Calcutta H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that, for the purpose of determining the quantum of penalty leviable under s. 273(1)(b) of the IT Act, 1961, the amount of tax ‘deductible’ at source under ss. 194 and 195 of the said Act has to be taken into consideration in computing the ‘assessed tax’ as defined under s. 215(5) of the said Act ?

AJlT K. SENGUPTA, J.:

This reference under s. 256(1) of the IT Act, 1961, relates to the asst. yr. 1981-82. The short question which calls for determination in this reference is how the quantum of penalty under s. 273 (1)(b) of the IT Act, 1961, should be computed. Shortly stated, the facts are that, in the course of the assessment proceedings, the ITO found that the assessee did not file the statement of advance tax nor did it pay advance tax during the relevant accounting year. The ITO, therefore, initiated penal proceedings under s. 273(2)(c) of the IT Act, 1961, r/w section 273 (sic) of the Act. In reply to the showcause notice, the assessee submitted before the ITO that it was a non-resident company and that the income accruing to it in India during the period comprised interest due from the bank on short-term deposit, interest due from Tata Finlay Ltd. and dividends received from Tata Finlay Ltd. It was further contended that tax was required to be deducted at source from interest and dividends. It is further pointed out that tax calculated on the estimated income would be reduced by the amount of tax deductible at source and, therefore, the tax deductible at source was not required to be paid as advance tax whether or not, such tax had actually been deducted by the payer. In the circumstances, it was under the impression that no estimate was required to be filed by it.

The ITO was of the view that the explanation offered by the assessee was not tenable in view of the fact that since there was no deduction of tax at source from bank interest, the assessee had the onus to furnish an estimate of advance tax and liability to pay advance tax on such income during the relevant accounting year which it failed to do. The ITO computed the shortfall at Rs. 44,390 and imposed a minimum penalty of Rs. 4,439 under s. 273(2)(c) being 10per cent of the shortfall.

Being aggrieved, the assessee filed an appeal before the CIT (A). The CIT (A) observed that the ITO wrongly applied s. 273(2)(c) ; the right section in this case to be applied was s. 273(1)(b) and he was of the view that unless the tax was deducted and paid to the credit of the Government, the benefit of s. 209(1)(a)(iii) of the Act in calculating advance tax liability could not be availed of. Since no tax was deducted by the bank from the interest income, the assessee was not correct in not filing the estimate under s. 209A. He, therefore, confirmed the penalty order passed by the ITO.Being aggrieved by this order of the CIT (A), the assessee filed an appeal before the Tribunal. The Tribunal found that the ITO imposed the minimum penalty at 10per cent of the shortfall. According to the Tribunal, while doing so, the ITO had not taken into account the tax deductible at source under s. 194 and 195 of the IT Act, 1961. Tax deductible at source under ss. 194 and 195 in respect of interest and dividend income from Tata Finlay Ltd. would have to be taken into account while computing the assessed tax as defined under s. 215(5) of the Act for the purpose of determining the quantum of minimum penalty imposable for the default falling under s. 273(1)(b). The Tribunal, therefore, directed the ITO to recompute the quantum of minimum penalty imposable under s. 273(1)(b) by first determining the tax on the basis of the regular assessment and then reducing the tax by the amount of tax deductible in accordance with the provisions of s. 194 and 195 and then to redetermine the quantum of penalty at 10per cent of the shortfall.

On these facts, the following questions of law have been referred to this Court :

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that, for the purpose of determining the quantum of penalty leviable under s. 273(1)(b) of the IT Act, 1961, the amount of tax ‘deductible’ at source under ss. 194 and 195 of the said Act has to be taken into consideration in computing the ‘assessed tax’ as defined under s. 215(5) of the said Act ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in directing the ITO to recompute the quantum of minimum penalty imposable under s. 273(1)(b) of the IT Act, 1961, by first determining the tax on the basis of the regular assessment and then reducing the tax by the amount of tax deductible in accordance with the provisions of ss. 194 and 195 of the said Act in respect of interest and dividend income from Tata Finlay Ltd. ?”

At the hearing before us, it has been contended by the Revenue that, in determining the assessed tax under s.215(5) of the Act, the tax deductible at source under ss. 194 and 195 cannot be taken into consideration. It is only the tax which has been deducted at source under s. 194 and 195 that can be taken into account in arriving at the assessed tax.

On the other hand, the contention of counsel for the assessee is that the Tribunal has properly construed the word “deductible” as appearing in s. 215(5) of the Act as well as in s. 273(1)(b) of the Act and that there is no infirmity in the order.To appreciate the contentions, it is necessary to set out the relevant provisions of the Act. Sec. 273(1)(b) provides that where an assessee has, without reasonable cause, failed to furnish a statement of the advance tax payable by him in accordance with the provisions of cl. (a) of sub-s. (1) of s. 209A, he shall, in addition to the amount of tax, if any, payable by him, pay by way of penalty a sum which shall not be less than 10 per cent. but shall not exceed one and a half times of 75 per cent. (83 1/3-per cent. in the case of company- assessees w.e.f. September 1, 1980) of the assessed tax as defined in sub-s. (5) of section 215. Sec. 215(5) defines “assessed tax” : ” ‘Assessed tax’, means the tax determined on the basis of the regular assessment (reduced by the amount of tax deductible in accordance with the provisions of ss. 192 to 194, s. 194A, s. 194C, s. 194D and s. 195) so far as such tax relates to income subject to advance tax and so far as it is not due to variations in the rates of tax made by the Finance Act enacted for the year for which the regular assessment is made.” Sec. 209 provides how the advance tax should be computed. First, the total income of the latest previous year in respect of which the assessee has been assessed by way of regular assessment or the total income as estimated shall be ascertained ; thereafter, the amount of capital gains and other incomes referred to therein shall be deducted from the said total income and, on the balance, income-tax shall be calculated at the rates in force in the financial year. Thereafter, the income-tax so calculated shall be reduced by the amount of income-tax which would be deductible during the said financial year in accordance with the provisions of ss. 192 to 194, s. 194A, s. 194C, s. 194D and s. 195 on any income (as computed before allowing any deductions admissible under the Act) on which tax is required to be deducted under the said sections and which has been taken into account.

The question, therefore, is what is the precise meaning of the words “tax deductible” as appearing in s. 215(5). The definition of “assessed tax” for the purpose of ss. 215, 217 and 273 as given in s. 215(5) is not very simple. It proceeds in a circuitous way. If we consider the provisions of s. 209A which in turn refers to s. 209 and s. 215(5), the income subject to advance tax has to be ascertained first and, on that income, the income-tax and surcharge on the income subject to advance tax at the rates applicable for the assessment year has to be calculated. Then comes the question of deduction from the amount of such tax the amount of tax deductible in accordance with the provisions of ss. 192 to 194, 194A, 194C, 194D and 195. In computing the advance tax payable, the tax deductible at source on the gross amount of income which is subject to such deduction and which has been taken into account in computing the total income will be set off against the tax calculated on the income subject to advance tax and the balance will be advance tax payable. If, for example, Rs. 50,000 is the gross amount of interest, in that event, although the net amount of interest will be includible in the total income, the tax deductible at source on the entire gross amount of interest which has been taken into account in computing the total income will be deductible. The reason why the word “deductible” is used in s. 209A or s. 215(5) is that there are special rates of deduction for the purpose of ss. 192 to 195 in Part II of the First Schedule to the Finance Act. As such, the gross income under the head “Interests and dividends” included in the said total income has to be ascertained and the tax deductible is to be computed on such income at the rate prescribed by the relevant Finance Act for the purpose of deduction of tax at source and this amount should be deducted from the tax computed under the provisions of s. 209(1)(a)(iii). The assessee is not liable to pay any advance tax on the income which is subject to deduction of tax at source. The advance tax is paid in a financial year ; the credit for the tax so paid in advance is given to the assessee at the time of regular assessment in the assessment year immediately following the year in which the advance tax is paid. It is, therefore, clear that tax deductible in the context of the ‘relevant” provision means tax deducted at source. The amount of tax so deducted at source under the provisions of ss. 192 to 195 is, so far as the affected person is concerned, to be treated as income received by him. For the purpose of computation of his total income, gross salary, gross dividend or gross interest, etc., i.e., the amount actually received plus the amount of tax deducted at source, will have to be considered. We are, therefore, of the view that unless tax is deducted at source from the interest and dividend during the relevant previous year by the payer, the payee cannot claim the benefit of such deduction while filing the estimate of advance tax. Advance tax is payable by an assessee during any financial year ; he is not liable to pay any advance tax on any income which has already suffered tax during that financial year.

We may mention that an assessee is liable to pay penalty under s. 271 (1) (a) for failure to furnish the return of income or failure to furnish it within the time allowed. Then the penalty is calculated on the assessed tax. Assessed tax as defined in the Explanation to s. 271 means tax as reduced by the sum, if any, deducted at source under Chapter XVII-B or paid in advance under Chapter XVII-C. Thus only if the tax is deducted at source or advance tax is paid, such tax is deducted from the tax determined on regular assessment. Sec. 194 enjoins that the principal officer of an Indian company shall deduct at the time of making the payments, etc., of dividends (real or deemed) therefrom income-tax at the rates in force for the assessment year concerned. Irrespective of any tax ultimately found payable by the assessee, if he is entitled to any dividend on his shareholding in a company, the company is bound to deduct tax from the dividend payable to him at the rates in force. The assessee shall get credit for the amount so deducted. Similarly, s. 195 imposes a statutory obligation on any person responsible for paying to a non-resident any interest (not being interest on securities) or any other sum (not being dividends) chargeable under the provisions of the IT Act to deduct income-tax at the rates in force. It is, therefore, clear that the person paying has to deduct income-tax at the time of payment of interest to a non-resident. The obligation of the payer is to deduct the tax, whether it is dividend income or interest, and the assessee, the recipient, can only take the benefit of such deduction in his own assessment inasmuch as the tax so deducted will be to the credit of the recipient. It cannot be the intention of the Legislature that an assessee who receives dividend income without deduction of income-tax therefrom will still be entitled to the benefit of tax deductible on such income, although neither the payer nor the assessee as the recipient has paid any tax thereon. While making payment of advance tax, the assessee can take into account only those taxes which in fact have been deducted at source and not others.

9. The Tribunal held that the assessee had the obligation to file a statement of advance tax under s. 209A(1) (a) as no tax was deducted or paid in respect of interest income from the bank within the financial year. However, the Tribunal directed that the tax deductible at source under ss. 194 and 195 in respect of interest and dividend income from Tata Finlay Ltd. will have to be taken into account while computing the “assessed tax” as defined under s. 215(5) for the purpose of determining the quantum of minimum penalty imposable for the default falling under s. 273(1)(b). Accordingly, the Tribunal directed the ITO to recompute the penalty by first determining the tax on the basis of the regular assessment and then reducing the tax by the amount of tax deductible in accordance with the provisions of ss. 194 and 195 in respect of interest and dividend income from Tata Finlay Ltd. The ITO was directed to redetermine the quantum of penalty at 10 per cent. of the shortfall. Since the order imposing penalty under s.273 was not in the file, we directed the Department to produce the records. The records have been produced. Counsel for the parties agreed that we should examine the records to ascertain the correct facts. From the records, it appears that the total income included the income from interest and dividend from Tata Finlay Ltd. The tax determined on regular assessment amounted to Rs. 1,38,134. The tax deducted at source from interest amounting to Rs. 54,863 and dividend of Rs. 30,000 aggregated to Rs. 84,863. After giving credit for the aforesaid amount of Rs. 84,863 and deducting the said amount from the tax determined at Rs. 1,38,134, a sum of Rs. 53,271 was found due and payable by the assessee. This amount was paid under s. 140A on July 16, 1981. The ITO, therefore calculated the penalty as follows : In other words, tax deductible and deducted at source under ss. 194 and 195 in respect of interest and dividend income from Tata Finlay Ltd. was taken into account while computing the assessed tax as defined under s. 215(5) for the purpose of determining the quantum of minimum penalty imposable for the default falling under s. 273(1)(b). Had the Tribunal examined the records, the matter would not have been remanded to the ITO for recomputation of the penalty under s. 273 of the Act, as the ITO proceeded to levy penalty after giving credit for the tax which was not only deductible but which in fact was deducted within the financial year and the certificate of such deduction had also been filed before the ITO. It is on record that although the assessee received interest of Rs. 75,094 from the banks, no tax was deducted on such interest and, accordingly, the question of any benefit of tax deductible under ss. 194 and 195, so far as the interest income from the bank is concerned, could not arise. The Tribunal rightly did not accept the assessee’s contention in that behalf.

For the reasons aforesaid, the first question in this reference is answered by saying that tax deductible at source and deducted within the financial year under ss. 194 and 195 has to be taken into consideration in computing the “assessed tax” as defined in s. 215(5) of the said Act.

The second question is answered in the negative inasmuch as the ITO computed the quantum of penalty correctly after allowing credit for the tax deducted at source under ss. 194 and 195 in respect of interest and dividend income from Tata Finlay Ltd.

There will be no order as to costs.

BHAGABAT1 PRASAD BANERJEE, J.:

I agree.

[Citation: 193 ITR 134]