Assessee is to be treated as Assessee in default if he fails to deduct tax at source u/s 195

Where assessee failed to deduct tax at source under section 195 from payment made to non-residents on purchases of immovable property from them and also assessee failed to obtain certificate for non-deduction of TDS, assessee was, therefore, rightly treated by AO as assessee-in-default under section 201(1).

Assessee purchased immovable property from five co-owners and out of 5 sellers, 3 were non-residents and remaining two were resident. Assessee failed to deduct TDS as required under section 195 from payment made to non-residents. CIT(A) directed AO that deductee|s tax liability would be ascertained as per CBDT Instruction No. 2/1014 and treated assessee as assessee-in-default.

Held: Assessee made payments to non-residents but not deducted tax at source as required under section 195. Assessee also did not obtain non-deduction certificate from concerned AO. Consequences for failure to deduct tax at source were enshrined in section 201 and as per section 201(1), assessee would be deemed to be assessee-in-default in respect of such tax. AO determined tax liability of non-residents on estimation which was not correct. AO/ITO (International Taxation) was, therefore, directed to treat assessee-in-default to the extent of actual tax liability, instead of estimation.

Decision: Against the assessee.

Followed: Bangalore in (2013) 55 SOT 441 (Bang-Trib).

Distinguished: Jagran Prakashan Ltd. v. Dy. CIT (TDS) (2012) 345 ITR 288 (All) and CIT v. Ranoli Ingestment (P) Ltd. & Ors. (1999) 235 ITR 433 (Guj).

IN THE ITAT, VISAKHAPATNAM BENCH

V. DURGA RAO, JM & D.S. SUNDER SINGH, AM

Sri Teki Venkata Ramana Rao v. ITO

ITA No.151/Viz/2017

10 August, 2018

Appellant by: I.Kama Sastry, AR

Respondent by: V.Appala Raju, DR

D.S. Sunder Singh, AM

This appeal is filed by the assessee against the order of the Commissioner (Appeals) (CIT(A))-10, Hyderabad vide I.T.A.No.0459/CIT(A)-10/2015-16 dated 30-9-2016 for the assessment year 2012-13.

2. The assessee raised six grounds in this appeal as under:

1. The learned AR is not at all correct and the learned Commissioner (Appeals) is not correct in treating the assessee as an assessee in default for non deduction of tax at source under section 195 when it is very much acknowledged by the learned assessing officer himself that all the three non-residents have filed their return of income in India for the relevant assessment year declaring nil capital gains from the transfer of immovable property to the assessee. This is contrary to the decision of the Honourable Supreme Court.

2. The liability to tax if any has to be determined in the hands of the nonresident sellers and collected from them once they have filed their returns of income.

3. The learned assessing officer is not at all correct in treating the assessee as an assessee in default for non deduction of tax at source under section 195 for the principal amount of tax of Rs. 9,83,538. In view of the clear mandate of subsection (2) of section 201 that such a charge can be created only when tax was deducted and not paid to the Government and not when tax was not deducted.

4. The learned assessing officer is not at all correct in the computation of long term capital gains by adopting an estimated value of the property as on 1-4-1981 without reference to any comparable cases.

5. All the above grounds are mutually exclusive and without prejudice to one another.

6. The appellant craves leave to add to, amend, alter all or any of the above grounds of appeal.

During the appeal hearing, the learned AR did not press ground No.1, 4, 5 and 6 therefore ground No.1, 4, 5 and 6 dismissed as not pressed.

3. Ground No.2 and 3 are related to the non-deduction of tax at source as required under section 195 of Income Tax Act, 1961 (hereinafter to as ‘Act’), consequently the assessee is treated as assessee in default for the tax liability under section 201(1) and 201(1A) of the Act.

4. The assessee purchased property admeasuring 560 sq.yards in survey No.779, Kakinada on 22-6-2011 from 5 persons vide registered document No.6930/2011 for a consideration of Rs. 65, 12, 000. The assessing officer(AO) noted from the sale deed that out of 5 sellers, 3 sellers are non-residents and the remaining 2 sellers are residents and details of the sale consideration received by the sellers of the property are as under :

The assessee is required to deduct the tax at source and remit to Government account on the payments made to the non-residents and the assessee failed to deduct the tax at source as required under section 195 of the Act. Therefore, the assessing officer treated the assessee as assessee in default and accordingly raised the demand of Rs. 9,83,538 under section 201(1) of the Act and also levied the interest under section 201(1A) of the Act at Rs. 5,21,275.

5. Aggrieved by the order of the assessing officer, the assessee went on appeal before the Commissioner (Appeals) and the learned Commissioner (Appeals) partly allowed the appeal and directed the assessing officer to ascertain the tax liability of the deductees as per CBDT Instruction No.2/2014 and treat the assessee as the assessee in default to the extent of actual tax liability of the non residents.

5.1. The assessee also challenged the order of the assessing officer in respect of the principal amount of Rs. 9,83,538 in the light of the provisions of section 201(2) of the act. The learned Commissioner (Appeals) decided the issue against the assessee and dismissed the appeal. Therefore, the assessee is in appeal before this Tribunal.

6. During the appeal hearing, the learned AR argued that the assessee cannot be treated as ‘assessee in default’ for the principal amount as per section 201(1) of the Act, since, the assessee failed to deduct the tax at source. The learned AR contended that as per sub-section 2 of section 201, if the assessee fails to deduct the tax at source, the assessee would be responsible for payment of interest under section 201(1A) but not the principal amount of tax, thus the assessee cannot be held to be assessee in default. Only in the case of having deducted the TDs but not remitted to the Government account then the assessee required to be treated as assessee in default for the principal amount as well as the interest under section 201(1A). The learned AR further argued that if the deductor does not deduct tax at source, the amount cannot be recovered from the deductor, but the same should be recovered from the deductee. The assessee relied on the decision of Hon’ble Allahabad High Court in the case of Jagran Prakashan Ltd. v. DCIT (TDS) (2012) 345 ITR 288 (All).

7. On the other hand, the learned DR supported the orders of the learned Commissioner (Appeals).

8. We have heard both the parties and perused the material placed on record. In this case, the assessee made the payments to the non residents but not deducted the tax at source as required under section 195 of the Income Tax Act. The assessee also did not obtain the non-deduction certificate from the concerned assessing officer. Consequences for failure to deduct the tax at source are enshrined in section 201 of the act and as per section 201(1) of the act, the assessee would be deemed to be assessee in default in respect of such tax. For ready reference, we extract relevant part of section 201(1) of the Act which reads as under :

“201. (1) Where any person, including the principal officer of a company,–

(a) who is required to deduct any sum in accordance with the provisions of this Act; or

(b) referred to in sub-section (1A) of section 192, being an employer, does not deduct, or does not pay, or after so deducting fails to pay, the whole or any part of the tax, as required by or under this Act, then, such person, shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default in respect of such tax:

Provided that any person, including the principal officer of a company, who fails to deduct the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid to a resident or on the sum credited to the account of a resident shall not be deemed to be an assessee in default in respect of such tax if such resident–

(i) has furnished his return of income under section 139;

(ii) has taken into account such sum for computing income in such return of income; and

(iii) has paid the tax due on the income declared by him in such return of income,

and the person furnishes a certificate to this effect from an accountant in such form as may be prescribed4:

Provided further that no penalty shall be charged under section 221 from such person, unless the assessing officer is satisfied that such person, without good and sufficient reasons, has failed to deduct and pay such tax.”

8.1. The learned AR argued that as per section 201(2) of the Act, the assessee would be liable for principal amount of tax only when tax was deducted but not paid to the Government account and not in a situation when the tax was not deducted. Plain reading of section 201(1) clearly shows that if the assessee fails to deduct the tax at source and does not pay after deducting, the assessee would be deemed to be assessee in default in respect of the tax that is to be deducted at source. The section contemplates to treat the assessee in default in both the situations of non-deduction and non remittance and deduction but non remittance to government account. The section also gives same concessions in the case of resident assesses as per proviso. In the instant case deductor is the resident and the recipient is the non resident and the payment is covered by section 195 of the Act and the concessions given in respect of exceptions as per proviso to section 201(1) are not extended to the non-residents covered by section 195 of the Act. Sub section 2 of section 195 allows the beneficiary to obtain the certificate from the assessing officer to submit the non deduction certificate in case the deductee is not liable for tax. Though Sub section 2 of section 201 enable the assessing officer to hold charge on all the assets of the person in the case of second situation of deduction of tax at source but not remittance to government account, it does not bar the deductor to treat the assessee in default for the principal amount. Sub section 2 of section 201 cannot be read in isolation and both the sections 201(1) and 201(2) must be read harmoniously. Conjoint reading of section 201(1) and 201(2) establish that if the assessee failed to deduct the tax at source and does not remit to the Government account and tax deducted but not remitted to government account covers both the situations and makes the assessee deemed to be assessee in default in respect of the principal amount as well as interest under section 201(1) and 201(1A) of the Act except the cases covered by proviso. Sub section 2 deals with the charge on assets of the person who fails to make payment of tax deducted but not the treatment of assessee in default. Therefore, the rigors of section 201(1) are clearly applicable in the case of assessee.. The learned Commissioner (Appeals) considered the decision of Hon’ble Gujarat High Court in the case of CIT v. Ranoli Investment Pvt. Ltd. & Ors. (1999) 235 ITR 433 (Guj) and held that if no deduction is made and the deducted amount is not paid, the person whose duty it was to deduct the tax at source and to pay is to be treated as ‘assessee in default’ in respect of the taxes and no penalty is to be charged under section 221 on such person if the ITO is satisfied that such failure to deduct the tax had occurred due to good and sufficient reasons. The assessee relied on the decision of Hon’ble High court of Calcutta in Jagran Prakashan Ltd. v. DCIT (supra) delivered in response to writ petition and the payment in respect of 194H and the writ petition is filed by the company for non deduction of tax at source under section 194H of the Act. The deduction of tax at source is not in respect of the non residents and it was in respect of the residents. 194H deals with the deduction of tax at source in respect of residents in respect of payments made for commission or brokerage. In respect of the nonresidents, the deduction of tax at source is more stringent since the person who receives the payment would be leaving the country and the recovery of tax is impossible or remotely possible. There is a clear distinction between the residents and the non residents. That is the reason why section 195(2) allows the assessee to furnish non deduction certificate and the Board has come up with Instruction No.2/2014. Proviso to section 201 also allows exceptions on sums paid to residents in different situations not to treat the assessee default for the principal amount in the following situations whereas the said concessions are not extended to the nonresidents.

(i) has furnished his return of income under section 139;

(ii) has taken into account such sum for computing income in such return of income; and

(iii) has paid the tax due on the income declared by him in such return of income,

and the person furnishes a certificate to this effect from an accountant in such form as may be prescribed

Therefore, the case law relied upon by the assessee which is dealing with the residents is not applicable in respect of the payments made to non-residents under section 195 of the Act. Hon’ble ITAT, Bangalore in (2013) 55 SOT 441 (Bangalore-Trib.) considered the similar issue of TDS under section 195 and held that the assessing officer has rightly held the as assessee in default for non deduction of tax at source under section 201(1) of the Act. For ready reference we extract the relevant Para of the ITAT’s order which reads as under:

7.3. We have heard both parties and carefully perused and considered the material on record and the relevant judicial decisions. The assessee’s case is that the assessing officer should have quantified the tax to be deducted at source at the rates specified on the capital gains arising out of this transaction and not on the amount of sale consideration of Rs. 61, 62, 500 for a better appreciation of the issue the provisions of section 195 are extracted here below :

“195.(1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries” shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force :

Provided that in the case of interest payable by the Government or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode :

Provided further that no such deduction shall be made in respect of any dividends referred to in section 115-O.

Explanation 1-For the purposes of this section, where any interest or other sum as aforesaid is credited to any account, whether called “Interest payable account” or “Suspense account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.

Explanation 2.-For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction thereunder applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has–

(i) a residence or place of business or business connection in India; or

(ii) any other presence in any manner whatsoever in India.

(2) Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the assessing officer to determine, by general or special order), the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable.

(3) Subject to rules made under sub-section (5), any person entitled to receive any interest or other sum on which income-tax has to be deducted under subsection (1) may make an application in the prescribed form to the assessing officer for the grant of a certificate authorising him to receive such interest or other sum without deduction of tax under that sub-section, and where any such certificate is granted, every person responsible for paying such interest or other sum to the person to whom such certificate is granted shall, so long as the certificate is in force, make payment of such interest or other sum without deducting tax thereon under sub-section (1).”

7.3.1. From a plain reading of section 195(1) and as held by us in para 6.4 of this order (supra), it is clear that the assessee was liable to deduct tax at source at the specified rates (i.e. 20% plus surcharge 10% and education cess 2%) from out of the sale consideration paid by him to the seller of the said flat purchased by him as she was an NRI. If the assessee (i.e. the person responsible for paying such sum to the NRI seller) was of the view that the whole or part of such sum viz. the sale consideration, would not be income chargeable in the hands of the recipient (i.e. in this case the seller, an NRI), section 195(2) of the Act required him to make an application to the assessing officer under section 197 read with section 195(2) to determine the amount chargeable and upon such determination deduct tax on such sum so determined. Similarly section 195(3) of the Act provides such a safeguard to the recipient of such sum, which in this case is the seller who is an NRI. From a perusal of the record and also as noted by the learned Commissioner (Appeals) in his order at page 6 thereof, we find the assessee failed to make an application under section 197 read with section 195(2) of the Act to the assessing officer and therefore he should have deducted tax at the specified rates from the sale consideration to be paid. In coming to this view of the matter, we find support from the decision of the Hon’ble Apex Court in the case of Transmission Corpn. of A.P. Ltd. v. CIT (1999) 239 ITR 587 (SC) wherein the Hon’ble Court has held–

“the purpose of sub-section(1) of section 195 is to see that on the sum which is chargeable under section 4 of the Act, for levy and collection of income tax, the payer should deduct income tax thereon at the rates in force, if the amount is to be paid to a non-resident. The said provision is for tentative deduction of income tax thereon subject to regular assessment and by the deduction of income tax, the rights of the parties are not, in any manner, adversely affected. Further, the rights of the payee or recipient are fully safeguarded under section 195(2), 195(3) and 197. The only thing which is required to be done is to file an application for determination by the assessing officer that such sum would not be chargeable to tax in the case of the recipient, or for determination of the appropriate proportion of such sum so chargeable, or for grant of a certificate authorizing the recipient to receive the amount without deduction of tax, or deduction of income tax at any lower rate. On such determination, tax at the appropriate rate could be deducted at the source. If no such application is filed, income tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such ‘sum’ to deduct tax thereon before making payment.”

The Hon’ble Apex Court has held that if the assessee failed to make an application under section 195(2) read with section 197 of the Act to the assessing officer for lower deduction of tax, then income tax on such ‘sum’ is to be deducted and it is the statutory obligation of the person responsible for making such payment of such ‘sum’ to deduct tax thereon before making payment. In the instant case of the assessee, the legal position is clear in as much as not having made the application under section 197 read with section 195 of the Act to the assessing officer for lower or no deduction of tax, he was statutorily duty bound to have deducted tax at the specified rate on the ‘sum’ i.e. the sale consideration, before making payment to the seller who was an NRI. Consequently, the assessee’s claim that TDS was to have been made by him on the Long Term Capital Gains which he worked out at 20% of Rs. 9,29,793 does not hold any water. In this view of the matter, we are of the considered opinion that the quantification of the TDS deductible by the assessee under section 195 of the Act was correctly made by the assessing officer under section 201(1) of the Act and rightly upheld by the learned Commissioner (Appeals) at Rs. 13,82,870 being 20.4% of the sale consideration of Rs. 61,62,500 and consequently dismiss this ground of the assessee.

Since the facts identical respectfully following the view taken by the coordinate bench we hold that the assessing officer has rightly treated the assessee in default and accordingly, we dismiss the appeal of the assessee on this ground and uphold the order of the learned Commissioner (Appeals).

9. The next issue is giving effect to the order of the learned Commissioner (Appeals) which was argued by the learned AR in this case. The learned Commissioner (Appeals) has directed the assessing officer to compute correct tax liability of the non residents and treat the assessee in default for the tax liability of the non residents as per CBDT Instruction No.2/2014. The Instruction No.2/2014 was issued by CBDT for the benefit of the non residents who could not approach the assessing officer for short deduction of tax at source or for the non-deduction of tax at source under section 195(2) of the Act. In such cases, the Board has directed the assessing officers to compute the tax liability and make the deductor responsible only for the tax as per the actual liability and treat the assessee’s in default under section 201(1) to the extent of the tax liability in respect of assesses. In this case, the non-resident assessees have filed the returns of income with ITO International Taxation which was verified by the assessing officer. Though the learned Commissioner (Appeals) has directed the assessing officer to verify the tax liability of the assessees and determine the assessees liability under section 201(1), the assessing officer determined the tax liability of the Non residents on estimation which is not correct. Since the assessees have filed the returns of income, the assessments must be completed under section 143(3) or have been accepted under section 143(1) and determined the tax liability. Therefore, we direct the AO/ITO international Taxation to treat the assessee in default to the extent of actual tax liability instead of estimation. Accordingly, the appeal of the assessee is partly allowed.

10. In the result, appeal of the assessee is partly allowed for statistical purpose.