2008 (7) TMI 284 - HC - Income Tax

Failure to deduct tax at source - assessee, a non-resident foreign company - another non-resident foreign company has engaged the assessee in the business of exploration/production of mineral oils, which did not deduct tax at source u/s 195 on payment to assessee held that it was the duty of the non-resident foreign company to deduct the tax at source assessee is not liable to pay interest u/s 234B for default on part of that foreign company (employer) in deducting TDS

Summary

Issues:
1. Interpretation of section 234B of the Income-tax Act, 1961 regarding the liability to pay interest for defaults in payment of advance tax.
2. Determining the liability of an individual assessee for interest under section 234B when tax deduction at source was the responsibility of the employer company.

Analysis:
1. The judgment involved two appeals under section 260A of the Income-tax Act, 1961, concerning the liability of the assessee to pay interest under section 234B. The common question of law was whether interest is payable by the assessee under section 234B despite the income being subject to tax deduction at source. The appeals were related to assessment years 1996-97 and 1997-98, where the Income-tax Appellate Tribunal had ruled in favor of the assessee, stating that the interest was not payable under section 234B.

2. The assessee, a non-resident foreign company engaged in exploration of mineral oils, was assessed under section 44BB of the Income-tax Act, 1961. The dispute arose as to whether the individual assessee was liable to pay interest under section 234B when the employer company failed to deduct tax at source as required under section 195 of the Act. The Assessing Officer had charged interest under section 234B, leading to appeals and subsequent rulings by the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal.

3. The court analyzed the relevant provisions of the Income-tax Act, including sections 208, 209, and 234B. Section 234B outlines the payment of interest for defaults in advance tax payment. The court considered arguments from both parties, where the appellants contended that the assessee should be liable for interest due to the employer company's failure to deduct tax at source. In contrast, the respondent argued against holding the individual assessee responsible for the employer's negligence.

4. Referring to previous case law, the court cited judgments such as CIT v. Century Building Industries P. Ltd. and CIT v. Sedco Forex International Drilling Co. Ltd. The court noted that when the employer failed to deduct tax at source, the individual assessee could not be held accountable for the employer's actions. Drawing from established legal principles, the court concluded that the individual assessee cannot be made liable to pay interest under section 234B for the employer's default in tax deduction at source.

5. Based on the analysis of relevant legal provisions and precedents, the court dismissed both appeals, affirming the rulings of the Income-tax Appellate Tribunal. The court held that the individual assessee was not liable to pay interest under section 234B due to the employer company's failure to deduct tax at source. The judgment clarified the legal position on the issue, providing a comprehensive interpretation of the applicable provisions of the Income-tax Act in the context of the case at hand.