Assessee Not Liable To Pay Interest U/s. 234B On Short Payment Of Advance Tax Due To Non-Deduction Of TDS By Payer, Prior To FY 2012-13: Supreme Court
A two-judge Bench of Justice L. Nageswara Rao and Justice Aniruddha Bose observed that Section 209 of the Income Tax Act, 1961, which relates to the computation of advance tax payable by the assessee cannot be ignored while construing the contents of Section 234B of the Act, which relates to interest levied in case of default in the payment of advance taxes.
The Court held, "…in view of the proviso to Section 209 (1) (d), pursuant to which if the assessee receives any amount, including the tax deductible at source on such amount, the assessee can not reduce such tax while computing its advance tax liability."
In this case, the Assessee-Respondent was a non-resident Japanese Company having its operations in India. The Respondent was issued a notice under section 143(2) of the IT Act and an assessment order was passed by the Assessing Officer. The Appellant had contended that a part of the Respondent's income formed a part of its activities in India and was therefore liable to pay tax in India under the Double Taxation Avoidance Agreement between India and Japan along with the relevant provisions of the IT Act.
Series of appeals were filed before the Commissioner of Tax (CIT), with respect to the levy of interest under section 234B of the IT Act, which were dismissed. Aggrieved, the Respondent appealed to the Income Tax Appellate Tribunal (ITAT), which ruled in favor of the Respondent. The ITAT held that the Respondent was not liable for payment of interest under Section 234B when tax at source was deductible from the payment made to the Respondent. This order of the ITAT was then challenged before the High Court. The High Court upheld the order of the ITAT. Aggrieved, the Appellant, i.e., the Revenue, filed an appeal before the Supreme Court. The issue before the Court related to the liability of the assessee to pay interest on short payment of advanced tax due to the default of the payer in not deducting the tax at the time of the payment according to the provisions of the Act.
The Appellant contended that Section 234B is compensatory in nature. The interest component of the Section is meant to compensate the Government for the loss accrued in terms of the tax which became due but was not paid.
It was further contended that "when there are two modes of recovery of tax, i.e., one from the assessee and other from the payer who had an obligation to deduct tax, the choice of the Revenue regarding the mode of recovery cannot be restricted." The Appellant argued that the High Court had made a serious error in the interpretation of the phrases "deductible or collectible at source." According to the Appellant, "the phrase "deductible or collectible at source" would not take into its fold tax which was not deducted within the statutory time limit and was, in fact, paid to the assessee without deduction."
However, the Respondent contended that Section 234B of the Act cannot be read in isolation but should be construed in light of Section 209 of the Act. The Respondent further submitted that deduction of tax at source and payment of tax are two different components of tax-recovery under the Act. According to Respondent, the assessee cannot be penalized for default on the part of the payer
The Court noted that a proviso was inserted into Section 209 (1) (d) of the Act by the Finance Act, 2012. This proviso, the Court noted, "is in the nature of an exception to Section 209 (1) (d), as an assessee, who has received any income without deduction or collection of tax, is made liable to pay advance tax in respect of such income."
Coming to the interpretation of the phrase "deductible or collectible at source", the Court observed, "The dispute relating to the interpretation of the words "would be deductible or collectible" in Section 209 (1) (d) of the Act can be resolved by referring to the proviso to Section 209 (1) (d), which was inserted by the Finance Act, 2012. The proviso makes it clear that the assessee cannot reduce the amounts of income-tax paid to it by the payer without deduction while computing liability for advance tax. The memorandum explaining the provisions of the Finance Bill, 2012 provides necessary context that the amendment was warranted due to the judgments of courts, interpreting Section 209 (1) (d) of the Act to permit computation of advance tax by the assessee by reducing the amount of income-tax which is deductible or collectible during the financial year."
The Court further noted, "If the construction of the words "would be deductible or collectible" as placed by the Revenue is accepted, the amendment made to Section 209 (1) (d) by insertion of the proviso would be meaningless and an exercise in futility. To give the intended effect to the proviso, Section 209 (1) (d) of the Act has to be understood to entitle the assessee, for all assessments prior to the financial year 2012-13, to reduce the amount of income- tax which would be deductible or collectible, in computation of its advance tax liability, notwithstanding the fact that the assessee has received the full amount without deduction."
While concluding, the Court observed that there was no force in the contention of the Appellant that Section 234B should be read in isolation, without any reference to other provisions of Chapter XVII of the Act. In this regard, the Court held, "The liability for payment of interest as provided in Section 234B is for default in payment of advance tax. While the definition of "assessed tax" under Section 234B pertains to tax deducted or collected at source, the pre-conditions of Section 234B, viz. liability to pay advance tax and non- payment or short payment of such tax, have to be satisfied, after which interest can be levied taking into account the assessed tax. Therefore, Section 209 of the Act which relates to the computation of advance tax payable by the assessee cannot be ignored while construing the contents of Section 234B."
The Court upheld the impugned order of the Delhi High Court and observed, "…the Revenue is not remediless and there are provisions in the Act enabling the Revenue to proceed against the payer who has defaulted in deducting tax at source. There is no doubt that the position has changed since the financial year 2012-13, in view of the proviso to Section 209 (1) (d), pursuant to which if the assessee receives any amount, including the tax deductible at source on such amount, the assessee can not reduce such tax while computing its advance tax liability."
Accordingly, the appeals were dismissed.