Kerala H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the levy of interest under s. 201 of the IT Act is time barred?

High Court Of Kerala

CIT vs. Meat Products Of India Ltd.

Sections 201(1A), 231

V.V. Kamat & G. Sivarajan, JJ.

IT Ref. No. 10 of 1992

29th March, 1996

Counsel Appeared

P.K.R. Menon & N.R.K. Nair, for the Applicant : C.N. Ramachandran Nair, for the Respondent


The Revenue has brought the following question for answer : “Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the levy of interest under s. 201 of the IT Act is time barred?”

2. In fact from the statement of case and from the impugned judgment of the Tribunal it is clear that the Division Bench judgment of this Court in Traco Cable Co. Ltd. vs. CIT (1987) 62 CTR (Ker) 174 : (1987) 166 ITR 278 (Ker) : TC 5R.560 had an occasion to consider the question and its answer. However, the learned senior tax counsel having urged that the question did not directly arise, strenuously persuaded us to carefully consider the said decision of this Court. We will consider the submissions keeping in mind the basic features of the law of precedents. It is fundamental that the Courts of co-ordinate jurisdiction bind each other. The theory of judicial precedents has an intrinsic internal and inter-related judicial strength, in the process of underlying thread of judicial discipline. The binding nature of the judgment of Court of co-ordinate jurisdiction has also an element of implicit faith and respect strong enough to bind similar situations. Although an independent approach is not decried such an approach has a postulate of all the necessary facets of the binding nature of a judicial precedent of a Court of co-ordinate jurisdiction. Although it is open for a subsequent Bench of equal strength, the aspect that the judgment of bench apart from its binding nature in posterity has also an understandable effect of the said judgment having been followed by all the authorities thereafter whenever an occasion require. This aspect also has to be borne in mind while proceeding to consider the submissions relating to a different or distinguishable note in regard thereto. In addition thereto, it must be borne in mind and we are doing so that an established situation need not be easily thought to be disturbed if there is satisfactory material to allow it to continue on the basis of the judgment already followed by the authority thereafter.

This is the occasion where the Tribunal has relied upon the said judgment to hold that the recovery of interest is barred by limitation. To understand and appreciate the controversy which is already in a narrow compass, some inevitable facts are necessary to be laid in the context.

The assessee is a Government owned company and entered into an agreement with a nonresident by name M.E. Wernberg A/S for the establishment of a meat processing plant at Chalakudi. This was for the purpose of help in regard to technical know-how, advice and services essential for the establishment of the plant. In fact, the project report as regards preparation was also a part of the agreement. The company agreed to pay in all Rs. 5.5 lakhs and under the terms 30% of the project fees were required to be paid in advance and accordingly the assesseecompany remitted Rs. 1,65,000 as advance payment of the project report fees. There is no dispute that with regard to the payment of this Rs. 1,65,000 no tax was tax deducted at source as required under the taxation law. Nor was it remitted by the assessing company, undisputedly in any capacity as the agent, which was initially the position, ultimately making it clear that the assessee-company was liable under the law and not as an agent.

While going through the records the ITO came across this situation relating to the law of the assessing company and by an order dt. 24th May, 1982 (Annexure A) held that the tax should have been deducted from the above payment of Rs. 1,65,000 at the time of remittance abroad. As a consequence he ordered that the income-tax at the rate of 40% being an amount of Rs. 71,243 and in addition interest under s. 201(1A) for 25 months amounting to Rs. 17,800 should be paid as per enclosed challan. This was taken up by the assessee to the first appellate authority—the CIT(A), Ernakulam. It is abundantly clear that this was an appeal against the order of ITO passed under s. 201 calling upon the assessee to pay a total sum of Rs. 89,043 (Rs. 71,243 + Rs. 17,800). The appellate authority considered the submissions and held that the amount was remitted to the non resident which was a part of the total amount of credit payment to the non-resident by the appellant. As such the payment would be the income of the non-resident as fees of technical advice and services in India. It is further observed that under s. 195(1) of the Act the tax ought to have been deducted at source out of the amount sent abroad. It is further observed that there is no doubt that the amounts remitted being the income of the non-resident, there was justification in treating the assessee in default under s. 201 of the Act as the amount of tax being deductible was not actually deducted. Treating the assessee being in default accordingly, as a consequence the appellate authority found it justifiable as regards the levy of interest under s. 201(1A) on the amount of tax due from the assessee. With regard to the quantum relating to both the tax and interest the order was confirmed.

The Tribunal, Cochin Bench, particularly in paragraph 5 considered that the remittance was made in the year ending on 31st March, 1980. The Tribunal observed that the order under s. 201 (1A) was passed on 24th May, 1982. In the context the Tribunal considered the question of limitation under s. 231 of the Act seeking support of a binding nature, from the decision of this Court in Traco Cable Co. Ltd. (supra). The Tribunal observed that the question of levy of interest, as found, would also be covered by the ambit of s. 231 with regard to the time limit specified therein. Accordingly, the Tribunal held that the order of the ITO acting under s. 201(1A) of the Act having been passed on 24th May, 1982 is barred by the period of limitation specified under s. 231. We have been taken through the above decision of this Court by the learned senior tax counsel.

At the outset the question that was for consideration and decision before this Court in the case of Traco Cable Co. Ltd. (supra) is as follows : “Whether, on the facts and in the circumstances of the case, the order passed by the ITO under s. 201 on 25th Feb., 1977, was barred under s. 231 of the IT Act, 1961 ?”

The question before us as specified hereinbefore relating to the levy of interest if could be held as time barred. The Court was required to consider the effect of s. 231 of the Act with regard to the provision of limitation. This Court has observed that the liability arises de hors an order and on account of the default in the deduction of tax and/or payment of the same as required by the statute. The provisions of ss. 195, 200 and 201 are reproduced ad verbatim to the extent required in the judgment under consideration.

12. It is then succinctly and clearly observed that a person responsible for tax deduction at source in terms of s. 195 is deemed to be in default if he does not either deduct the tax at source or having deducted it, does not pay it as required by s. 200 within the time prescribed under r. 30. Thereafter, it is observed that s. 201 further shows that the failure of such a person makes him an assessee in default, although he would not, but for the default, be an assessee in respect of the sum referred to in s. 195. It is thereafter observed that it is his failure to discharge his statutory obligation that visits him with the liability of “an assessee in default”. This liability is cast upon him under the aforesaid provisions, the observation continues, not because of any order or notice of demand but because of the operation of the statute itself. This is quite unlike a regular assessment under which the tax becomes payable only upon service of a notice of demand under s. 156. After referring to this normal procedure, this Court proceeds to observe the peculiar aspect spelt out by the provisions of ss. 195, 200 and 201characterising it as dealing with a liability which is at no time ambulatory, but which is attracted immediately upon the happening of an event, namely, payment, and failure to deduct under s. 195 or failure to credit the sum deducted as required by s. 200. After emphasising the peculiarities of the situation, describing it as not ambulatory in any way the Court proceeds to observe further which is of vital importance. It is observed that as soon as such failure occurs, the liability arises once and for all, there is no further requirement of computation or assessment. More importantly it is emphasised thereafter that once the liability is incurred no further demand is necessary to recover the tax and interest due therein unless the Revenue were to initiate proceedings for imposition of penalty in terms of the proviso to s. 201(1) r/w s. 221.

It is in the light of the above provisions, s. 231 is taken up for analysis and its legal effect. In fact the relevant text of s. 231 is quoted. Thereafter the situation is considered with reference to the two limbs, first one referring to a situation of tax directly payable by the person earning the income and whose liability arises only upon demand. In analysing the rigour of s. 231 in regard to the above situation it is observed that the period begins to run from the last day of the financial year in which the demand is made. Thereafter, the second limb is taken up for consideration in relation to the statutory liability of a person de hors the notice of demand and in regard thereto it is carefully emphasised that such liability arises by operation of law and has nothing by way of relation to any demand in regard thereto. It is observed that the period of limitation relating to such liabilities begin to run not with reference to any notice of demand but from the last day of the financial year in which the default has occurred by reason of the failure to deduct tax as warranted by s. 195 or to pay the tax deducted as required by s. 200. If the above reasoning is taken into consideration some of the specific features showing the landmarks in the process of reasoning float on the surface thereof. In the first instance the failure to discharge statutory obligation which is the assessee with the liability of “an assessee in default”. In the process it is observed that failure occurs and results into a liability arising once and for all leaving no requirement relating to the computation, assessment or payment thereof. It is emphasised that no further demand is necessary. This is the position with regard to the question of recovery of tax and the interest due thereon.

The learned senior tax counsel was more than strenuous in taking out the liability of payment of interest due, off the clutches of the similar liability with regard to the payment of tax. He emphasised upon the statutory wording of the provisions of s. 201(1A) specially liability to pay simple interest. He urged that this is independant of the liability as regards the payment of tax. Learned counsel strenuously submitted that any person who does not deduct or after deducting fails to pay the tax as required by the provisions of the Act his liability to pay simple interest at 12% per annum is independant and accrues from the date on which such tax was deductible to date on which such tax is actually paid. In the submission of the learned counsel the words in s. 201(1A) “such tax is actually paid” in the context would have to be read as “such tax ought to have been paid”. In support reliance is placed on the decision of the Supreme Court in Gursahai Saigal vs. CIT (1963) 48 ITR 1 (SC) : TC 4R.1027 relating to the situation of liability to pay interest as regards an assessee failing to submit estimate of his income and pay advance tax under the then s. 18A(3) of the Indian IT Act, 1922, in regard to which the Supreme Court justifiably read the date to the date on or before which the tax ought to have been paid.

In our judgment the factual peculiarities as stated at the outset show that by the order dt. 24th May, 1982 the amount of tax at Rs. 71,243 and also interest at Rs. 17,800 is ordered to be paid by the ITO on 24th May, 1982. This shows that both the payment of tax and interest are hit by the provisions of s. 231 of the IT Act. This is more than clear also from the order of the first appellate court emphasized hereinbefore. The situation shows that even the tax is time barred. The question that was for consideration before this Court in the case of Traco Cable Company Ltd. (supra) as has been reproduced hereinbefore shows that this Court considered the effect of s. 231, it cannot be said in isolation with regard to the question of payment of tax alone but the rigour of limitation under s. 231 of the Act. This Court has considered the situation of consequences and it cannot be said to be in isolation separating the question of interest altogether.

Learned senior tax counsel strenuously submitted that the question does not seem to have been argued with reference to the question of interest. In our judgment reading the reasoning, the question is not required to be considered in isolation and we agree with the reasoning of the above decision which is followed by the Tribunal. Once the tax is time barred interest has no separate existence even in accordance with the natural course of observation as seen from the kid following the camel. For all the above reasons we answer the above question in the affirmative—against the Revenue and in favour of the assessee. It is unnecessary to refer to other submissions of the learned counsel.

[Citation : 224 ITR 1]

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