2025 (5) TMI 625 - HC - Income Tax

Notice u/s 201(1) issued when no failure on the part of the petitioner to deduct or deposit TDS - HELD THAT - It is important to note that the averment that the petitioner had deducted tax at a lower rate in regard to payments made to Sir Ganga Ram Hospital pursuant to a certificate dated 08.05.2015 is not controverted. Thus admittedly there is no material on record to suspect that the petitioner had failed to deduct TDS or deposit the same with the Income Tax Authorities. The allegation on the basis of which the impugned notice is stated to have been issued stands sufficiently addressed by the petitioner in its rejoinder affidavit. We do not consider it necessary to examine the larger question whether any notice for the purpose of verifying the details regarding deduction of payment of TDS can be initiated. It is clear in the present case that no proceedings u/s 201 of the Act are warranted in the case of the petitioner.It is clear in the present case that no proceedings under Section 201 of the Act are warranted in the case of the petitioner.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court include:

- Whether Section 201(1) of the Income Tax Act, 1961 contemplates proceedings akin to assessment proceedings for determining the obligation to deduct and deposit tax at source (TDS).

- Whether a notice under Section 201(1) can be issued absent any failure on the part of the petitioner to deduct or deposit TDS.

- Whether the issuance of the impugned notice dated 19.03.2021 under Section 201(1) of the Act was justified on the basis of alleged TDS default for FY 2015-16.

- The applicability of the proviso to Section 201(1) regarding exemption from being deemed an assessee in default if the resident payee has furnished return of income, accounted for the sum, and paid the tax due.

- Whether the petitioner's deduction of tax at a lower rate pursuant to a certificate from the Assessing Officer negates the allegation of default.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Nature and scope of proceedings under Section 201(1) of the Income Tax Act

The Court referred to the statutory language of Section 201, which provides that a person required to deduct tax at source but who fails to deduct or pay such tax shall be deemed an assessee in default. Sub-section (3) prescribes a limitation period for passing orders deeming a person an assessee in default.

The Court noted that Section 201(1) does not explicitly contemplate proceedings akin to assessment proceedings. Rather, it is triggered by a failure to deduct or deposit tax. The learned counsel for the Revenue contended that Section 201 incorporates an inbuilt procedure for verification and seeking information from the assessee regarding TDS deduction and payment. However, it was not disputed that a notice under Section 201(1) cannot be issued without a reasonable basis to believe that a default has occurred.

The Court observed that the Revenue's reliance on Section 201(1) for initiating proceedings presupposes the existence of material indicating failure to deduct or deposit TDS.

Issue 2: Justification for issuance of the impugned notice based on alleged TDS default

The impugned notice was issued on the basis of an auditor's report (Form No. 3CD) flagging deduction of tax at less than the specified rate on payments amounting to Rs. 23,85,46,666 under Section 194J of the Act for FY 2015-16. The Revenue asserted that this constituted a TDS default warranting proceedings under Section 201(1).

The petitioner countered this by producing a certificate dated 08.05.2015, obtained from the Assessing Officer, authorizing deduction of tax at a lower rate on payments exceeding Rs. 25,98,90,000 to Sir Ganga Ram City Hospital. This certificate was not controverted by the Revenue.

The Court emphasized that the uncontroverted existence of the certificate negated any material basis to suspect failure to deduct or deposit TDS. Consequently, the foundational premise for issuance of the impugned notice was undermined.

Issue 3: Application of the proviso to Section 201(1) and related provisions

The Court referred to the proviso to Section 201(1) which exempts a person from being deemed an assessee in default if the resident payee has furnished a return of income, accounted for the sum, and paid the tax due, supported by a certificate from an accountant. Although not directly engaged in this case, the Court noted the significance of this provision in limiting the scope of Section 201(1) proceedings.

Issue 4: Whether the impugned notice constituted an unwarranted or roving inquiry

The Revenue contended that the notice was not a roving or fishing inquiry but was based on specific information regarding lower rate deduction. The Court, however, found that since the petitioner had valid authorization for lower deduction rate, the notice lacked any substantive foundation. Therefore, the issuance of the notice was unwarranted in the facts and circumstances.

Conclusions on issues:

The Court concluded that Section 201(1) proceedings require a prima facie material indicating failure to deduct or deposit TDS, which was absent in this case due to the valid certificate authorizing lower rate deduction. The impugned notice was thus without basis and liable to be set aside.

3. SIGNIFICANT HOLDINGS

- The Court held that "Section 201(1) of the Act, essentially, stipulates that a person including the principal officer of the company, who is obliged to deduct TDS does not do so or fails to deposit the tax after deducting the same, would be deemed to be an assessee in default in respect of such tax."

- It was emphasized that "a notice under Section 201(1) of the Act cannot be issued if there is no ground to believe that there has been a failure on the part of the assessee to deduct and pay TDS."

- The Court noted that the petitioner had produced an uncontroverted certificate from the Assessing Officer authorizing deduction of tax at a lower rate, thereby negating any material basis for the allegation of default.

- The Court stated: "It is clear in the present case that no proceedings under Section 201 of the Act are warranted in the case of the petitioner."

- The impugned notice dated 19.03.2021 issued under Section 201(1) was set aside, and the respondents were restrained from initiating any proceedings pursuant to the said notice.