Commissioner of Income Tax vs The Municipal Corporation

Challa Kodanda Ram, J.—At the instance of the Revenue, below mentioned question of law has been referred to the opinion of this Court as arising from the orders of the Tribunal in I.T.A. No. 944/Hyd/93 for the assessment year 1991-92.

Whether, on the facts and in the circumstances of the case, the income tax Appellate Tribunal was justified in cancelling the orders passed u/s 201 and 201 (1A) of the IT Act, 1961 by holding that there was no legal obligation cast on the Municipal Corporation to. deduct at source surcharge on income tax also in addition to tax at 2% on payment made to Contractors?

Heard Sri S.R. Ashok, learned senior counsel appearing for the Revenue. None appeared for the respondent-assessee.

The assessee is a local body constituted under the Hyderabad Municipal Corporation Act. During the financial year 1991-92 payments to the tune of Rs. 6.92 crores were made to the Contractors after deducting T.D.S. as applicable at 2% on the payments made to the Contractors and credited the same to the account of the Central Government. The income tax Officer (T.D.S.), Visakhapatnam, felt that the Municipal Corporation in addition to tax deducted at source at the rate of 2%, should also have further deducted surcharge on the tax at 12% at source itself and should have credited the said surcharge also to the Central Government. Accordingly, surcharge amount was worked out to Rs. 2.08 lacs and treated the same as short deduction and passed orders dated 30-10-1992 u/s 194C r/w. Section 201(1) of Income Tax Act, 1961, (for short, ''the Act'') directing the respondent-Municipal Corporation to make good the short deduction of Rs. 2.08 lacs representing the non-deducted surcharge. Obviously, the income tax Officer passed the said order treating the Municipal Corporation as an assessee in default u/s 201 of the Act. Further, an amount of Rs. 13,028/- was levied towards interest on the short deduction of Rs. 2.08 lacs u/s 201(1A) of the Act and accordingly raised a demand.

The respondent-assessee preferred appeal and the first appellate authority on analysis of Section 194C of the Act as existing at that point of time had come to the conclusion that the assessee could not be treated as in default for the reason the liability to deduct 12% at source as surcharge came to be introduced by the Finance Act, 1991 only. The order of the first appellate authority was also confirmed by the Tribunal.

Learned counsel for the Revenue would contend that the Tribunal had erred in concluding that there was no obligation on the Municipal Corporation to deduct surcharge at source at the relevant point of time, inasmuch as Clause 5 (2) of the Finance Act, 1991 had imposed a liability, which would apply to the payment made during financial year 1990-91.

We have no hesitation to reject the contention of the learned counsel for the Revenue for the reason Section 194C(1) & (2) of the Act as existed at the relevant point of time had cast no obligation on the assessee-Municipal Corporation to deduct any surcharge during the relevant years when payments were made to the Contractors. Section 194C(1) & (2) of the Act as existed at that point of time may be noticed. It reads as follows:-

194C. Payments to contractors and sub-contractors-(1) Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and -

(a) the Central Government or any State Government; or

(b) any local authority; or

(c) any Corporation established by or under a Central, State or Provincial Act; or

(d) any Company; or

(e) any co-operative Society, shall, 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 a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to two percent of such sum as income tax on income comprised therein.

(2) Any person (being a contractor and not being an individual or a Hindu undivided family) responsible for paying any sum to any resident (hereafter in this section referred to as the ''sub-contractor'') 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 the sub-contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to one percent of such sum as income tax on income comprised therein.

Explanation:- For the purposes of this section, where any sum referred to in sub-section (1) or sub-section (2) is credited to any account, whether called ''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.

(3) ....

(4) .... (omitted intentionally as they are not relevant for the purpose of this case)

Questions before us are whether there is obligation to collect surcharge on T.D.S. from contractors for the relevant period on account of the obligation cast by Clause 5 of the Finance Act, 1991 which came into force from 1st April, 1991 and whether Municipal Corporation was under any obligation to pay any interest on surcharge u/s 201 r/w. Section 201(1A) of the Act. This Court in the case of Sriram Refregeration Industries Vs. Income Tax Officer, , dealing with Section 201 and 201 (1A) of the Act and considering the provisions as existing at that point of time, by following the judgment in the case of P.V. Rajgopal and Others Vs. Union of India and Others, held that Section 201(1A) of the Act has no application in the case of short deduction. The ratio of the said judgment would squarely apply to the present case on hand even assuming that there is short deduction. We make it clear that when we say ''even assuming'' it does not mean that at the relevant point of time there was any obligation on the Municipal Corporation to deduct surcharge as the very obligation to collect surcharge was not in existence and the same came to be introduced only with effect from Is'' April, 1991 by Finance (No. 2) Act, 1991. In the circumstances, we do not find any error in the order passed by the Tribunal and in that view of the matter, the question of law is answered in favour of the assessee and against the Revenue. Miscellaneous petitions, if any pending in this case shall stand closed. There shall be no order as to costs.