D.C. Agrawal, A.M.
These four appeals, two by the department and two by the assessee involve common issue of collection of deficit tax under section 201 and interest under section 201(1A) on non-deduction of tax at source by the employer (i.e. M/s. Excel Industries Ltd., the assessee) on payment of salary by not including therein conveyance allowance paid by it to its employees. Since facts are common, they are disposed off by this common order for convenience.
The facts of the case are that : for the assessment year 1996-97, the assessee filed annual return of salary under section 206 read with. Rule 36 on 30-5-1996 declaring total TDS at Rs. 71,74,672. On being asked to furnish the details in respect of salaries paid as well as to explain the nature of perquisites and allowances paid, the assessee submitted the details from time to time. One of the details so furnished was as under :
"The calculation of income-tax by disallowing the conveyance allowance in respect of Employees of the company amounting to Rs. 4,60,832 is as under :
817 staff members
Rs. 18.22 lakhs,
IT Rs. 3,99,562
503 worker members
Rs. 2.96 lakhs,
IT. Rs. 61,270
1320 total employees
Rs. 21.18 lakhs,
IT Rs. 4,60,832'
The assessing officer considered that conveyance allowance was taxable (sic) perquisite under section 17(2) and hence the employer was required to deduct the tax on payment of conveyance allowance. For non-deduction of tax at source on payment of conveyance, he ordered collection of deficit tax of Rs. 4,60,832 under section 201(c). For this, he advanced following reasoning :
"I have considered the submissions made by the assessee but I am unable to agree with the same. The word 'perquisite' is defined under section 17(2) of the Act. As per clause (iv) thereof perquisite will include any sum paid by the employer in respect of any obligation which but for such payment would have been payable by the assessee. As held by the Hon'ble Supreme Court in 53 ITR 91 in the case of CIT v. L.W. Russel, a benefit or advantage would be taxable as perquisite it has a legal origin. By virtue of memorandum of undertaking, as already stated, the above conveyance allowance at fixed rate was agreed to be paid on monthly basis. It is not denied that but for such conveyance allowance payment, the employees were expected to attend duties spending out of their pocket to reach the work place and return. The employer can exempt only such payments as are covered by section 10(14) of the Act. For conveyance payments incurred in the discharge of duties after reaching office are separately claimed by the assessee under conveyance travelling. The amount that was paid to the employees were 'for the performance of duties' and this cannot be on par with in the performance of duties' as inserted in section 10(14) of the Act. Moreover, that section contemplates actual expenses incurred. Here in assessee's case, may be employees spent for auto/taxi etc. But no evidence vests with the company to show actual expenses incurred which is a primary condition for considering applicability of section 10(14) of the Act.
The specific provisions for exempting conveyance allowance did not exist in the years relevant to assessment year under consideration. The circular No. 196 dated 31-8-1976 relied by the assessee would not apply because, the disbursing office did not use his discretion in exempting conveyance allowance in some cases and taxing the same in rest of the cases, The said circular applies only where the DDO had been satisfied that conveyance allowance was exempt under section 10(14) of the Act. But in assessee's case, invariably all employees were exempted from purview of tax on conveyance allowance payment. In my view standard deduction admissible in each employee's case takes care of necessary deduction due to employees for incidental expenses of commutation to attend the job. The employer, therefore, was not right in giving separate exemption of conveyance allowance. The assessee is hence held to have not deducted tax as required under the Act, liable for tax under section 201 (1) of the Act."
The assessing officer also charged interest of Rs. 3,96,864 under section 201(1A) for failure to deduct tax on payment of conveyance allowance to the salaried employees. The assessee filed an appeal before Commissioner (Appeals), who agreed with the reasoning of the assessing officer, that conveyance allowance was taxable on perquisite, hence employer, i.e., the assessee was required to deduct the tax on payment of the same. The assessee had raised the issue of inordinate delay in passing the order under section 201/201(1A). The annual return was filed on 30-5-1996, whereas the common order under these two sections was passed on 23-3-2001, i.e., beyond the period of four years. The assessee relied on the decisions :
1. Traco Cable Ltd. v. CIT (1987) 166 ITR 278 (Ker)
2. Bal Krishna Das v. CIT (1976) 103 ITR 825 (Delhi)
for the proposition that orders passed under section 201 after the lapse of 4 years is bad in law. The Commissioner (Appeals), however, did not agree with the assessee on this proposition as it involved interpretation of section 231, which was withdrawn w.e.f. 1-4-1989. Hence, it would not have any application to assessment year 1996-97.
While dealing with quantum of deficient tax and interest, the Commissioner (Appeals) considered non-deduction of tax from payment of conveyance allowance to 503 workers to whom Rs. 2.96 lakhs was paid, proper as conveyance allowance paid to them was actually incurred for conveyance for official duties. However, in respect of payment of Rs. 18.22 lakhs to 817 staff members, the Commissioner (Appeals) held that these employees had taxable income and moreover, it was granted to commute between residence and place of work. His reasonings, to hold assessee in default and hence liable to interest and deficient tax, were recorded in paras 10-19 of his order.
In nutshell the reasonings of the Commissioner (Appeals) are that :
(i) Expenses incurred or reimbursed for travelling prior to reaching and after leaving the office will not qualify for exemption under section 10(14) and they will form part of salary within the meaning of section 17(2).
(ii) As per decision in Dr. Reddy's Laboratories Ltd. 88 ITR 104 (sic), the phrase 'wholly and exclusively' used in section 10(14) does not cover expenditure/re-imbursement for commuting between residence and office (place of work).
(iii) As per decision in LIC Class-I Officers (Bombay) Association v. LIC of India (1998) 229 ITR 510 (Bom), conveyance allowance paid to an employee for commuting from office to residence is not exempt under section 10(14).
Thus, he allowed partial relief in respect of a sum of Rs. 2.96 lakhs paid as CA to a group of employees who were drawing low salary. The assessee is in appeal against the confirmation of part of penalty and interest in respect of payment of Rs. 18.22 lakhs of CA. Whereas the department is in appeal against relief in interest and penalty allowed by the Commissioner (Appeals) in respect of amount of Rs. 2.96 lakhs. Thus, there are four appeals to be disposed off.
Before us, the learned AR of assessee submitted that :
(1) The annual return of salaries under section 206 read with section 192 of the Income Tax Act, 1961 and with rule 37 of the Income Tex Rules, 1962 was filed on 30-5-1996 wherein the total tax deducted at source amounted to Rs. 71,74,672.
(2) The Assistant Commissioner (TDS) issued a notice dated 5-8-1997 under section 133(6) of the Act, requiring the appellant to submit details in respect of the salaries paid as well as to explain the nature of perquisites and allowances paid and the amounts claimed as exempt under section 10 of the Act.
(3) In response to the aforesaid notice the appellant appeared before the assessing officer in December, 1997 and submitted the requisite details.
(4) Subsequently, in January 2001, the assessing officer called for further details and fixed hearing in February, 2001.
(5) Accordingly, the appellant submitted various details vide letters dated 28-2-2001 and 12-3-2001.
(6) In the letter dated 28-2-2001 the appellant had submitted detailed notes in respect of various queries raised by the assessing officer. In respect of conveyance allowance it was stated that although it was termed as an allowance it was in fact a reimbursement made to the employees towards petrol/maintenance of cars and drivers' salaries for cars used for official duties, subject to a fixed limit-as per the norms laid down by the appellant.
(7) It was further clarified that in respect of employees not provided with a car by the appellant nor having a car of their own, reimbursement towards conveyance expenses was made for commuting to and from the office and residence through the salary slip. The amount reimbursed towards conveyance expenses was fixed depending on the grade of employee.
(8) It had been further clarified that the aforesaid reimbursement of conveyance expenses was not treated as perquisite under section 17 in view of the explanation to sub-section (2) of the Act and accordingly was treated as exempt under section 10(14) of the Act.
(9) For this proposition reliance was placed on the circular Nos. 23 dated 9-9-1956 and 196 dated 31-3-1976 issued by the CBDT.
For the proposition that there was inordinate delay and hence order under section 201(1) is bad in law, learned authorised representative of assessee relied on the following decisions :
(1) Raymond Woollen Mills Ltd. v. ITO (1996) 57 ITD 536 (Bom)
(2) Government of India v. Citadel Fine Pharmaceuticals (1990) 184 ITR 467 (SC)
(3) Bal Kishan Das v. CIT (1976) 103 ITR 825 (Del)
(4) CIT v. Dunlop Rubber Co. (India) Ltd. (1986) 121 ITR 476 (Cal)
(5) Gujarat Narmada Valley Fertilisers Co. Ltd. v. ITO (1999) 71 ITD 66 (Ahd)
(6) Traco Cable Co. Ltd. v. CIT (1987) 166 ITR 278 (Ker)
(7) Indian Airlines Ltd. v. Asstt. CIT (1996) 59 ITD 353 (Mum)
(8) A & M Agencies v. CIT (1999) 239 ITR 136 (Bom)
On the other hand, learned DR heavily relied on the order of Assessing Officer and partly on the orders of Commissioner (Appeals) for the proposition that conveyance allowance is taxable and hence the employer-assessee ought to have included the same while computing the income of the employees. He pleaded for reversal of the order of Commissioner (Appeals) in respect of that part, in which he has allowed relief to the assessee and, thus, restore the entire order of assessing officer.
We have heard the rival submissions and examined the facts and materials on record and perused the relevant provisions of law and citations relied upon by the parties. It is an admitted position that interest under section 201(1A) is mandatory and there is no question of considering a reasonable cause for non-payment of tax deducted at source in time. This view has been consistently taken by Hon'ble Bombay High Court in Pentagon Engg. (P) Ltd. v. CIT (1995) 212 ITR 92 and in its earlier decision in Bennet Coleman & Co. Ltd. v. Mrs. V.P. Damle, Third Income Tax Officer (1986) 157 ITR 812 (Bom). This view was subsequently followed in Ernakulam District Co-op. Bank Ltd. v. Asstt. CIT (2005) 272 ITR 95 by Hon'ble Kerala High Court and by Hon'ble Calcutta High Court in Kanoi Industries (P) Ltd. v. Assistant CIT (2003) 261 ITR 488 and in Grindlays Bank Ltd. v. CIT (1993) 200 ITR 441, wherein it has been held that where a person has failed to either deduct tax or after deducting failed to pay the same to the credit of Central Government, he can be subjected to recovery proceedings, which are available under the Act. In CIT v. K.K. Engg. (2001) 249 ITR 447, Hon'ble Kerala High Court held that interest under section 201(1A) is mandatory and automatic. In CIT v. Dhanalakshmy Weaving Works (2000) 245 ITR 13 (Ker), it was held that such interest is compensatory and not penal. Having said so it is to be seen as to when and under what circumstances interest under section 201(1A) can be levied.
Section 201(1A) reads as under :
"201. Consequences of failure to deduct or pay-(1). If any such person referred to in section 200 and in the cases referred to in section 194, the principal officer and the company of which he is the principal officer 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, without prejudice to any other consequences which he or it may incur, be deemed to be an assessee in default in respect of the tax :
that no penalty shall be charged under section 221 from such person, principal officer or company unless the Assessing Officer is satisfied that such person or principal officer or 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 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 fifteen 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.
(2) Where the tax has not been paid as aforesaid after it is deducted, the amount of the tax together with the amount of simple interest thereon referred to in sub-section (1A) shall be a charge upon all the assets of the person, or the company, as the case may be, referred to in sub-section (1)."
A bare reading of this section shows that interest under section 201(1A) read with section 201(1) can be levied only when : a person is declared as assessee in default. (because levy of interest is only on a person, who is declared as assessee in default as mentioned in sub-section (1) and in sub-section (1) only that person can be declared an assessee in default (i) who does not deduct tax in the cases referred in section 194, (ii) or after deducting fails to pay the tax as required by or under the Act)
When a person is declared as assessee in default, then it has to be seen whether interest as per section 201(1A) can be computed. For computation of interest, there are three elements. One is quantum on which interest has to be levied. Second is the rate at which interest has to be charged and the third is the period for which interest has to be charged. The rate is provided in the Act under section 201(1A) itself. It is not in dispute. Then comes the quantum on which interest has to be paid. The sub-section (1A) specifies on the amount of such tax' which is mentioned in sub-section (1), wherein, it is the amount of tax in respect of which assessee has been declared in default. Further, there is no provision of penalty under section 201(1). After declaring the assessee as deemed to be in default, the assessing officer has to resort to section 221 for levy of penalty. Section 201(1) provides that without prejudice to any other consequences, which the assessee may incur he will be deemed to be an assessee in default in respect of that sum (for which he has been declared as deemed to be in default). Thus, levy of penalty as per proviso is in addition to any other consequences to the assessee as provided in the Act or under any other Act, (no Act is mentioned in the sub-section (1)). Therefore, it is quite clear that penalty under section 221 as per proviso can be levied only after the assessee is declared as deemed to be in default for the sum of tax not deducted at source or after deduction not paid to the credit of Central Government in time as provided under the Act. The interest under section 201(1A) can also be levied only after the assessee is declared as deemed to be in default. Thus, in a case where the assessee is not declared as deemed to be in default or has wrongly been declared, then neither the penalty under section 221 can be levied nor interest under section 201(1A) can be charged.
Proviso to section 201(1) provides one exception to the main sub-section. It provides that no penalty shall be charged under section 221 from such person, unless the assessing officer is satisfied that such person has without good or sufficient reasons failed to deduct and pay the tax. The main sub-section does not provide levy of penalty. The main section only provides as to under what circumstances a person can be declared as deemed to be in default. Thus, proviso attached to this sub-section carves out only an exception to what is provided in the main section. The proviso enacted to sub-section (1) cannot carve out an exception to another section, in this case section 221. Thus, one is not required to go to section 221 in respect of a person, who is saved by virtue of proviso. One will go to section 221 only when the person does not fall in, i.e., not saved by the proviso to section 201(1). The section for levying penalty for default in payment of tax is section
221. In that section word used is "levied". It is clear from 2nd proviso to section, which reads as under :
"221. Penalty payable when tax in default(1) When an assessee is in default or is deemed to be in default in making a payment of tax, he shall, in addition to the amount of the arrears and the amount of interest payable under sub-section (2) of section 220, be liable, by way of penalty, to pay such amount as the assessing officer may direct, and in the case of a continuing default, such further amount or amounts as the assessing officer may, from time to time, direct, so, however, that the total amount of penalty does not exceed the amount of tax in arrears :
that before levying any such penalty, the assessee shall be given a reasonable opportunity of being heard :
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.
For the removal of doubt, it is hereby declared that an assessee shall not cease to be liable to any penalty under this sub-section merely by reason of the fact that before the levy of such penalty he has paid the tax,
(2) Whereas a result of any final order the amount of tax, with respect to the default in the payment of which the penalty was levied, has been wholly reduced, the penalty levied shall be cancelled and the amount of penalty paid shall be refunded."
In the proviso to section 201(1), the word used is 'charged'. The difference between 'charge' and 'levy' used in 2nd proviso to section 221(1) is obvious. The difference between the two words has been clarified by Hon'ble Bombay High Court in M.K. Kirtikar v. CIT (1955) 28 ITR 908. 'Charge' is the liability to be assessed under section 3 of Income Tax Act, 1961 (section 4 of Income Tax Act, 1961) and 'levy' is the procedure laid down for the realization of the tax, Thus, the proviso to section 201(1) determines the liability to levy of penalty, which can be fastened only on the persons, who did not have good and sufficient reasons for not deducting tax and paying to the Central Government and thus could not be protected by virtue of proviso. That is only those persons will be liable to penalty under section 221 who are declared as 'deemed to be in default' after holding that they did not have good and sufficient reasons for not deducting the tax or not paying in time to the Central Government. Thus, a person who has not committed any default in TDS, he is not at all liable to penalty. One is not required to take recourse to section 221 in their cases. And further, a person, who is not in default is also not covered by section 201(1A). Thus, before invoking section 221, the assessing officer has to clear the hurdle provided by section 201(1), i.e., he has to first declare the assessee in default. Interest under that section can also not be charged on an assessee not declared in default, which is clear from the wordings used in section 201(1A). Liability to pay interest under section 201(1A) arises only in those cases who are declared assessee as deemed to be in default as that sub-section refers for such liability of interest to the persons mentioned in sub-section (1). From this it is (sic) that if an assessee is not in default he is not liable to pay interest under section 201(1A) also. The proposition that where an assessee has not been declared as an assessee in default within the meaning of section 201(1A) no interest under section 201(1A) can be charged from him has been supported by the decision of Hon'ble Madhya Pradesh High Court in Gwalior Rayon Silk Co. Ltd. v. CIT (1983) 140 ITR 832 and in Orient Paper & Industries Ltd. v. CIT (1983) Taxation 6841-32. In Gwalior Rayon Silk Co. Ltd.'s case (supra), it is held by Hon'ble Madhya Pradesh High Court that an employer cannot be held to an assessee in default in respect of excess of tax, purported to be computed on the basis of some controversial additions, not made by the employer but so thought as ought to have been done by the assessing officer. Therefore, employer cannot be made liable to pay interest under section 201(1A). The liability to deduct tax under section 192 is on estimated income of the employee. Though the employer is required to act honestly and impartially (while estimating income of an employee) but an incorrect estimate alone would not be sufficient to hold that he has not acted honestly and fairly while estimating income of the employee. In this regard the observation of Hon'ble Madhya Pradesh High Court in Gwalior Rayon Silk Co. Ltd.'s case (supra) is as under :
"The provisions of section 201 of the Act are attracted in the case of an employer only when that employer does not deduct tax at source or after deducting fails to pay the tax as required by the Act. A duty is cast on an employer to form an opinion about the tax liability of his employee in respect of the salary income. While forming this opinion, the employer is undoubtedly expected to act honestly and fairly. But if it is found that the estimate made by the employer is incorrect, this fact alone, without anything more, would not inevitably lead to the inference that the employer has not acted honestly and fairly. Unless that inference can be reasonably raised against an employer, no fault can be found with him. It cannot be held that he has not deducted tax on the estimated income of the employee.
The assessee filed annual returns of salary income in respect of its employees showing the amount of tax deductible at source under section 192 for the assessment year 1977-78. The Income Tax Officer examined the returns and found after making some controversial additions that the tax was not properly deducted. The additions made by the Income Tax Officer related to valuation of perquisites relating to accommodation and furniture, disallowance of claim for exemption of leave travel, concession and reduction of the standard deduction to Rs. 1,000 on the ground that the employees were in receipt of conveyance allowance. The Income Tax Officer demanded extra tax as well as interest under section 201(1A) from the assessee. The Tribunal held that if the salary income of the employee was not correctly estimated by the employer, the Income Tax Officer (TDS) could demand additional tax from the employer under section 201, but where full taxes had been realised from the employees, no demand could be made under section 201. The Tribunal further held that interest under section 201(1A) was leviable. On a reference :
q Held, q that in the instant case it had not been found by the Income Tax Officer or the Tribunal that the assessee's estimate was not honest and fair. The assessee had deducted tax from the salary of the employees on the salary income honestly estimated by it and had also paid the tax as required by section 200. It could not be held to be an assessee in default in respect of the tax. Therefore, the provision of section 201(1A) also were not attracted.
q Held, q also, that where the regular assessment of an employee had been completed and the amount of tax was fully paid by him, the Income Tax Officer (TDS) had no jurisdiction under section 201 to demand further tax from the employer in respect of tax short deducted relating to such employees.
Above decision was followed in CIT v. MP Agro Morarji Fertilisers Ltd. (1989) 176 ITR 282 (MP), wherein it was held that :
"Where the regular assessment of an employee had been completed and the amount of tax fully paid by him, the Income Tax Officer (TDS) has no jurisdiction under section 201 of the Income Tax Act, 1961, to demand further tax from the employer in respect of the tax short deducted relating to such employer."
From the above, it follows that levy of interest under section 201(1A) is a posterior action to declaring an assessee (employer) as deemed to be in default. If no fault can be found with the employer for not deducting tax on some controversial addition or deducting and paying tax on an honest and fair estimation, then he cannot be declared as an assessee deemed to be in default. Under such circumstances, the question of levy of interest under section 201(1A) would not arise.
Section 201 (as quoted above) has two levels. One is that employer has not deducted tax and second is that after deduction he has failed to pay to the Government. There is nothing in section 201 to treat the employer in default for the deduction. The default in section 201 is for non-deduction and not for short deduction. Since section 201 is a penal section, it has to be strictly construed and it cannot be assumed that there was a duty to deduct tax strictly in accordance with the computation under the Act and for any shortfall as compared to such strict computation, the employer can be declared as assessee in default, i.e., it cannot be assumed that due to difference of opinion as to the taxability of an item, the employer has to be declared to be an assessee in default. Our view finds support from the decision of Hon'ble Andhra Pradesh High Court in P. V. Rajagopal v. Union of India (1998) 233 ITR 678. The head notes from the above decision are :
"On 23-3-1995, the Central Board of Direct Taxes informed the Chief Commissioner of Income-tax, Hyderabad, that where the employer directly bears a part of the interest burden of the employees by reimbursing a portion of the interest payable by the employee in respect of building loans, such reimbursement is taxable as income from 'salaries' under section 17(2)(iii) of the Income Tax Act, 1961. This was forwarded to the Deputy Commissioner of Income Tax of each zone and circulated to various companies. Orders under section 201 were passed on the companies. On writ petitions challenging the letter by the employees including a trade union :
q Held, q (i) that when an action is taken by the employer ostensibly for administering a statute adverse to a person at the instance of the department a cause of action certainly arises to dispute the same. The letter of the Central Board of Direct Taxes was the basis of the action taken by the employer to the detriment of the employees. The remedy suggested by the revenue that after deduction, the employee should file a return and seek refund would involve thousands of appeals and long delay in granting refund by which a section of the salaried class would be deprived of a portion of the salary due to them for a considerable time without any recompense. If the writ petition could not be entertained to direct the department to give proper guidance to the employers, the actual taxpayers would be left without any speedy or effective remedy. The writ petitions were maintainable. Joint writ petitions were valid. The employer was acting as the agent of the revenue and was also an instrument of the State and the alleged violation of the Income Tax Act involved the service conditions of the employees. The trade unions were entitled and justified in filing the writ petitions. (ii) that the word 'salary' as such is not defined in the Act. Words in a statute dealing with the matters relating to the general public are presumed to be used in their popular sense. In its popular sense 'salary' is confined to periodical payments and does not include other special payments even though they may be from an employer to an employee and also because of that relationship, it cannot include interest subsidy. Clause (iv) of section 17(2) relates to the payment by the employer to a third party in respect of an obligation undertaken by the employee such as club subscription and not direct payments to the employee. Hence, the interest subsidy is not a perquisite under section 17(2)(iv). The scheme of the Act does not envisage the addition of cash payments as a perquisite in the nature of the benefit or amenity. Interest subsidy is not a benefit within the meaning of section 17(2)(iii). Interest subsidy is not a reward or a periodical payment for services rendered. Nor is it paid in lieu of salary. It is not a profit in lieu of salary. Employers cannot treat the interest subsidy as a perquisite while deducting the tax at source in respect of income under the head "Salaries" under section 192 of the Income Tax Act.
By the court : A better solution would be to shift the stage of deduction to the hands of the payee. For instance, all payments can be made to a declared bank account of the payee where 10 per cent of the balance can be frozen until the assessment is made and an amount equal to the tax determined then transferred to the department by the bank. Such a scheme would benefit the taxpayer and the revenue as well as the employees. As far as the taxpayer is concerned, the money will be in his account earning interest until a correct adjudication is made as to the liability and he does not have to lose it and seek refund. As far as the revenue is concerned, there will be a guaranteed security for the payment of tax until adjudication takes place. The employers can also be relieved of the unpaid burden of acting as the agent of the Government for collecting tax at source."
Similar view is expressed by ITAT in Mahindra & Mahindra Ltd. v. ITO (1996) 55 TTJ (Bom) 174 that section 201 cannot be applied in a case where tax is short deducted without any mala fide. Further, another important question arises in this case is that whether a written order is necessary for treating an assessee in default. It is held in Mettur Chemicals & Industrial Corpn. Ltd. v. IAC (1984) 150 ITR 341 (Mad) that a written order is necessary for declaring a person as deemed to be in default so that the aggrieved person can file an appeal under section 246/246A.
In the present case, the assessing officer has passed an order directing the assessee to pay Rs. 4,60,832 under section 201(1), as is evident from the last para of the order under section 201(1) 'passed by the assessing officer on 23-3-2001'. There is no specific order declaring the assessee as 'deemed to be in default'. In our view, this order is necessary so that further consequences would follow and assessee can file an appeal against this specific order by the assessing officer.
On this account alone, the order of the assessing officer under section 201(1) is liable to be quashed. Even though, Commissioner (Appeals) has mentioned in his order in para 3 that the assessing officer has treated the assessee in default for not including the conveyance allowance in computation of salary for the purposes of deduction of tax at source, but such finding of Commissioner (Appeals) are only presumptive or speculative as in the order there is no such specific finding by the assessing officer declaring the assessee as deemed to be in default, even though the default, as prescribed by the assessing officer, has been mentioned. The specific finding to declare the assessee deemed to be in default is necessary for further consequences as provided in sections 201(1A) and 221. Merely describing default is not enough for charging interest and levy of penalty under section 221. It may be enough for recovery of tax relating to default by issuing demand notice under section 156. But levy of penalty under section 221, charging of interest under section 201(1A) and creating of charge over all the assets of the person in default as per sub-section (2) would follow only when there is a specific order declaring the employer as 'deemed to be in default'.
In the present case of the employer/assessee, we find that assessing officer has not levied any penalty under section 221. He has only directed to recover the sum of Rs. 4,60,832, which was prescribed as deficiency of TDS by the employer-assessee. In addition to this, interest under section 201(1A) was levied at Rs. 3,96,864. Coming to the merits of the case, as to whether the assessee, i.e., M/s. Excel Industries Ltd. can be declared to be an assessee deemed to be in default under the facts and circumstances of the case, we take note of certain facts and arguments as found from the orders of the assessing officer and Commissioner (Appeals) and submissions made by the assessee-employer before the assessing officer, Commissioner (Appeals) and before us. They are :
(i) Staff of canteen were paid conveyance allowance (in short CA) (9) Rs. 25, 50 & 100 P.M. during different periods of the year.
(ii) Employees in the management cadre were paid CA ranging from Rs. 415 to 915 P.M.
(iii) The work place was at a distance of 2 to 4 km. from railway station and the employees needed to engage auto rickshaw or other public conveyance to reach work place.
(iv) The CA was paid thus, to commute from place of residence to work place and back.
(v) Reliance was placed by the assessee on circular No. 196, dated 31-3-1976 which provided that if disbursing office is satisfied that CA is covered under section 10(4) as incurred wholly and exclusively for the purposes of business employment then deduction to tax thereon may not arise.
(vi) As per employer-assessee, Explanation to section 17(2) stated that use of vehicle from office to residence and vice versa will not be regarded as perquisite.
(vii) The assessing officer was of the view that perquisite as per clause (iv) of section 17(2) would include a sum paid by employer for an obligation which but for such payment would have been payable by the assessee.
(viii) According to the assessee-employer, there are two decisions supporting the contention that reasonable conveyance allowance paid to meet the expenditure incurred to commuting between place of work and residence is not taxable. They are :
1. ICICI v. Fourth Income Tax Officer(1993) 47 TTJ (Mum) 401
2. Nestle Industries Ltd. v. Asstt. CIT (1997) 61 ITD 444 (Del)
3. CIT v. Nestle India Ltd. (2000) 243 ITR 435 (Del)
4. Merchant Marine Education & Research Trust (IT Appeal Nos. 4721 to 4726 (Mum) of 1996)
5. Pevegrive Capita India (P) Ltd. (IT Appeal No. 1848 (Mum) of 1999).
(ix) order under sections 201(1) and 201(1A) was passed on 23-3-2001 whereas the assessment year involved is 1996-97 and the conveyance allowance was paid during financial year 1995-96.
From the above facts, it is clear that the assessment of the employees to whom CA was paid must have been completed before the date when order under section 201(1) and 201(1A) was passed. The limitation for completing the assessment for assessment year 1996-97 must have expired by 31-3-1999. The shortfall in tax, if any, in the deduction of tax at source has to be paid back by the employee while filing their return. Section 140A has been enacted to meet out the contingency where tax deducted at source and advance tax etc. is less than tax as per return of income. If on assessment of the employee under section 143(3), further demand is raised then that demand can be recovered from the employee. There is no provision in the Act, which would empower the assessing officer to raise the demand in the hands of the employee and simultaneously also raise the demand against the employee on account of short deduction or no deduction. It could have been a separate and inherent case and assessing officer levied penalty under section 221 after declaring the assessee as deemed to be in default. But in this case, the penalty has not been levied. Only the alleged deficient demand has been raised. But according to us, the deficient demand for TDS cannot be raised against the employer-assessee after the completion of assessment of the employees. Whatever deficient demand is, it can only be raised against the employee and it has to be paid by them. Suppose, the assessments of the employees are completed as in this present case we presume at the time of passing of the order under section 201(1) and the assessing officer also raise the demand against the employer-assessee as in the present case has been done, then effect of additional tax due to default can be collected from the employer on behalf of the Govt. but adjustment in the hands of the employees cannot be given as their assessments are already stand completed. Section 199 provides that credit for any tax deducted as per sections 192 to 196D shall be given to the person on whose behalf tax has been deducted. The mechanism to give credit of deficient tax as per section 201(1) collected after the completion of assessment of the concerned employees will fail as no such credit could be given. This will create an unjust enrichment of the revenue, which is not permissible. From this, it follows that raising of demand for collection of deficit tax, if any, as per section 201(1) can be done only before the completion of assessment of the concerned employee. However, this will not be the case insofar as the levy of penalty under section 221 read with section 201(1) and charging of interest under section 201(1A) are concerned. If an assessee is declared as deemed to be in default for certain tax, then levy of interest under section 201(1A) can still be done. Thus, in our view, the assessing officer was incorrect in directing to recover a sum of Rs. 4,60,832 as deficient tax from the employer after the expiry of limitation of completion of assessment of the employees.
The main aspect, which is to be considered, is whether the assessee-employer could be declared as an assessee deemed to be in default under the present facts and circumstances. In our view, there are two views possible on the question of including CA as the income of the employees. One view is supported by the decision cited by the assessee. In addition to the case law cited by the assessee, we also notice that in CIT v. Nestle India Ltd. (2000) 243 ITR 435, the Hon'ble Delhi High Court has held that bona fide belief of the employer that conveyance allowance is not taxable under section 10(14), then interest under section 201(1A) could be charged (i.e. the employer cannot be treated as assessee deemed to be in default without which interest under section 201(1A) could not have been charged). In CIT v. Oil & Natural Gas Corpn. Ltd. (2002) 254 ITR 121, Hon'ble Gujarat High Court has said that it is not relevant as to whether employees have got entire sum taxed in their hands. The employer can treat the sum as exempt. The head notes from the decision of Hon'ble Bombay High Court in the said case are as under :
The assessee had a scheme, approved by the Central Government, for reimbursement of expenditure towards maintenance by its employees of a conveyance. Under the scheme reimbursement was granted to an employee for one vehicle subject to the employee giving a certificate that the expenditure actually incurred was in excess of the amount claimed. While deducting tax at source on salaries paid to its employees, the assessee did not take into account the amount reimbursed under the scheme, as it considered that it was not taxable under section 10(14) of the Income Tax Act, 1961. Holding that the amount so disbursed to the employees was not fully exempt from tax under section 10(14), the Income Tax Officer initiated proceedings for penalty under section 221 and also for interest under section 201(1A) for short deduction of tax at source. The Appellate Tribunal held that the amounts so paid to the employees were fully exempt and in any case the excess not satisfactorily explained by the employee had been actually taxed in his hands and the tax had been recovered. The Tribunal having rejected the application for a reference, the department applied to the High Court under section 256(2) :
, rejecting the application for a reference, (i) on the facts, that section 10(14) was applicable : reimbursement was granted for use of one vehicle owned and possessed by the employee for expenses incurred in undertaking official journeys and payment was made on the employee issuing a certificate that he incurred more expenses than the amount reimbursed. That the amount was reimbursed only up to a limit did not detract from the fact that expenses were being paid towards actual expenses incurred by the employee.
(ii) That the fact that the employee, during the course of his assessment to tax, was found not entitled to full benefit under section 10(14) did not in any way reflect on the estimate made by the employer of the tax payable on the income of the employee at the time when sach amount was paid.
Similarly, in the case of CIT v. Hyundai Heavy Industries Ltd. (2003) 264 ITR 328 (Uttaranchal), Hon'ble High Court held that where reimbursement for free meals was paid to technicians, no TDS was done, and it was not treated as taxable by the employer then no TDS was required to be done and, therefore, no interest under section 201(1A) was required to be paid. The other view is, what the assessing officer and Commissioner (Appeals) are putting forward in support of their case that conveyance allowance is taxable in the hands of employees and hence TDS was required to be done. Thus, clearly the employer had a case that CA is not taxable or exempt in the hands of the employees. In fact, the employer is required to have a broad picture of the estimated income, which is subject to TDS. He is not required to make a final computation of income for TDS purposes. He has only to act honestly and fairly. This estimate should be accepted as honest unless it is contrary to express provisions of law or the non-TDS is mala fide. When even the opinion of assessing officer in the assessment order cannot be treated as final, as the employer can prefer to challenge, then it is not concealable that employer should make a final or an accurate computation of income for TDS purposes. Where rent was exempted under section 10(BA) and perquisite value of accommodation and of car for official use was not subject to TDS, no interest under section 201(1A) was leviable (re. Eicher Goodearth Ltd. v. ITO (1998) 98 Taxman 229 (Delhi) (Mag) and Orient Paper & Industries v. CIT (1983) 12 Taxman 348 (MP)). Similarly in KLM Royal Dutch Airlines v. Asstt. CIT (1998) 62 TTJ (Delhi) 268, it was held that where the assessee was under a bona fide belief that the amount paid for transportation reimbursement expenses to its employees did not require TDS, no interest under section 201(1A) could be charged. In Dr. Sajay P. Desai v. ITO (2004) 90 TTJ (Ahd) 137, it was held that reimbursement of expenses by employer to employees incurred to commute from residence to office and back are exempt under section 10(14).
There is another aspect of the problem where tax deducted or short deducted has not been actually paid. The machinery for computing interest under section 201(1A) will fail. Notwithstanding, our view is that for deduction of tax, an assessee cannot be declared as assessee deemed to be in default as discussed above. Where deficient tax has not been paid, there will not be an outer limit of time for computation of interest. The interest as per section 201(1A) is chargeable for the period from the date on which such tax (deficient tax) was deductible ending on the date on which such tax was actually paid. Thus, where deficient tax has not been paid interest cannot run in perpetuity. The working becomes an impossibility. Hence, no interest under section 201(1A) can be charged in such case. Other view is also-supported by the decision of ITAT in Salwan Construction Co. v. Asstt. CIT (IT Appeal No. 2915 (Delhi) of 1993) for assessment year 1987-88, relied upon by the learned counsel for the assessee. In the present case also the alleged deficient tax has not been paid. Hence, interest under section 201(1A) cannot be charged from the employer-assessee.
In view of foregoing discussion, we hold that :
1. A written order has to be passed specifically declaring an assessee as deemed to be in default. If such specific order is not passed, interest under section 201(1A) cannot be charged on the defaulting assessee and also penalty under section 221 cannot be levied.
2. Where an employer-assessee honestly and fairly estimate income of his employees, then for addition to be made by the assessing officer in the cases of employee, the employer-assessee cannot be defaulted.
3. If there are two views possible on an issue/item of addition and employer adopts the view favourable to the employee and do not deduct the tax thereon, then he cannot be defaulted for non-TDS on such amount of payment to the employees.
4. Section 201(1A) is a charging section for levy of penalty under section 221. If an employer-assessee cannot be declared in default, no proceedings can be initiated for levy of penalty under section 221.
5. After the completion of assessment of employees, the employer-assessee cannot be directed to pay the deficient tax, if any, not deducted from the payments made to the employees.
6. Where tax deducted either in full or short, has not been paid, interest under section 201(1A) will not be workable.
In view of the above, we find that the employee-assessee cannot be defaulted for holding an honest opinion that CA is not to be included in the computation of income of employees while making TDS. Hence, he cannot be declared as an assessee deemed to be in default. Therefore, interest under section 201(1A) cannot be charged from him. This view is further fortified from the fact that computation of interest in its case is not workable. Since the employer-assessee cannot be declared as deemed to be in default, deficient tax arising on account of short deduction cannot be demanded from him, more so, when the assessment of employees have been apparently completed. Therefore, we cancel the order of both the authorities below.
In the result, the appeals of the assessee are allowed but that of revenue are dismissed.