Assessee in default u/s 201 not absolved if the resident who receives the payment without TDS files a loss return. Proviso require actual payment of tax-High Court
ABCAUS Case Law Citation:
ABCAUS 2256 (2018) (03) HC
The appellant assessee was aggrieved by the order treating the appellant as an assessee in default under Section 201(1) and initiation of recovery of the tax deduction at source (TDS) which the assessee ought to have deducted and remitted, with respect to the expenses disallowed u/s 40(a)(ia) of the Income Tax Act, 1961 (the Act).
The appellant assessee had claimed rent payments by crediting a limited company in the books of account. However no TDS was deducted thereon as required under Chapter XVII-B of the Act. During the Assessment the AO made a disallowance u/s 40(a)(ia) for failure to deduct TDS. Also, the proceedings for recovery of TDS initiated by treating the assessee as in default within the meaning of section 201(1).
The assessee , not finding any relief from the appellate authorities, approached the Hon’ble High Court.
Before the Hon’ble High Court the assessee inter alia contended that no actual payment was made but for creation of the liability in the accounts. It was submitted that as per proviso introduced by Finance Act, 2012 the assessee was absolved from being treated as in default.
The Hon’ble High Court observed that as per the first proviso to Section 201(1), when a resident, who receives any sum from an assessee, has furnished his return of income under Section 139 and taken into account such sum for computing income, as also paid the tax due on the income declared by him in such return of income; then assessee would stand absolved from being treated as an assessee in default, despite the fact that the assessee had failed to deduct at source, the whole or any part of the tax in accordance with the provisions of Chapter-XVII-B.
When an assessee has failed to deduct tax by virtue of the proviso to Section 201(1), he is not treated as an assessee in default, only when the person from whom tax was to be deducted has paid the tax.
The cumulative effect of the second proviso to Section 40(a)(ia) and the first proviso to Section 201(1) would be that on payment of tax by the resident receiver, the assessee who failed to deduct tax under Chapter-XVII-B on any sum paid to the resident receiver, would not be considered as an assessee in default and the additions under Section 40(a)(ia) would also not have to be made in the case of that assessee.
However the Hon’ble High Court observed that to avail of the beneficial provisos under Sections 40(a)(ia) & 201(1), there should be
(i) return of income under Section 139
(ii), with computation of income including such amounts received, as also
(ii) payment of tax on such income.
Only if all the three conditions are satisfied, would the beneficial provision be applicable to an assessee who failed to deduct tax at source.
It was noted that in the present case, admittedly, resident-receiver to whom the assessee paid or credited the lease rent had filed a return belatedly and not paid any tax due on the income declared.
The Hon’ble High Court opined that when there is no tax paid on the income declared; even if for reason of a loss return, there cannot be any claim raised by the assessee in default to absolve him from the consequences flowing from Sections 201(1) and 40(a)(ia). He will be treated as an ‘assessee in default‘ and would be liable to pay the amount of TDS with interest as also subject to the expenses being disallowed.
The assessee had raised an additional ground urged on the basis of Section 43(2) of the Act that the term “paid” had been defined as an amount paid or actually incurred and hence in the case of a loss return, even if there was no actual payment, the loss return, which does not raise a liability to pay, had to be liberally construed.
The Hon’ble High Court opined that the definition clause referred was with reference to ‘income from profits and gains of business’. By the specific words employed in sub-section (2) of Section 43, this was with reference to the method of accounting; which is either on accrual or receipt. In the instant case, no ground was raised on the basis of the method of accounting of the assessee, therefore the contention was only to be rejected. The definition clause had nothing to do with Section 201(1) or the determination of an ‘assessee in default‘.
