Sharing insights. News Alert 25 April, 2011

Transcription

1 Sharing insights News Alert 25 April, 2011 Interest under section 234B not payable by employee where salary income is subject to tax deduction at source under section 192 In brief Facts In a recent ruling, in the matter of Maersk Co. Ltd. as an agent of Mr Henning Skov ( employee ) 1, the Full Bench of the Uttarakhand High Court has held that where there is a failure on part of the employer to deduct tax at source on an employee s salary income, the employee only becomes liable to pay the tax directly under section 191 of the Income-tax Act, 1961 ( the Act ), but is not liable to pay interest, payable for failure to pay advance tax under section 234B of the Act. The assessee, Maersk Co. Ltd. ( MCL ), a non-resident company, had a contract for supply of technicians to the Oil and Natural Gas Corporation ( ONGC ). The Assessing Officer ( AO ) treated MCL as an agent of the employees and issued a notice of re-assessment under section 148 of the Act. 1 Maersk Co. Ltd. v. DIT [2011-TII-16-HC-UKHAND-LB-INTL] 1

2 The AO, considering MCL as an agent of Mr Henning Skov (the employee), 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 head Salaries had not been subjected to withholding of tax at source ( TDS ), the agent company was liable to pay interest under sections 234A and 234B of the Act. The Commissioner of Income-tax (Appeals) partly allowed the appeal and remitted the matter to the AO to reconsider the levy of interest under section 234B of the Act, relying upon a decision of the Division Bench of Uttarakhand High Court in the case of Sedco Forex International Drilling Co. Ltd. 2 The Revenue filed an appeal before the Income Tax Appellate Tribunal ( ITAT ), which was dismissed. A Division Bench of the High Court while hearing the present appeal held that the decision of the Division Bench in Sedco Forex International Drilling Co. Ltd. (supra) was distinguishable and was not directly applicable to the case in hand. Furthermore, it did not agree with the decision of another Division Bench in the case of Tide Water Marine International Inc. 3. The Division Bench held that if the assessee was liable to be taxed in India, then, it was his obligation to pay advance tax and, if he failed to pay the advance tax, he was liable to pay interest under section 234B of the Act. Since the view of the Division Bench was contrary to the view taken by the same Division Bench in the case of Tide Water Marine (supra), the matter was referred to a Larger Bench. Issue The following issue was placed before the Larger Bench: Whether interest under section 234B of the Act was not chargeable as the payments were subject to tax deduction at source under section 192 of the Act Revenue s contentions The Revenue contended that interest under section 234B of the Act should be levied on the assessee for the following reasons: Section 234B of the Act was applicable to income falling under the head Salaries and that the assessee was liable to pay interest for non-payment of advance tax As per section 191 of the Act, in the case of a failure to deduct tax at source by the employer, the tax had to be paid by the assessee and, in the case of a shortfall in the payment of advance tax by the assessee, interest was liable to be paid under section 234B of the Act Even where the employer did not deduct the tax at source under section 192 of the Act, the assessee still incurred the liability to pay interest under section 234B of the Act There was no bar in imposing interest simultaneously on the employer under section 201(1A) of the Act or on the assessee under section 234B of the Act and that the Revenue had an option to recover interest either from the employer or from the assessee 2 CIT & another v. Sedco Forex International Drilling Co. Ltd. [2003] 264 ITR 320 (Uttarakhand) 3 CIT & another v. Tide Water Marine International Inc. [2009] 309 ITR 85 (Uttarakhand) 2

3 The provisions of section 234B of the Act are mandatory and, therefore, interest under all circumstances was liable to be paid by the assessee Assessee s contentions The assessee contended that interest under section 234B of the Act should not be levied for the following reasons: Under section 191 of the Act, income tax is payable by the assessee at the stage of self-assessment or after a tax assessment and not by way of advance tax Under section 192(1) of the Act, the employer is obliged to withhold tax at source on the income under the head Salaries at the rates in force on the estimated income If there is a shortfall in the tax deducted at source, then the Revenue has a right to initiate proceedings against the employer under section 201 of the Act for the recovery of the balance tax with interest as provided under section 201(1A) of the Act Where any income was liable to tax deduction at source, section 234B of the Act is not applicable Section 191 of the Act only creates a liability upon the assessee to pay the tax required to be deducted at source, where it was not deducted, but the said provisions does not provide for payment of interest chargeable under section 234B of the Act High Court ruling The Full Bench of the High Court referred to various relevant sections of the Act and allowed the assessee s appeal. It held as under: Section 191 of the Act provides that in the case of income in respect of which a provision is not made for deduction of income tax at the time of payment and, in any case, where income tax has not been deducted, income tax shall be payable by the assessee directly Section 192(1) of the Act 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 this head for that financial year. Thus, it is clear that tax in such a case would be required to be deducted at source at the time when payment is being made to the payee and not thereafter at any subsequent stage From a combined reading of sections 190, 191, 192, 198, 200, 201, 203 and 204 of the Act, it is clear that as soon as tax is deducted 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 directly payable by the assessee as provided under section 191 of the Act. Furthermore, the liability to pay interest under section 201(1A) of the Act is on the person who fails to deduct tax at source, and this lasts until the date the tax is actually paid When the tax is not deducted, 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 statute has taken care of the liability for the assessee under section 191 of the Act to pay the tax required to be deducted at source directly, if it has not 3

4 been deducted by the person responsible for deducting the tax. The loss of interest on the amount of tax suffered by the Revenue would be compensated by the person responsible for deducting the tax, namely, the employer as provided under section 201(1A) of the Act The payment of tax and interest has been separately dealt with under the Act. The liability to pay interest under section 234B arises only if the assessee who is liable to pay advance tax has failed to pay such tax or where the advance tax paid by the assessee is less than 90% of the assessed tax Advance tax on the salary of an employee is not payable under section 208 of the Act by the assessee, as the obligation to deduct tax at source is upon the employer under section 192 of the Act The assessee cannot foresee that the tax required to be deducted under a statutory duty imposed upon the employer would not be so deducted. The employee assessee proceeds on an assumption that the tax has been deducted at source or would be deducted and a certificate to that effect would be issued to him. Consequently, the liability to pay interest in respect of such an amount required to be deducted is therefore clearly excluded The liability to pay interest under section 234B of the Act is different and distinct in as much as the interest could only be imposed on the person who had defaulted, which in the present case is the employer, for not making deduction of tax at source as required under section 192 of the Act 1. CIT v. Madras Fertilizers Ltd. [1984] 149 ITR 703 (Mad) 2. CIT v. Ranoli Investment P. Ltd & others [1999] 235 ITR 433 (Guj) 3. CIT & another v. Sedco Forex International Drilling Co. Ltd. [2003] 264 ITR 320 (Uttarakhand) 4. CIT & another v. Halliburton Offshore Services Inc. [2004] 271 ITR 395 (Uttarakhand) 5. CIT & another v. Tide Water Marine International Inc. [2009] 309 ITR 85 (Uttarakhand) In light of this, the assessee was not liable to pay advance tax under section 208 of the Act as the tax was required to be deducted at source by the person responsible for paying 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 where the tax was not deducted at source. 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. Conclusion This decision fortifies and follows the earlier decisions rendered on the ratio that if an employer has failed to deduct tax at source from the salary payable to the assessee, then the assessee is not liable to pay interest under section 234B of the Act since there is no liability on the assessee to pay advance tax. Reliance was placed on the following decisions where it was held that the assessee was not liable to pay interest under section 234B of the Act on account of non-deduction of tax at source by the employer or where the entire income was subject to deduction of tax at source. 4

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