Question And Answer
Subject: Is there a time limit for holding an assessee in default for default of Tax Collection at source?
Category:  Income Tax
Asked by: CA Raghavendra
Answered by:
Tags: ,
Date: September 14, 2018
Query asked by CA Raghavendra

My client is liable to collect tax at source (TCS) @ 5% as per provisions of Section 206C(1) of the Income-tax Act but it has defaulted for non-collecting of TCS.

The default has occurred in F.Y. 2007-08 to 2014-14 relevant to assessment year 2008-09 to 2015-16.

The Assessing Officer proceeded to pass order U/s 206C(6)/206C(7) of the Act on 30/03/2016 whereby the assessee was held as “assessee in default” within the meaning of Section 206C(6) read with Section 206C(7) of the Act for non-collection of tax including interest.

Is the AO justified in his action?

Section 206C or any other provisions of the Income Tax Act does not provide any limitation for passing the order by the Assessing Officer U/s 206C(6)/206C(7) of the Act holding the assessee in default due to failure to collect tax at source.

However, non-providing the limitation in the statute would not confer the jurisdiction/powers to the Assessing Officer to pass order U/s 206C at any point of time disregarding the amount of time lapse from such default of collection of tax at source.

In a number of judgements of the High Court and the ITAT it has been held that if the contention of the revenue is accepted that the Assessing Officer is free to initiate the action and pass the order U/s 206C at any time depending upon the circumstances of the case, it would amount to give an unfettered powers to the Assessing Officer to take action at any point till an indefinite period.

It was emphasized that such interpretation or inference would defy or defeat the very purpose and scheme of the statute and further the concept of finality of matters. Hence, in such a situation, a reasonable time period is allowed to the taxing authority for a particular action or an order to be passed otherwise it would lead to unregulated powers and authorities to the taxing authority.

The law is to be followed by the authorities concerned as well as the persons governed by the said law and therefore, in absence of the limitation on the powers of the taxing authority, it would allow the misuse of such powers and provisions of the Act.

It is pertinent to note that when a limitation is not provided in statute for a specific purpose then the limitation provided for the purpose of completing the assessment would be a proper guidance for taking the reasonable time period within which an order has to be passed by the taxing authority.

An identical situation was prevailing in respect of the order passed U/s 201(1)(201(1A) of the Act prior to the amendment vide Finance Act, 2009 w.e.f. 01/4/2010 whereby subsection (3) was inserted to Section 201 of the Act and limitation has been provided for passing the order U/s 201(1) and 201(1A) of the Act.

When this issue of limitation for passing the order U/s 201(1)/201(1A) of the Act came before the Courts, it was held that the Assessing Officer cannot be given unfettered powers which can be exercises even beyond a reasonable time because of non-providing the limitation in the statute.

Hence, the courts have taken a consistent view that reasonable time period for passing the order U/s 201(1)/201(1A) of the Act would be four years. The Hon’ble Delhi High Court in the case of CIT Vs. NHK Japan Broadcasting 305 ITR 137 has considered and decided this issue in para 18 to 25 as under:

“18. Insofar as the Income-tax Act is concerned, our attention has been drawn to section 153(1)(a) thereof which prescribes the time-limit for completing the assessment, which is two years from the end of the assessment year in which the income was first assessable. It is well-known that the assessment year follows the previous year and, therefore, the time-limit would be three years from the end of the financial year. This seems to be a reasonable period as accepted under section 153 of the Act, though for completion of assessment proceedings.

The provisions of re-assessment are under sections 147 and 148 of the Act and they are on a completely different footing and, therefore, do not merit consideration for the purposes of this case.

19. Even though the period of three years would be a reasonable period as prescribed by section 153 of the Act for completion of proceedings, we have been told that the Income-tax Appellate Tribunal has, in a series of decisions, some of which have been mentioned in the order which is under challenge before us, taken the view that four years would be a reasonable period of time for initiating action, in a case where no limitation is prescribed.

20. The rationale for this seems to be quite clear – if there is a time-limit for completing the assessment then the time-limit for initiating the proceedings must be the same if not less. Nevertheless, the Tribunal has given a greater period for commencement or initiation of proceedings.

21. We are not inclined to disturb the time-limit of four years prescribed by the Tribunal and are of the view that in terms of the decision of the Supreme Court in Bhatinda District Co-op. Mil (P.) Union Ltd.’s case (supra) action must be initiated by the competent authority under the Income-tax Act where no limitation is prescribed as in section 201 of the Act within that period of four years.

22. Learned counsel for the revenue submitted that the Department came to know that the assessee was an assessee in default only in November, 1998 when a survey was conducted and it came to be known only then that when the assessee had not deducted tax at source on the global salary.

We are of the opinion that the date of knowledge is not relevant for the purposes of exercising jurisdiction insofar as the provisions of the Income-tax Act are concerned. If it were so, the limitation period, as for example prescribed under section 147/148 of the Act would become meaningless if the concept of knowledge is imported into the scheme of the Act.

23. The second part of the argument of learned counsel for the revenue in this regard was that the question of limitation did not at all arise because the assessee had itself admitted its liability and it voluntarily paid the tax and interest on that amount. Again, we are not in agreement with learned counsel for the revenue in this regard.

24. It appears that the assessee paid the tax voluntarily as well as interest thereon but the acceptance of the liability by the assessee would not by itself extend the period of limitation nor would it extend the reasonable time that is postulated by the scheme of the Income-tax Act. The assessee cannot be put, in a sense, in a worse position merely because it has admitted its liability.

If the assessee had denied its liability the question that would have arisen would be whether the revenue could have initiated proceedings after a lapse of four years. The answer to that would of course have to be in the negative in view of the reason that we have already indicated above. The fact that the assessee agreed to pay the tax voluntarily cannot put the assessee in a situation worse than if it had contested its liability.

25. We may also note that under section 191 of the Act, the primary liability to pay tax is on the person whose income it is that is the deductee. Of course, a duty is cast upon the deductor, that is the person who is making the payment to the deductee, to deduct tax at source but if he fails to do so, it does not wash away the liability of the deductee. It is still the liability of the deductee to pay the tax.

In that sense, the liability of the deductor is a vicarious liability and, therefore, he cannot be put in a situation which would prejudice him to such an extent that the liability would remain hanging on his head for all times to come in the event the Income-tax Department decides not to take any action to recover the tax either by passing an order under section 201 of the Act or through making an assessment of the income of the deductee.”

The Hon’ble High Court was of the view that the time limit for completing the assessment as per Section 153(1)(a) is two years from the end of the assessment year in which the income was first assessable which was considered as reasonable period for passing the order U/s 201(1)/201(1A) of the Act. The Hon’ble High Court has turned down the contention of limitation provided U/s 147/148 of the Act and hence, it was observed that three years would be a reasonable period as prescribed by Section 153 for completion of proceedings.

However, since the Tribunal in a series of decisions had taken a view that the period within which the order U/s 201(1)/201(1A) shall be passed would be four years and therefore, the Hon’ble High Court has refrained from disturbing the view taken by this Tribunal.

Following the said decision, the Hon’ble Delhi High Court in a subsequent decision in the case of Vodafone Essar Mobile Services Ltd. Vs Union of India & ors. (2016) 385 ITR 436 (Del) has reiterated the view taken in the case of CIT Vs NHK Japan Broadcasting. The Hon’ble Gujarat High Court in the case of Tata Teleservices Vs. Union of India & Anr. has held in paras 15 and 16 as under:

“15. Considering the law laid down by the Hon’ble Supreme Court in the aforesaid decisions, to the facts of the case on hand and more particularly considering the fact that while amending section 201 by Finance Act, 2014, it has been specifically mentioned that the same shall be applicable w.e.f. 1/10/2014 and even considering the fact that proceedings for F.Y. 2007-08 and 2008-09 had become time barred and/or for the aforesaid financial years, limitation under section 201(3)(i) of the Act had already expired on 31/3/2011 and 31/3/2012, respectively, much prior to the amendment in section 201 as amended by Finance Act, 2014 and therefore, as such a right has been accrued in favour of the assessee and considering the fact that wherever legislature wanted to give retrospective effect so specifically provided while amending section 201(3) (ii) of the Act as was amended by Finance Act, 2012 with retrospective effect from 1/4/2010, it is to be held that section 201(3), as amended by Finance Act No.2 of 2014 shall not be applicable retrospectively and therefore, no order under section 201(i)of the Act can be passed for which limitation had already expired prior to amended section 201(3) as amended by Finance Act No.2 of 2014. Under the circumstances, the impugned notices / summonses cannot be sustained and the same deserve to be quashed and set aside and writ of prohibition, as prayed for, deserves to be granted.

16. In view of the above and for the reasons stated above, all these petitions succeed. The impugned notices / summonses are held to be invalid and the same are hereby quashed and set aside and the respondents herein are hereby restrained by writ of prohibition from proceedings with the impugned notices / summonses which are, as such, hereby quashed and set aside”.

Thus, the Hon’ble High Court has specifically dealt with the issue of applicability of amendment brought to the provisions of Section 201 of the Act and held that the proceedings in the assessment year 2007-08 and 2008-09 had become time barred as the limitation U/s 201(3) has already expired and otherwise amendment cannot be applicable retrospectively. The Hon’ble Gujarat High Court in the case of CIT (TDS) Vs. Anagram Wellington Assets Management Co. Ltd. (supra) has again considered this issue and held in para 7 as under:

“7. It is true that it is the duty of the assessee to deduct TDS and the question is whether it is likely to cause any loss to the revenue if it is not deducted in time. If TDS is not deducted, it is required to be paid in the first installment of advance tax, which is required to be paid within four months from the date of filing of return.

Therefore, even if the contention of Mr. Bhatt is accepted, loss that may be caused to the revenue is only to the tune of interest of four months on delayed payment of tax. Not only that when the declaration about this is made in the return, it comes within the knowledge of the Assessing Officer even if the TDS is not deducted. Therefore, we are of the view that the period of four years is reasonable period and we concur with the view taken by the Delhi High Court. It is true that the Court cannot legislate the Act, however, the Assessing Officer also cannot be given unfettered powers, which he can exercise even beyond the reasonable period of four years.

Therefore, in our view, period of four years is just and proper and the Tribunal has not committed any error while passing the impugned order. Therefore, all these appeals are dismissed. The questions posed for our consideration are answered in favour of the assessee and against the revenue.”

Thus, four years time period was considered as reasonable period for passing the order U/s 201(1)/201(1A) of the Act. We find that the similar view has been taken by the Hon’ble Andhra Pradesh High Court in the case of CIT Vs. U.B. Electronics Instruments Ltd. (2015) 371 ITR 314 (AP) as well as by the Hon’ble Kerala High Court in the case of CIT(TDS) & Anr. Vs Bharat Hotels Limited (2016) 384 ITR 77 (Karn.). The Hon’ble Karnataka High Court has dealt this issue in para 23 to 27 as under:

“23. In the memorandum explaining the provisions in the Finance (II) Bill, 2009, it was clearly stated that ‘to provide sufficient time for pending cases, it is proposed to provide that such proceedings for a financial year beginning from 1st April, 2007 and earlier years can be completed by the 31st March, 2011. As such, the memorandum itself clarified that the proviso is for pending cases, and not decided cases.

The Circular dated 3.6.2010, issued by the CBDT, also clearly specifies that the said proviso would be for pending cases and not decided cases. With regard to the applicability of the amendment made by the Finance Act, 2009 with effect from 1.4.2010, it was also clarified to be from the assessment year 2011-12 and subsequent years.

As such, it is clear that proviso to sub-section (3) did not legalize the cases where action had already been taken, but was meant for only such cases which were pending at the time of insertion of sub-section (3) to Section 201 of the Act.

24. Thus, for the reasons given above, we find that the Tribunal was correct in holding that the order passed under Sec.201 (1) and (1A) of the Act on 28.1.2008 for the assessment year 2002-03, would be barred by limitation as the period of limitation would be four years from the end of the financial year in question. As such, we answer the first question raised in this appeal, in favour of the respondent assessee and against the Revenue.

25. Now, coming to the second question of law, it is true that in view of the first question having been decided in favour of the assessee, this question remains only academic in nature. However, since the question would be relevant for the other assessment years (more particularly, assessment year 2004-05 and 2005-06), the appeals regarding which assessment years are also connected with this appeal, learned counsel for both the parties submitted that this question may also be considered and decided in this appeal, which would then govern the other appeals of the Revenue filed against the same assessee.

26. Sri K V Aravind, learned counsel for the Revenue has submitted that sub-section (1A) of Section 201 of the Act provides for payment of interest. The sub-section, as it stood at the relevant time, prior to 1.7.2010, reads as under:

“(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 the whole or any part of the tax 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 ‘one per cent for every month or part of a month 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 and such interest shall be paid before furnishing the statement in accordance with the provisions of sub-section (3) of Section 200.”

The said sub-section clearly provides that interest would be payable from the date on which such tax was deductible, i.e., the date when payment was made by the assessee to the Recipient; till the date on which such tax was actually paid, i.e., tax was deposited by the Recipient.

27. The provision for tax deduction at source is only a mechanism for collection of tax by the payer, even though the liability to pay tax is that of the Recipient. The provision for payment of interest under sub-section (1A) of Section 201 of the Act is only of compensatory nature.

It cannot be a means to penalise the payer. The provision for payment of interest would arise from the date when it ought to have been deducted i.e., from the date of payment by the payer to the Recipient.
The liability to pay interest would end on the date when such tax has been deposited by the Recipient, either by way of advance tax or along with the return of income. Interest, herein, being compensatory in nature, cannot be thus charged for the period beyond the date when such tax has already been deposited by the Recipient.

If the Revenue is permitted to charge interest even after the Recipient has deposited the tax, the same would amount to undue enrichment of the Revenue, as even after receiving the tax, it would continue to get interest on the amount which has already been paid or deposited with it. As such, the liability of the assessee herein would not be for payment of interest after the period of deposit of tax by the Recipient.”

This view of the High Courts has been followed by the ITAT in ITO vs. Eid Mohammad Nizamuddin ITA No. 316/JP/2018 Assessment Year :2009-10.

The ITAT noted that a consistent view has been taken by the various Hon’ble High Courts on this issue that when no limitation is provided in the statute then a period of four years is considered as reasonable for passing the order U/s 201(1)/201(1A) of the Act. The provisions of Section 206C of the Act are analogous and a measure for compliance of collection of tax at source as a similar measure for compliance of deduction of tax at source is provided U/s 201 of the Act.

It was noted that the department has accepted those decisions and consequently brought amendment to the provisions of Section 201 and thereby provided the limitation for passing the orders U/s 201(1)/201(1A) of the Act which was inline with the view taken by the Hon’ble High Courts on this issue.

Though, subsequently an amendment vide Finance Act, 2014 was again brought in the said provisions of Section 201 enlarging the period of limitation, however, the said amendment is not retrospective.

The ITAT held in ITO vs. Eid Mohammad Nizamuddin that the liability of tax collected at source is also a vicarious liability of the assessee to assist the department in the measure to avoid any possibility of tax avoidance by the persons with whom the specific transactions have been entered into by the assessee.

The analogy and reasoning given in the decisions of various Hon’ble High Courts cited supra in respect of the limitation for passing the order U/s 201 of the Act was also held applicable for considering the reasonable time period for passing the order U/s 206C of the Act.

The provisions of Section 201 and 206C of the Act has the same scheme and object being the measures against the avoidance of tax by the opposite parties with whom the assessee had the transactions.

Hence, applying the reasonable period of limitation as four years within which the Assessing Officer could pass the order U/s 206C(6)/206C(7) of the Act, the ITAT held that the impugned order passed by the Assessing Officer on 30/3/2016 is beyond the said reasonable period of limitation and consequently is invalid being barred by limitation and quashed the order passed U/s 206C(6)/206C(7) of the Act.

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