A and M AGENCIES vs COMMISSIONER OF INCOME TAX

The assessee complains that the amount sought to be recovered from the assessee as the amount of tax which the assessee had an obligation to pay u/s 197 of the Income Tax Act, 1961 (hereinafter referred to as ''the Act''), but had not paid, is not payable by the petitioner.

The assessee was the agent of the third respondent who had supplied goods to the assessee on credit. It is after expiry of the last date of the credit that the assessee was required to pay to the principal through its banker, the interest incurred by the principal for the period beyond the period of credit, as also a further sum equal to 31 per cent of the amount in arrears. The assessee had made such payment to the principal through the banker. The assessee, however, failed to deduct the tax on the amount of interest and the amount described as penalty which amount was paid along with interest through its banker. Such payments were made during the years 1981-82 to 1984-85.

The assessing officer, in the year 1985 on 29-11-1985, raised the demand on the assessee for the payment of the amount of tax which, according to the revenue, should have been deducted from the amount paid as interest and penalty to the principal. He treated the amount that was described by the assessee as penalty as nothing, but additional interest paid to his principal. The assessee has averred that no order has been passed against the assessee u/s 201 of the Act, treating the assessee as an assessee in default by reason of the failure to deduct the amount of tax which was required to be deducted u/s 194A of the Act. That averment of the assessee has remained unrebutted. The assessee''s case, therefore, must be considered on the basis that there is no order u/s 201 holding that the assessee is to be deemed as assessee in default in respect of the tax required to be deducted from the amount of interest and penalty paid to his principal.

The assessee, being aggrieved by the demand, applied to the Commissioner u/s 264 of the Act. The Commissioner has rejected the revision petition holding that the assessee was liable to pay the amount demanded as he had admittedly failed to deduct the tax at the time of paying the interest and penalty. He rejected the assessee''s argument that the amount described by the assessee''s principal as penalty did not form part of the interest. He also held that he has no power to waive the recovery of tax. Before the Commissioner, the question of limitation was not raised.

At the time of hearing, the counsel for the assessee sought leave to raise the question of limitation. He was permitted to argue that point as a point of law and the facts necessary for raising the same are already on record and not in dispute. The assessment years for which demand had been raised are 1981-82 to 1984-85. The date of demand was on 29-11-1985. Section 231 of the Act, as it stood at the relevant time, prescribed a period of limitation of one year for commencing recovery proceedings against a person who is deemed to be an assessee in default under any of the provisions of the Act, that period of one year to be computed from the end of the financial year in which the assessee is deemed to be in default. The financial years in which the assessee was required to deduct the tax and make payment are the years immediately preceding the financial years ended on 31-3-1984 and earlier years. The notice of the demand issued on 29-11-1985 was clearly beyond the period of one year from 31-3-1984. In respect of the earlier years also, it is patently beyond the time prescribed u/s 231. Though there is considerable merit in the statement made by the counsel for the revenue that the amount characterised by the assessee''s principal as penalty is in fact an amount required to be regarded as interest having regard to the definition of the term in section 2(28A) of the Act, which defines ''interest'' to mean not only interest payable on moneys borrowed or debt incurred, but also any service fee or other charge in respect of such borrowing or debt incurred, the amount of penalty is in fact a charge relatable to the debt incurred by the assessee by reason of non-payment of the value of the goods in time and, therefore, has to be regarded as interest with the consequent liability to deduct the tax on that account; as the proceedings for recovery were initiated after the period of limitation, the proceedings cannot be regarded as having been lawfully instituted.

6.The learned counsel for the assessee also contended that the amounts had been paid to a bank and, therefore, the assessee was not required to deduct the tax. As rightly pointed out by the counsel for the revenue, the amount was not paid to the bank for being detained by it but had been paid to the bank, which had merely acted as an agent of the assessee''s principal for the purpose of collection of the amount and that did not constitute a payment exempting deduction of tax at source u/s 97A of the Act.

Thus, though the assessee was required to deduct the tax and has failed to do so and in the normal circumstances, was a person who was liable to be treated as an assessee in default, as the assessing officer has failed to treat him as an assessee in default by passing an appropriate order u/s 201 and the proceedings for recovery had not been initiated until 29-11-1985, long after one year from the end of the financial year in which the assessee was required to deduct the tax, the proceedings must be held to be illegal. The impugned order of the Commissioner as also of the assessing officer requiring the assessee to pay the amount demanded as the amount of tax which the assessee was required to deduct, but failed to deduct on the interest and other amounts paid to the principal during the financial years which are relevant to the previous years for these assessment years, therefore, have to be and held to be unsustainable in law and to that extent set aside.