TMI Blog2006 (5) TMI 50X X X X Extracts X X X X X X X X Extracts X X X X ..... f the case, the Tribunal was justified in holding that no penalty under section 221 is leviable on the tax deductible at source and non-deduction of tax being held for good and sufficient reasons ?" RA Nos. 202 to 209 (Jp.) of 1991 "1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in invoking the provisions of section 231 of the Income-tax Act, 1961, and thus holding the levy of interest as barred by time? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that no interest under section 201(1A) is leviable on the tax deductible at source, the non-deduction of tax being held for good and sufficient reasons ?" these contracts to sub-contractors for which commission at 3 per cent. was charged, which was declared as its taxable income. 3.Section 194C was inserted in the Income-tax Act, 1961, by the Finance Act, 1972, with effect from April 1, 1972. Under sub-section (1) of section 194C, any person responsible for paying any sum to any resident for carrying out any work (including supply of labour for carrying out a work) in pursuance of contract between the contractor and the various ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st time, two consolidated notices were issued to the assessee, one under section 221 and another under section 201(1A) on February 26, 1983, calling upon the assessee to show cause why simple interest at 12 per cent. per annum be not charged under section 201(1A) up to the date of the credit of payment in the account of sub-contractor and why penalty under section 221 be not levied on the assessee. 6. The assessee had replied that the notice issued on February 26, 1983 for recovery of any amount relating to non-deduction of tax at source up to the financial year closing on March 31 1981 was barred by time in terms of section 231. It was contended that the assessee has not deducted tax at source from those sub-contractors who did not have taxableincome. 7. While the Assessing Officer found vide order dated November 1, 1984, that the assessee had deducted tax at source in respect of three sub-con tractors who had taxable income, namely, M/s. Sushil Construction Company, M/s. Sanjay Construction Company and M/s. Ramesh Construction Company. On these points the Income-tax Officer said in his order that the default in respect of which the assessee has failed to deduct the tax as per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the tax at source. It was also found that the position in relation to the penalty under section 221 is similar. The penalty could not have been imposed automatically and, secondly, because there was a disobedience beyond section 194C(2). 10. No allegation of default as referred to by the authority is made by the Revenue. Secondly, interest and penalty levied by the Assessing Officerwere deleted in toto in the aforesaid circumstances. The aforesaid two sets of questions have been referred to this court for its opinion. 11. Question No. 1 relates to the limitation within which recovery proceedings could have been initiated in respect of tax to be deducted at source ne tinder section 194C(2). Section 231 since omitted from the statute with ye effect from April 1, 1989, by the Direct Tax Laws (Amendment) Act, 1987, reads as under: "231. Period for commencing recovery proceedings. Save in accordance with the provisions of section 173 or sub-section (7) of section 220, no proceedings for the recovery for any sum payable under this Act shall be commenced after the expiration of three years ax from the last day of the financial year in which the demand is made, or, in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the financial year in which the assessee is deemed to be in default, it is necessary to consider the provisions under which the assessee is deemed to be in default in respect of his obligation to deduct tax at source and the financial year in which the assessee is deemed to be in default in respect of each of the assessment years in question. 14. It may also be noticed here that one basic concept in respect of the assessment year is that it relates to a definite accounting period, the income earned during which is to be assessed for the concerned assessment year. The accounting period is technically described as "previous year" vis-a-vis assessment year. The previous year in relation to which assessment is to be made for any assessment year comes to a close before the commencement of any assessment year. Every assessment year commences each year on 1st of April of a calendar year and closes on 31st March of succeeding year. Thus, the assessment year 1974-75 commenced on April 1, 1974, and ended on March 31, 1975. The previous year in rela tion to the assessment year 1974-75 is the accounting period closing on March 31, 1974. Applying this principle for the assessment years 197 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be considered whether the officer concerned had jurisdiction to initiate such proceedings on February 26, 1983, when he issued notice for the first time. 18. This takes us to the provisions relating to collection and recovery of tax under Chapter XVlI of the Act of 1961 which consists of section 190 to section 234D. Section 190 provides the various modes of collection of tax which include by deduction at source or by advance payment or by payment under sub-section (1A) of section 192. In the present case, we are not concerned with the liability of the assessee to make direct payment of tax payable by him in respect of his income but we are concerned with the provisions relating to deduction of tax at source where the person obligated to deduct certain amount of tax at source is himself not liable for any tax on the income embedded in the payments made by him but which belongs to the recipient of such payment. The provisions relating to deduction at source are contained in respect of various payments from sections 192 to 196B. We are herewith concerned with the obligation cast under section 194C to which we have adverted to earlier. Under these provisions the duty is cast upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company, as the case may be, has without good and sufficient reasons failed to deduct and pay the tax. (1A) Without prejudice to the provisions of sub-section (1), if any such person, principal officer or company as is referred to in that sub-section does not deduct or after deducting fails to pay the tax as required by or under this Act, he or it shall be liable to pay simple interest at eighteen per cent. per annum on the amount of such tax from the date on which such tax was deductible to the date on which . such tax is actually paid." 21. The statutory consequence of not deducting the amount when required to be deducted or not making the payment after such deduction has been made within the time prescribed are two-fold. It provides that if any such person is required to deduct tax at source does not deduct or after deducting fails to pay such tax as required for or under this Act or it shall without prejudice to any other consequences which may be incurred, be deemed to be assessee-in-default in respect of tax, so as to attract penalty imposable id n the assessee-in-default in terms of section 221. Apparently, if the assessee had deducted the tax in accordance with the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of any sort was taken by the respondents to effect the recovery proceedings for recovering the sums which were required to be deducted by the assessee according to the Income-tax Officer as and when payments were made by him to his subcontractors. In other words, no proceedings were ever taken for recovering the principal sum or interest accrued on the sum liable to be deducted by the assessee up to the end of financial year 1981-82 in respect of which alone the recovery proceedings were initiated. 25 If the principal sum itself has not been sought to be recovered, the next question arises whether there can be any recovery proceedings in respect of interest. It appears to us that if the recovery of the principal sum is not per missible, the recovery of interest thereon also is not permissible as the interest is only ancillary and adjunct to the principal sum as its servicing charges. The very concept of interest is to compensate the person to whom the money belongs by the person who has used that money. So far as the principal sum is recoverable, the interest is also recoverable. It is immaterial whether the creditor insists upon the recovery of the entire sum including intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment under which tax becomes payable only upon service of a notice of demand under section 156. The reason is that no liability arises in such a case until service of a notice of demand, because the liability to pay tax, until determined by means of a proper assessment, remains merely ambulatory, and becomes fixed only upon the completion of the assessment and demand. . . 29. Thus, laying the foundation of distinction, the court observed: "On the other hand, sections 195, 200 and 201 deal with a liability which is at no time ambulatory, but which is attracted immediately upon the happening of an event, namely, payment and failure to deduct under section 195 or failure to credit the sum deducted as required by section 200. As soon as such failure occurs, the liability arises once and for all, and there is no further requirement of computation or assessment. Once the liability is incurred, no further demand is necessary to recover the tax and the interest due thereon, unless the Revenue were to initiate proceedings for imposition of penalty in terms of the proviso to section 201(1) read with section 221." 30. Considering that the liability of tax and interest being automatic a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed at source either against the respondent-contractor or against the person by n the income may have actually been earned so as to make him liable to tax.The notice of recovery of the sum liable to be deducted at source by .respondent-assessee for failure to deduct tax at source within financial year up to 1980-81 has become barred by time. 35. In view of the aforesaid discussion, we hold that the Tribunal was right In holding that the recovery of interest in respect of the principal sum required to be deducted at source by the assessee has also become barred bytime under the provisions of section 231, along with recovery of the principle sum becoming barred by time. 36. So far as question No. 2 is concerned, it need not be answered for the present purposes in view of the answer to the first question. However, prima facie, we are of the opinion that the existence of good and sufficient reasons of not deducting the tax which was required to be deducted at source but not deducted, or if deducted not deposited within time prescribed is not germane for the purpose of levy of interest. For the purpose of not deducting tax at source or non the tax deducted at source, existence of go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, from time to time, direct, so, however, that the total amount of penalty does not exceed the amount of tax in arrears : Provided that before levying any such penalty, the assessee shall be given a reasonable opportunity of being heard: Provided further that where the assessee proves to the satisfaction of the Assessing Officer that the default was for good and sufficient reasons, no penalty shall be levied under this section." 40. Rest of the provisions, we are not concerned with the present purpose. 41. Section 221 provides general provision for levy of penalty in case the assessee is deemed to be in default. Section 201 while laying down the rule when a person is liable to pay any sum to the Central Government under section 194C is deemed to be in default, made a specific provision in respect of penalty to be imposed under section 221 on any person deemed to be in default for the reason that he has not deducted the tax at source when the assessee was required to do so under the provisions of the Act or after deduction he failed to deposit the same as required under the Act. 42 The proviso to section 201(1) reads as under : "Provided that no penalty shall be charged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on record any material that the assessee has not deposited tax without any good and sufficient reason is a finding of fact and cannot be interfered while considering the question in the jurisdiction under section 256. 46. As a result, question No. 2 referred in this regard is answered in the affirmative that is to say in favour of the assessee and against the Revenue and we hold that the Tribunal was justified in deleting the penalty. 47. In view of our conclusion of question No. 2, question No. 1 has become of academic importance however, prima facie we are of the opinion that the principle on which recovery of non-deduction of tax at source or non-depositing of tax deducted at source which becomes barred by limitation under section 231, is not applicable to recover penalty imposed under sec tion 221. The liability to pay the penalty under section 221 does not arise automatically. Levy of penalty depends on making an order to this effect in appropriate proceeding under section 221 and a notice of demand has to be issued before this amount of penalty becomes payable. Hence, until levy of penalty and issue of notice of demand for such penalty levied, the assessee does not become ..... 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