1. At the instance of Revenue on the application made under Section 256(2) of the IT Act, 1961 the following two sets of questions have been referred impugning upon two controversies relating to recovery of interest in respect of tax not deducted at source by the assessee and the levy of penalty in respect of the same default.
RA Nos. 194 to 201/Jp/1991
1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in invoking provisions of Section 231 of the IT Act, 1961, and thus holding the levy of penalty under Section 221 for non-payment of tax deductible at source as barred by time?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that no penalty under Section 221 is leviable on the tax deductible at source and non-deduction of tax being held for good and sufficient reasons?
RA Nos. 202 to 209/Jp/1991
1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in invoking provisions of Section 231 of IT Act, 1961 and thus holding the levy of interest as barred by time?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that no interest under Section 201(1A) is leviable on the tax deductible at source, the non-deduction of tax being held for good and sufficient reasons?
2. The respondent-assessee is a registered firm which carried on business as contractors and taken contracts from the PWD and Irrigation Department of the State Government. The assessee was also subletting these contracts to subcontractors for which commission @ 3 per cent was charged, which was declared as his taxable income.
3. Section 194C was inserted in IT Act, 1961 by Finance Act, 1972 w.e.f. 1st April, 1972. Under Sub-section (1) of Section 194C any person responsible for paying any sum to any resident for carrying out any work (including supply of labour for carrying out any work) in pursuance of contract between the contractor and the various other persons enumerated in the provisions is required to make deduction from payments made by contractors to sub-contractors @ 1 per cent as income-tax on income comprised therein at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of cheque or draft or by any other mode whichever is earlier.
4. Sub-section (2) of Section 194C casts a similar obligation on the contractor to deduct tax at source from payments made to sub-contractors. It envisages that any contractor referred to in Sub-section (1) who is other than the individual or HUF and responsible for paying any sum to any resident in pursuance of a contract with the sub-contractor for carrying out or for the supply of labour for carrying out the whole or any part of the work undertaken by the contractor or for supplying, whether wholly or partly, any labour which the contractor has undertaken to supply, shall, at the time of credit of such sum to the account of sub-contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode to his sub-contractor deduct 1 per cent of such sum as income-tax on the income comprised therein. The duty to deduct the tax at source is statutory and arises at the time when the credit is made to account or payment is made. Sub-section (3) of Section 194C of the Act made an exception to the general rule that until such payments as and when made do not exceed the limit prescribed therein, the obligation to deduct the tax at source does not arise while the provision initially prescribed the limit of credit or payment upto which duty to deduct tax at source did not arise was Rs. 5,000. This limit was enhanced to Rs. 10,000 w.e.f. 1st June, 1982 by Finance Act, 1982 and was further enhanced to Rs. 20,000 by Act No. 22 of Finance Act, 1995 w.e.f. 1st July, 1995. In this reference we are concerned with the assessment periods 1974-75 to 1981-82. The last of the previous years in relation to which obligation for deduction of tax at source may have arisen expired on 31st March, 1981.
5. For these assessment years for the first time, two consolidated notices were issued to the assessee, one under Section 221 and another under Section 201(1A) on 26th Feb., 1983 calling upon the assessee to show cause why simple interest @ 12 per cent per annum be not charged under Section 201(1A) upto the date of the credit of payment in account of sub-contractor and why penalty under Section 221 be not levied on the assessee.
6. The assessee had replied that notice issued on 26th Feb., 1983 for recovery of any amount relating to non-deduction of tax at source upto financial year closing on 31st March, 1981 was barred by time in terms of Section 231. It was contended that the assessee has not deducted tax at source from those subcontractors who did not have taxable income.
7. While AO found vide order dt. 1st Nov., 1984 that assessee had deducted tax at source in respect of three sub-contractors who had taxable income namely, M/s Sushil Construction Company, M/s Sanjay Construction Company and M/s Ramesh Construction Company. On these points the ITO said in his order that the default in respect of which the assessee has failed to deduct the tax as per provisions of Section 194C r/w Section 201(1A) of the IT Act, 1961 without any good and sufficient reason and, therefore, penalty of varying sums was imposed for each assessment year between 1974-75 to 1980-81. Similarly, interest was also calculated for same period and it was also levied on the sum so computed which ought to have been deducted at source, but which has not been so deducted by assessee for each assessment year. The interest in all these separate orders was charged from the last date of ending of previous year's 31st March relevant to assessment year, in relation to which assessee was required to deduct tax at source and deposit it with Central Government within time prescribed upto the date of the order. The ITO has not expressed his opinion to the questions of limitation at all, and has rest contended with saying that the arguments have been taken for the sake of arguments only having no force.
8. On appeal the AAC deleted the penalty and interest charged for asst. yrs. 1974-75 to 1979-80. In respect of asst. yrs. 1974-75 and 1979-80 the first appellate authority upheld the assessee's contention that assessee has not bona fidely deducted tax against the amount payable to those sub-contractors who did not have taxable income and, therefore, the assessee could not be held responsible for such non-deduction. The first appellate authority also held the initiation of recovery proceedings for the asst. yr. 1974-75 as barred by time under Section 231. However, in relation to asst. yrs. 1980-81 and 1981-82 the first appellate authority found initiation of proceedings for said years within limitation provided under Section 231 and sustained the imposition of penalty and charge of interest in respect of tax not deducted at source.
9. On further filing of the appeal, the Tribunal allowed the assessee's appeal in respect of asst. yr. 1981-82 and dismissed the appeal of the Revenue for asst. yrs. 1974-75 to 1979-80. It was held by the Tribunal that charging of interest under Section 201 in this case was not permissible for the simple reason that ITO has not brought on record any material to controvert the appellant's assertion regarding good and sufficient reasons for not deducting the tax at source. It was also found that the position in relation to the penalty under Section 221 is similar. The penalty could not have been imposed automatically and secondly because there was a disobedience beyond Section 194C(2).
10. No allegation of default as referred to by the authority is made by the Revenue. Secondly, interest and penalty levied by the AO were deleted in toto in the aforesaid circumstances. The aforesaid two sets of questions have been referred to this Court for its opinion.
11. The question No. 1 relates to the limitation within which recovery proceedings could have been initiated in respect of tax to be deducted at source under Section 194C(2). Section 231 since omitted from the statute w.e.f. 1st April, 1989 by Direct Tax Laws (Amendment) Act, 1987 reads as under:
Section 231. Period for commencing recovery proceedings.-Save in accordance with the provisions of Section 173 or Sub-section (7) of Section 220, no proceedings for the recovery for any sum payable under this Act shall be commenced after the expiration of three years from the last day of the financial year in which the demand is made, or, in the case of a person who is deemed to be an assessee-in-default under any provision of this Act, after the expiration of three years from the last day of the financial year in which the assessee is deemed to be in default.
Explanation 1-The period of three years referred to shall be reckoned-
(i) where an assessee has been treated as not being in default under Sub-section (6) of Section 220, as long as his appeal is undisposed of, from the last day of the financial year in which the appeal is disposed of;
(ii) where recovery proceedings in any case have been stayed by any order of a Court, from the last day of he financial year in which the order is withdrawn;
(iii) where the date of payment of tax has been extended by an IT authority to another date, from the last day of the financial year in which such other date falls;
(iv) where the sum payable is allowed to be paid by instalments, from the last day of the financial year in which the last of such instalments is due.
Explanation 2-A proceeding for the recovery of any sum shall be deemed to have commenced within the meaning of this section, if some action is taken to recover the whole or any part of the sum within the period hereinbefore referred to.
12. Before proceeding further we may notice that period of three years stated in the aforesaid provision was substituted for one year w.e.f. 1st Oct., 1984 only vide the Taxation Laws (Amendment) Act, 1984. The provision indicates that it provides limitation for commencing proceedings for recovery of any sum payable under the Act other than the provisions governed by the Section 173 and Sub-section (7) of Section 220, which relate to the assessment and consequential demand raised in respect of non-resident Indians against their agent. We are not concerned with such contingencies in this case.
13. Section 231 at the relevant time provided embargo against commencing of the recovery proceedings by any officer competent under the Act after the expiry of one year upto 1st Oct., 1984, and thereafter after the expiry of three years from the last date of financial year in which the assessee is deemed to be in default. Therefore, in order to find whether the proceedings commenced in this case on 23rd Feb., 1983 were within limitation or beyond limitation prescribed under Section 231, from the last date of financial year in which the assessee is deemed to be in default, it is necessary to consider the provisions under which the assessee is deemed to be in default in respect of his obligation to deduct tax at source and the financial year in which the assessee is deemed to be in default in respect of each of the assessment years in question.
14. It may also be noticed here that one basic concept in respect of assessment year is that it relates to a definite accounting period, the income earned during which is to be assessed for the concerned assessment year. The accounting period is technically described as 'previous year' vis-a-vis assessment year. The previous year in relation to which assessment is to be made for any assessment year comes to a close before commencement of any assessment year. Every assessment year commences each year on 1st of April of a calendar year and closes on 31st March of succeeding year. Thus, asst. yr. 1974-75 commenced on 1st April, 1974 and ended on 31st March, 1975. The previous year in relation to asst. yr. 1974-75 is the accounting period closing on 31st March, 1974. Applying this principle for the asst. yrs. 1974-75 to 1981-82 the accounting period in relation to which the liability to deduct tax at source would have arisen must have fallen before 31st March, 1981. The liability to deduct any tax at source after 31st March, 1982 would be relevant to be dealt with in relation to asst. yr. 1982-83 and not earlier thereto. Therefore, at the threshold it can be safely assumed that the last of the financial years in respect of which the assessee is deemed to be in default is the previous year relating to asst. yr. 1981-82 or in other words the financial year ending on 31st March, 1981. If the assessee is not in default prior to 31st March, 1981 he could not have been dealt with as assessee-in-default for asst. yr. 1981-82 because all proceedings in respect of financial year commencing after 1st April, 1981 must relate to the proceeding relating to asst. yr. 1982-83 or thereafter. No recovery proceeding in question relates to asst. yr. 1982-83 or thereafter.
15. Section 231 of the Act of 1961 clearly envisaged before its amendment that no proceedings for recovery of any sum payable under the Act shall be commenced after expiration of one year or three years as the case may be from the last day of financial year in which demand is made or in the case of a person who is deemed to be an assessee-in-default under provisions of this Act after expiration of the period from the last day of the financial year in which assessee is deemed to be in default.
Therefore, the commencement of the period of limitation is to be counted from 1st April following the financial year in which the assessee is deemed to be in default.
16. Since in the case of tax deduction at source no demand note is issued but an obligation is cast upon person making payment, the question for raising of a demand for deduction of tax at source or its payment thereafter does not arise. Therefore, we have to search for the date on which the assessee can be deemed to be an assessee-in-default for the purpose of determining the date with effect from which the period of limitation for initiating the recovery proceedings commenced and to find whether notice issued on 26th Feb., 1983 was within limitation as such. Undoubtedly, the recovery proceedings were commenced when Section 231 was operative, and with reference to said provision it has to be considered whether the officer concerned had jurisdiction to initiate such proceedings on 26th Feb., 1983 when he issued notice for the first time.
17. This takes us to the provisions relating to collection and recovery of tax under Chapter XVII of the Act of 1961 which consists of Section 190 to 234D. Section 190 provides the various modes of collection of tax which include by deduction at source or by advance payment or by payment under Sub-section (1A) of Section 192. In the present case we are not concerned with the liability of the assessee to make direct payment of tax payable by him in respect of his income but we are concerned with the provisions relating to deduction of tax at source where the person obligated to deduct certain amount of tax at source is himself not liable for any tax on the income embedded in the payments made by him but which belongs to the recipient of such payment. The provisions relating to deduction at source are contained in respect of various payments from Sections 192 to 196B. We are herewith concerned with the obligation cast under Section 194C to which we have adverted to earlier. Under these provisions the duty is cast upon the contractor to deduct tax on the income included in the payments made by him to the sub-contractors provided the payments made to sub-contractors do not exceed Rs. 5,000. The time for making such deduction is at the time of making payment or crediting the amount to be paid to the sub-contractor in his account by the contractor. Where assessee is under an obligation to deduct tax while making payment to others, he is further obligated to make payment of such amount of tax deducted by him to the Central Government or as the Board directs in terms of Section 200 of the Act of 1961 which provides that any person deducting any sum in accordance with the provisions of Chapter XVII shall pay within the prescribed time sum so deducted to the credit of the Central Government or as the Board directs.
18. Thus, the time within which the amount deducted at source is to be paid to the Central Government or to the authority directed by the Board is prescribed by Rule 30 which inter alia provides that a sum deducted under Section 194C is to be paid to the Central Government or as per the directions of the Board within one week of the last day of the month in which deduction is made and this liability to pay sum deducted in terms of Section 194C is a statutory obligation which does not require any demand to be issued. In fact, Section 200 r/w Rule 30 enjoins a duty on the person making any deduction of tax at source to pay sum so deducted within the time prescribed in Rule 30. This duty to pay in time is solely upon the person so obligated to deduct tax at source.
19. Section 201 of the Act provides when assessee can be deemed to be in default. Section 201(1) and (1A) which is relevant for the purpose reads as under:
Consequences of failure to deduct or pay.-(1) If any such person 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 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:
Provided that no penalty shall be charged under Section 221 from such person, principal officer or company unless the AO is satisfied that such person 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 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 eighteen 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.
20. The statutory consequence of not deducting the amount when required to be deducted or not making the payment after such deduction has been made within the time prescribed are two-fold. It provides that if any such person is required to deduct tax at source does not deduct or after deducting fails to pay such tax as required for or under this Act or it shall without prejudice to any other consequences which may be incurred, be deemed to be assessee-in-default in respect of tax, so as to attract penalty imposable on assessee-in-default in terms of Section 221. Apparently, if the assessee had deducted the tax in accordance with the provisions of the Act, he is deemed to be an assessee-in-default in respect of such sum deducted if he fails to pay such tax to the Central Government within the time prescribed which in the present case is seven days. Since in the present case the undisputed position is that the assessee has not deducted any sum when it was required to be deducted, he is deemed to be assessee-in-default in respect of the tax as on the date he made payment of any sum to his sub-contractor or credited such amount in his account as the case may be. Be that as it may, it all relates to the respective financial years relating to the respective assessment years that assessee has been deemed to have been in default inviting recourse to recovery proceedings against the defaulter.
21. We have noticed above that two consolidated notices were given for levy of interest under Section 201(1A) and imposition of penalty under Section 221 by considering the assessee-in-default for asst. yrs. 1974-75 to 1981-82, therefore, the conclusion is irresistible that it was comprised that assessee was deemed to be in default in terms of Section 201(1A) during the financial years 1974-75 to 1980-81 relating to each successive asst. yr. 1974-75 to asst. yr. 1981-82.
22. The last of the financial year 1981-82 ended on 31st March, 1981, therefore, in terms of Section 231, as it stood on 28th Feb., 1983, no recovery proceedings could have been initiated after expiry of one year from 31st March, 1981 even in respect of asst. yr. 1981-82. The limitation for effecting recovery in respect of sums not deducted at source in respect of each of the assessment years under notice, which had expired long before and the period for initiating proceedings in respect of financial year 1981-82 also expired on 31st March, 1982. Apparently, the notice initiated the recovery proceedings in respect of the sum not deducted from payments made to sub-contractor in terms of Section 194C(2) could not have been initiated on the date notices were issued by the AO.
Therefore, in view thereof the Tribunal was justified in coming to the conclusion that the recovery proceedings in respect of sum not so deducted under Section 194C(2) upto the financial year ending on 31st March, 1981 were barred by time.
23. It may be pertinent to notice that no action of any sort was taken by the respondents to effect the recovery proceedings for recovering the sums which were required to be deducted by the assessee according to the ITO as and when payments were made by him to his sub-contractors. In other words no proceedings were ever taken for recovering the principal sum or interest accrued on sum liable to be deducted by the assessee upto the end of financial year 1981-82 in respect of which alone the recovery proceedings were initiated.
24. If the principal sum itself has not been sought to be recovered, the next question arises whether there can be any recovery proceedings in respect of interest. It appears to us that if the recovery of the principal sum is not permissible, the recovery of interest thereon also is not permissible as the interest is only ancillary and adjunct to the principal sum as its servicing charges. The very concept of interest is to compensate the person to whom the money belongs by the person who has used that money. So far as the principal sum is recoverable, the interest is also recoverable. It is immaterial whether the creditor insists upon the recovery of the entire sum including interest or only on the principal sum, so long as the principal amount is recoverable.
25. This may be looked from another angle. Sub-section (1A) of Section 201 envisages charge of simple interest, at rates varying from time to time, until the tax is actually paid. Therefore, the determination of interest is directly connected with the actual payment of tax, without reference to which the liability of interest cannot be determined. When principal amount which could be recovered in terms of Section 201 by considering the assessee to be in default but cannot be recovered in terms of Section 231, the question would not arise requiring the assessee to pay interest independently for indefinite period while in respect of principal sum, the assessee cannot be subjected to recovery proceeding under the Act of 1961.
26. We are fortified in taking this view by the Bench decision of Kerala High Court in Traco Cables Co. Ltd. v. CIT : [1987]166ITR278(Ker) , wherein Justice Kochu Thommen, as His Lordship then was, after analysing the provision of Section 201 vis-a-vis other provisions of the Act requiring the assessee to pay the tax and the interest due thereon, on creation of a demand and liability to pay penalty on culmination of penalty proceeding held that in case the liability to deduct tax at source is incurred, no demand is necessary to make it payable unless the Revenue were to initiate proceedings for imposition of penalty in terms of proviso to Section 201(1) r/w Section 221.
The Court held:
This section r/w Sections. 195 and 200 would indicate that a person responsible for deduction of tax at source in terms of Section 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 Section 200 within the time prescribed under Rule 30. Section 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 Section 195. 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, 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 tax becomes payable only upon service of a notice of demand under Section 156. The reason is that no liability arises in such a case until service of a notice of demand, because the liability to pay tax, until determined by means of a proper assessment, remains merely ambulatory, and becomes fixed only upon the completion of the assessment and demand.
Thus, laying the foundation of distinction, the Court observed:
On the other hand, Sections. 195, 200 and 201 deal 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 Section 195 or failure to credit the sum deducted as required by Section 200. As soon as such failure occurs, the liability arises once and for all, and there is no further requirement of computation or assessment. Once the liability is incurred, no further demand is necessary to recover the tax and the interest due thereon, unless the Revenue were to initiate proceedings for imposition of penalty in terms of the proviso to Section 201(1) r/w Section 221.
27. Considering that the liability of tax and interest being automatic and no demand is created until recovery proceedings for tax are shown to be initiated, the interest added thereon automatically also becomes a part of that recovery and if the recovery of principal amount of tax to be deducted at source itself becomes barred by time, no interest, which is an adjunct of principal sum also becomes barred by time with principal sum.
28. The principle was reiterated in the later decision of Kerala High Court in CIT v. Meat Products of India Ltd. : [1997]224ITR1(Ker) . Similar views have been expressed by the High Court of Calcutta in CIT v. Dunlop Rubber Co. (India) Ltd. : [1980]121ITR476(Cal) and Delhi High Court in Bal Kishan Dass v. CIT : [1976]103ITR825(Delhi) and Anr. case of Madras High Court in Mettur Chemicals and Industrial Corporation Ltd. v. IAC : [1984]150ITR341(Mad) .
29. The Revenue has relied on a decision of Madras High Court in Mettur Chemicals and Industrial Corporation Ltd. v. IAC (supra) which had opined that in order to treat that the assessee has defaulted in terms of Section 201, a written order is necessary so as to enable him to file an appeal.
30. With utmost respect, we are unable to accept the proposition for the reasons stated above vis-a-vis considering whether the recovery proceedings in respect of tax not deducted and deposited when the period of limitation runs.
There is no ambiguity in Section 201 about the time of occurrence of contingency when the assessee is deemed to be in default, nor there is any ambiguity in language of Section 231, the time when the period of limitation within which recovery proceeding can be initiated commences. We may notice here that the Madras High Court was not directly concerned with the computation of limitation for initiating the recovery proceeding in respect of an assessee deemed to be in default regarding his obligations under Section 201. Therefore, otherwise also the decision of Madras High Court reported in : [1984]150ITR341(Mad) (supra) did not directly govern the present case and is distinguishable.
31. It may be pertinent to notice that in the present case, no proceeding was initiated for recovery of the sums which were required to be deducted at source either against the respondent-contractor or against the person by whom the income may have actually been earned so as to make him liable to tax. The notice of recovery of the sum liable to be deducted at source by the respondent-assessee for failure to deduct tax at source within financial year upto 1980-81 has become barred by time.
32. In view of the aforesaid discussion, we hold that the Tribunal was right in holding that the recovery of interest in respect of the principal sum required to be deducted at source by the assessee has also become barred by time under the provisions of Section 231, along with recovery of principal sum becoming barred by time.
33. So far as question No. 2 is concerned, it need not be answered for the present purposes in view of the answer to the first question. However, prima facie, we are of the opinion that the existence of good and sufficient reasons of not deducting the tax which was required to be deducted at source but not deducted, or if deducted not deposited within time prescribed is not germane for the purpose of levy of interest. For the purpose of not deducting tax at source or non-depositing the tax deducted at source, existence of good and sufficient reasons is a relevant consideration only in case penalty is to be levied.
34. The second set of the questions which has been referred to this Court under the direction of the Court under Section 256(2) for its decision along with statement of case relates to asst. yrs. 1974-75 to 1981-82 is in respect of the penalty under Section 221 which was levied by ITO in terms of Section 221 but was deleted by the Tribunal.
35. The questions have been referred in the following terms in respect of RA Nos. 194 to 201/Jp/1991 relating to penalty proceedings:
1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in invoking provisions of Section 231 of the IT Act, 1961 and thus holding the levy of penalty under Section 221 for non-payment of tax deductible at source as barred by time?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that no penalty under Section 221 is leviable on the tax deductible at source and non-deduction of tax being held for good and sufficient reasons.
36. The facts about levy of penalty are same, that is to say non-deduction of tax at source by the respondent-contractor in respect of payments made by him to sub-contractors, which he was required to deduct under Section 194C(2) of the Act of 1961. Therefore, we need not repeat the facts. Along with initiating recovery proceedings, in respect of failure of the assessee to deduct the tax while making payment to his sub-contractor in terms of Section 194C(2), the AO has also initiated proceeding by issuing notice under Section 221 for levy of penalty for non-deduction of tax at source in respect of payment made by the respondent during the accounting periods relevant to the aforesaid assessment years. As on the date, notices were issued and order of penalty was passed by the ITO under Section 221, the provisions read as under:
(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 AO may direct and in the case of a continuing default, such further amount or amounts as the AO may, from time to time, direct, so, however, that the total amount of penalty does not exceed the amount of tax in arrears:
Provided that before levying any such penalty, the assessee shall be given a reasonable opportunity of being heard:
Provided further that where the assessee proves to the satisfaction of the AO that the default was for good and sufficient reasons, no penalty shall be levied under this section.
Rest of the provisions, we are not concerned with the present purpose.
37. Section 221 provides general provision for levy of penalty in case the assessee is deemed to be in default. Section 201 while laying down the rule when a person is liable to pay any sum to Central Government under Section 194C is deemed to be in default, made a specific provision in respect of penalty to be imposed under Section 221 on any person deemed to be in default for the reason that he has not deducted the tax at source when the assessee was required to do so under the provisions of the Act or after deduction he failed to deposit the same as required under the Act.
Proviso to Section 201(1) reads as under:
Provided that no penalty shall be charged under Section 221 from such person, principal officer or company unless the AO 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.
38. The contours of general provision of Section 221 and contours of special provision of Section 201 regarding the case in which penalty cannot be imposed by the ITO make out the clear distinction between two provisions. The penalty is imposed in respect of assessee deemed to be in default in terms of Section 201. The provisions of Section 221 in respect of its second controversy stand modified to the extent that provision has been made in contravention to Section 201. In this case, in the matter of penalty r/w Section 201 an obligation is cast upon the AO to be satisfied that default by assessee was without good and sufficient reason. The burden was upon the Revenue to establish that the assessee has not deposited the tax at source without good and sufficient reasons. In other words, in absence of such finding, no negative terms for levying penalty can be made and the burden specifically lies on the Revenue.
39. In these circumstances, the Revenue has failed to discharge its burden in terms of proviso to Section 201 by not placing any material on record that the assessee has defaulted without good and sufficient reasons particularly keeping in view the fact that the assessee has under bona fide belief that since subcontractors to whom payments were made did not have taxable income, no sum was required to be deducted at source. The bona fide of belief is fortified from circumstances that in case the assessee had deducted requisite sum from payments made to sub-contractors named in order, were all assessees under IT Act and in respect of persons tax has not been deducted at source, no proceedings for assessing their income have ever been initiated. In other words, no tax is ultimately assessed in the hands of those who received income embedded in payments made to them. This was in spite of the fact that respondent being a contractor all payments made by him to his sub-contractor were all part of record.
40. In these circumstances, the conclusion reached by the Tribunal that the AO has failed to bring on record any material that the assessee has not deposited tax without any good and sufficient reason is a finding of fact and cannot be interfered while considering the question in the jurisdiction under Section 256.
41. As a result, the question No. 2 referred in this regard is answered in affirmative that is to say in favour of the assessee and against the Revenue and we hold that the Tribunal was justified in deleting the penalty.
42. In view of our conclusion of question No. 2, the question No. 1 has become of academic importance, however, prima facie we are of the opinion that the principle on which recovery of non-deduction of tax at source or non-depositing of tax deducted at source which becomes barred by limitation under Section 231, is not applicable to recover penalty imposed under Section 221. The liability to pay the penalty under Section 221 does not arise automatically. Levy of penalty depends on making an order to this effect in appropriate proceeding under Section 221 and a notice of demand has to be issued before this amount of penalty becomes payable. Hence, until levy of penalty and issue of notice of demand for such penalty levied, the assessee does not become a defaulter. He is deemed to be an assessee-in-default if he fails to make payment of sum demanded vide a proper notice within time specified therein. The order of penalty has come into existence only after notice under Section 221 was issued in October, 1994 and order of penalty was passed only in November, 1994. The levy of penalty could not be said to be barred by time.
43. Accordingly, we answer question No. 2 referred to in RA Nos. 194 to 201/Jp/1991 and question No. 1 in RA Nos. 202 to 209/Jp/1991 in affirmative that is to say in favour of assessee and against the Revenue.
44. In view of the conclusion on question No. 2 arising out of RA Nos. 194 to 201/Jp/1991 and question No. 1 arising out of RA Nos. 202 to 209/Jp/1991, we do not answer the question No. 1 in the first group and question No. 2 in the second group, respectively.
No costs.