that interest would be charged under Section 234B of the Act, since advance tax was not paid.   The assessee being aggrieved, filed an appeal which was dismissed and thereafter filed a second appeal before the Income Tax Appellate Tribunal, who allowed the appeal holding that the interest was not payable by the assessee under Section 234B of the Income Tax Act as the assessee himself was not liable to deduct the source in order to pay advance tax under Section 208 of the Act.   The Department being aggrieved by the order of the Tribunal filed an appeal before the High Court under Sec. 260A of the Act.   The High Court dismissed the appeal and affirmed the order of the Tribunal holding that the assessee was not liable to pay interest under Section 234B of the Act for the default committed by the employer, who was liable to deduct the tax at source. 

                        In ‘DIT V. Maersk Co. Ltd’ – (2011) 334 ITR 79 (Uttarkhand) (FB) the assessee is a non resident company and had a contract for supply of technicians to ONGC in respect of which hire charges had been received by it.  MCL was required to provide technicians to ONGC.  The Department treated the assessee (MCL) as an agent of the employees and issued a notice under Section 148.  The Assessing Officer assessed the income of the assessee under Sections 143(3)/147 and 163 of the Act and held that since the income of the assessee under the agent company was liable to pay interest under Sections 234A and 234B of the Act.   The assessee filed appeal against this order.   The appellate authority partly allowed the appeal and remitted the matter to the Assessing Officer to reconsider the levy of interest under Sec. 234B of the Act.  The Department being aggrieved against the order filed an appeal before the Income Tax Appellate Tribunal who dismissed the appeal being devoice of merit.   The Department filed appeal before High Court.  The Division Bench held that if the assessee is liable to be taxed in India, then it is obligation to pay advance tax and if he fails to pay the advance tax he is liable to pay interest thereon under Section 234B of the Act.    Since this view is contrary to the decision taken by the Division Bench in another case ‘CIT V. Tide Water Marine International Inc’ (Supra) the matter was referred to Larger bench. 

                        Before the Full Bench the Department put forth the following arguments: 

• In the facts and circumstances of the present case, section234B of the Act was applicable and that the assessee was liable to pay interest for non payment of the advance tax;
• Section 234B was applicable to income falling under the head ‘salaries’;
• Under Section 191 in case of a failure to deduct tax at source by the employer, the tax had to be paid by the assessee and, in case of a short fall in the payment of advance tax by the assessee, interest was liable to be paid under Section 234 B of the Act;
• Even where the employer did not deduct tax at source under Sec. 192 the assessee still incurred the liability to pay interest under Section 234B of the Act;
• There was no bar in imposition of interest simultaneously on the employer under Section 201(1A) or on the assessee under Section 234B and the Department had an option to recover interest either from the employer or from the assessee;
• The provisions of Sec. 234B are mandatory and, therefore, interest under all circumstances was liable to be paid by the assessee. 

The assessee put for the following arguments: 

• The advance tax is required to be paid in accordance with the provisions of Chapter XVII C of the Act;
• Under Section 191 income tax is payable by the assessee at the stage of self assessment and not by way of advance tax and that the tax is payable during the assessment proceedings;
• Under Section 192(1) the employer is liable to deduct the tax at source on the income under the head ‘salaries’ at the rates in force on the estimated income;
• The assessee, who is a salaried employee, is not required to pay advance tax on his salaried income inasmuch as the obligation is put upon the employer under Section 192(1) of the Ac to deduct the tax at source and if there was a short deduction of the tax at source then, in such a case, the Department had a right to move against the employer under Section 201 of the Act for the recovery of the balance tax;
• Where any income was liable to tax deducted at source, Section 234B of the Act was not applicable;
• Section 191 only created a liability upon the assessee to pay the tax deductible at source, but the said provision does not include the liability for payment of interest chargeable under Section 234 B on the assessee for failure on the part of his employer to deduct the tax at source. 

The Full Bench is of the view that the assessee was not liable to pay advance tax under Section 208 of the Act inasmuch as the tax at source was required to be deducted by the person responsible for paying any income chargeable under the Head ‘Salaries’ at the time of payment under Section 192 of the Act.   The assessee only became liable to pay the tax directly under Section 191 of the Act since it was not deducted at source.   The stage for making payment of tax could only arise at the stage of self assessment which is to be made in a later assessment year as is clear from Section 190 of the Act, whereas advance tax is liable to be paid in a financial year only and not thereafter.  If the employer fails to deduct the tax at source, while paying any income chargeable under the head ‘salaries’ would be responsible for payment of interest under Sec. 201(1A) of the Act.   The Full Bench held that the assessee would not be liable to pay interest under Section 234B of the Act since he was not liable to pay advance tax under Section 208 of the Act.