Judgment:
1. This is an appeal filed by the Income-tax Officer, Rishikesh urging that the learned Deputy Commissioner of Income-tax (Appeals) erred in law and on facts in reducing the interest charged under Section 201(1 A) for the assessment years 1985-86 and 1986-87.
2. The assessee a firm had paid interest of Rs. 1,46,216 and Rs. 2,20,793 in the assessment years 1985-86 and 1986-87 respectively to M/s United Rosin Industries, Calcutta. No tax was deducted from this interest as per the provisions of Section 194 A of the Income-tax Act, 1961. For this default interest under Section 201(1 A) was charged by the Income-tax Officer of Rs. 7,750 for the assessment year 1985-86 and of Rs. 8,556 for the assessment year 1986-87. Aggrieved by the levy of this interest the assessee preferred appeals to the Deputy Commissioner of Income-tax (Appeals), who by his order dated 4th August, 1988 reduced the levy of interest to Rs. 1,444 in the assessment year 1985-86 and Rs. 3,198 in the assessment year 1986-87. He found that the payee M/s United Rosin Industries had already paid advance tax on this interest on different dates of Rs. 18,000 for the assessment year 1985-86 and of Rs. 5,350 for the assessment year 1986-87 and that the requirement of deduction of tax at source must be deemed to have been complied with for the periods covered by the dates on which the advance was paid by the payee. Relying upon the decision of the Madhya Pradesh High Court in the case of CIT v. Divisional Manager, New India Assurance Co. Ltd. [1983] 140 ITR 818 and in the case of CIT v. Life Insurance Corporation [1987] 166 ITR 191 (MP) for this view, he recalculated the interest payable after eliminating the period covered by the payment of advance tax and arrived at the interest as stated above.
3. Aggrieved by the scaling down of this interest, the Revenue preferred this appeal urging as mentioned earlier, that the Deputy Commissioner of Income-tax (Appeals) should have seen that when the default was committed by the assessee, the payer of interest, he should be required to compensate the Government by paying the interest at stipulated rate of interest and that there is no justification nor warrant for condoning the period covered by the payment of advance tax by the payee, which concept is totally alien to the levy of interest for the default committed under Section 194A.4. The learned counsel for the assessee Shri Prakash Narain submitted that the deduction of tax at source on certain payments like salary, interest on securities, interest on loans etc. is only a mode of recovery of tax payable by the payee and if the payee had already paid the tax leaving nothing for the payer to pay anything more and if those payments happened to be on time and since the tax due to the State had already reached the State, there cannot be said to be any default committed by the payer except a technical default and for that technical and venial default no interest need be charged. This is the view taken by the High Courts consistently, particularly by the Madhya Pradesh High Court on which the Deputy Commissioner of Income-tax (Appeals) relied on in reducing the rate of interest.
5. Chapter XVII of the Income-lax Act provided for the collection and recovery of tax. Section 190 provided for the general clause that notwithstanding that the regular assessment in respect of any income is to be made in a later year, the tax on such income shall be payable by deduction at source or by advance payment as the case may be in accordance with the provisions of Chapter X VII. Section 192 then provided for deduction of tax at source on salaries payable to any person at the stipulated rates. This responsibility of deducting tax at source and paying it to the Government was placed upon the person responsible for paying the salaries i.e. the employer. Under Section 193 the responsibility for deducting the tax at source and paying it to the Government was placed upon the person responsible for paying any income chargeable under the head "interest on securities". In respect of dividends the Principal Officer of the company paying the dividends is held responsible for deducting the tax at source. Similarly Section 194A made any person responsible for paying to a resident any income by way of interest other than interest on securities is made responsible for deducting the tax at source before paying the interest. These sections also stipulated the conditions and the time on which the amount of tax is to be deducted and also the period within which it is to be paid to the Government. Section 194B provided for tax to be deducted at source from winnings from lottery or crossword puzzles.
Section 194BB provided for winnings from horse race and Section 194C for payment to contractors and sub-contractors. After making these provisions for some other commissions etc. payable and also providing for circumstances where tax need not to be deducted at source or at lower rates than prescribed, Section 198 provided that all sums deducted in accordance with the provisions of Sections 192 to 195 shall for the purpose of computing the income of an assessee be deemed to be income received. Pausing here for a moment, the provisions made in Section 198 shows that it is out of the income of the payee assessee that tax is being deducted at source by the payer, on whom the responsibility for deducting the tax at source was placed under the Statute. Then Section 199 provided that any deduction made in accordance with the provisions of Sections 192 to 195 and paid to the Central Government shall be treated as a payment of the tax on behalf of the person from whose income the deduction was made or of the owner of the security or of the shareholder, as the case may be, and credit shall be given to him for the amount so deducted on production of proof of deduction of tax at source in making the assessment. Thus the scheme so far seen is nothing but a mode provided for the recovery of tax at source in respect of certain incomes, which are known or can be known and specified by deducting tax at source itself making it clear that the tax so deducted at source and made out to the Central Govt. shall not only be the income of the payee assessee on whose behalf the tax is so deducted but credit shall be given to that assessee while making his assessment. In other words for the lax deducted at source and for payment of it to the Government, the person responsible for paying the income is only constituted as a agent of the Government to pay the tax payable by the payee to the Government. In order to obligate the person responsible for paying the tax to discharge his duty promptly with due care and caution and does not abuse the powers given to him to deduct the tax at source by defaulting in paying the tax to the Central Govt., by retaining it for personal gain, certain civil consequences were provided, namely, payment of interest. This is to prevent only unjust enrichment by the person responsible for paying the tax to the Government. If such a tax that is required to be paid by the payer is already paid by the payee and since no double deduction of tax is provided for under this Act, it must in equity be presumed that the tax paid by the payee is the tax paid not only on his behalf but also in discharge of the obligation cast upon the payer. Therefore if Section 201 (1 A) provided for the payment of interest for commission of default in not deducting the tax or after deducting fails to pay the tax as required, simple interest has to be paid 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, it is only to compensate the Govt. for deprivation of the use of money. The crucial words in this section are the period for which the interest is to be computed. The interest is to be computed on the amount of tax which is required to deduct from the date on which such tax was deductible to the date on which such tax is actually paid. The date of deductibility is the date when the payer has to pay the amount of income or credit it to the account of the payee.
If on that date the payee undertakes the responsibility to pay the tax and actually pays it, there is no tax deductible by the payer at all and since it was actually paid by the payee the question of other date also does not arise. Since the purpose of recovery of tax is achieved by the payee paying the tax, there is no deprivation of user of money by the Government, the payer has to be absolved from the responsibility of paying the tax and if that is so, there is no failure to deduct or to pay the tax and consequently the consequences provided for the failure to deduct or pay the tax do not apply. It is this reasoning and logic that prevailed and found approval with the Madhya Pradesh High Court in the earliest case of CIT v. Manager, M.P. State Co-operative Development Bank Ltd. [1982] 137 ITR 230. This decision was later on followed by the same High Court in the case of Divisional Manager, New India Assurance Co. Ltd. (supra) and in the case of Life Insurance Corporation Ltd. (supra). Though all these cases relate to the tax to be deducted from salaries, the view taken by the High Court was that when the employee has paid the tax and when an assessment on the employee was completed, the Income-tax Officer has no jurisdiction under Section 201 of the Income-tax Act to demand further tax from the employer in respect of the tax sought to be deducted relating to such employee. In coming to this conclusion the High Court discussed the scheme of Chapter XVII and held that when there is no liability by the employee and when the employee discharges the liability of paying the tax, the employer need not be called upon to pay the tax and consequently the penal interest also. It is also brought to our notice by the learned advocate for the assessee that S.L.P. filed against this decision was also rejected by the Supreme Court, which was reported in 151 I.T.R. Statutes. Having regard to the scheme of the Act when the Deputy Commissioner of Income-tax (Appeals) found that the payee, namely, the Calcutta company had paid advance tax on this interest, to that extent the liability of the assessee can be deemed to have been discharged, and he cannot be again called upon to pay interest even for that period. It may be that if interest is levied in the hands of the assessee, as contended for by the Revenue, to that extent there may be unjust enrichment on the part of the Government because having already collected the tax due to it from the payee it is again seeking to collect the tax from the payer also, and what is more levying interest for non-payment of such tax.
6. For these reasons, we are of the opinion that the view taken by the Deputy Commissioner of Income-tax (Appeals) is not incorrect and we uphold it.