1999 (8) TMI 2 - SC - Income Tax

Held that assessee who made the payments to the three non-residents was under obligation to deduct tax at source under section 195 of the Act in respect of the sums paid to them under the contracts entered into ; and (ii) the obligation of the respondent-assessee to deduct tax under section 195 is limited only to the appropriate proportion of income chargeable under the Act, are correct.

Issues Involved:
1. Applicability of Section 195 of the Income-tax Act, 1961, to sums paid to non-residents.
2. Determination of the tax deductible on gross sums paid to non-residents.
3. Interpretation of the phrase "any other sum chargeable under the provisions of this Act" in Section 195.

Issue-wise Detailed Analysis:

1. Applicability of Section 195 of the Income-tax Act, 1961, to sums paid to non-residents:
The primary issue was whether Section 195 of the Income-tax Act, 1961, applies to payments made to non-residents, even if such payments do not wholly represent income. The Andhra Pradesh State Electricity Board (the Board) made payments to non-residents for the purchase of machinery and equipment and for services related to their erection and commissioning. The Income-tax Officer deemed the Board as an assessee in default for not deducting tax at source on these payments under Section 195. However, the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal ruled in favor of the Board, stating that Section 195 applies only to sums that are "pure income profits."

Upon appeal, the High Court reframed the question to determine if the Board was liable to deduct income-tax under Section 195 on payments made to non-residents and whether the tax deductible should be on the gross sum or only the income portion. The High Court concluded that the Board was indeed obligated to deduct tax at source under Section 195, but only on the income portion of the gross sums paid.

2. Determination of the tax deductible on gross sums paid to non-residents:
The High Court addressed whether the Income-tax Officer could enforce tax deduction at source on the entire gross amount of trading receipts or only on the portion chargeable as income. The court held that the obligation to deduct tax under Section 195 is limited to the appropriate proportion of income chargeable under the Act. This means that the tax should be deducted only on the income component embedded within the gross sum paid to non-residents.

The Supreme Court upheld this interpretation, emphasizing that Section 195(2) allows the payer to apply to the Income-tax Officer to determine the appropriate proportion of the sum chargeable to tax. This ensures that tax is deducted only on the income portion, safeguarding the rights of both the payer and the recipient.

3. Interpretation of the phrase "any other sum chargeable under the provisions of this Act" in Section 195:
The crux of the legal argument hinged on the interpretation of the phrase "any other sum chargeable under the provisions of this Act" in Section 195. The appellant contended that this phrase implies that tax should be deducted only when the sum paid is entirely income. However, the Supreme Court clarified that the phrase encompasses sums that may include income hidden or embedded within them. The court explained that the purpose of Section 195 is to ensure that tax is deducted on sums chargeable to tax under the Act, even if these sums are gross amounts that include both income and non-income components.

The Supreme Court referred to the scheme of Sections 195(1), 195(2), 195(3), and 197, which collectively ensure that appropriate tax is deducted at source, subject to regular assessment. The court emphasized that the statutory obligation to deduct tax at source is clear and unambiguous, and the rights of the parties are protected through provisions allowing for the determination of the appropriate proportion of the sum chargeable to tax.

Conclusion:
The Supreme Court upheld the High Court's findings that:
1. The Board was obligated to deduct tax at source under Section 195 on payments made to non-residents.
2. The obligation to deduct tax is limited to the appropriate proportion of income chargeable under the Act.
3. The phrase "any other sum chargeable under the provisions of this Act" includes sums that may contain both income and non-income components.

The appeals were dismissed with costs, affirming the obligation to deduct tax at source on the income portion of payments made to non-residents.

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