2005 (1) TMI 332 - AT - Income Tax

Summary

Issues Involved:

1. Assessee in default for not deducting tax at source on payments to employees.
2. Nature of payments (reimbursement vs. allowance) and their taxability.
3. Bona fide belief and its impact on liability under sections 201(1) and 201(1A).
4. Exemption applicability under section 10(14) and relevant notifications.
5. Interest liability under section 201(1A).

Detailed Analysis:

1. Assessee in Default for Not Deducting Tax at Source:

The assessee was treated as an "assessee in default" for failing to deduct tax at source on various payments made to its employees, including refreshment expenses, shift allowance, transport expenses, laundry expenses, bonus, and estimated expenditures for expatriates and Indian managers. The Assessing Officer (AO) held that these payments were taxable and the assessee did not comply with the tax deduction requirements.

2. Nature of Payments and Their Taxability:

The primary contention was whether the payments were reimbursements or allowances. The AO and CIT (Appeals) held that these payments constituted "salary" under section 17(1) and were not mere reimbursements. The payments were made based on agreements with employees and were not contingent upon actual expenses incurred. Therefore, they were considered taxable as perquisites or profits in lieu of salary.

3. Bona Fide Belief and Its Impact on Liability:

The assessee argued that it acted under a bona fide belief that the payments were reimbursements and not taxable. The Tribunal noted that bona fide belief could be a defense against penalties but not against the primary liability under section 201(1). The Tribunal referenced various judgments to highlight that the correct legal position, not the assessee's belief, determines the liability for tax deduction at source.

4. Exemption Applicability Under Section 10(14):

The Tribunal examined whether the payments were exempt under section 10(14) and relevant notifications. It was found that transport expenses for sales staff were exempt under Notification No. GSR 606, dated 9-6-1989. However, other payments did not meet the exemption criteria. The Tribunal upheld the CIT (Appeals)'s decision that laundry expenses were exempt but rejected the exemption claims for other payments.

5. Interest Liability Under Section 201(1A):

The Tribunal held that interest under section 201(1A) is mandatory and compensatory for withholding tax that should have been paid to the exchequer. The Tribunal referenced multiple judgments to support this view. The Tribunal directed the AO to levy interest on the amounts where tax was not deducted, except for transport expenses for sales staff and laundry expenses, which were exempt.

Conclusion:

The Tribunal allowed the assessee's appeal against the order under section 201(1), holding that the assessee should not be treated as an assessee in default. However, the appeal against the order under section 201(1A) was only partly allowed, affirming the interest liability on most payments except those specifically exempted. The Tribunal directed the AO to provide the assessee an opportunity to furnish details for certain payments and to quantify the value of free or concessional air tickets for the purpose of interest calculation.