2021 (4) TMI 276 - HC - Income Tax

Assessee in default u/s 201(1) - non deduction of tax at source from the amount when such amount had not accrued to payee or any person at all - HELD THAT - If an assessee fails to deduct the TDS as required under the provisions of the Act, he is treated as assessee in default. Section 194C(1) of the Act mandates that a person who makes a payment to any non resident Indian, has to deduct the tax at the time of payment. Similar language is employed in Section 194J, 194H and 194I. Thus, the tax is required to be deducted at the time when the payment is made. The Supreme Court in SHOORJI VALLABH DAS 196 2 (3) TMI 6 - SUPREME COURT has held that income tax is a levy on income and the Act takes into account two points of time at which the liability to tax is attracted i.e., accrual of income or its receipt but substance of the matter is the income. It has further been held that if the income does not result at all, there cannot be a levy of tax even though in book keeping entry is made about a hypothetical income which does not materialize. In the instant case, the provisions were created during the course of the year and reversal of entry was also made in the same accounting year. The Assessing Officer erred in law in holding that assessee should have deducted tax as per the rate applicable along with interest. The authorities under the Act ought to have appreciated that in the absence of any income accruing to anyone under the Act, the liability to deduct TDS on the assessee could not have been fastened and consequently, the proceeding under Section 201 and 201(1A) could not have been initiated. For the aforementioned reasons, the substantial question of law is answered in favour of the assessee and against the revenue.

Summary

Issues:
Assessment of liability for non-deduction of tax at source under Section 201(1) of the Income Tax Act, 1961 for an amount not accrued to payee.

Analysis:
1. The appeal pertained to the Assessment Year 2012-13, where the assessee, a Joint Venture engaged in manufacturing vehicles, made provisions for expenses as per Accounting Standard -29. The Assessing Officer treated the assessee as "assessee in default" under Section 201(1) for not deducting tax at source from an unutilized provision amount of ?8,71,32,988. The total payable amount was determined as ?17,10,879.

2. The Commissioner of Income Tax (Appeals) and the tribunal affirmed the Assessing Officer's order. The assessee contended that no tax liability could be imposed as the unutilized provision amount was not payable to anyone and did not accrue as income. Citing legal precedents, the assessee argued that no tax could be levied in the absence of income accrual.

3. The Revenue argued that tax should be deducted when provisions are made, and the order of assessment is based on entries in the books of accounts. They maintained that the assessee was liable to deduct tax under various sections of the Act and supported the tribunal's decision.

4. The Court examined Sections 201(1) and 201(1A) of the Act, emphasizing that an assessee failing to deduct TDS as required is deemed an assessee in default. It noted that tax deductions were required when payments were made, i.e., when income accrued under the Act.

5. Referring to legal precedents, including the Supreme Court's decision in SHOORJI VALLABH DAS, the Court emphasized that tax liability arises upon income accrual. It held that in the absence of income accrual, there is no obligation to deduct tax at source. The Court concluded that as no income accrued to anyone, the liability to deduct TDS could not be imposed on the assessee, quashing the orders of the lower authorities.

6. Consequently, the Court ruled in favor of the assessee, allowing the appeal and quashing the orders of the tribunal, Commissioner of Income Tax (Appeals), and the Assessing Officer.