2023 (3) TMI 867 - HC - Income Tax

Demand u/s 201(1) - assessee in default - payments made to a non-resident - limitation being prescribed for the purpose of passing orders under Section 201(1) - payment made beyond reasonable period - reasonable period for the purpose of passing an order u/s 201(1) of the Act, deeming a person to be an assessee in default for failure to deduct tax at source in respect of payments to non-residents - HELD THAT - The object of TDS being common for payments both to residents and nonresidents, that the limitation prescribed by the legislature to pass orders u/s 201 (1) of the Act, deeming a person to be an assessee in default for failure to deduct tax at source in respect of payments to residents should be applied in respect of passing orders deeming a person to be an assessee in default for failure to deduct tax at source even in respect of payments to non-residents. Presumption of Reasonableness vis-a-vis legislative action - The legislature having prescribed the limitation for passing order u/s 201(1) of the Act deeming a person to be an assessee in default for failure to deduct tax at source in respect of payments to residents, the above prescription of limitation is instructive and would serve as a guide to the Courts in determining what would constitute a reasonable period under Section 201(1) of the Act deeming a person to be an assessee in default for failure to deduct tax at source in respect of payments to non-residents. Thus the limitation prescribed for passing orders under Section 201(1) of the Act deeming a person to be an assessee in default for failure to deduct tax at source in respect of payments to residents would constitute reasonable period in the absence of a legislative prescription of limitation for passing orders under Section 201(1) of the Act, deeming a person to be an assessee in default for failure to deduct tax at source in respect of payments to non-residents as well. Reasonableness not a static concept - Limitation introduced vide Section 201(3) of the Act while passing orders deeming a person to be an assessee in default for failure to deduct tax at source in respect of payments to residents which was originally fixed at four years and amended subsequently extending the limitation to six years with retrospective effect and thereafter to seven years, serves as a reflection of the legislature's recognition of the need for a longer period of limitation to make the provision effective. The need for reparation by way of successive amendments extending the limitation for deeming a person to be an assessee in default for failure to deduct tax at source in respect of payments to residents within a short period, is an outcome and result of experience. The above legislative action by way of extended period of limitation is indicative of the need to revisit the question as to what would constitute reasonable period for deeming a person to be an assessee in default for failure to deduct tax at source in respect of payments to non-residents and to provide for a longer period. In the circumstances, I am of the view that it is imperative to adopt the period of limitation prescribed by the legislature for passing order under Section 201(1) of the Act as constituting the reasonable period for passing orders under Section 201(1) of the Act deeming a person to be an assessee in default for failure to deduct tax at source in respect of payments to non-residents. Fiscal laws - Result of Trial and Error - The limitation for passing orders under Section 201(1) of the Act deeming a person to be an assessee in default for failure to deduct TDS on payments to residents has been extended in view of the inadequacy of the original period of limitation which was fixed at 4 years as a result of trial and error. The above legislative action providing and extending the limitation for passing orders under Section 201(1) of the Act with regard to residents as stated above is instructive and serves as a guide in determining the reasonable period for passing orders u/s 201 (1) of the Act deeming a person to be an assessee in default for failure to deduct TDS on payments to non-residents. The limitation for passing orders under Section 201(1) of the Act deeming a person to be an assessee in default for failure to deduct TDS on payments to residents must thus be adopted and treated as constituting reasonable period for the purpose of passing orders under Section 201(1) of the Act deeming a person to be an assessee in default for failure to deduct TDS on payments to non-residents. Impact of amendment vide the Finance Act 2014 extending period of limitation for passing orders under Section 201 of the Act, in respect of residents - As relying on B.K. Educational Services (P) Ltd. 2018 (10) TMI 777 - SUPREME COURT extended period of limitation of 7 years would be available for passing orders under Section 201(1) of the Act deeming a person to be an assessee in default for failure to deduct taxes in respect of payments to residents. The sequitur is that the reasonable period for passing orders under Section 201(1) of the Act deeming a person to be an assessee in default for failure to deduct taxes in respect of payments to non-residents shall also be 7 years from the end of the Financial year in which the payment is made or credit given w.e.f. 1.4.2010. As the challenge in these writ petitions were limited to the aspect of limitation which is clarified, it is left open to the petitioner to file appeals challenging the order on merits. If the petitioner raises the plea of limitation, the same shall be decided by the appellate authority in accordance with legal position clarified by this Court and it would also be open to the respondents to rely upon the Taxation and other Laws (Relaxation of Certain Provisions) Ordinance, 2020 No.2 of 2020 (TOLO) and the judgment of the Hon'ble Supreme Court in exercise of suo moto power Cognizance for Extension of Limitation, 2020 (5) TMI 418 - SC ORDER If the petitioner chooses to file an appeal, the time spent in these writ petitions shall stand excluded while reckoning limitation and the same shall be decided in accordance with law.

Summary

Issues Involved:
1. Limitation for passing orders under Section 201(1) of the Income Tax Act, 1961.
2. Determination of a reasonable period for passing such orders.

Issue-wise
Detailed Analysis:

1. Limitation for Passing Orders under Section 201(1) of the Income Tax Act, 1961:
The primary issue in this case was whether there is a prescribed limitation period for passing orders under Section 201(1) of the Income Tax Act, which deems a person to be an "assessee in default" for failure to deduct tax at source on payments made to non-residents. The petitioner argued that in the absence of a specific limitation period in the Act, such orders should be passed within a "reasonable period," which various High Courts have interpreted to be four years. The respondent, on the other hand, contended that it is impermissible to read a reasonable time period into the statute when the legislature has chosen not to prescribe one.

2. Determination of Reasonable Period for Passing Orders:
The petitioner cited several High Court judgments to support the claim that four years is a reasonable period for passing orders under Section 201(1) of the Act. However, the court noted that the legislative history showed successive amendments extending the limitation period for residents, reflecting a legislative intent to allow a longer period for passing such orders. The court concluded that the reasonable period for passing orders under Section 201(1) for non-residents should not be less than the period prescribed for residents, which is currently seven years.

Detailed Analysis:

Background and Legislative History:
The petitioner, engaged in mining and exploration, entered into agreements with a non-resident company for consultancy and other services but failed to deduct tax at source. The respondent issued show cause notices and passed orders deeming the petitioner to be an "assessee in default" for various financial years. The petitioner challenged these orders as being barred by limitation, arguing that they were made beyond a reasonable period.

Judicial Precedents:
The petitioner relied on several judgments, including Commissioner of Income-Tax v. NHK Japan Broadcasting Corporation and Vodafone Essar Mobile Services Limited v. Union of India, which held that four years is a reasonable period for passing orders under Section 201(1). The respondent argued that no limitation should be read into the statute and, if at all, the period should not be less than that prescribed for residents.

Court's Reasoning:
The court traced the legislative amendments to Section 201(1) of the Act, noting that while the original statute did not prescribe any limitation, subsequent amendments introduced and extended the limitation period for residents. The court emphasized that in the absence of a statutory prescription, orders must be passed within a reasonable period, which should be determined based on legislative intent and judicial precedents.

Determination of Reasonable Period:
The court referred to various judgments to conclude that the reasonable period for passing orders under Section 201(1) for non-residents should align with the period prescribed for residents. The court noted that the legislative amendments extending the limitation period for residents reflect a recognition of the need for a longer period to make the provision effective. Thus, the court held that the reasonable period for passing orders under Section 201(1) for non-residents is seven years from the end of the financial year in which the payment is made or credit is given.

Conclusion:
The court clarified that the reasonable period for passing orders under Section 201(1) of the Income Tax Act, deeming a person to be an "assessee in default" for failure to deduct tax at source on payments to non-residents, is seven years from the end of the financial year in which the payment is made or credit is given. The court disposed of the writ petitions, allowing the petitioner to file appeals challenging the orders on merits, with the time spent in these writ petitions excluded from the limitation period for filing appeals.