Judgment:
The assessee is one of the biggest public sector undertakings of the country. It deducts tax at source while making payments of salaries to its employees and deposits the same in time. However, it did not deduct the tax on the reimbursement of conveyance incurred by the employees in the course of performing their official duties under the Conveyance Maintenance Reimbursement Expenditure Scheme approved by the Central Government on the ground that the said reimbursement did not constitute income in the hands of the employees and alternatively if it constituted income, it was exempt under the provisions of s. 10(14) of the IT Act, 1961. The ITO, TDS-1, Surat, was, however, of the opinion that the assessee failed in its duty by not deducting tax on reimbursements made under CMRE Scheme. While passing the order, she did not serve any notice on any employee posted at Hazira of her intention of treating him as the principal officer of the assessee-company as required in s. 2(35)(b) of the Act.
2. The CIT (A), however, agreed with the opinion of the AO and confirmed the order under s. 201 of the Act. The assessee is in appeal before us.
3. We have heard the assessees counsel and the Departmental Representative. The counsel for the assessee mainly repeated the arguments that were advanced before the AO and the CIT(A) while the Departmental Representative strongly relied upon the orders of the lower authorities. Persons responsible for paying salaries, interest on securities, dividends, etc., are required, under the provisions of ss.
192 to 195 of the Act to deduct tax at source from the amount of such payments. Sec. 201 of the Act provides that where a person defaults in the fulfilment of the obligation to deduct tax at source and to pay it to the credit of the Central Government within the prescribed time, he will be treated as an "assessee in default in respect of the tax".
Accordingly, such a defaulter is liable to the imposition of a penalty under s. 221 of the Act in an amount not exceeding the amount of tax in arrears. Under s. 201(1A) it is provided that such defaulter will be liable to pay simple interest at 15 per cent per annum on the amount of tax from the date on which such tax was deductible to the date on which such tax is actually paid to the credit of the Central Government. This s. 201 enacts a three-fold punishment for a non-Government person including a company bound to deduct tax at source and defaulting to so deduct tax, or, after having deducted, defaulting in making payment thereof to the credit of the Central Government as prescribed in s. 200 r/w r. 30 of the IT Rules, 1962. The defaulter is to be treated as an assessee-in-default and a penalty under s. 221 is imposable. Such person failing to deduct tax at source while being liable to deduct, or failing to make due payment after having deducted tax, is liable to pay interest at 15 per cent per annum on the amount of such tax from the date on which such tax was deductible to the date when such tax is actually paid. The two consequences are without prejudice to each other and both will operate simultaneously even against persons who, being liable, have failed to make the deduction of tax at source. Sec. 201(2) creates a statutory charge upon all the assets of the defaulter for the amount of tax deducted and not paid plus the amount of interest leviable under s. 201(1A). The liability that is cast upon the persons concerned under s. 201 is not because of any notice of demand, but because of the operation of the statute itself. When the liability is incurred, no further demand notice is necessary to recover tax and the interest thereon. There are two more important issues which cannot be forgotten at this stage. Where the regular assessment of an employee had been completed and the amount of tax fully paid by him, the AO has no jurisdiction under s. 201 to demand further tax from the employer in respect of the tax deducted relating to such employee [CIT vs. Manager, Madhya Pradesh State Co-op. Development Bank Ltd. (1982) 137 ITR 230 (MP)]. Similarly, the employer cannot be deemed to be an assessee-in-default for not deducting tax at source on an amount which has been held to be not includible in the total income of the employee as per the assessment made in the hands of the employee concerned. [CIT vs. Kannan Devan Hill Produce Co. Ltd. (1986) 161 ITR 477 (Ker)]. It is notable that in this case neither the AO nor the CIT (A) have discussed this issue. It seems that in some of the cases of the employees the assessments have been completed and the tax have been paid by the employees. Under such a situation we do not know as to how the Department can proceed further and recover the amount on the assessee by treating him to be in default. Similarly, we do not know as to whether the amount in dispute have been added to the total income of the employees and have been assessed to tax or not. The Departmental Representative also is not in a position to help us in this regard.
A perusal of s. 192 makes it clear that the liability of an employer is to deduct tax on the estimated income of the assessee-employee. While making such estimate, an employer is 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. In such a case an employer cannot be made liable to pay interest under s. 201(1A) of the Act [Gwalior Rayon Silk Co. Ltd. vs. CIT (1983) 140 ITR 832 (MP)].
In this case the scheme which has been brought to our notice known as CMRE was issued by the ONGC with the approval of the Central Government The scheme aims at promoting efficiency by encouraging the employees to own and maintain conveyance for using such conveyance for journeys undertaken by them for official work. Reimbursement is granted for one vehicle subject to the condition that the employee is in complete ownership and possession of the conveyance which is to be maintained in good running condition and which is actually used for official journeys. Further, the reimbursement of the expenditure actually incurred by the employees to maintain and run the conveyance for official use is not made automatically but is released only after the employee gives a certificate that the expenditure incurred on the maintenance and running of the vehicle during the relevant month is in excess of the amount claimed. The ceiling under CMRE scheme have been changing from time to time. We are of the opinion that the assessee could be under genuine impression in such a situation that the amount in question was an item which was exempt under s. 10(14) of the Act.
Under s. 10(14) exemption is allowed provided the following conditions are fulfilled : (i) It is not in the nature of a perquisite within the meaning of s.
17(2); (ii) Secondly, the allowance and benefit is specifically granted to meet expenses which are wholly, necessarily and exclusively incurred in the performance of duties of an office or employment of profit; (iii) Thirdly, such an allowance or benefit stands notified by Central Government in the Official Gazette; (iv) Fourthly, the option is available only to the extent to which such expenses are actually incurred for that purpose.
There is no dispute that condition No. (i) and condition No. (ii) have been satisfied. While going through the Circular No. 690, dt. 1st September, 1994, on this subject reported in (1994) 209 ITR (St) 96, the condition No. (iii) is satisfied in view of Govt.s notification No.GSR 606(E) dt. 9th June, 1989. Para 3 of the Circular dt. 1st September, 1994, is also applicable to the facts of the case. In any case the assessee was under the genuine impression that the amount in question was exempt under s. 10(14). We are therefore, of the opinion that the employer cannot be made liable to pay tax under s. 201(1) [Gwalior Rayon Silk Co. Ltd. (supra)]. There is no case against this view taken by the Madhya Pradesh High Court and we hold that the same has to be applied to the facts of the case. Therefore, we are of the opinion that the AO was not justified in charging interest under s.
201(1) and the CIT (A) was further not justified in confirming the same.
4. In the result, the assessees appeal is allowed and the tax charged is accordingly cancelled. We are also fortified by the decision of the Tribunal in the case of Nestle India Ltd. vs. Asstt. CIT in ITA Nos.
5975 to 5992/Del/1996 reported in (1997) 61 ITD 444 (Del).