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Reserved on 04.5.2012
Delivered on 23.5.2012
Case :- WRIT TAX No. - 388 of 2012
Petitioner :- Jagran Prakashan Limited
Respondent :- The Deputy Commissioner Of Income Tax (Tds)
Petitioner Counsel :- Ritvik Upadhya
Respondent Counsel :- Bharat Ji Agrawal,B. Agarwal,Govind
Krishna
Hon'ble Ashok Bhushan,J.
Hon'ble Prakash Krishna,J.
(Delivered by Hon'ble Ashok Bhushan, J.)
This writ petition by a public Ltd. Company, publishing a
Hindi daily newspaper “Dainik Jagaran” has invoked the jurisdiction
of this Court under Article 226 of the Constitution of India
challenging the initiation of proceedings under sections 201 and
201 (1A) of Income Tax Act, 1961 (hereinafter referred to as 'Act')
vide notices dated 19.3.2012 and 21.3.2012 on the allegation that
although the petitioner had allowed trade discount of 15% to
advertising agencies in the assessment years in question but had
failed to deduct the tax at source hence, the petitioner may show
cause as to why it may not be declared as an asessee in default of
such tax. The petitioner replied the notices. During the pendency of
the writ petition assessment orders dated 28.3.2012 (Financial Year
2009-10) and 29.3.2012 (Financial Year 2008-09) were passed
fastening liability of Rs.13,15,31,472 and Rs.3,26,82,953
respectively, which orders were also challenged in this writ petition
by means of an amendment application, which was allowed on
18.4.2012.
The brief facts giving rise to this writ petition are; the
petitioner is engaged in the business of printing and publishing
newspapers 'Dainik Jagaran' and 'I-next' from different centres
across the country. The registered office of the petitioner's
company is situate at Kanpur Nagar. The major source of revenue
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of the petitioner is generated from advertisements published in the
said newspapers. The petitioner is also member of Indian
Newspaper Society (hereinafter referred to as INS). The petitioner
has been giving 15% trade discount to accredited advertising
agency and trade discount of 10% to 15% to non-accredited
advertising agency as per Rules and Regulations of INS for last
several years. On 15.3.2012, the respondent conducted a survey
under section 133A of the Act at the premises of the petitioner at
Kanpur Nagar and recorded statement of General Manager
Taxation and Legal. The notice dated 19.3.2012 for the financial
year 2009-2010 was issued to the petitioner stating that during the
course of survey on 15.3.2012, it has been gathered that the
petitioner has failed to deduct tax at source under section 194 H of
the Act on the payment received from advertising agencies after
allowing 15% trade discount, which is as well a deemed
commission. Details of monthwise amount of payment of discount
were required to be submitted. The petitioner was asked to show
cause as to why order under section 201 (1) and 201(1) A of the
Act be not passed declaring the petitioner as an assessee in default
in respect of such taxes and interest thereon. The petitioner was
asked to appear on 22.3.2012. Another notice dated 21.3.2012 for
the financial year 2008-09 was issued requiring details as
mentioned therein including monthwise amount of payment of trade
discount by the petitioner along with copy of the bills from January
to March 2009. The petitioner filed a reply to the notices dated
19.3.2012 and 21.3.2012 on 22.3.2011. On 22.3.2012, the
petitioner was required to submits monthwise bills of the
advertisements received and trade discount given thereon by the
next date i.e. on 23.3.2012. On 23.3.2012, another notice was
issued by the respondent calling the petitioner to submit reply along
with documents called for by 12:00 noon on 26.3.2012 positively.
The petitioner was also informed by the same notice that Kerala
High Court in 325 ITR 205 on the similar issue had decided that
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advertising agency has acted as an agent of the principal hence
trade discount allowed can be considered as commission or
brokerage defined under Explanation (i) of Section 194H of the Act.
This writ petition was filed in this Court on 23.3.2012 praying for
quashing the notice dated 29.3.2012 and 21.3.2012. The writ
petition was heard on 19.3.2012 on which date following order was
passed.
“Supplementary affidavit filed today is taken on
record.
On a mention made by learned counsel for the
petitioner, the matter is taken up in the presence of
learned counsel appearing for the department.
By means of this petition, the petitioner has prayed
for quashing the notice dated 19.3.2012 and
21.3.2012 issued by the respondent ( Annexure
No. 4 and 5 to the writ petition) by which the
petitioner has been asked to furnish certain
informations as required.
Learned counsel for the petitioner challenging the
notice contended that notices do not furnish any
jurisdiction to the authority to proceed under
section 201 of the Income Tax Act. as no TDS.
was deductible on 15% trade discount.
He submits that the trade discount can not be
treated as commission so as to liable for any
deduction. He has placed reliance on the decision
of Delhi High Court passed in the case of I.T.A.
No. 1264 of 2007,Commissioner of Income Tax
Vs. Living Media India Limited filed as Annexure
No. 1 to the writ petition at page 33.
He has submitted that there is no material with the
respondent to proceed under section 201 of the
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Income Tax Act.
Shri Govind Krishna, learned counsel appearing
for the respondent submits that by notice
impugned only informations have been called from
the petitioner and there is no lack of jurisdiction in
the authority to proceed. He further submits that at
this state, the writ petition be not entertained.
Learned counsel for the petitioner further placed
reliance on the decision of Supreme Court passed
in the case of Siemens Ltd. Vs. State of
Maharashtra and others reported in (2006)12
Supreme Court Cases 33.
Be that as it may, in view of the fact that the
assessment order is to be passed on or before
31.3.2012 as indicated in the notice, we are of the
view that the petitioner may appear and submit
necessary information as required and respondent
may proceed to pass appropriate orders in
accordance with law.
It shall be open for the parties to bring on record
the order passed by the respondent.
Respondent is allowed three weeks' time to file
counter affidavit.
List thereafter.”
On 26.3.2012, the petitioner again submitted a letter to the
Department stating therein that information sought for is not readily
available and it needs a herculean manual exercise of compilation
of more than 1,80,000 bills. On 28.3.2012, the petitioner again
submitted a letter stating therein that relationship of the petitioner
with the advertising agency is principal to principal and not as
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principal and agent. Reliance was also placed on the order of the
Kerala High Court dated 9.12.2005, passed in writ petition No.
26871/2005, The Malayala Manorama Co. Ltd. Vs. The Income
Tax Officer & others, wherein on identical facts, the proceedings
of the department initiated under section 201/201 (1A) had been
stayed. It was further stated that the judgment of the Kerala High
Court reported in 325 ITR 205 was not applicable and points of
distinction from the said judgment were specifically pointed out in
the reply. It was stated that there is no liability of the petitioner to
deduct tax at source.
On 28.3.2012 an assessment order for the financial year
2009-10 has been passed by the Deputy Commissioner of Income
Tax holding the petitioner to be an assessee in default for non
deduction of tax at source for an amount of Rs. 10,94,60,865 under
section 201 (1) of the Act on which interest under section 201 (1A)
amounting to Rs. 2,62,70,607/- making the total amount to Rs.
13,57,31,472/-. A demand notice was issued on 29.3.2012.
Proposal for initiating penalty proceeding was also sent to Joint
Commissioner Income Tax TDS Kanpur separately. Another order
dated 29.3.2012 for the Financial Year 2008-09 was passed holding
the petitioner to be an assessee in default for non deduction of TDS
for an amount of Rs. 2,40,31,583 and on which interest was also to
be chargeable making the total amount of Rs. 3,26,82,953/-.
Penalty proceeding was to be separately initiated under Section
271C. The demand notice was also issued on 29.3.2012. The
petitioner filed an application for amendment of the writ petition
praying for adding paragraphs, grounds and reliefs in the writ
petition for challenging the assessment orders dated 28.3.2012
and 29.3.2012. The amendment application was allowed by this
Court on 18.4.2012 and the petitioner was permitted to challenge
the assessment orders in this writ petition. Counter affidavit has
also been filed by the Department to the writ petition and amended
pleadings to which rejoinder affidavit has also been filed. Following
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are the reliefs which have been claimed in the writ petition including
the reliefs prayed for by means of amendment application :
“i) a suitable writ, order or direction in the
nature of Certiorari calling for the records of the
case and to quash the impugned notices dated
19.03.2012 and 21.03.2012 issued by the
respondent (Annexures-4 and 5 to this writ
petition).
ii) a suitable writ, order or direction in the
nature of Certiorari calling for the records of the
case and to quash the impugned order dated
28.03.2012 along with the notice of demand dated
28.03.2012 (Annexure-6 to this writ petition) and
the impugned order dated 29.3.2012 along with
the notice of demand dated 29.03.2012
(Annexure-7 to this writ petition).”
We have heard Sri V.K. Upadhyay learned senior Advocate,
assisted by Sri Ritvik Upadhyay, for the petitioner, Sri Govind
Krishna for the respondent Income Tax Department and have
perused the record.
Learned Counsel for the petitioner challenging the notices
dated 19.3.2012 and 21.3.2012 contended that there were no
foundational facts on the basis of which the respondent could have
assumed jurisdiction under sections 201 and 201(1A) for initiating
the proceedings. He submits that the petitioner allowed trade
discount to advertising agencies on the advertisements received in
accordance with the established trade practice and allowing of
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trade discount cannot be termed as commission paid by the
petitioner to the advertising agency for any service. It is submitted
that an advertising agency is not an agent of the petitioner and the
transaction between the petitioner and advertising agency is on
principal to principal basis. Advertising Agency infact acts as an
agent of the advertisers. Section 194H is not attracted on trade
discount allowed by the petitioner to advertising agency and the
proceeding initiated under section 201/201 (1A) are without
jurisdiction. The Income Tax Authorities have wrongly assumed
jurisdictional facts although no such jurisdictional facts exist so as
to enable the respondent Department to initiate proceedings under
section 201/201 (1A) of the Act. The initiation of the proceedings by
the Department is wholly without jurisdiction. The jurisdictional facts
as required by Section 194H does not exist in the present case.
Circular issued by Central Board of Direct Taxes dated 8.8.1995
clarifies that commission received from advertising agency by
media would require deduction of tax at source under section 194J
of the Act. The above circular was clarified by the CBDT vide
subsequent letter dated 12.9.1995, clarifying that where the media
raises only a bill for an advertising contract including therein interalia
commission at the specified percentage to be retained by
advertising agency, the media is not required to deduct tax at
source since such a payment is subjected to TDS by the advertiser
at the time of payment. Further where the media makes a direct
payment to the advertising agency in respect of professional or
technical services, it shall deduct tax at source @ 5% under section
194J.
Learned Counsel for the petitioner submits that the petitioner
being a member of INS is required to pay trade discount of 15%
according to the rules of INS. The advertising agency which are
accredited by INS are also bound to follow the rules and under the
terms of agreement entered with the advertising agency and INS
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under which it is obligatory for the news agency to give 15% trade
discount and as per Rules of INS and terms of agreement entered
between INS and advertising agency, the advertising agency acts
as agent of the advertiser. The advertising agency carry on
business of advertising and is not an agent appointed by the
petitioner. No agreement with any advertising agency has been
entered into by the petitioner nor there is any other relevant factor
on the basis of which it can be said that the advertising agency is
agent of the petitioner. It is submitted that the Rules of INS, as well
as terms and conditions as mentioned above, clearly prove that
advertising agency is not an agent of the petitioner and the
jurisdictional facts as required under section 194H being not
present, the entire proceedings are without jurisdiction. Learned
Counsel for the petitioner further submits that the question as to
whether 15% trade discount allowed to the news agency invites
deduction of tax at source was raised by Income Tax Department
with regard to news paper publication namely; M/s Living Media
Ltd. Which publishes the magazines India Today, Business today
etc. An order against M/s Living Media Ltd. under sections 201 and
201 (1A) was passed by the assessing authority on the ground that
advertising agencies are agent of the news agencies and 15%
trade discount is commission with regard to which tax at source is
required to be deducted by the news agency. The matter was taken
before the Income Tax Appellate Tribunal by the Department and
Income Tax Appellate Tribunal held that there was no liability of the
news agency to deduct tax at source with regard to 15% trade
discount and advertising agency is not the agent of news agency. It
was held that news agency was not liable to deduct tax. The
Department took up the matter before the Delhi High Court and
Delhi High Court vide its judgment and order dated 6.5.2008 has
dismissed the writ petition of the Department holding that contract
between the news agency and advertising agency was on principal
to principal basis and trade discount allowed to advertising agency
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was as per Rule 32 of the INS Rules and there was no commission
paid to advertising agency and the provisions of section 194H was
not attracted. Although in the counter affidavit (paragraphs 21 and
41) filed by the Department, it was stated that judgment of the Delhi
High Court has not accepted by CBDT and the same has been
challenged by the Department by means of Special Leave Petition
No. 3433 of 2009 but it was not mentioned that Special Leave
Petition had been dismissed. Learned Counsel for the petitioner
has produced the order of the apex Court dated 11.12.2009 by
which the Special Leave Petition (Civil) 3433 Commissioner of
Income Tax Vs. M/s Living Media India Ltd. has been dismissed.
Learned Counsel for the petitioner submits that the issue having
already been decided by the Delhi High Court in the aforesaid case,
the initiation of the proceedings under section 201/201 (1A) on the
same allegations are nothing but harassment of the petitioner and
the proceedings so initiated are without jurisdiction. Learned
Counsel for the petitioner submitted that the judgment of the Kerala
High Court relied by the Department in [2010] 325 ITR 205
Commissioner of Income Tax Vs. Director Prasar Bharti, is not
applicable in the present case and although distinguishing facts
were submitted in writing by the petitioner but still the said judgment
has been relied and the judgment of the Delhi High Court which
was directly applicable has been brushed aside on the flimsy
ground that judgment of the Kerala High Court is recent in point of
time. Learned Counsel for the petitioner further submitted that the
assessment orders dated 28.3.2012 and 29.3.2012 and the
demand raised for tax which according to the respondents ought to
have been deducted at source is wholly without jurisdiction.
It is further submitted that under sections 201 and 201(1A),
in a case where tax is not deducted at source, the only proceedings
which can be initiated are proceedings for realisation of interest and
penalty and the liability to pay tax cannot be fastened on deductor.
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As per Section 191 read with Section 4 of the Act, such tax has to
be directly paid by the assessee i.e. advertising agency and the
assessment orders dated 28.3.2012 and 29.3.2012 demanding
payment of tax are wholly without jurisdiction. The petitioner could
not have been treated to be an assessee in default with regard to
tax which according to the respondents was required to be
deducted unless a finding is returned that assessee has not paid
the tax. In the entire assessment order, there is no finding that
assessee has not paid the tax on the aforesaid trade discount
(alleged commission) hence, the entire order is without jurisdiction.
Learned Counsel for the petitioner further submits that there
is no agreement between the petitioner and the advertising agency
on the basis of which the assessing officer can conclude that
advertising agency was an agent of the petitioner. It is further
submitted that rules of INS have not been adverted to by the
assessing authority which were relevant to find out the nature of
transaction between the petitioner and the advertising agency and
without adverting to the said Rules in its entirety, an erroneous
inference has been drawn by the assessing officer that advertising
agency was agent of the petitioner. It is further submitted that
instead of reliance on circular of the Board dated 8.8.1995 as
clarified on 12.9.1995, the assessing authority has relied on an
article published in the newspaper 'Business Standard' on
31.10.2006, which article contain some opinion of the Central Board
of Direct Taxes that deduction of tax at source is to be made on
commission or brokerage given to the advertising agency. It is
submitted that the aforesaid article was wholly irrelevant, which
vitiates the order of the assessing authority.
Learned counsel for the petitioner lastly contended that the
Department has violated the principles of natural justice, while
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proceeding under sections 201 and 201 (IA). It is submitted that
notices were issued on 19.3.2012 and 21.3.2012, requiring
submission of details regarding trade discount given to various
advertising agencies by 22.3.2012, which was nothing but denial of
adequate opportunity since in the accounting practice adopted by
the petitioner, only revenue receipts were recorded in its account
and there was no separate account maintained for trade discount
given to the advertising agencies. The order of authorities asking
the petitioner to give the details of trade discount within three days,
given to the advertising agencies from its various centres
throughout the country, from where the newspapers are published,
which could have run in more than 1,80,000 items is nothing but
denial of adequate opportunity to the petitioner. The compilation of
the said data was a herculean task and the request by the
petitioner to grant reasonable time, was denied. Had the petitioner
been given adequate opportunity, it would have established that tax
on the income of 15% trade discount, has already been paid and
there was no occasion to impose liability upon the petitioner but the
respondent rushed through the proceedings which was completed
within ten days from issue of notice.
Sri Govind Krishna, learned counsel for the Department
refuting the submissions of learned Counsel for the petitioner,
contended that the petitioner is not entitled to invoke the jurisdiction
of this Court under Article 226 of the Constitution of India since the
assessment order has already been passed and the petitioner be
relegated to avail the alternative remedy of statutory appeal as
provided under the Act. He submits that the judgment of the Kerala
High Court in Prasar Bharti's case is fully applicable and there is no
lack of the jurisdiction in the authorities in initiating the proceedings
under sections 201 and 201 (1A) of the Act. He submits that the
payment which is being made by the petitioner to the advertising
agency in the name of 15% trade discount is nothing but payment
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of commission to advertising agency in lieu of services which are
being rendered by the advertising agency to the petitioner in
bringing business to the petitioner i.e. advertisements. It is
submitted that the assessing officer has rightly recorded finding in
paragraph 30 of the order that jurisdictional facts as required for
applicability of Section 194H, are fully present and neither the
initiation of the proceedings were without jurisdiction nor the
assessment order can be held to be without jurisdiction. The
petitioner, inspite of giving opportunity could not provide details of
monthwise trade discount allowed by it to different advertising
agencies hence, no error has been committed in assessing the tax
liability on 15% of gross receipts of revenue from advertising
agency, which amount has been disclosed by the petitioner himself
in the survey on 15.3.2012. It is submitted that if the advertising
agency could not have rendered services to the petitioner, it cound
not have received any discount or payment and the advertising
agency acts on behalf of the news agency since it is a news
agency, which decides as to what type of advertisement it publishes
e.g. it does not publish advertisement of alcoholic drinks. There is a
contract between the news agency and advertising agency through
INS, since the petitioner are members of the INS and INS enters
into an agreement with the advertising agency for accrediting the
said agency thus, there is a implied contract between the petitioner
and advertising agency. It is further submitted that principal and
agent relationship can also exist without any written or codified
agreement. The assessing order has rightly referred to recent stand
of Central Board of Direct Taxes in its judgment as such, the order
of the assessing officer was based on recent stand of CBDT.
Advertising Agency Institution of India (AAAI) in its rules also
provide for payment of 15% commission to the advertising agency.
Thus, the payment of commission by the news agencies to
advertising agencies is fully proved. The logic and reasons are not
relevant, while interpreting a tax statute. Since the petitioner is
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allowing the discount/commission, the petitioner is payer and liable
under section 204 (iii). Under section 201, the deductor, who fails to
deduct the tax at source, is an assessee in default and apart from
interest and penalty, the tax which was not deducted can very well
be recovered from the deductor. He submits that if there is any
mistake in the order of the assessment, it is open for the petitioner
to invoke section 154 of the Act for correction of mistake, if any.
Learned Counsel for the petitioner replying the objections of
learned Counsel for the respondent regarding relegating the
petitioner to statutory appeal, submitted that the present is not a
case where the petitioner be denied relief under Article 226 of the
Constitution of India. It is submitted that when the Income Tax
authorities assumed jurisdiction without there being jurisdictional
facts available for initiating the proceedings under section
201/201(1A), the notice initiating the proceeding can very well be
challenged through writ proceedings. It is further submitted that by
the order impugned huge liability has been imposed on the
petitioner and apart from assessment order, proceedings under
section 147 of the Act have also been initiated. The notice under
section 147 has been issued for several assessment years. It is
further submitted that assessment order directing for realisation of
tax, which according to the respondent was not deducted at source
by the petitioner is without jurisdiction since under section 201/201
(1A) at best proceeding could have been initiated only for recovery
of interest and penalty. He submits that when the order of
assessing authority directing for recovery of tax is without
jurisdiction, the writ petition be not thrown out on the ground of
alternative remedy. Apart from above reason, huge illegal demand
would have a cascading effect on the petitioner company. Penalty
proceedings have also been initiated including proceedings for reopening
of all completed assessment and total tax liability may be
more than 100 crores, which may adversely and irreparably effect
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the petitioner business and its shares. The pre-determined and
void orders cannot withstand judicial scrutiny of this Court hence,
the present is not a fit case in which the petitioner be relegated to
alternative remedy.
Learned Counsel for the parties have relied on various
judgements of the apex Court, this Court and other High Courts
which shall be referred to while considering the submissions in
detail.
We have considered the submissions of learned counsel for
the parties and have perused the record.
From the submissions of learned counsel for the parties
following are the issues which arise for consideration:
1. Whether in the facts and circumstances of the present case,
the petitioner is entitled to invoke the writ jurisdiction of this
Court under Article 226 of the Constitution of India for the
reliefs sought or the petitioner be relegated to avail the
statutory remedy of appeal in view of the fact that the
assessment order has already been passed during the
pendency of the writ petition?
2. Whether condition precedent as contemplated by Section
194H making liable the petitioner to deduct tax at source for
15% trade discount allowed by it to Advertising Agency is
present so as to give jurisdiction to the authorities to initiate
proceedings under section 201/201 (1A) of the Income Tax
Act, 1961?
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3. Whether between the petitioner and the advertising agency
there is a relationship of principal and agent?
4. Whether the advertising agency is rendering services to the
petitioner or they are rendering services to advertiser as their
agent?
5. Whether 15% trade discount allowed by the petitioner to
advertising agencies is payment of commission within the
meaning of Section 194H Explanation (i).
6. Whether the Judgement of the Kerala High Court in 325 ITR
205 was attracted in the present case or the judgment of the
Delhi High Court in ITA 1264/07, The Commissioner of
Income Tax Vs. Living Media India Ltd. decided on
6.5.2008 was applicable?
7. Whether against a deductor who fails to deduct the tax at
source, the liability of payment of tax can also be fastened
against the deductor under section 201 apart from liability of
interest and penalty?
8. Whether with regard to tax which was required to be
deducted at source, the liability is of the assessee with
regard to whose income the tax was required to be deducted
at source or the liability is of deductor for payment of tax
which could not be deducted?
9. Whether according to Section 191 read with Section 201, a
deductor, who fails to deduct tax at source can be deemed to
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be an assessee in default without adverting to the issue and
recording a finding that assessee who is liable to pay tax
directly had not paid tax?
10.Whether the assessing authority has taken into consideration
all relevant materials for taking the decision and has not
taken into consideration any irrelevant material ?
11.Whether the assessing authority has violated the principle of
natural justice in the proceeding under section 201 and 201
(1A)?
12.To what relief, if any the petitioner is entitled in the present
writ petition?
The first issue, which is to be answered, is as to whether the
petitioner can be permitted to invoke the jurisdiction of this Court
under Article 226 of the Constitution of India for challenging the
notices dated 19th March, 2012 and 21st March, 2012 and the
subsequent assessment order dated 28th/29th March, 2012 on the
principal ground that there were no foundational facts to assume
jurisdiction by the Income Tax authorities to proceed under Section
201/201(1A) of the Act. The next challenge of the petitioner to the
assessment order is on the ground that assessment order directing
for recovery of tax, which according to the respondents was not
deducted by the petitioner at source, is without jurisdiction. The
submission is that under Section 201 read with Section 191 of the
Act the liability of the tax, which was required to be deducted at
source, cannot be fastened on the deductor and in the event the tax
has not been deducted the primary liability to pay such tax is on the
assessee and the assessment order framing assessment of tax on
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the petitioner was beyond the jurisdiction and was outside the
provisions of Section 201 of the Act.
The question as to whether sufficient grounds have been
made out for exercise of writ jurisdiction by this Court under Article
226 of the Constitution of India or the petitioner has to be
necessarily relegated to avail the statutory remedy of appeal under
the Income tax Act, 1961 is dependent on various issue which have
been raised in this writ petition and are to be answered by us. We
thus are of the view that first issue be answered after considering
the various grounds of attack and submissions of learned counsel
for the parties which have arisen in the writ petition.
Issues No.2, 3, 4,5 and 6 are interrelated and are being taken
together.
The proceedings under Section 201/201(1A) of the Act have
been initiated against the petitioner on the ground that the
petitioner, who was required to deduct tax at source with regard to
payment of 15% trade discount (alleged commission) given to
advertising agency, having failed to deduct the tax on the said
payment is liable to pay interest and tax. The proceedings are
founded on Section 194H of the Act. Section 194H of the Act is
quoted below:-
“194H. Commission or brokerage. Any person,
not being an individual or a Hindu undivided
family, who is responsible for paying, on or after
the 1st day of June, 2001 to a resident, any
income by way of commission (not being
insurance commission referred to in section
194D) or brokerage, shall, at the time of credit of
such income to the account of the payee or at the
time of payment of such income 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 rate of ten per cent.
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Provided that no deduction shall be made under
this section in a case where the amount of such
income or, as the case may be, the aggregate of
the amount of such income credited or paid or
likely to be credited or paid during the financial
year to the account of, or to, the payee, does not
exceed five thousand rupees.
Provided further that an individual or Hindu
undivided family, whose total sales, gross
receipts or turnover from the business or
profession carried on by him exceed the
monetary limit specified under Clause (a) or
Clause (b) of Section 44AB during the financial
year immediately preceding the financial year in
which such commission or brokerage is credited
or paid, shall be liable to deduct income tax
under this Section.
Provided also that no deduction shall be made
under this section on any commission or
brokerage payable by Bharat Sanchar Nigam
Limited or Mahangar Telephone Nigam Limited to
the public call office franchisees.
Explanation : For the purposes of this section, -
(i) "Commission or brokerage" includes any
payment received or receivable, directly or
indirectly, by a person acting on behalf of another
person for services rendered (not being
professional services) or for any services in the
course of buying or selling of goods or in relation
to any transaction relating to any asset, valuable
article or thing, not being securities;
(ii) the expression "professional services" means
services rendered by a person in the course of
carrying on a legal, medical, engineering or
architectural profession or the profession of
accountancy or technical consultancy or interior
decoration or such other profession as is notified
by the Board for the purposes of section 44AA;
(iii) the expression “securities” shall have the
meaning assigned to it in clause (h) of section 2
of the Securities Contracts (Regulation) Act, 1956
(42 of 1956);
(iv) Where any income is credited to any account,
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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.”
The case of the department against the petitioner is that
allowing 15% trade discount to advertising agencies by the
petitioner during the relevant assessment year is nothing but
payment of commission within the meaning of Section 194H
Explanation-(i) and the petitioner was liable to deduct tax at source.
The commission or brokerage has been defined in explanation. As
per definition for payment to be treated as commission, following
three conditions are required to be fulfilled:-
(1) payment received or receivable directly or indirectly;
(2) by a person acting on behalf of another person;
(3) for services rendered (not being professional services).
The Condition Nos. (2) and (3) , which are interrelated, are
being taken first. The Condition Nos.2 and 3 contemplate that
person receiving payment should be acting on behalf of another
person i.e. he must be agent of the principal and secondly payment
should be for the services rendered by the agent. Thus the test is
as to whether person receiving commission is agent of the principal
and he is receiving commission in lieu of services. The above are
jurisdictional facts which have to be found out in the proceeding to
be taken under Section 201/201(1A) of the Act. What are the
jurisdictional facts and what is the scope of entertaining such
challenge in proceeding under Article 226 of the Constitution of
India needs to be first examined before proceeding further to
examine the facts of the present case.
The Apex Court in the case of Calcutta Discount Co. Ltd.
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vs. Income Tax Officer reported in 1961(41) ITR 191 had occasion
to consider the aforesaid issue in context of the provisions of
Income Tax Act, 1922. It is useful to note the facts of the said case
in some detail. The appellant in the aforesaid case was assessed to
income tax for the assessment year 1942-43, 1943-44 and 1944-45
by three separate orders. Three notices purporting to be under
Section 34 of the Income Tax Act, 1922 for re-assessment was
issued. Notices were replied by the appellant and it challenged the
proceedings by means of writ petition under Article 226 of the
Constitution of India on the ground - “The said pretended notice
was issued without the existence of the necessary conditions
precedent which confers jurisdiction under section 34
aforementioned, whether before or after the amendment in 1948”.
Learned Single Judge held that the above ground was not made
out but being of the opinion that Amending Act, 1948 was not
retrospective,held the notices without jurisdiction and issued a writ
of prohibition to the Income Tax Officer from continuing the
assessment proceedings any further. In the Letter Patent Appeal,
the Division Bench set-aside the order of learned Single Judge and
the writ petition was dismissed. The appeal was filed in the Apex
Court. The Apex Court laid down following:-
“To confer jurisdiction under this section to
issue notice in respect of assessments beyond
the period of four years, but within a period of
eight years, from the end of the relevant year two
conditions have therefore to be satisfied. The first
is that the Income-tax Officer must have reason
to believe that income, profits or gains
chargeable to income- tax have been underassessed.
The second is that he must have also
reason to believe that such " under assessment "
has occurred by reason of either (i) omission or
failure on the part of an assessee to make a
return of his income under s. 22, or (ii) omission
or failure on the part of an assessee to disclose
fully and truly all material facts necessary for his
assessment for that year. Both these conditions
are conditions precedent to be satisfied before
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the Income-tax Officer could have jurisdiction to
issue a notice for the assessment or reassessment
beyond the period of four years but
within the period of eight years, from the end of
the year in question.”
The Apex Court considered the facts of the case including the
affidavits filed in the High Court as well as before the Apex Court.
The Apex Court took the view that one of the preconditions for
initiating proceedings under Section 34 that there had been any
material non-disclosure by reason of which under assessment was
taken place, was not there before the Income Tax Officer, hence he
had no jurisdiction to issue notice. In this context following was held
by the Apex Court:-
“It must therefore be held that the Incometax
Officer who issued the notices had not before
him any non-disclosure of a material fact and so
he could have no material before him for
believing that there had been any material nondisclosure
by reason of which an underassessment
had taken place.”
It is relevant to note that before the Apex Court also counsel
for the department contended that company would have sufficient
opportunity to raise the question before the Income Tax Officer and
in the event it is unsuccessful there is appellate jurisdiction under
Section 66(2) of the Income Tax Act, 1922, hence the High Court
ought not to have entertained the writ petition. Repelling the said
submission, following was laid down by the Apex Court:-
“Mr. Sastri mentioned more than once the
fact that the company would have sufficient
opportunity to raise this question, viz., whether
the Income-tax Officer had reason to believe that
under assessment had resulted from nondisclosure
of material facts, before the Incometax
Officer himself in the assessment
proceedings and, if unsuccessful there, before
the appellate officer or the appellate tribunal or in
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the High Court under section 66(2) of the Indian
Income-tax Act. The existence of such alternative
remedy is not however always a sufficient reason
for refusing a party quick relief by a writ or order
prohibiting an authority acting without jurisdiction
from continuing such action.”
The next case to be considered is the judgment of the Apex
Court in the case of Raza Textiles Ltd. vs. Income Tax Officer,
Rampur reported in (1973)87 ITR 539. In the said case Income Tax
Officer, Rampur directed the appellant to pay tax on a sum of
Rs.2,00,000/- remitted by it as a selling commission to M/s.
Nathirmal and Sons, Djakarta (Indonesia) during the year ending on
December 31, 1951 which was a non-resident firm. After being
unsuccessful before the appellate authorities, the writ petition under
Article 226 of the Constitution of India was filed. The learned Single
Judge held that M/s. Nathirmal and Sons is not a non-resident firm
and the appellant was not required to act under Section 18(3-B) of
the Income Tax Act, 1922. The revenue went in appeal before the
High Court. The High Court allowed the appeal against which
judgment the appellant filed an appeal before the Apex Court. While
reversing the judgment of the Division Bench of the High Court,
following was laid down by the Apex Court:-
“..... The single Judge after going into the
matter in detail came to the conclusion that M/s.
Nathirmal and Sons is not a non-resident firm
and that being so the appellant was not required
to act under Section 18(3B). He accordingly, set
aside the order impugned. The revenue went up
in appeal against the order of the learned single
Judge to the Appellate Bench. That Bench
allowed the appeal with the observations, "In the
present case the question before the Income-tax
Officer, Rampur, was whether the firm Nathirmal
and Sons was non-resident or not. There was
material before him on this question. He had
jurisdiction to decide the question either way. It
cannot be said that the officer assumed
jurisdiction by wrong decision on this question of
residence". The Appellate Bench appears to have
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been under the impression that the Income-tax
Officer was the sole judge of the fact whether the
firm in question was resident or non-resident.
This conclusion, in our opinion, is wholly wrong.
No authority, much less a quasi-judicial authority,
can confer jurisdiction on itself by deciding a
jurisdictional fact wrongly The question whether
the jurisdictional fact has been rightly decided or
not is a question that is open for examination by
the High Court in an application for a writ of
certiorari. If the High Court comes to the
conclusion, as the learned single Judge has done
in this case, that the Income-tax Officer had
clutched at the jurisdiction by deciding a
jurisdictional fact erroneously, then the assesses
was entitled for the writ of certiorari prayed for by
him. It is incomprehensible to think that a quasijudicial
authority like the Income-tax Officer can
erroneously decide a jurisdictional fact and
thereafter proceed to impose a levy on a citizen.
In our opinion the Appellate Bench is wholly
wrong in opining that the Income-tax Officer can
"decide either way".”
The Apex Court in the said case held that it is
incomprehensible that a quasi-judicial authority like the Income Tax
Officer can erroneously decide a jurisdictional fact and thereafter
proceed to impose levy on a citizen.
The Apex Court in the case of Shrisht Dhawan (Smt.) vs.
M/s Shaw Brothers reported in (1992)1 SCC 534 had again laid
down that jurisdictional fact is one on existence or non-existence of
which depends assumption or refusal to assume jurisdiction by an
authority. Following was laid down in paragraph 9 of the said
judgment:-
“9. ..... A jurisdictional fact is one on
existence or non-existence of which depends
assumption or refusal to assume jurisdiction by a
Court, tribunal or an authority. In Black's Legal
Dictionary it is explained as a fact which must
exist before a court can properly assume
jurisdiction of a particular case. Mistake of fact in
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relation to jurisdiction is an error of jurisdictional
fact. No statutory authority or tribunal can
assume jurisdiction in respect of subject matter
which the statute does not confer on it and if by
deciding erroneously the fact on which
jurisdiction depends the court or tribunal
exercises the jurisdiction then the order is
vitiated. Error of jurisdictional fact renders the
order ultra vires and Wade Administrative Law;
bad. In Raza Textiles Raza Textile v. Income Tax
Officer, Rampur it was held that a court or
tribunal cannot confer jurisdiction on itself by
deciding a jurisdictional fact wrongly. ..... Error in
assumption of jurisdiction should not be confused
with mistake, legal or factual in exercise of
jurisdiction. In the former the order is void
whereas in the latter it is final unless set aside by
higher or competent court or authority. An order
which is void can be challenged at any time in
any proceeding.....”
The next case to be considered is the judgment of the Apex
Court in the case of Siemens Ltd. vs. State of Maharashtra and
others reported in (2006)12 SCC 33. In the said case demand of
payment of cess was issued to the appellant’s company which was
challenged in the High Court on the ground that no jurisdictional
fact exists for the levy. By the notice the appellant was directed to
make payment of cess with interest. The writ petition was dismissed
by the High Court on the ground that the petitioner may file reply to
the show cause notice. The Apex Court held that although writ
Court may not exercise its discretionary jurisdiction in entertaining a
writ petition challenging the notice unless the same appears to have
been without jurisdiction, but the question herein has to be
considered from a different angle. Following was laid down by the
Apex Court in paragraphs 6, 8 and 9:-
“6. A writ petition was filed by the appellant
herein questioning the said purported notice. By reason
of the impugned order, the High Court refused to
exercise its jurisdiction under Article 226 of the
Constitution of India stating:
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"Challenge is to a show cause notice issued by
the Corporation demanding certain payment of
cess on the value of goods imported from
Aurangabad and Daman. Petitioners may file
their reply to the show cause notice and produce
the relevant documents within two weeks. In
case the order is adverse to the petitioner no
recovery shall be made for a period of four weeks
from the date of service of the order on the
petitioner."
8. The question as to whether jurisdictional
fact existed for issuance of the said notice order passed
by the respondent was in question in the said writ
petition.
9. Although ordinarily a writ court may not
exercise its discretionary jurisdiction in entertaining a
writ petition questioning a notice to show cause unless
the same inter alia appears to have been without
jurisdiction as has been held by this Court in some
decisions including State of Uttar Pradesh v. Brahm
Datt Sharma and Anr. AIR 1987 SC 943, Special
Director and Another v. Mohd. Ghulam Ghouse and
Another, (2004) 3 SCC 440 and Union of India and
Another v. Kunisetty Satyanarayana, 2006 (12) SCALE
262], but the question herein has to be considered from
a different angle, viz, when a notice is issued with premeditation,
a writ petition would be maintainable. In
such an event, even if the courts directs the statutory
authority to hear the matter afresh, ordinarily such
hearing would not yield any fruitful purpose [See K.I.
Shephard and Others v. Union of India and Others
(1987) 4 SCC 431 : AIR 1988 SC 686]. It is evident in
the instant case that the respondent has clearly made
up its mind. It explicitly said so both in the counter
affidavit as also in its purported show cause notice.”
The next case to be considered is the judgment of the Apex
Court in the case of Arun Kumar and others vs. Union of India
and others reported in (2007)1 SCC 732. The question of
applicability of Section 17(2)(ii) of the Income Tax Act, 1961 and
Rule 3 of the Income Tax Rules, 1962 came for consideration. Rule
3 provided for method of computing valuation of perquisite under
Section 17(2). In context of the said challenge, following was laid
down by the Apex Court in paragraphs 74, 75, 76, 77, 78, 82, 83,
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84 and 85:-
“74. A "jurisdictional fact" is a fact which must
exist before a Court, Tribunal or an Authority
assumes jurisdiction over a particular matter. A
jurisdictional fact is one on existence or nonexistence
of which depends jurisdiction of a
court, a tribunal or an authority. It is the fact upon
which an administrative agency's power to act
depends. If the jurisdictional fact does not exist,
the court, authority or officer cannot act. If a
Court or authority wrongly assumes the existence
of such fact, the order can be questioned by a
writ of certiorari. The underlying principle is that
by erroneously assuming existence of such
jurisdictional fact, no authority can confer upon
itself jurisdiction which it otherwise does not
posses.
75. In Halsbury's Laws of England, it has been
stated;
"Where the jurisdiction of a tribunal is dependent
on the existence of a particular state of affairs,
that state of affairs may be described as
preliminary to, or collateral to the merits of, the
issue. If, at the inception of an inquiry by an
inferior tribunal, a challenge is made to its
jurisdiction, the tribunal has to make up its mind
whether to act or not and can give a ruling on the
preliminary or collateral issue; but that ruling is
not conclusive".
76. The existence of jurisdictional fact is thus
sine qua non or condition precedent for the
exercise of power by a court of limited
jurisdiction.
77. In Raja Anand Brahma Shah v. State of
U.P. & Ors., AIR 1967 SC 1081 : (1967) 1 SCR
362, sub-section (1) of Section 17 of the Land
Acquisition Act, 1894 enabled the State
Government to empower Collector to take
possession of 'any waste or arable land' needed
for public purpose even in absence of award. The
possession of the land belonged to the appellant
had been taken away in the purported exercise of
power under Section 17(1) of the Act. The
appellant objected against the action inter alia
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contending that the land was mainly used for
ploughing and for raising crops and was not
'waste land', unfit for cultivation or habitation. It
was urged that since the jurisdiction of the
authority depended upon a preliminary finding of
fact that the land was 'waste land', the High Court
was entitled in a proceeding for a certiorari to
determine whether or not the finding of fact was
correct.
78. Upholding the contention and declaring the
direction of the State Government ultra vires, this
Court stated;
"In our opinion, the condition imposed by s. 17(1)
is a condition upon which the jurisdiction of the
State Government depends and it is obvious that
by wrongly deciding the question as to the
character of the land the State Government
cannot give itself jurisdiction to give a direction to
the Collector to take possession of the land
under s. 17(1) of the Act. It is well-established
that where the jurisdiction of an administrative
authority depends upon a preliminary finding of
fact the High Court is entitled, in a proceeding of
writ of certiorari to determine, upon its
independent judgment, whether or not that
finding of fact is correct". (emphasis supplied)
82. A question under the Income Tax Act, 1922
arose in Raza Textiles Ltd. v. Income Tax Officer,
Rampur, (1973) 1 SCC 633 : AIR 1973 SC 1362.
In that case, the ITO directed X to pay certain
amount of tax rejecting the contention of X that
he was not a non-resident firm. The Tribunal
confirmed the order. A single Judge of the High
Court of Allahabad held X as non-resident firm
and not liable to deduct tax at source. The
Division Bench, however, set aside the order
observing that:
"..... ITO had jurisdiction to decide the
question either way. It cannot be said that the
Officer assumed jurisdiction by a wrong decision
on this question of residence". X approached this
Court.
83. Allowing the appeal and setting aside the
order of the Division Bench, this Court stated;
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"The Appellate Bench appears to have been
under the impression that the Income-tax Officer
was the sole judge of the fact whether the firm in
question was resident or non- resident. This
conclusion, in our opinion, is wholly wrong. No
authority, much less a quasi-judicial authority,
can confer jurisdiction on itself by deciding a
jurisdictional fact wrongly The question whether
the jurisdictional fact has been rightly decided or
not is a question that is open for examination by
the High Court in an application for a writ of
certiorari. If the High Court comes to the
conclusion, as the learned single Judge has done
in this case, that the Income-tax Officer had
clutched at the jurisdiction by deciding a
jurisdictional fact erroneously, then the assesses
was entitled for the writ of certiorari prayed for by
him. It is incomprehensible to think that a quasijudicial
authority like the Income-tax Officer can
erroneously decide a jurisdictional fact and
thereafter proceed to impose a levy on a citizen."
(emphasis supplied)
84. From the above decisions, it is clear that
existence of 'jurisdictional fact' is sine qua non for
the exercise of power. If the jurisdictional fact
exists, the authority can proceed with the case
and take an appropriate decision in accordance
with law. Once the authority has jurisdiction in the
matter on existence of 'jurisdictional fact', it can
decide the 'fact in issue' or 'adjudicatory fact'. A
wrong decision on 'fact in issue' or on
'adjudicatory fact' would not make the decision of
the authority without jurisdiction or vulnerable
provided essential or fundamental fact as to
existence of jurisdiction is present.
85. In our opinion, the submission of Mr. Salve
is well founded and deserves to be accepted that
"concession" under clause (ii) of sub-section (2)
of Section 17 of the Act is a 'jurisdictional fact'. It
is only when there is a 'concession' in the matter
of rent respecting any accommodation provided
by an employer to his employee that the mode,
method or manner as to how such concession
can be computed arises. In other words,
concession is a 'jurisdictional fact'; method of
fixation of amount is 'fact in issue' or 'adjudicatory
fact'. If the assessee contends that there is no
'concession', the authority has to decide the said
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question and record a finding as to whether there
is 'concession' and the case is covered by
Section 17 (2) (ii) of the Act. Only thereafter the
authority may proceed to calculate the liability of
the assessee under the Rules. In our considered
opinion, therefore, in spite of the legal position
that Rule 3 is intra vires, valid and is not
inconsistent with the provisions of the parent Act
under Section 17 (2) (ii) of the Act, it is still open
to the assessee to contend that there is no
'concession' in the matter of accommodation
provided by the employer to the employee and
hence the case did not fall within the mischief of
Section 17 (2) (ii) of the Act.”
The proposition of law deducible from the aforesaid
pronouncement is that unless pre-conditions for exercise of
jurisdiction exists in an authority assumption of jurisdiction on
assuming wrong fact can always be questioned in a writ Court and
the mere fact that income tax authorities have assumed jurisdiction
and proceeded to pass an order does not preclude the scrutiny that
whether jurisdictional facts to assume jurisdiction were present or
not.
Now we again revert to the facts of the present case to find
out as to whether preconditions to proceed under Section
201/201(1A) of the Act were present or not.
As noted above, two conditions, which are required to be
fulfilled before holding a person liable for deduction at source, are
the payment is received by a person as agent of principal and
secondly payment is for services rendered (not being professional
services). The petitioner’s contention is that relationship between
the petitioner i.e. newspaper agency and the advertising agency is
not on the basis of principal and agent, rather is on the basis of
principal to principal. It has been submitted that there is no
agreement between the petitioner and the advertising agency from
which any assumption can be inferred nor at any point of time the
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petitioner has employed the advertising agency as its agent
whereas the contention of the department is that advertising
agencies are agent of the petitioner since they are bringing
advertising business which are services rendered by them to the
petitioner and payment of trade discount to the advertising agency
is nothing but commission in lieu of services rendered. We now
proceed to examine as to what are the tests for finding out
relationship of principal and agent.
Section 182 of the Indian Contract Act, 1872, which defines
“Agent” and “Principal”, is quoted below:-
“182."Agent" and "principal" defined.-An
"agent" is a person employed to do any act for
another or to represent another in dealings with
third persons. The person for whom such act is
done, or who is so represented, is called the
"principal".
The rule as to agency is expressed in maxim “qui facit per
alium, facit per se”. It is founded on a contract, express or implied,
by which one of the parties confides to the other, the management
of some business to be transacted in his name or on his account
and by which the other assumes to do the business and renders an
account of it. A Division Bench of this Court had occasion to
consider Section 182 of the Indian Contract Act in the case of Loon
Karan Sohan Lal vs. Firm John and Co. and others reported in
A.I.R. 1967 Alld. 308. Following was laid down in paragraphs 5 and
6:-
“6. ..... The court must examine the true
nature of the agreement and the subsequent
dealings between the parties, and then decide
whether it established a relationship of agency
under the law. It is common experience that the
word 'agent' is frequently used to describe a
relationship which is not an agency in law. In
several cases, a person described as an agent in
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the agreement or his letter of appointment was
held to be not an agent according to law. Some of
these cases are cited in Halsbury's Laws of
England, 3rd edition, Vol. 1 p. 146, in a foot-note
to the following observation:
"351. Agency Depends on True Nature of
Relationship In order to ascertain whether the
relation of agency exists, the true nature of the
agreement or the exact circumstances of the
relationship between the alleged principal and
agent will be regarded and if it is found that such
agreement in substance contemplates the
alleged agent acting on his own behalf, and not
as an agent in the agreement, the relation of
agency will not have arisen."
The cases cited in the foot-note are: Re Nevill, Ex
parte White, (1871) 6 Ch. App. 397; Towle (John)
and Co v. White, (1873) 29 LT 78; Livingstone v.
Ross. 1901 AC 327; Micheline Tyre Co. v.
Macfarlane (Glasgow) Ltd., (1917) 55 Sc L. R.
35; Kitson v. King (P. S.) and Son, Ltd. (1919) 36
T. L. R. 162, Lamb (W T.) & Sons v. Goring Brick
Co. (1932) K. B. 710.
6. I have examined these cases except the
one reported in 55 Sc. L. R. 35 which is not
available. They establish the principle that in
determining legal nature of relationship between
the alleged principal and agent the use or
omission of the word "agent" is not conclusive.
American Law is similar:
"the manner in which the parties designate the
relationship is not controlling, and if an act done
by person on behalf of another is in its essential
nature one of agency, the one is the agent of
such other notwithstanding he is not so called.
Conversely the mere use of the word by agent in
the contract cannot have to be held the effect of
making one agent, who, in fact is not such."
American Jurisprudence, IInd edition Vol. 3 page
431. The foot-note on this page refers to a case
in which it was held that the use of the words
"agency agreement" and "agent" by the parties in
a contract does not necessarily establish a
relationship of agency in the legal sense.
McCarty v. King County Medical Service Corp. 26
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Wash 2d 660, 175 P2d 658. The law in India is
the same. It has been held in several decisions
that the fact that the parties have called their
relationship an agency is not conclusive, if the
incidence of this relationship, as disclosed by
evidence does not justify a finding of agency, and
that the court must examine the true nature of the
relationship and the functions and responsibilities
of the alleged agent: Banaras Bank v. Ram
Prasad, AIR 1930 All 573, Phool Chand v.
Agarwal B. M. Co., AIR 1938 Lah 814;
Suryaprakasaraya v. Matheson's Coffee Works,
(1913) 14 Mad L. T. 249. What is the real nature
of the relationship created between the plaintiff
and the Government of Assam under the socalled
agreement of agency Ex. C-1. Before
analysing this agreement, it is necessary to state
the essential characteristic of an agency in law.
Section 182 of the Contract Act defines an agent
as "a person employed to do any act for another
or to represent another in dealings with third
person." The section defines a principal as "the
person for whom such act is done or who is so
represented." According to this definition, an
agent never acts on his own behalf but always on
behalf of another. He either represents his
principal in any transaction or dealing with a third
person, or performs any act for the principal. In
either case, the act of the agent will be deemed in
law to be not own but of the principal. The crucial
test of the status of an agent is that his acts bind
the plaintiff.
A Division Bench of Madras High Court in the case of P.
Krishna Bhatta and others vs. Mundila Ganapathi Bhatta and
others, AIR 1955 Madras 648 laid down following in paragraph 36:-
“36. ..... Looked at from this point of view,
an agency is a contract of employment for the
purpose of bringing another-in legal relation with
a third party or in other words, the contract
between the principal and agent is primarily a
contract of employment to bring him into legal
relation with a third party Or to contract such
business as may be going on between him and
the third party. An agent is thus a person either
actually or by law held to be authorised and
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employed by any person to bring hint into
contractual or other legal relations with a third
party. He is a representative vested with
authority, real or ostensible, to create voluntary
primary obligations for his principal by making
promises or representations to third persons
calculated induce them to change their legal
relations. Representative character and
derivative authority may briefly be said to be the
distinguishing features of an agent.”
The Apex Court in the case of Chiarman, Life Insurance
Corporation vs. Rajiv Kumar Bhasker reported in (2005)6 SCC
188 had occasion to consider various sections of Indian Contract
Act including Sections 182, 186 and 187. The Apex Court in the
said case held that an agency can be created expressly or by
necessary implications. Followings were laid down in paragraphs
26, 27 and 28:-
“26. The definition of 'agent' and 'principal' is
clear. An agent would be a person employed to
do any act for another, or to represent other in
dealings with third parties and the person for
whom such act is done or who is so represented
is called the principal. It may not be obligatory on
the part of the Corporation to engage an agent in
terms of the provisions of the Act and the rules
and regulations framed thereunder, but
indisputably an agent can be appointed for other
purposes. Once an agent is appointed, his
authority may be express or implied in terms of
Section 186 of the Contract Act.
27. For creating a contract of agency, in view
of Section 185 of the Indian Contract Act, even
passing of the consideration is not necessary.
The consideration, however, so far as the
employers are concerned as evidenced by the
Scheme, was to project their better image before
the employees.
28. It is well-settled that for the purpose of
determining the legal nature of the relationship
between the alleged principal and agent, the use
of or omission of the word "agent" is not
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conclusive. If the employee had reason to believe
that his employer was acting on behalf of the
Corporation, a contract of agency may be
inferred.”
Now after having taken note of the propositions as laid down
in the aforesaid judgments regarding tests to be applied for finding
out as to whether particular relationship is of a principal and agent
or not, we proceed to look into the relevant facts and materials
which have been brought on the record to examine the above
question.
As noted above, the assessment order has already been
passed by the assessing authority holding that relationship between
the petitioner and advertising agency is that of principal and agent
and the relevant materials and facts, which have been relied for
coming to the said conclusion, have been expressly referred to in
the assessment order and have been reiterated in the counter
affidavit filed by the department. The entire case of the department
having come on the record, it is useful to refer to and rely on the
said materials for determining the above jurisdictional question.
The assessment order itself noticed the three conditions,
which were required to be satisfied for principal and agent
relationship, and finding has been returned that all the said three
conditions are fulfilled. The relevant findings and observation are
contained in paragraphs 21, 27, 30 and 31, which are to the
following effect:-
“21. The gist of the above para is that it is a
principal agency relationship because the advertising
agents canvass advertisement for the media house at
tariff prescribed by the media house. In this
connection, it would be relevant to quote para 4 of the
Standard of Practice for Advertising Agencies (As
approved by the Advertising Agencies Association of
India, Bombay) as under:
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“No member shall pay or undertake or
allow to an advertiser or his agent or
representative, the whole or any portion of the
standard rate of commission resulting or to result
to such member from any advertising medium
nor promise or procure or undertake to procure
advertising or at a reduced rate nor supply free
or partly free to any advertiser, any advertising
material, including finished drawings, or other art
work, photographs, blocks, stereos, matrices or
the like, typesetting or printing nor defray in
whole or in part the salary of any employee of an
advertiser, nor grant any allowances, discount or
the like nor render any service having the effect
of rebating the commission allowed by an
advertising medium. The sharing of commission
with member or overseas agency or with agent
by this Association shall, however, be permitted.”
27. It can be said that an agent can conduct
the business of his principal according to the custom
which prevails in doing business. Therefore, the
assessee’s argument that since it has no codified
agreement with the advertising agency, the advertising
agency cannot be treated as its agent, does not hold
good. The principal-agent relationship can also exist
without any written or codified agreement. The
assessee has himself admitted that the INS as an apex
trade body for governing newspaper publishers also
govern newspaper relations with advertising agencies.
Since, assessee is a part of INS it is implied that it also
has a contract/agreement with the advertising agent
though it may not be codified agreement between the
assessee and the advertising agency.
30. In order to satisfy the requirements of
principal-agent relationship, certain condition laid down
in explanation (I) to section 194H are required to be
fulfilled:
1. There should be payment received or
receivable directly or indirectly.
2. It should be received or receivable by a
person acting on or behalf of another person.
3. The payment should be received or
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36
receivable for:
(a) Services rendered (not being professional
services) or
(b) For any services in the course of buying or
selling of goods or
(c) In relation to any transaction relating to
any asset, valuable articles or thing not being
securities.
All these three conditions are fulfilled in the
instant case:-
1. In the Jagran Prakashan Ltd. case the
advertising agent is receiving payment indirectly
under the name of “discount”. This discount is
nothing but an amount deducted from the gross
amount receivable by the principal i.e. Jagran
Prakashan Ltd. If the advertising agent would
have not rendered services to the Jagran
Prakashan Ltd. it would have not received any
discount or payment.
2. This discount or payment was received by
the advertising agent for procuring/providing
advertisements to Jagran Prakashan Ltd. The
advertisements were given as per the space
available in the Jagran Newspaper. Therefore,
the publication of the advertisement is strictly
subject to the availability of space in the
newspaper. The advertising agency is providing
advertisements on the basis of requirement of
the newspaper. The newspaper also decides
what type of advertisements it will publish. For
example, newspapers don’t publish the
advertisement for alcoholic drinks. Thus, it is the
newspaper which decides that what type of
advertisement it will publish and in how much
space. Thus, the advertising agency is acting on
behalf of the Jagran Prakashan Ltd. and
receiving payment in the name of discount from
the gross amount accruing to the Jagran
Prakashan Ltd.
3. The advertisement agency is rendering a
service to Jagran Prakashan Ltd. by procuring
and supplying the advertisement to the later and
for this service it is receiving its payment from the
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Jagran Prakashan Ltd. under the name
‘discount’.
31. From the above discussion, it can be appreciated
that the advertising agency is acting on behalf of
Jagran Prakashan Ltd. and receiving payments for the
services it has rendered to the Jagran Prakashan Ltd.
Thus, the existence of principal-agent relationship visa-
vis assessee and advertising agencies is established.
The provisions of section 194 H of the I.T. Act, 1961 are
applicable in such cases. Accordingly, the commission
paid by the assessee to various accredited advertising
agencies in the guise of “trade discount” is liable to
TDS.”
It is the case of the department, as apparent from the
impugned assessment order as well as from the counter affidavit,
that there is no inter se contract between the petitioner and any
advertising agency, rather the case of the department is that
principal-agent relationship can exist even if there is implicit
agreement. The conclusions have been recorded in the
assessment order in paragraph 34, which is to the following effect:-
“34. In conclusion, the whole discussion of this
order is summarised as under:-
A. There is a implicit agreement
between the Jagran Prakashan Ltd. and the
advertising agencies via Indian Newspaper
Society (INS) or otherwise.
B. There is a principal-agent
relationship between the Jagran Prakashan Ltd.
and the advertising agencies and the advertising
agencies act on behalf and as per the
requirement of the Jagran Prakashan Ltd.
C. There is payment from the Jagran
Prakashan Ltd. to advertising agencies in the
name of so called ‘discount’. The source of this
discount is nothing but the ad revenue generated
by the Jagran Prakash Ltd.
D. This payment from Jagran
Prakashan Ltd. to the advertising agencies is
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entirely for the services of advertisement
procurement by the advertising agencies.
E. That the Jagran Prakashan Ltd. visa-
vis INS and AAAI have devised a cosmetic and
artificial methodology to circumvent the clear
provisions of section 194H.”
The petitioner is member of Indian Newspapers Society (INS)
by whom the advertising agencies are granted accreditation.
According to the Rules of INS the advertising agencies while being
granted accreditation are required to enter into an agreement. The
department submits that since the petitioner is bound by Rules of
INS by whom the accreditation was granted to advertising agencies
after entering into an agreement, there is implicit contract between
the petitioner and the advertising agencies and the relationship of
principal-agent exists between them.
The petitioner has brought on the record Rules governing
accreditation of advertising agencies and the proforma of the
agreement which is entered between the advertising agencies and
the INS. The aforesaid rules have also been referred to in the
assessment order. On the basis of Rules of INS of which petitioner
is also a member and with whom the advertising agency enters into
an agreement, the department has concluded that there is implicit
contract between the petitioner and the advertising agencies from
which relationship of principal-agent can be found out. The
assessment order also refers to Standard of Practice for Advertising
Agencies as approved by the Advertising Agencies Association of
India, Bombay. Apart from abovesaid two materials, no other
material has been referred to in the order impugned. The
proposition is well settled that relationship of principal and agent
can be founded either expressly or by implication. Even if there is
no agreement between the principal and agent, the relationship can
exist. To find out the real relationship between the petitioner and the
advertising agency, the Rules of INS and the agreement entered
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between the advertising agencies and the INS has to be carefully
looked into. The petitioner has brought on record as Annexure RA-
2, copy of the Rules governing accreditation (INS Press Handbook
2010-11). The aforesaid rules delineate the clear picture of
relationship between the newspaper agencies and advertising
agencies. It is useful to refer to certain rules of INS which clearly
negate the relationship of principal and agent between the
newspaper agency and the advertising agency. Under the heading
“Rules and Regulations Governing Accreditation of Advertising
Agencies”, Rule 10 clearly indicates that there is no control of
newspapers agency on the advertising agency whereas in a
relationship of principal and agent principal retains full control over
the activities of agent. Rule 10(1), 10(b) and 10(c) are quoted
below:-
“10(a). It is free from control or interference
of any business or person who owns or controls
any newspaper or other advertising medium or
media.
(b) Its principal or principals are not the
proprietor/partners/salaried employees of any
advertiser or publisher of a newspaper or an
advertising medium.
(c) Any of its Directors, Proprietor,
Partners or Chief Executives do not hold any
share or equity in any publication or any other
form of advertising media and have no
connection financially or otherwise, with any
publication or with any firm of advertising media
such as outdoor, hoardings, cinemas, radio, etc.
or with any advertiser except as an advertising
agent. Such persons can hold a small number of
shares in public limited client companies.”
When Rule 10, as quoted above, clearly provides that
advertising agency is free from control or interference from
any business or person who owns or controls newspaper, the
newspaper agency cannot be treated to be principal and advertising
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agency as agent.
Rule 32, which provides for payment of trade discount has
been referred by the department, is to the followign effect:-
“32. Payment of Trade Discount. As and
from the date of accreditation as above, the
accredited advertising agency shall be entitled to
receive from the members of the Society the
maximum and minimum Trade Discount of 15%
in respect of advertisement business placed by it
with such members. In the case of the
provisionally accredited advertising agency, the
maximum and minimum Trade Discount shall be
10% of the advertisement business.”
Rule 45 prohibits the members of the society from appointing
advertising agency as their representatives. Rule 45 is quoted
below:-
“45. Member’s Representation by
Advertising Agency. Members of the Society
are free to appoint whomsoever they like as their
representative provided the said representatives
are not classified as “advertising agents” and do
not function as advertising agencies.”
A agency is a contract of employment for the purpose of
bringing another in legal relation with a third party or in other words,
the contract between the principal and agent is primarily a contract
of employment to bring him into legal relation with a third party or to
contract such business as may be going on between him and the
third party. In publication of advertisement submitted by advertising
agency, the responsibility to make payment of bills of the
newspaper is on the advertising agency and there is no
responsibility of advertiser to make payment to the newspaper
agency and no privity of contract took place between the
newspaper agency and the advertiser and had the advertising
agency being agent of newspaper agency, the advertiser was to be
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liable for payment to the newspaper agency. Rule 56(a) of the
Rules clearly contemplates that it is the advertising agency which is
responsible for payment even if the advertiser has not paid to the
advertising agency. Rule 56(a) of the Rules is quoted below:-
“56. Defaulting Clients. (a) where an advertiser
fails to pay and in consequence the agency is
unable to pay publications, INS upon being
authentically informed by the agency and being
so satisfied will advise its member publications to
suspend the advertisements of the concerned
advertiser until payment is realised. This is
without prejudice to the agency’s clear liability to
pay its dues even if its client has not paid.”
In the form of application, which is provided in Appendix-II to
the Rules, advertising agency is required to attach a list of the
names and addresses of clients whose advertisement is handled by
the advertising agency, which clearly indicates that in fact the
advertising agency is working for the advertisers/clients. Column 26
of the form of application is as follows:-
“Attach a list of the names and addresses
of clients whose advertisement is handled by you
and products/services as advertised along with
letters of appointment issued by the clients as
also with other documentary evidence.”
The most important material is format of contract between the
advertising agency and the INS, which is in Appendix-III to the
Rules. The contents of first paragraph of the contract clearly
indicates that object is to secure the best advertising service for
the advertiser. Thus the accreditation of advertising agency is for
the object of providing better service to the advertiser and it is not
engaged as agent of the newspaper agency and advertising
agency, in fact, is running its advertising business and while
conducting the said business it acts on behalf of their client i.e.
advertiser. The first paragraph of the agreement is as follows:-
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“(1) BY THE SOCIETY: ‘That the Society
accredits the Agency and includes its name in
the list of accredited agents published from time
to time.”
Clause 2 of the agreement clearly indicates that advertising
agency works in the interest of consumer and advertisers. Clause
2(a), (b), (c) and (d) are quoted below:-
“(2) BY THE AGENCY: In consideration
of the accreditation herein afforded and of the
trade discount to which the Agency is entitled by
reasons of such accreditation.
(a) The Advertising Agency shall maintain a
properly equipped office and shall fully abide by
the Standards of Service by Advertising Agencies
in the interest of consumers and Advertisers set
out in the Society’s Rules and Regulations on
Accreditation of Advertising Agencies.
(b) The Advertising Agency shall ensure
that all advertisements placed by it are legal,
clean, honest and truthful and it shall render the
best possible advertising service to the advertiser
and encourage the development of new
advertisement accounts and it shall fully adhere
in this respect to the advertisement ethics and the
Code of Ethics and Standards set out in the
Society’s Rules and Regulations on Accreditation
of Advertising Agencies.
(c) The Advertising Agency shall be paid trade
discount in accordance with the Society’s Rules
and Regulations on Accreditation of the
Advertising Agencies.
(d) That it will retain full trade discount earned
as an advertising agency from Member
Publications and that it will at no time pay or
otherwise allow any part of such trade discount to
any advertiser or representative of any advertiser
for whom it may be acting, or has acted as an
advertising agency.”
In the agreement Clause 2(q) mentions about 15% trade
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discount which advertising agency is entitled from newspaper
agency. Clause 2(q) is quoted below:-
“2(q). As and from the date of
accreditation, the Advertising Agency shall be
entitled to receive from the Members of the
Society the maximum and minimum trade
discount of 15% in respect of advertisement
business placed by it with such Members. In the
case of provisional accreditation the Advertising
Agency shall be entitled to receive maximum and
minimum trade discount of 10% only.”
According to Clause (3) of the agreement the advertising
agencies whose accreditation application is accepted by the society
are bound by the contract to be entered in Appendix-III.
The second precondition, which is required to be fulfilled for
applicability of Section 194H of the Act is that the person receiving
payment has rendered service to the deductor. A perusal of the INS
Rules clearly indicates that advertising agencies are rendering
service to the advertisers/customers and they are accredited by the
society not as an agent of newspaper agency but to provide service
to the advertisers/its clients. The aforesaid is clear from the
following part of the Rules.
A bare reading of Rule 20 indicates that advertising agencies
are rendering service to the advertisers i.e. their clients. Rule 20 of
the Rules is quoted below:-
“20. No Rebating. The Trade Discount
allowed to the agency by the members shall be
retained in full by the agency and shall not be
shared or rebated to any other person, firm or
company, directly or indirectly except:
When an agency rebates full Trade Discount to
its clients and is paid a service fee for its services
provided that the amount of the service fee so
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received shall not be less than 15%, such service
fee being levied on the gross and not on the net
amount.”
Column 26 of the application form, as quoted above, which
require the advertising agencies to submit the list of names and
addresses of clients whose advertisement is handled by them with
the letters of appointment issued by the clients (advertisers) clearly
mean that advertising agencies act for the advertisers who are their
client and they cannot be treated to be an agent of the newspaper
agency. The format of agreement in Appendix-III Clause (2) subclause
(d), as quoted above, which provides that advertising
agency shall retain full trade discount earned as an advertising
agency from member publications and it will at no time pay or
otherwise allow any part of such trade discount to any
advertiser or representative of any advertiser for whom it may
be acting, or has acted as an advertising agency. Thus the said
clause clearly indicates that advertising agencies act for the
advertisers who are their client and they are not the agent of the
News Agency.
In paragraph 21 of the assessment order, paragraph 4 of the
Standard of Practice for Advertising Agencies as approved by the
Advertising Agencies Association of India, has been relied and
referred to. Paragraph 4 of the Standard of Practice for Advertising
Agencies, provides a rule that no advertising agency shall pay or
undertake to pay any part of its commission received from
newspaper agency or promise or procure or undertake to procure
advertising at a reduce rate or to provide free or partly free any
advertising material to the advertiser. The said clause is with
different object and has no relevance in finding out the relationship
of newspaper and advertising agency as principal and agent. The
observation in the assessment order that advertising agency is
providing advertisements on the basis of requirement of newspaper,
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for example, the newspaper do not publish advertisement for
alcoholic drinks and thus it is the newspaper which decides that
what type of advertisement it will publish and hence the advertising
agency is acting on behalf of the Jagran Prakashan Ltd. and
receiving payment in the name of discount from the gross amount
accruing to the Jagran Prakashan Ltd. The fact that advertisement
for alcoholic drinks is prohibited is in view of the prohibition
contained in the executive orders and statutory provisions to which
every newspaper is bound to follow and on the aforesaid factor
inference of agency which has been drawn by the respondents is
wholly misplaced. The observation that advertisement agency is
rendering service to Jagran Prakashan Ltd. is also without any
basis and foundation.
From the aforesaid , it is clear that no foundational fact exists
on the basis of which any inference can be drawn that advertising
agencies are agent of the petitioners and further advertising
agencies render any service to the newspaper. The above two
foundational facts being non existent, the proceedings under
Section 201/201(1A) of the Act were clearly not permissible.
Now comes another factor (first factor) which is required to
be established for applicability of Section 194H of the Act i.e. as to
whether any payment was made to the advertising agency as
commission. The case of the petitioner throughout has been that
petitioner has been paying a trade discount at the rate of 15% as
per Rule 32 of the Rules. The sample bills, which were collected by
the department at the time of survey and are part of the
assessment order, mention the total amount paid to advertising
agency and the discount provided for and the net bill amount. The
petitioner’s case is that trade discount has been provided by the
petitioner throughout as a part of trade practice. The trade discount
is claimed to be given in normal business practice which has been
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recognised in several cases. Reliance has been placed on the
judgment of the Apex Court in the case of Moped India Ltd. vs.
Assistant Collector of Central Excise, Nellore and others
reported in (1986)1 SCC 125. In the said case the appellant,
manufacturer of moped, allowed commission to its dealer. The
central excise duty was paid on the price list after deducting the so
called commission to the dealer. The Central Excise Department
took the view that they were not entitled for deduction of the
aforesaid amount and demand of central excise was issued. The
Apex Court held in the said judgment that the said amount was
trade discount. Following was laid down in paragraph 7 of the said
judgment:-
“7. That takes us to the second question,
namely, whether the Division Bench was right in
taking the view that the Commission of Rs. 110,
145 and 165 per moped in respect of different
varieties of mopeds sold to the dealers could not
be said to be trade discount. Mr. Nariman,
Learned Counsel appearing on behalf of the
appellants contended that this Commission
allowed to the dealers was clearly trade discount
and was, therefore, liable to be deducted in
determining the exciseable value of the mopeds
by reasons of sub section (b) (ii) of Section 4 of
the Act. Now it is true that this amount allowed to
the dealers has been referred to in the
agreement as commission but the level given by
the parties cannot be determinative because it is
for the court to decide whether the amount is
trade discount or not, whatever be the name
given to it. If we look at the terms of the
agreement, it is clear that the agreement was
between the appellants and the dealers on
principal to principal basis. The clauses of the
agreement which we have set out above clearly
show beyond doubt that under the agreement,
the mopeds were sold by the appellants to the
dealers and the dealers did not act as agents of
the appellants for the purpose of effecting sales
on behalf of the appellants. It is clear from clause
5 (a) of the agreement that the bills in respect of
the mopeds delivered to the dealers were to be
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sent by the appellants through their bankers and
it was the responsibility of the dealers to retire
the bills for the purpose of taking delivery of the
mopeds. Clause 5 (b) of the agreement laid an
obligation on the dealers to insure the mopeds
against all risks, pilferage, non-delivery and
SRCC including breakage from the time the
mopeds left the factory or stockyard of the
appellants until they arrived at the premises of
the dealer and this again would show that the
dealers acted as principal to principal in
purchasing the mopeds from the appellants. The
dealers were also liable under Clause 6 of the
agreement to maintain adequate organisation for
sale and service of the mopeds including service
stations, repair shops, spare parts. salesmen etc.
and the mechanics were also to be trained at the
cost of the dealers. The relationship between the
appellants and the dealers was clearly on
principal to principal basis and in the
circumstances it is difficult to see how the
amount of Rs. 11 , 145 and 165 allowed to the
dealers. in respect of different varieties of
mopeds could be regarded as anything other
than trade discount. The appellants charged to
the dealer the price of the mopeds sold to them
less the amount of Rs. 110, Rs. 145 and Rs. 165
in respect of different varieties of mopeds. These
amounts allowed to the dealers were clearly
trade discount liable to be deducted from the
price charged to the dealers for the mopeds.
purpose of arriving at the exciseable value of the
moped.”
Another judgment relied by the petitioner is in the case of
Commissioner of Central Excise, New Delhi vs. DCM Textiles
reported in (2006)9 SCC 349 where the amount paid to dealer was
treated to be trade discount. In the aforesaid case under the
agreement with the dealer a payment of commission was
contemplated. The Apex Court rejected the argument that dealer
was agent of the appellant and further the amount to be paid to the
dealer was trade discount. Followings were laid down in paragraphs
8 to 12:-
“8. Respondent has entered into different
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but similar agreements with its dealers in
connection with the sale of cotton yarn
manufactured by it and one of the agreement
was produced during the course of proceedings
before the original authority for the purposes of
ascertaining the terms and conditions at which
the goods were supplied by the respondent to
its dealers. The agreement purports to be a
dealership agreement. The relevant clauses of
the agreement are reproduced hereunder:
"2. That the Cotton Yarn will be delivered to the
dealer on his requisitions placed in company's
office at Delhi, Ex-company's Delhi Godown
subject to availability of the stock with company
in their said godown.
3. That the dealer shall be wholly and solely
responsible for making full payment to the
company of all stocks of Cotton Yarn
received from the company.
xx xx xx
xx xx xx
8. That the company shall pay the dealer
commission of 1.5% including brokerage, if any,
on the net value of the sale. The
commission payable shall be worked out at
the end of every quarter and remitted to the
dealer.....
9. The dealer shall be paid ½% cash discount if
cheque/pay order/draft is issued and handed
over to company's staff by the dealer within one
day of date of the sale invoice. The cash
discount will be 0.25% if the payment is
made by the dealer by cheque/pay order/draft
within four days of the date of sale invoice.
10. No interest shall be levied if the payment is
made by the dealer by cheque/pay order/draft
within seven days of the date of the sale invoice
for payment delayed beyond seven days of the
date of sale invoice interest will be recoverable
from 8th day of the sale invoice till the date of
issue of cheque/draft/pay order and handed
over to the company's staff. The interest shall be
recovered at the end of every month.
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11. That the dealer shall arrange to lift the
stocks of cotton yarn purchased by the dealer
as per the agreed schedule failing which the
company may issue the sale invoice in dealer's
favour. In such event, terms of cash
discount/interest free period and interest
recoverable shall start from the date of sale
invoice itself.
xx xx xx
13. That the dealer shall keep with the
company a security deposit of Rs.50,000/-
as security which shall carry on interest of 15%
per annum which will be payable yearly.
xx xx xx
xx xx xx
16. If at any time this agreement is terminated
in accordance with the conditions of this
agreement, the accounts shall be finalised and
settled within one week from the date of
its termination.
9. A bare perusal of the above-noted clauses
clearly shows that the agreement entered into
between the respondent and dealers was on
'principal to principal basis' and it was an
absolute sale made by the respondent in
favour of the dealers. The dealer is required to
make full payment of the cotton yarn purchased
by him forthwith and he is given half percent
cash discount if the payment is made within one
day, 0.25 per cent if the payment is made within
four days and if the payment is not made within
seven days then from 8th day onwards the dealer
becomes liable to pay interest on the delayed
payment. This indicates that there was an
absolute sale made by the respondent to its
dealers and the sale was on 'principal to principal
basis'.
10. This Court in Union of India & Others v.
Bombay Tyres International Pvt. Ltd. reported in
1984 (17) ELT 329 (SC) on further arguments
held trade discount to mean:
“1. Trade Discounts - Discounts allowed in
the Trade (by whatever name such discount is
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described) should be allowed to be deducted
from the sale price having regard to the nature
of the goods, if established under agreements
or under terms of sale or by established
practice, the allowance and the nature of the
discount being known at or prior to the removal
of the goods. Such Trade Discounts shall not be
disallowed only because they are not payable at
the time of each invoice or deducted from the
invoice price."
11. It was held that discount allowed in the trade,
if established under agreements or under terms
of sale or by established practice, the allowance
and the nature of the discount being known at or
prior to the removal of the goods, then the same
shall amount to a trade discount provided the
sale is from 'principal to principal basis'. It was
further observed that such trade discount shall
not be disallowed only because they are not
payable at the time of each invoice or deducted
from the invoice value.
12. Original authority as well as
Commissioner (Appeals) had stressed upon the
point that since the trade discount was not paid
to the dealer at the time of the preparation of the
invoice and was to be paid later based on the net
sale value of the sale effected (½ per cent of the
net sale value); that the agreement between the
parties amounting to be an agency agreement
and not the dealership agreement and the sale
was not from principal to principal basis. We
agree with the Tribunal that this view is not
sustainable on the facts of this case.”
Heavy reliance was placed by the learned counsel for the
petitioner on the judgment of the Delhi High Court in I.T.A. No.1264
of 2007 (The Commissioner of Income Tax XVII Mvs. Living
Media India Ltd.), dated 6th May, 2008. The facts of the aforesaid
case need to be noted in detail. The petitioner has already brought
on the record copy of the judgment of the Income Tax Appellate
Tribunal in Assistant Commissioner of Income Tax vs. Living
Media India Limited as well as the judgment of the High Court
along with the letter dated 14th August, 2008 of the Indian
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Newspaper Society as Annexure-1 to the writ petition. The Indian
Newspaper Society has issued the letter dated 14th August, 2008 on
the reference “TDS on advertising agency trade discounts under
Section 194H of the Income Tax Act”. Following was circulated to all
the members of the Indian Newspaper Society:-
“Re: TDS on advertising agency trade discounts
under Section 194H of the Income Tax Act.
Several of our member publications have reported
having received a demand for depositing TDS against
the trade discounts permitted by them to advertising
agencies from whom member publications received
advertising releases.
In this connection, we are enclosing copies of the
following Court orders in the case of Living Media Ltd
vs Asstt. Commissioner of Income Tax Circle 50(1),
New Delhi.
1. Order No.I.T.A.No.3807/Del/2005 by the
Appellate Tribunal Delhi Bench H, New Delhi,
which held that the advertising agency was not
an agent of the assessee and the amount
deducted out of the gross payment received by
the agency from the advertiser cannot be treated
as payment of commission by the assessee to
agency. Thus it was held that the assessee was
not liable to deduct TDS on payment received by
the agency.
2. Order No. ITA No. 1264 of 2007 by the
High Court of Delhi, New Delhi upholding the
judgment passed by the Appellate Tribunal Delhi
Bench H, New Delhi.
These orders may be of use in dealing with such notices.”
M/s Living Media Limited is a publisher, which is publishing
various magazines like India Today, Business Today, Cosmopolitan
etc. The company had been generating income through space
selling (advertisement) in its magazines which was done through
advertising agency or directly through advertiser. The Company
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52
used to pay 15% discount as per Rule 32 of the INS Rules. Similar
notices were issued to Living Media Ltd. asking for similar details
and alleging non deduction of tax at source under Section 194H.
Copy of the order of Tribunal has been enclosed at Page 26 of the
writ petition which notes these facts in paragraph 4. The Tribunal
dismissed the appeal of the department against which a writ petition
was filed by the department. The Delhi High Court dismissed the
writ petition of the department. The Delhi High Court held that there
is no liability of deduction of tax at source under Section 194H with
regard to trade discount of 15% given to the advertising agency.
Following was laid down in paragraph 6 to 10 of the judgment of
Delhi High Court:-
“6. It is contended by learned counsel for the
Revenue that the CIT (A) had determined the
payment of 15% to the advertising agency by the
Assessee as commission and this was not
challenged by the Assessee. Consequently, the
provisions of Section 194H of the Act would
come into play. While this is factually so, we are
of the opinion that the conclusion arrived at by
the CIT (A) really turns the argument upside
down.
7. What is first required to be seen is the
nature of the contract between the parties and
after that determination, it is necessary to find out
what is the nature of the payment. What the
CIT(A) has done is to determine the nature of the
payment and then to determine the nature of the
contract. This, we think, is incorrect.
8. On a reading of the contract as well as the
order passed by the CIT (A) and the Tribunal, we
find that the two authorities below have held it to
be a principal to principal contract. That being so,
by its very definition, the payment made by the
Assessee to the advertising agency cannot be
classified as commission. The payment may be
called a trade discount or may be described as a
concession but since Rule 32 of the INS Rules
described it as a trade discount, we have to
proceed on that basis and by merely describing
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the trade discount as commission, the Revenue
cannot seek to invoke the provisions of Section
194H of the Act.
9. There is a concurrent finding of the CIT (A)
as well as the Tribunal that the contract was a
principal to principal contract and in terms of that
contract what was given by the Assessee to the
advertising agency was trade discount as per
Rule 32 of the INS Rules.
10. Under the circumstances, we are of the
view that the Tribunal was not in error in coming
to the conclusion that commission was not paid
by the Assessee to the advertising agency and
therefore, the provisions of Section 194H of the
Act could not be invoked by the Revenue.”
It is relevant to note that the Income Tax Department filed
Special Leave to Appeal (Civil) No.3433 of 2009 against the
judgment of the Delhi High Court dated 6th May, 2008 which special
leave to appeal was dismissed by the Apex Court vide its order
dated 11th December, 2009. The petitioner has relied on the
aforesaid judgment extensively and the assessing authority has
distinguished the judgment of the Delhi High Court stating that
Kerala High Court has delivered a judgment in the case of CIT
Thiruvanathapuram vs. Director, Prasar Bharati reported in 325
ITR 205, which is more recent judgment, hence the recent
judgment is to be preferred. The aforesaid reasoning by assessing
authority is wholly erroneous. The judgment of the Delhi High Court
was fully applicable on the facts of the present case and the
department was obliged to take into consideration the said
judgment specially when the special leave to appeal filed by the
department was dismissed by the Supreme Court.
Now we come to the judgment of the Kerala High Court
(supra) on which much reliance has been placed by the assessing
authority. The Prasar Bharati is fully owned Government of India
undertaking engaged in telecast of news, various sports,
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entertainments, cinemas and other programmes. The
advertisements were canvassed through agents under the
agreement with them. The advertising agencies and the Director,
Prasar Bharati were principal and agent as per the agreement and
the Doordarshan provided 15% discount on the basis of which it
was contended that no deduction at source was required. The
Tribunal held that there was no liability for deduction of tax at
source under Section 194H which judgment was reversed by the
Kerala High Court. From the facts of the aforesaid case, it is clear
that Doordarshan had appointed agents i.e. advertising agencies
and there was agreement entered between them. In the aforesaid
circumstances 15% advertisement charges collected and remitted
was held to be in the form of commission payable to the agent by
Doordarshan. There was explicit agreement between the agency
and the Doordarshan where both understood that payment made to
the agency was liable to tax deduction. It is useful to quote following
observations of the judgment of Kerala High Court:-
“Respondent is a fully owned Government of
India undertaking engaged in telecast of news,
various sports, entertainments, cinemas and
other programmes. Advertisement income is a
major source of revenue for all telecasting
companies including the respondent.
Advertisements are canvassed through agents
appointed by the respondent under agreement
with them. Advertising agencies recognised by
the respondent are of two types, the unregistered
agencies which are not entitled to any credit
facility and the other type are registered agencies
which are given accredition and credit facility with
Doordarshan. In other words, while the first
category will be able to telecast advertisment
programmes canvassed from customers only on
advance payment, the other category can have
telecast done before making payments.
Advertisement charges are based on air-time
used for telecasting advertisement material.
Rates are also varying depending upon the time
of advertisment. However, these matters have no
relevance for the purpose of deciding this case
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because the issue involved is whether the
commission paid at the rate of 15% by the
respondent on advertisement charges remitted
by the advertising agencies is subject to tax
deduction at source as commission under
Section 194H of the Act.
From the above it is very clear that parties
have understood their relationship as Principal
and Agent and what is paid to the agent by
Doordarshan is 15% of advertisement charges
collected and remitted to it by the agent which is
in the form of commission payable to the Agent
by Doordarshan. Counsel for the respondent
referred to one of the agreements where the
commission is referred to as standard discount
and contended that the arrangement between
respondent and advertising agency is not agency
but is a Principal to Principal arrangement of
sharing advertisement charges. We are unable to
accept this contention because advertisement
contract entered into between the customer and
the agency is for telecasting advertisement in
Doordarshan channels. The agent canvasses
advertisement on behalf of Doordarshan under
agreement between them and the advertisement
charges recovered from the customers are also
in accordance with tariff prescribed by
Doordarshan which is incorporated in the
agreement. Further it is specifically stated in the
agreement that advertisement material should
also conform to the discipline introduced by
Doordarshan which is nothing but a Government
agency which cannot telecast all what is desired
to be telecast by advertising agencies. In fact,
Doordarshan is bound by advertisement contract
canvassed by advertising agencies and it is their
duty under the agreement between them and the
advertising agencies to telecast advertisement
material in terms of the contract which the
agency signs with the customer. In our view, the
transaction is a pure agency arrangement
between the respondent and the advertising
agencies because one acts for the other and the
act of the agent binds the respondent in their
capacity as Principal of the agent. It is pertinent
to note that commission or brokerage defined
under explanation (i) to Section 194H has a wide
meaning and it covers any payment received or
receivable directly or indirectly by a person acting
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on behalf of another person for services
rendered. In this case, no one can doubt that
15% commission paid to advertising agencies by
the Doordarshan is for canvassing
advertisements on behalf of the respondent. So
much so, the payment of 15%, by whatever
name called, whether discount or commission,
falls within the definition of "commission" as
defined under Explanation (i) to Section 194H of
the Act.
The next question to be considered is
whether the provision in the agreement
permitting advertising agencies to retain 15% of
the advertising charges payable by them to the
respondent towards commission from out of the
charges received for advertising services from
customers will exonerate the respondent from
their liability to deduct tax at source under
Section 194H of the Act. In this context, it is
pertinent to refer to clause 2(e) of Annexure A
agreement which is extracted hereunder:
(e) The Agency shall retain in full all
discount earned as an advertising agency and
that it will at no time pay or otherwise allow
directly or indirectly any part of such
discount or remuneration to any person,
advertiser or representative of any advertiser for
whom it may be acting or has acted as an
advertising agency.
Agency agrees to pay the TDS/Income Tax
liability as applicable under the Income Tax Law
on the discount retained by him. For this purpose
agency agrees to make payment to Doordarshan
Commercial Service by means of
cheque/demand draft for the TDS on 15%
discount retained by them. This cheque/demand
draft will be drawn separately and should not be
included in the telecast fee/advertisement
charges.
It is very clear from the above provision that the
advertising agency clearly understood the
agreement as an agency arrangement and the
commission payable by the respondent to such
agency is subject to tax deduction at source
under the Income Tax Act and so much so the
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57
provision in the agreement was for the agent
after retaining 15% to give cheque or demand
draft for TDS amount which was originally 5%
until it was enhanced to 10% by Finance Act
2007 with effect from 1.6.2007...”
In the aforesaid case, the relationship of principal and agent
was fully established since the advertising agency was appointed
as agent by written agreement and there was specific clause that
tax shall be deductible at source on payment of trade discount. In
the said circumstances the Kerala High Court held that Section
194H of the Income Tax Act was applicable. In the present case,
there is no agreement between the petitioner and the advertising
agency and the advertising agency has never been appointed as
agent of the petitioner. Thus the above case of Kerala High Court is
clearly inapplicable and the reliance on the said judgment for
fastening the liability of tax and interest on the petitioner is wholly
untenable. The judgment of the Kerala High Court thus does not
help the respondents in the present case.
Issues No. 7,8 and 9 are interrelated hence, they are being
taken together. The ground of challenge of the petitioner is that
under section 201 of the Act, the Income Tax authorities cannot
direct for payment of tax from the person, who was obliged to
deduct the tax at source and at best only interest and penalty can
be recovered on failure of deductor to deduct the tax at source.
Elaborating the submission, it is submitted that the orders of the
assessing authority directing for payment to the extent of amount
which was deductible under section 194H from the petitioner is
without jurisdiction and beyond the scope of provisions of section
201. The order being without jurisdiction, the petitioner can very
well invoke the jurisdiction of this court praying for quashing of such
an order which is void and in excess of the jurisdiction of the
authorities. Before answering the aforesaid issues, the scheme of
the Act including the scheme of collection and recovery of tax have
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to be looked into.
Section 4 of the Act is charging section which provides that
income tax is chargeable in respect of the total income of the
previous year of every person. The charge of the income tax is thus
on the income of a person. Person has been defined in Section 2
(31). Section 4 of the Act is quoted as below:
“ 4 (1) Where any Central Act enacts that incometax
shall be charged for any assessment year at
any rate or rates, income-tax at that rate or those
rates shall be charged for that year in accordance
with, and subject to the provisions (including
provisions for the levy of additional income-tax) of,
this Act in respect of the total income of the
previous year of every person :
Provided that where by virtue of any provision of
this Act income-tax is to be charged in respect of
the income of a period other than the previous
year, income-tax shall be charged accordingly.
(2) In respect of income chargeable under subsection
(1), income-tax shall be deducted at the
source or paid in advance, where it is so
deductible or payable under any provision of this
Act.”
Interpreting the similar provisions of the Income Tax Act,
1922, the Federal Court in 15 ITR 302 Chatturam Vs.
Commissioner of Income Tax held that section imposes income
tax upon a person in respect of his income. While interpreting
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Sections 3,4 and 22 of Income Tax Act, 1922 following was laid
down by the Federal Court:
“ The liability to pay tax is founded on Sections 3
and 4 of the Income Tax Act, which are the
charging sections. Section 22 etc. are the
machinery sections to determine the amount of
tax. Lord Dunedin in Whitney Vs. Commissioners
of Inland Revenue stated as follows:- “ Now, there
are three stages in the imposition of a tax. There
is the declaration of liability, that is the part of the
statute which determines what persons in respect
of what property are liable. Next, there is the
assessment. Liability does not depend on
assessment, that ex hypothesi has already been
fixed. But assessment particularizes the exact sum
which a person liable has to pay. Lastly, come the
methods of recovery if the person taxed does not
voluntarily pay.” In W.H. Cockerline & Co. V.
Commissioners of Inland Revenue, Lord
Hanworth, M.R., after accepting the passage from
Lord Dunedin's judgment quoted above, observed
as follows:- “Lord Dunedin, speaking, of course,
with accuracy as to these taxes, was not unmindful
of the fact that it is the duty of the subject to whom
a notice is given to render a return in order to
enable the Crown to make an assessment upon
him; but the charge is made in consequence of the
Act, upon the subject; the assessment is only for
the purpose of quantifying it.” He quoted with
approval the following passage from the judgment
of Sargant, L.J., in the case of Williams:- “ I cannot
see that the non-assessment prevents the
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incidence of the liability, through the amount of the
deduction is not ascertained until assessment. The
liability is imposed by charging section, namely,
Section 38 (of the English Act) the words of which
are clear. The subsequent provisions as to
assessment and so on are machinery only. They
enable the liability to be quantified, and when
quantified to be enforced against the subject, but
the liability is definitely and finally created by the
charging section and all the materials for
ascertaining it are available immediately.” In
Attorney-General V. Aramayo and others, it was
held by the whole Court that there may be a waiver
as to the machinery of taxation which inures
against the subject. In India these well-considered
pronouncements are accepted without reservation
as laying down the true principles of taxation under
the Income-tax Act.”
The apex Court had occasion to consider section 4 of the
Income Tax Act in (1993) 201 ITR 88 Universal Radiators Vs.
Commissioner of Income Tax. Following was laid down by the
apex Court:
“But liability to pay tax under the Act arises on the
income accruing to an assessee in a year. The
word 'income', ordinarily in normal sense, connotes
any earning or profit or gain periodically, regularly
or even daily in whatever manner and from
whatever source. Thus it is a word of very wide
import. Clause (24) of Section 2 of the Act is
legislative recognition of its elasticity. Its scope has
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been widened from time to time by extending it to
varied nature of income. Even before it was
defined as including profits, gains, dividends and
contributions received by a trust it was held to be a
word, 'of broadest connotation' which could not be
'understood in restricted or technical sense'. The
wide meaning of the word was explained by this
Court in Raghuvanshi Mills Ltd., Bombay v.
Commissioner of Income Tax, Bombay City MANU/
SC/0043/1952 : [1952]22ITR484(SC) and it was
emphasised that the expression, 'from whatever
source derived' widened the net. But exigibility to
tax is not the same as liability to pay tax. The
former depends on charge created by the Act and
latter on computation in accordance with the
provisions in the Act and the rules.”
Chapter XVII of the Act deals with collection and recovery of
tax. Section 190 provides for deduction at source and advance
payment. Section 190 is quoted below:
“190 (1) Notwithstanding that the regular
assessment in respect of any income is to be
made in later assessment year, the tax on such
income shall be payable by deduction or collection
at source or by advance payment or by payment
under sub-section (1A) of Section 192, as the case
may be, in accordance with the provisions of this
Chapter.
(2) Nothing in this section shall prejudice the
charge of tax on such income under the provisions
of sub-section (1) of section 4.”
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Section 190 thus, provides mode of collection and recovery
of tax and under sub-section (1) of Section 190, the tax is payable
by deduction or collection at source.
Section 191 provides that in the case of income in respect of
which either provision is not made for deduction at source or where
income tax has not been deducted in accordance with the
provisions of this Chapter, income-tax shall be payable by the
assessee direct. Section 191 is quoted below:
“ 191. In the case of income in respect of which
provision is not made under this Chapter for
deducting income-tax at the time of payment, and
in any case where income-tax has not been
deducted in accordance with the provisions of this
Chapter, income-tax shall be payable by the
assessee direct.
Explanation.—For the removal of doubts, it is
hereby declared that if 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 after so
deducting fails to pay, or does not pay, the whole
or any part of the tax, as required by or under this
Act, and where the assessee has also failed to pay
such tax directly, then, such person shall, without
prejudice to any other consequences which he
may incur, be deemed to be an assessee in default
within the meaning of sub-section (1) of section
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201, in respect of such tax.”
Section 194H provides for payment of commission or
brokerage where income tax is to be deducted at source by the
person responsible for paying such commission or brokerage.
Section 201 provides for consequence of failure to deduct or pay.
Section 201 is quoted as below:
“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 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.
(1A) Without prejudice to the provisions of subsection
(1), if any such person, principal officer or
company as is referred to in that sub-section does
not deduct the whole or any part of the tax or after
deducting fails to pay the tax as required by or
under this Act, he or it shall be liable to pay simple
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interest,—
(i) at one per cent for every month or part of a
month on the amount of such tax from the date on
which such tax was deductible to the date on
which such tax is deducted; and
(ii) at one and one-half per cent for every month
or part of a month on the amount of such tax from
the date on which such tax was deducted to the
date on which such tax is actually paid,
and such interest shall be paid before furnishing
the statement in accordance with the provisions of
sub-section (3) of section 200.
(2) Where the tax has not been paid as aforesaid
after it is deducted, the amount of the tax together
with the amount of simple interest thereon referred
to in sub-section (1A) shall be a charge upon all
the assets of the person, or the company, as the
case may be, referred to in sub-section (1).
(3) No order shall be made under sub-section (1)
deeming a person to be an assessee in default for
failure to deduct the whole or any part of the tax
from a person resident in India, at any time after
the expiry of—
(i) two years from the end of the financial year in
which the statement is filed in a case where the
statement referred to in section 200 has been filed;
(ii) four years from the end of the financial year in
which payment is made or credit is given, in any
other case :
Provided that such order for a financial year
commencing on or before the 1st day of April, 2007
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may be passed at any time on or before the 31st
day of March, 2011.
(4) The provisions of sub-clause (ii) of subsection
(3) of section 153 and of Explanation 1 to
section 153 shall, so far as may, apply to the time
limit prescribed in sub-section (3).”
The main issue to be answered is as to whether in event, the
person who is responsible to deduct tax at source fails to deduct
the tax at source, what are the consequences? Whether the tax
which was required to be deducted at source by such deductor, can
also be recovered from the deductor or recovery can confine only to
interest and penalty. The Income Tax Act is an integrated Act
delineating a scheme for payment of income tax. For interpreting
provisions of Section 201 of the Act, other related provisions have
to be looked into to find out the scheme of section 201.
Sections 190 and 191 of Chapter XVII under which chapter
Section 201 also falls need a closure scrutiny. Section 190(1)
provides that tax on income shall be payable by deduction or
collection at source or by advance payment. Sub-section (2) of
section 190 starts with a negative injunction i.e. “nothing in this
section shall prejudice the charge of tax on such income under the
provisions of sub-section (1) of Section 4.” Sub-section (1) of
section 4 as noted above, provides that charge of the income tax
shall be on the income of a person. Sub-section (2) of Section 190
clearly mandates that despite of mode and manner of collection
and recovery of tax i.e. by deduction or collection at source as
envisaged under section 190 (1), the charge of payment of income
tax is on a person, whose income is to be taxed.
Section 191 provides that in the case of income in respect of
which provision is not made under this Chapter for deducting
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income tax at source and where income tax has not been deducted
in accordance with the provision of this chapter, income tax shall be
payable by the assessee direct. Thus, both the conditions i.e. (i) in
the case of income in respect of which provision is not made under
chapter XVII for deducting income tax at the time of payment and
(ii) in case where income tax has not been deducted in accordance
with the provisions of Chapter XVII, the Income tax is payable by
the assessee direct. Section 191 thus re-enforces that primarily the
liability of payment of income tax is on the person, whose income is
to be taxed as delineated under sub-section (1) of section 4 and
sub-section (2) of section 190. The explanation to Section 191
provides that where a deductor who was required to deduct income
tax at source does not deduct or after deduction does not pay and
where the assessee has also failed to pay such tax directly then
such person shall without prejudice to any other consequence be
deemed to be an assessee in default within the meaning of subsection
(1) of Section 201 in respect of such tax. The explanation
to section 191 thus has to be read into section 201 (1).
Sub-section (1) of Section 201 provides that where deductor
does not deduct or does not pay after deduction 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.
The language of the explanation to Section 191 and sub-section (1)
of Section 201 is almost similar except with one difference. In
Explanation to Section 201, the deductor shall be deemed to be an
assessee in default where the assessee has also failed to pay such
tax directly, whereas in sub-section (1) of Section 201, the above
condition is not mentioned. While interpreting the provisions of
sections 191 and sub-section (1) of Section 201, a harmonious
construction has to be adopted and such interpretation is to be put
which gives meaning and purpose to both the provisions.
Explanation to section 191 specifically mentions “....be deemed to
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be an assessee in default within the meaning of sub-section (1) of
section 201 in respect of such tax.” The above meaning thus has to
be read in sub-section (1) of section 201, which has been
specifically provided for. Not repeating the said condition again in
section 201 (1) is inconsequential. Thus, deductor who fails to
deduct income tax at source shall be deemed to be an assessee in
default only when the assessee has also failed to pay such tax
directly. Thus, it flows that there is no occasion to treat the deductor
as an assessee in default unless the assessee has not paid the tax
directly.
The apex Court in (2010) 10 SCC 29 GE India Technology
Centre Private Limited Vs. Commissioner of Income Tax, had
occasion to consider Section 195 of the Act, which also provides for
deduction of income tax. In the aforesaid case, words “chargeable
under the provisions of the Act” contained in Section 195 came for
interpretation. In the above context, the apex Court had held that
charging provisions of the Act form one single integral inseparable
code. It is useful to quote paragraphs 16,17 and 18:
“ 16. The fact that the Revenue has not obtained
any information per se cannot be a ground to
construe Section 195 widely so as to require
deduction of TAS even in a case where an amount
paid is not chargeable to tax in India at all. We
cannot read Section 195, as suggested by the
Department, namely, that the moment there is
remittance the obligation to deduct TAS arises. If
we were to accept such a contention it would mean
that on mere payment income would be said to
arise or accrue in India. Therefore, as stated
earlier, if the contention of the Department was
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accepted it would mean obliteration of the
expression “sum chargeable under the provisions
of the Act” from Section 195(1). While interpreting
a Section one has to give weightage to every word
used in that section. While interpreting the
provisions of the Income Tax Act one cannot read
the charging Sections of that Act dehors the
machinery Sections. The Act is to be read as an
integrated code.
17. Section 195 appears in Chapter XVII which
deals with collection and recovery. As held in the
case of C.I.T. Vs. Eli Lilly &Co. (India) (P.) Ltd. [312
ITR 225] the provisions for deduction of TAS which
is in Chapter XVII dealing with collection of taxes
and the charging provisions of the I.T. Act form one
single integral, inseparable Code and, therefore,
the provisions relating to TDS applies only to those
sums which are “chargeable to tax” under the I.T.
Act. It is true that the judgment in Eli Lilly (supra)
was confined to Section 192 of the I.T. Act.
However, there is some similarity between the two.
If one looks at Section 192 one finds that it
imposes statutory obligation on the payer to deduct
TAS when he pays any income “chargeable under
the head salaries”. Similarly, Section 195 imposes
a statutory obligation on any person responsible
for paying to a non- resident any sum “chargeable
under the provisions of the Act”, which expression,
as stated above, do not find place in other
Sections of Chapter XVII. It is in this sense that we
hold that the I.T. Act constitutes one single integral
inseparable Code. Hence, the provisions relating
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to TDS applies only to those sums which are
chargeable to tax under the I.T. Act.
18. If the contention of the Department that any
person making payment to a non-resident is
necessarily required to deduct TAS then the
consequence would be that the Department would
be entitled to appropriate the moneys deposited by
the payer even if the sum paid is not chargeable to
tax because there is no provision in the I.T. Act by
which a payer can obtain refund. Section 237 read
with Section 199 implies that only the recipient of
the sum, i.e., the payee could seek a refund. It
must therefore follow, if the Department is right,
that the law requires tax to be deducted on all
payments. The payer, therefore, has to deduct and
pay tax, even if the so-called deduction comes out
of his own pocket and he has no remedy
whatsoever, even where the sum paid by him is
not a sum chargeable under the Act. The
interpretation of the Department, therefore, not
only requires the words “chargeable under the
provisions of the Act” to be omitted, it also leads to
an absurd consequence. The interpretation placed
by the Department would result in a situation
where even when the income has no territorial
nexus with India or is not chargeable in India, the
Government would nonetheless collect tax. In our
view, Section 195(2) provides a remedy by which a
person may seek a determination of the
“appropriate proportion of such sum so
chargeable” where a proportion of the sum so
chargeable is liable to tax.”
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Sri Govind Krishna, learned counsel for the Department
relied on judgment of the apex Court on statutory interpretation
namely; AIR 1972 S.C. 2319 Azam Jha Bahadur Vs. Expenditure
Tax Officer for the proposition that logic or reason cannot be of
much avail in interpreting a tax statute. There cannot be any
dispute to the proposition as laid down by the apex Court in the
aforesaid case.
While interpreting the provisions of charging section of the
Income Tax Act and the machinery part both have to be treated as
integrated code as held by the apex Court in GE India
Technology Centre Private Limited Vs. Commissioner of
Income Tax (supra). Sri Govind Krishna further relied on the
judgment of the apex Court in Civil Appeal No. 1507 of 2007 of
2007 M/s Sharma Transports Vs. The State of Maharashtra
decided on 2.8.2011 for the proposition that if a particular method
is prescribed for doing a certain thing by the Statute, it rules out any
other method. For the same proposition reliance has been placed
on the judgment of the apex Court in Dr. Ram Deen Maurya Vs.
State of U.P. & others Civil Appeal No. of 2009 (arising out of
Special Leave Petition (C) No. 22330 of 2007), decided on
17.4.2009, wherein same proposition was laid down i.e. when rules
prescribed a particular procedure to be followed, the same requires
to be followed and any deviation would disentitle the applicant to
claim relief. There cannot be any dispute to the proposition laid
down by the apex Court in the aforesaid two cases. However, the
present is not a case of non compliance of any procedural
requirement.
The apex Court had occasion to consider provisions of
Section 201 in (2007) 8 SCC 463 Hindustan Coca Cola Beverage
(P) Ltd. Vs. Commissioner of Income Tax. In the aforesaid case,
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the appellant entered into an agreement with M/s Pradeep Oil
Corporation for use of their premises for receipt, storage and
dispatch of goods belonging to the appellant-company. Tax was
deducted under Section 194C @ 2% in respect of ware housing
charges. The Assessing Officer took the view that warehousing
charges were in the nature of rent and tax was to be deducted at
the rate of 20% under section 194-I. The Assessing Officer
accordingly determined the amount of short deduction of tax and
also levied interest payable thereon under Section 201 (1A) of the
Act. The Tribunal held that there can be no recovery of tax alleged
to be in default from the appellant considering the fact that Pradeep
Oil Corporation had already paid taxes on the amount received
from the appellant. High Court however, interfered with the order of
the Tribunal. The view of the Tribunal was affirmed by the apex
Court reversing the order of the High Court. It is useful to quote
paragraphs 6,7,8,9 and 10:
“6. The Tribunal upon rehearing the appeal held
that though the appellant-assessee was rightly
held to be an 'assessee in default', there could be
no recovery of the tax alleged to be in default once
again from the appellant considering that Pradeep
Oil Corporation had already paid taxes on the
amount received from the appellant. It is required
to note that the department conceded before the
Tribunal that the recovery could not once again be
made from the tax deductor where the payee
included the income on which tax was alleged to
have been short deducted in its taxable income
and paid taxes thereon. There is no dispute
whatsoever that Pradeep Oil Corporation had
already paid the taxes due on its income received
from the appellant and had received refund from
the tax department. The Tribunal came to the right
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conclusion that the tax once again could not be
recovered from the appellant (deductor- assessee)
since the tax has already been paid by the
recipient of income.
7. The High Court interfered with the order passed
by the Tribunal on the ground that the order dated
12.7.2002 of the Income-Tax Appellate Tribunal
has attained its finality since the appeal filed
against the same by the appellant was dismissed
by the High Court on 21.5.2004; the point based
on Ground No. 7 was not taken up in the appeal
preferred by the appellant in the High Court. The
High Court further held that the Income-tax
Appellate Tribunal's order dated 12.7.2002 got
itself merged into the order passed by it on
21.5.2004 dismissing the appeal of the appellant
herein. The High Court came to the conclusion
that the Tribunal could not have reopened the
matter for any further hearing.
8. We have already noticed that the order passed
by the Tribunal to reopen the matter for further
hearing as regards ground No. 7 has attained its
finality. In the circumstances, the High Court could
not have interfered with the final order passed by
the Income-tax Appellate Tribunal.
9. Be that as it may, the circular No. 275/201/95-
IT(B) dated 29.1.1997 issued by the Central Board
of Direct Taxes, in our considered opinion, should
put an end to the controversy. The circular
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declares "no demand visualized under Section 201
(1) of the Income- tax Act should be enforced after
the tax deductor has satisfied the officer-in-charge
of TDS, that taxes due have been paid by the
deductee-assessee. However, this will not alter the
liability to charge interest under Section 201 (1A)
of the Act till the date of payment of taxes by the
deductee-assessee or the liability for penalty
under Section 271C of the Income-tax Act."
10. In the instant case, the appellant had paid
the interest under Section 201 (1A) of the Act and
there is no dispute that the tax due had been paid
by deductee- assessee (M/s Pradeep Oil
Corporation). It is not disputed before us that the
circular is applicable to the facts situation on
hand.”
From the above, it is clear that deductor cannot be treated an
assessee in default till it is found that assessee has also failed to
pay such tax directly. In the present case, the Income tax
authorities had not adverted to the Explanation to Section 191 nor
had applied their mind as to whether the assessee has also failed
to pay such tax directly. Thus, to declare a deductor, who failed to
deduct the tax at source as an assessee in default, condition
precedent is that assessee has also failed to pay tax directly. The
fact that assessee has failed to pay tax directly is thus, foundational
and jurisdictional fact and only after finding that assessee has failed
to pay tax directly, deductor can be deemed to be an assessee in
default in respect of such tax. It is relevant to notice here that
Explanation to Section 191 is confined only to the amount of tax
which was required to be deducted.
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The point next to be considered is as to whether under
Section 201, the Income Tax Authorities could have fastened the
liability of tax which was not deducted at source by the petitioner
and the said tax can be recovered from the petitioner. From the
assessment orders which have been brought on the record, it is
clear that with regard to assessment year 2009-10, the amount of
tax which was required to be deducted at source under section
194H has been determined as Rs. 10,49,60,865 and adding the
interest on the said short deductions total amount directed to be
recovered has been arrived at Rs. 13,57,31,472 similarly with
regard to the financial year 2008-09 total amount on which tax was
required to be deducted at source under section 194H has been
determined as Rs. 2,40,31,583 and after adding interest recovery
has been issued for Rs. 3,26,82,953. The challenge is that there is
no liability of deductor to pay the tax not deducted from assessee
and it is the assessee, who is liable to pay the said tax on the
aforesaid income and liability, if any, of the deductor is of interest
and penalty.
Section 201 (1) provides that where any person who is
required to deduct tax at source does not deduct, or does not pay,
or after so deducting fails to pay, the whole or any part of the tax,
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.
Section 201 (1A) contains a specific provision for payment of
simple interest by any such person who does not deduct whole or
any part of the tax or after deducting fails to pay the tax. Subsection
(2) of Section 201 provides that where tax has not been
paid after it is deducted the amount of tax together with simple
interest shall be a charge upon all the assets of the person or the
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company as may be, referred to under sub-section (1). Sub-section
(2) thus, although enact a provision that in case where tax after
deduction has not been paid by the deductor, the amount of the tax
together with the amount of simple interest thereon shall be a
charge upon all the assets of the deductor, whereas nothing has
been said in sub-section (2) with regard to such charge on a
deductor, who fails to deduct the tax. The reason is obvious, in a
case where deductor fails to deduct the tax, the consequences are
different as compared to in a case where deductor deducts the tax
and does not pay to the Government. It is relevant to notice that
Section 201 (1A) specifically provides for payment of only simple
interest when tax has not been deducted or not paid. Sub-section
(2) provides for creating a charge on the assets of the deductor, if
the tax deducted is not paid. But nothing under section 201 can be
read as to mean that when the tax has not been deducted by the
deductor, the tax not deducted can be realised from the deductor.
No such provision is made under section 201 obviously because
the liability to pay income tax is on the assessee direct in whose
case, the tax has not been deducted. In the present case, the
income tax authorities in proceeding under section 201 apart from
directing recovery of interest from the petitioner has also directed
for recovery of tax which is alleged to be short deducted, which is
beyond the scope of section 201 and is an action of the authorities
without jurisdiction.
A Full Bench of Uttarakhand High Court had considered the
provisions of Section 190,191,201 and other provisions of the Act in
(2011) 334 ITR 79 Director of Income Tax Vs. MAERSK Co. Ltd.
The question arose for consideration was as to when no deduction
for payment of advance tax has been made by the employer,
whether the assessee is liable to pay interest under section 234B
of the Act. The Full Bench considering the provisions of the Act had
held that under the scheme of the Act provisions relating to
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payment of tax and payment of interest operate in two different
areas. It is useful to quote following relevant extract from the
judgment:
“Part A of Chapter XVII of the Act deals with the
general provision for the collection and recovery of
tax. Section 190(1) of the Act provides that
notwithstanding the fact that the regular
assessment in respect of any income is to be
made in a later assessment year, the tax on such
income shall be payable by deduction at source or
by advance payment in accordance with the
provisions of this Chapter. Section 191 of the Act
provides that in the case of income in respect of
which a provision is not made under this Chapter
for deducting income tax at the time of payment
and, in any case, where income tax has not been
deducted in accordance with the provisions of this
Chapter, income tax shall be payable by the
Assessee directly.
xxxxx
Section 201 of the Act provides the consequences
of failure to deduct the tax at source or failure to
pay the tax deducted to the Government. If the
person responsible to deduct the tax at source
fails to deduct the whole or any part of the tax or
after deducting fails to pay the tax as required
under the Act, the person responsible would be
treated as an Assessee in default in respect of the
tax. Section 201(1A) of the Act provides that
without prejudice to the provision of Sub-section
(1), if such person does not deduct the tax or
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having deducted, failed to pay the tax, he or it shall
be liable to pay simple interest @ 15 % per annum
on the amount of such tax from the date on which
it was deductible to the date on which it was
actually paid. Under Section 204 of the Act, the
expression "the person responsible for paying" in
the case of payment of income chargeable under
the head "Salaries" means, the employer.
xxxxxxxxx
Thus, from a combined reading of Section 190,
191, 192, 198, 200, 201, 203 and 204 of the Act, it
is clear that as soon as tax is deducted at source
by the person responsible to make the payment,
the liability of the Assessee to pay the tax gets
discharged. If the tax is not deducted, it remains
payable by the Assessee direct as provided under
Section 191 of the Act. Further, the liability to pay
interest under Section 201(1A) is on the person
who fails to deduct the tax at source is absolute
and is upon the person responsible for deducting
tax at source till the date it was actually paid.
xxxxxx
When the tax is not deducted, the Assessee is
required to pay the tax directly which would be at
the stage of self assessment and not by way of
advance tax. The liability to pay the interest will
however remain upon the person responsible to
deduct the tax at source. The statute has taken
care of the liability for the Assessee under Section
191 of the Act to pay the tax deductible at source
directly if it has not been deducted by the person
responsible for making such deduction. The loss of
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interest on the amount of tax suffered by the
revenue would be compensated by the person
responsible for making such deduction, namely, in
the present case, by the employer as provided
under Section 201(1A) of the Act.
xxxxxxxx
The statute has taken care of the liability to pay tax
by the Assessee under Section 191 of the Act
directly if the tax has not been deducted at source.
xxxxxxxxxx
Looking into the scheme of Chapter XVII of the
Act, it is clear that the provisions relating to
payment of tax and payment of interest operate in
two different areas. If the tax has not been
deducted at source, the liability is upon the
Assessee to pay directly as per Section 191 of the
Act and upon failure to deduct the tax at source,
the liability is upon the employer to pay interest
under Section 201(1A) of the Act. An Assessee
whose income is liable to be deducted at source is
not liable to pay advance tax under Section 208 of
the Act and consequently is not liable to pay
interest under Section 234B of the Act. The
contention of the Appellant that it is open to the
department to proceed against the employer or
against the employee for the recovery of interest is
patently misconceived and, in any case, would not
make the Assessee jointly and severally liable to
pay interest on the amount of tax which was not
deducted at source on the income by the
employer.”
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The Full Bench of Uttarakhand High Court had clearly laid
down that in event the tax at source is not deducted, the liability of
the deductor is to pay interest.
The similar view was been taken by the Gujrat High Court in
(1999) 235 ITR 433 Commissioner of Income Tax Vs. Ranoli
Investment P. Ltd. And others, while considering the provisions of
Sections 201, 190,191 and other provisions of the Act. Following
was laid down in the aforesaid judgment:
“The consequences of failure to deduct the tax at
source or failure to pay the tax deducted to the
Government, are provided for in s. 201 of the Act
as per which, if no deduction is made or if the
deducted amount is not paid as required by the
Act, the person whose duty it was to deduct the tax
at source and to pay, is to be treated as an
assessee-in-default in respect of the tax, but no
penalty is to be charged under s. 221 from such
person, if the ITO is satisfied that the failure to
deduct and pay the tax had occurred due to good
and sufficient reasons. As provided by sub-s. (1)A
of s. 201, without prejudice to the provisions of
sub-s. (1), if such person did not deduct the tax or
having deducted, fails to pay the tax, he or it shall
be liable to pay simple interest at 12 per cent. per
annum on the amount of such tax from the date on
which it was deductible to the date on which it was
actually paid. The liability to pay interest under
sub-s. (1A) of s. 201 imposed on the person who
fails to deduct the tax at source or does not pay the
tax deducted, is absolute and runs throughout the
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period from the date when the tax was deductible
till the date it was actually paid. When the tax is not
deducted at source, it is required to be paid by the
assessee directly but in such a case the liability to
pay interest consequent upon failure to deduct tax
at source will nonetheless remain with such person
who was duty-bound to deduct, till the date when
the tax is actually paid by the assessee or on his
behalf. It is only when the tax has not been paid
after it is deducted, that the amount of the tax
together with the amount of simple interest thereon
referred to in sub-s. (1A) of s. 201 shall be a
charge upon all the assets of the person who has
failed in his duty to pay the tax deducted, as
provided by sub-s. (2) of s. 201. The power to levy
tax by deduction at source is without prejudice to
any other mode of recovery, as stated in s. 202 of
the Act. It will thus, be seen that where the tax is
not deducted, the liability to pay the tax directly will
be on the assessee, but so far as the interest is
concerned, the liability has been fastened on the
person who had failed to deduct the tax while
crediting the interest income to the assessee.”
It is relevant to note that Chapter XVII Part BB, which deals
with collection at source contains a provision under section 206C
(6) which provide that any person responsible for collecting the tax
who fails to collect the tax shall be liable to pay the tax to the credit
of the Central Government. Section 206C deals with “profits and
gains from the business of trading in alcoholic liquor, forest
produce, scrap, etc.” Section 206C (6) is as follows:
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“206C (6) Any person responsible for collecting the
tax who fails to collect the tax in accordance with
the provisions of this section, shall, notwithstanding
such failure, be liable to pay the tax to the credit of
the Central Government in accordance with the
provisions of sub-section (3).”
From the above provision, it is thus, clear that wherever the
liability to pay tax was fastened on the person who failed to deduct
the tax at source a are specific provision was made for that
purpose.
In view of the foregoing discussions, we are of the
considered opinion that in a case where tax has not been deducted
at source, the short deducted tax cannot be realised from the
deductor and the liability to pay such tax shall continue to be with
the assessee direct, whose income is to be charged and a person
who fails to deduct the tax at source, at best is liable for interest
and penalty only. The above issues thus, are decided in favour of
the petitioner.
Now comes issue no. 10 which is in two parts; (i) whether
the assessing authority has taken into consideration all relevant
materials, while passing the assessment order ? (ii) whether the
assessing authority has taken into consideration any irrelevant
material, while passing the assessment order. The petitioner in the
writ petition has specifically referred to and relied on the Circular
issued by the Central Board of Direct Taxes being Circular No. 715
dated 8.8.1995. The said circular was clarified vide letter dated
12.9.1995 of Central Board of Direct Taxes. Copy of the said
Circulars along with letter dated 12.9.1995 have been filed as
Annexure-10 to the writ petition. The clarification was issued on the
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subject “ Circular No. 715 dated 8-8-1995 regarding applicability of
TDS provisions.”. Paragraph 4 of the letter dated 12.9.1995 has
been specifically relied and pleaded in paragraph 32-O of the writ
petition, which is quoted below:
“32-O. That TDS is already deducted on the
amount paid by the advertiser to the advertising
agency under section 194C of the Act and as duly
clarified by the Central Board of Direct Taxes in its
Circular No. 715 dated 8.8.1995. The CBDT has
further clarified the aforesaid circular dated
8.8.1995 in its letter F. No. 133/19/95-tPl-111 dated
12.9.1995 that:
'4. In a situation where the media raises only a bill for
an advertising contract including therein inter-alia
commission at the specified percentage to be retained
by the advertising agency out of the gross payment
received/collected from the advertiser, the media is not
required to deduct tax at source @ 1% under section
194C since such payment is subject to TDS by the
advertiser at the time of payment as clarified in reply to
Question No. 17. Of course, where the media makes a
direct payment to the advertising agency in respect of
professional or technical services, it shall deduct tax at
source @ 5% under section 194J of the Act as clarified
in reply to Question No. 27'. True copies of the
Circular No. 715 dated 8.8.1995 and of the letter dated
12.9.1995 is being filed herewith and marked
collectively as Annexure-10 to this writ petition.
As such the amount of trade discount allowed by the
petitioner to the advertising agencies has already been
subjected to TDS on the payment of the gross amount
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by the advertisers to the advertising agencies. The
same amount cannot be subjected to TDS again and
again by any strained and illegal interpretation of any
other provision of the Act by assuming/deeming the
existence of the jurisdictional facts necessary for the
applicability of the provision.”
Paragraph 32-O has been replied in counter affidavit in
paragraph 40, which is quoted below”
“40. That with regard to the contents of para 32 O
of the affidavit filed in the amendment application it
is submitted that it refers to the CBDT circular
dated 08.08.1995. The order dated 28.03.2012
and 29.03.2012 has made reference to the recent
stand of the CBDT on page no. 15&16. The
remaining allegation has been suitably replied in
the above preceding paragraph need not to be
repeated here again.”
Paragraph 40 of the counter affidavit does not deny the
issuance of the Circular dated 8.8.1995 and the clarification issued
by the Central Board of Direct Taxes on 12.9.1995 but nothing has
been said as to why the said clarification be not be applicable. The
assessing authority in its assessment order has not adverted to the
aforesaid circular dated 8.8.1995 and its clarification dated
12.9.1995, which was the most relevant material while deciding the
issues. Thus, the assessing authority has not applied its mind to a
relevant material i.e. the clarification issued by the CBDT dated
12.9.1995, which clinches the issues.
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While considering issues No. 2 to 6, we have already
observed that the assessing authority has not adverted to the
relevant Rules of INS, which were required to be adverted for
finding out the relationship of principal and agent. We thus,
conclude that assessing authority has not considered the relevant
materials while passing the assessment order which clearly vitiates
the assessment order.
Learned Counsel for the petitioner has submitted that
assessing authority has placed reliance on a wholly irrelevant
material i.e. an article published in newspaper 'Business Standard'
on 31.10.2006. In Paragraph 32 of the order of assessment, the
article has been reproduced. The said article refers to some
correspondences of CBDT with INS. It is useful to quote paragraph
32 of the assessment order which contains the article as follows:
“ It would not be out of context at this juncture to
mention an article published in “Business
Standard” on 31st October 2006. The title of the
article is “Newspaper' ad payments liable to be
taxed”. The article is reproduced as under:
'The Central Board of Direct Taxes has informed
the Indian Newspaper Society that Tax Deducted
at Source (TDS) is liable to be deducted by
newspapers on payments made by them to
advertising agencies.
The CBDT has written to the INS following a
clarification sought by the latter on whether TDS
was deductible on payments made by them to
advertising agents.
The contention of INS was that such payments are
not in the nature of a commission but a discount.
Since the payment was actually a discount, no
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TDS was liable on such payments, it had said.
However, revenue department officials said the
CBDT was of the view that such payments were
covered by the definition of the term ‘commission
or brokerage’ given in Section 194H of the Income
Tax Act and hence liable to TDS.
Section 194H defines ‘commission or brokerage’
as any payment received or receivable, directly or
indirectly, by a person acting on behalf of another
person for services rendered or for any services in
the course of buying or selling of goods or in
relation to any transaction relating to any asset,
valuable article or thing, not being securities.
“The board examined the contention of the INS
that such payment is in the nature of a discount. A
discount is given on sale or purchase of an article
in which there is no agreement between the seller
and the buyer. The board found that the INS
granted accreditation to the advertising agencies
and usually the newspapers would enter into an
agreement with the agencies. Hence, the
newspapers and the agencies were not acting
independently and the agency was in fact an agent
of the newspaper and was being paid a
commission for the services rendered,” an official
said.
It was also observed by the board that the agency
did not book ad space from the newspapers and
sell the space, in turn, to the advertisers, the
officials said.
“The model used by the newspapers is that the
agency informs the newspapers about the
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advertisement and then the paper slots the
advertisement. Hence, once again, the agency is
merely being paid for the services it renders, which
is why such payment is liable to TDS,” the official
added.”
Learned Counsel for the petitioner is right in his submission
that reliance on the said article published in a newspaper was an
irrelevant material. The assessing authority from the aforesaid
article has relied on the opinion of CBDT as disclosed in the said
article to the effect that members of the society are liable to deduct
tax at source on payments made by them to advertising agency. In
paragraph 40 of the counter affidavit as quoted above, the said
stand of the CBDT has also been relied. We are of the view that the
said article was an irrelevant material, which was not required to be
relied by the assessing authority, while passing the assessment
order.
After having considered and answered the issues No. 2 to
10, now we revert on the first submission of learned counsel for the
Department that the writ petition be not entertained and the
petitioner be asked to avail the statutory remedy of appeal provided
under the Act. Learned Counsel for the respondent in support of his
submission that the petitioner be relegated to avail the alternative
remedy, have placed reliance on several judgements which need to
be referred to. Learned Counsel for the respondent has relied on
judgment of the apex court reported in AIR 2001 S.C. 3208 Punjab
National Bank Vs. O.C. Krishnan and others. In the aforesaid
case, a suit was filed by the bank for recovery of money from the
principal debtor as well as the guarantors, which was transferred to
the Debts Recovery Tribunal and was decreed against the principal
debtor and guarantors. The Recovery Officer was directed to
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proceed to realise the amount. The guarantor filed a petition under
Article 227 before the High Court. In said circumstances, the apex
Court laid down following in paragraphs 5 and 6:
“5. In our opinion, the order which was passed by
the Tribunal directing sale of mortgaged property
was appealable under Section 20 of the Recovery
of Debts Due to Banks and Financial Institutions
Act, 1993 (for short "the Act"). The High Court
ought not to have exercised its jurisdiction under
Article 227 in view of the provision for alternative
remedy contained in the Act. We do not propose to
go into the correctness of the decision of the High
Court and whether the order passed by the
Tribunal was correct or not has to be decided
before an appropriate forum.
6. The Act has been enacted with a view to provide
a special procedure for recovery of debts due to
the banks and the financial institutions. There is
hierarchy of appeal provided in the Act, namely,
filing of an appeal under Section 20 and this fast
track procedure cannot be allowed to be derailed
either by taking recourse to proceedings under
Articles 226 and 227 of the Constitution or by filing
a civil suit, which is expressly barred. Even though
a provision under an Act cannot expressly oust the
jurisdiction of the court under Articles 226 and 227
of the Constitution, nevertheless when there is an
alternative remedy available judicial prudence
demands that the court refrains from exercising its
jurisdiction under the said constitutional provisions.
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This was a case where the High Court should not
have entertained the petition under Article 227 of
the Constitution and should have directed the
respondent to take recourse to the appeal
mechanism provided by the Act.”
There cannot be any dispute to the proposition as laid down
by the apex Court in the aforesaid case. In the aforesaid case, the
rights were already adjudicated in the suit which was decreed. In
the said circumstances, the apex court observed that petition under
article 227 ought not to have been entertained and the guarantor
should have been relegated to take recourse to the appeal. The
present is a case where the proceedings have been challenged on
the ground that there was no jurisdictional facts on the basis of
which the income tax authorities could have assumed jurisdiction
under section 201 and further there was no jurisdiction to direct for
recovery of tax which according to the respondent was short
deducted by the deductor. Thus, the present case is clearly
distinguishable. It is further relevant to note that in the present
case, the assessing authority has relied on an article published in
the newspaper namely; 'Business Standard' which article quoted
the opinion of CBDT that the news agency is liable to deduct tax at
source while making payment to advertising agency for
advertisement. Although there are no material brought on the
record by the Department to indicate as to when and in what
circumstances, the CBDT has expressed the said opinion. As noted
above, Delhi High Court in its judgment in the case of M/s Living
Media (supra) has already turned down the stand of the
Department that Section 194H is applicable with regard to payment
to advertising agency by the news agency and the special leave
petition filed by the Department against the Division Bench
judgment of Delhi High Court has been dismissed on 11.2.2009. No
distinguishing feature could be pointed out by the Department as to
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why the said view of the Delhi High Court should not be followed by
the Department. We are of the view that it is not a fit case in which
the petitioner be relegated to remedy of appeal.
Further more, as submitted by learned counsel for the
petitioner, huge liability running in several crores have been
fastened on the petitioner and on the basis of the assessment
order, reassessment notice dated 30.3.2012 has been issued by
the Department for reopening the assessment for the years 2005-
06, 2006-07, 2007-08, 2008-09 and 2009-10, which will again
expose the petitioner, which proceedings would be nothing but
multiplicity of proceedings to be faced by the petitioner which may
prolong years increasing the sufferings of the petitioner, whereas
under law section 194 H of the Act is not applicable in the facts of
the present case. Taking into consideration over all facts and
circumstances of the present case, and the answers given by us,
while deciding the issues No. 2 to 10, we are of the view that the
petitioner has rightly invoked the jurisdiction of this Court under
Article 226 and the petition cannot be thrown out on the ground of
alternative remedy.
The issue next to be considered is as to whether there has
been violation of principles of natural justice in the proceedings
undertaken by the respondents. Learned Counsel for the petitioner
submits that the respondent did not provide adequate opportunity to
the petitioner to place relevant materials and have denied
reasonable time to bring the details, which were asked for from the
petitioner. It is submitted that notice was issued on 19.3.2012 and
within ten days opportunity, hearing and proceedings were
concluded and completed. Whereas, the petitioner was required to
give details pertaining to each and every payments made to
advertising agencies during the relevant period which were in
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90
numbers more than 1,80,000. The petitioner submits that there are
various centres spread throughout the country which have separate
offices and the petitioner having not maintained any detail of the
TDS discount account, which is being given to the advertising
agencies, the informations were required to be compiled and it was
a herculean task requiring atleast one month's time. In 2004 (266)
ITR 283 V.K. Packaging Industries Vs. Tax Recovery Officer
and others, a Division Bench has made following observation:
“Before parting with the case we would like to state
that we cannot appreciate this practice of the
Income-tax Department of hurriedly passing
assessment orders shortly before the limitation
period is about to expire and justifying this practice
by saying that there was shortage of time and
hence it was impossible to verify the facts properly,
and hence the additions were being made. It is
common knowledge that when the limitation for
making an assessment is about to expire (usually
on 31st March) there is a sudden rush and
scramble to complete the assessments. If this
practice is countenanced the citizens of the
country will be put to great harassment as
exorbitant demands can be made against them
merely by saying that there was shortage of time
and hence additions were being made for this
reason without verifying the facts correctly. It is the
duty of the Department to make a correct
assessment and not to make an excessive
assessment merely on the ground of shortage of
time.
No doubt the Department has to assess and
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91
collect the correct tax, but for this purpose it
should devise and set up a rational scheme in
accordance with law. It should certainly not make
assessments hurriedly merely by saying that there
is shortage of time (as often happens), thus putting
the citizens to great harassment.”
The caution given by the Division Bench in the aforesaid
case is fully applicable in the facts of the present case. Suddenly in
second quarter of March, the proceedings are started and
concluded within ten days. The Department has rushed through the
proceedings to complete it before 31.3.2012, which evidences
infraction of rules of natural justice. We thus, conclude that the
adequate opportunity to which the petitioner was entitled was not
provided for by the Department and the Department rushed through
the proceedings.
In the result of foregoing discussions, the petitioner is entitled
for the reliefs as claimed in the writ petition. The proceedings
initiated vide notices dated 193.2012 and 21.3.2012 culminated into
assessment orders dated 28.3.2012 and 29.3.2012 are set aside.
The writ petition is allowed.
The parties shall bear their own costs.
Order Date :- 23.5.2012
LA/Rakesh
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Reserved on 04.5.2012
Delivered on 23.5.2012
Case :- WRIT TAX No. - 388 of 2012
Petitioner :- Jagran Prakashan Limited
Respondent :- The Deputy Commissioner Of Income Tax (Tds)
Petitioner Counsel :- Ritvik Upadhya
Respondent Counsel :- Bharat Ji Agrawal,B. Agarwal,Govind
Krishna
Hon'ble Ashok Bhushan,J.
Hon'ble Prakash Krishna,J.
(Delivered by Hon'ble Ashok Bhushan, J.)
This writ petition by a public Ltd. Company, publishing a
Hindi daily newspaper “Dainik Jagaran” has invoked the jurisdiction
of this Court under Article 226 of the Constitution of India
challenging the initiation of proceedings under sections 201 and
201 (1A) of Income Tax Act, 1961 (hereinafter referred to as 'Act')
vide notices dated 19.3.2012 and 21.3.2012 on the allegation that
although the petitioner had allowed trade discount of 15% to
advertising agencies in the assessment years in question but had
failed to deduct the tax at source hence, the petitioner may show
cause as to why it may not be declared as an asessee in default of
such tax. The petitioner replied the notices. During the pendency of
the writ petition assessment orders dated 28.3.2012 (Financial Year
2009-10) and 29.3.2012 (Financial Year 2008-09) were passed
fastening liability of Rs.13,15,31,472 and Rs.3,26,82,953
respectively, which orders were also challenged in this writ petition
by means of an amendment application, which was allowed on
18.4.2012.
The brief facts giving rise to this writ petition are; the
petitioner is engaged in the business of printing and publishing
newspapers 'Dainik Jagaran' and 'I-next' from different centres
across the country. The registered office of the petitioner's
company is situate at Kanpur Nagar. The major source of revenue
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of the petitioner is generated from advertisements published in the
said newspapers. The petitioner is also member of Indian
Newspaper Society (hereinafter referred to as INS). The petitioner
has been giving 15% trade discount to accredited advertising
agency and trade discount of 10% to 15% to non-accredited
advertising agency as per Rules and Regulations of INS for last
several years. On 15.3.2012, the respondent conducted a survey
under section 133A of the Act at the premises of the petitioner at
Kanpur Nagar and recorded statement of General Manager
Taxation and Legal. The notice dated 19.3.2012 for the financial
year 2009-2010 was issued to the petitioner stating that during the
course of survey on 15.3.2012, it has been gathered that the
petitioner has failed to deduct tax at source under section 194 H of
the Act on the payment received from advertising agencies after
allowing 15% trade discount, which is as well a deemed
commission. Details of monthwise amount of payment of discount
were required to be submitted. The petitioner was asked to show
cause as to why order under section 201 (1) and 201(1) A of the
Act be not passed declaring the petitioner as an assessee in default
in respect of such taxes and interest thereon. The petitioner was
asked to appear on 22.3.2012. Another notice dated 21.3.2012 for
the financial year 2008-09 was issued requiring details as
mentioned therein including monthwise amount of payment of trade
discount by the petitioner along with copy of the bills from January
to March 2009. The petitioner filed a reply to the notices dated
19.3.2012 and 21.3.2012 on 22.3.2011. On 22.3.2012, the
petitioner was required to submits monthwise bills of the
advertisements received and trade discount given thereon by the
next date i.e. on 23.3.2012. On 23.3.2012, another notice was
issued by the respondent calling the petitioner to submit reply along
with documents called for by 12:00 noon on 26.3.2012 positively.
The petitioner was also informed by the same notice that Kerala
High Court in 325 ITR 205 on the similar issue had decided that
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advertising agency has acted as an agent of the principal hence
trade discount allowed can be considered as commission or
brokerage defined under Explanation (i) of Section 194H of the Act.
This writ petition was filed in this Court on 23.3.2012 praying for
quashing the notice dated 29.3.2012 and 21.3.2012. The writ
petition was heard on 19.3.2012 on which date following order was
passed.
“Supplementary affidavit filed today is taken on
record.
On a mention made by learned counsel for the
petitioner, the matter is taken up in the presence of
learned counsel appearing for the department.
By means of this petition, the petitioner has prayed
for quashing the notice dated 19.3.2012 and
21.3.2012 issued by the respondent ( Annexure
No. 4 and 5 to the writ petition) by which the
petitioner has been asked to furnish certain
informations as required.
Learned counsel for the petitioner challenging the
notice contended that notices do not furnish any
jurisdiction to the authority to proceed under
section 201 of the Income Tax Act. as no TDS.
was deductible on 15% trade discount.
He submits that the trade discount can not be
treated as commission so as to liable for any
deduction. He has placed reliance on the decision
of Delhi High Court passed in the case of I.T.A.
No. 1264 of 2007,Commissioner of Income Tax
Vs. Living Media India Limited filed as Annexure
No. 1 to the writ petition at page 33.
He has submitted that there is no material with the
respondent to proceed under section 201 of the
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Income Tax Act.
Shri Govind Krishna, learned counsel appearing
for the respondent submits that by notice
impugned only informations have been called from
the petitioner and there is no lack of jurisdiction in
the authority to proceed. He further submits that at
this state, the writ petition be not entertained.
Learned counsel for the petitioner further placed
reliance on the decision of Supreme Court passed
in the case of Siemens Ltd. Vs. State of
Maharashtra and others reported in (2006)12
Supreme Court Cases 33.
Be that as it may, in view of the fact that the
assessment order is to be passed on or before
31.3.2012 as indicated in the notice, we are of the
view that the petitioner may appear and submit
necessary information as required and respondent
may proceed to pass appropriate orders in
accordance with law.
It shall be open for the parties to bring on record
the order passed by the respondent.
Respondent is allowed three weeks' time to file
counter affidavit.
List thereafter.”
On 26.3.2012, the petitioner again submitted a letter to the
Department stating therein that information sought for is not readily
available and it needs a herculean manual exercise of compilation
of more than 1,80,000 bills. On 28.3.2012, the petitioner again
submitted a letter stating therein that relationship of the petitioner
with the advertising agency is principal to principal and not as
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5
principal and agent. Reliance was also placed on the order of the
Kerala High Court dated 9.12.2005, passed in writ petition No.
26871/2005, The Malayala Manorama Co. Ltd. Vs. The Income
Tax Officer & others, wherein on identical facts, the proceedings
of the department initiated under section 201/201 (1A) had been
stayed. It was further stated that the judgment of the Kerala High
Court reported in 325 ITR 205 was not applicable and points of
distinction from the said judgment were specifically pointed out in
the reply. It was stated that there is no liability of the petitioner to
deduct tax at source.
On 28.3.2012 an assessment order for the financial year
2009-10 has been passed by the Deputy Commissioner of Income
Tax holding the petitioner to be an assessee in default for non
deduction of tax at source for an amount of Rs. 10,94,60,865 under
section 201 (1) of the Act on which interest under section 201 (1A)
amounting to Rs. 2,62,70,607/- making the total amount to Rs.
13,57,31,472/-. A demand notice was issued on 29.3.2012.
Proposal for initiating penalty proceeding was also sent to Joint
Commissioner Income Tax TDS Kanpur separately. Another order
dated 29.3.2012 for the Financial Year 2008-09 was passed holding
the petitioner to be an assessee in default for non deduction of TDS
for an amount of Rs. 2,40,31,583 and on which interest was also to
be chargeable making the total amount of Rs. 3,26,82,953/-.
Penalty proceeding was to be separately initiated under Section
271C. The demand notice was also issued on 29.3.2012. The
petitioner filed an application for amendment of the writ petition
praying for adding paragraphs, grounds and reliefs in the writ
petition for challenging the assessment orders dated 28.3.2012
and 29.3.2012. The amendment application was allowed by this
Court on 18.4.2012 and the petitioner was permitted to challenge
the assessment orders in this writ petition. Counter affidavit has
also been filed by the Department to the writ petition and amended
pleadings to which rejoinder affidavit has also been filed. Following
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are the reliefs which have been claimed in the writ petition including
the reliefs prayed for by means of amendment application :
“i) a suitable writ, order or direction in the
nature of Certiorari calling for the records of the
case and to quash the impugned notices dated
19.03.2012 and 21.03.2012 issued by the
respondent (Annexures-4 and 5 to this writ
petition).
ii) a suitable writ, order or direction in the
nature of Certiorari calling for the records of the
case and to quash the impugned order dated
28.03.2012 along with the notice of demand dated
28.03.2012 (Annexure-6 to this writ petition) and
the impugned order dated 29.3.2012 along with
the notice of demand dated 29.03.2012
(Annexure-7 to this writ petition).”
We have heard Sri V.K. Upadhyay learned senior Advocate,
assisted by Sri Ritvik Upadhyay, for the petitioner, Sri Govind
Krishna for the respondent Income Tax Department and have
perused the record.
Learned Counsel for the petitioner challenging the notices
dated 19.3.2012 and 21.3.2012 contended that there were no
foundational facts on the basis of which the respondent could have
assumed jurisdiction under sections 201 and 201(1A) for initiating
the proceedings. He submits that the petitioner allowed trade
discount to advertising agencies on the advertisements received in
accordance with the established trade practice and allowing of
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trade discount cannot be termed as commission paid by the
petitioner to the advertising agency for any service. It is submitted
that an advertising agency is not an agent of the petitioner and the
transaction between the petitioner and advertising agency is on
principal to principal basis. Advertising Agency infact acts as an
agent of the advertisers. Section 194H is not attracted on trade
discount allowed by the petitioner to advertising agency and the
proceeding initiated under section 201/201 (1A) are without
jurisdiction. The Income Tax Authorities have wrongly assumed
jurisdictional facts although no such jurisdictional facts exist so as
to enable the respondent Department to initiate proceedings under
section 201/201 (1A) of the Act. The initiation of the proceedings by
the Department is wholly without jurisdiction. The jurisdictional facts
as required by Section 194H does not exist in the present case.
Circular issued by Central Board of Direct Taxes dated 8.8.1995
clarifies that commission received from advertising agency by
media would require deduction of tax at source under section 194J
of the Act. The above circular was clarified by the CBDT vide
subsequent letter dated 12.9.1995, clarifying that where the media
raises only a bill for an advertising contract including therein interalia
commission at the specified percentage to be retained by
advertising agency, the media is not required to deduct tax at
source since such a payment is subjected to TDS by the advertiser
at the time of payment. Further where the media makes a direct
payment to the advertising agency in respect of professional or
technical services, it shall deduct tax at source @ 5% under section
194J.
Learned Counsel for the petitioner submits that the petitioner
being a member of INS is required to pay trade discount of 15%
according to the rules of INS. The advertising agency which are
accredited by INS are also bound to follow the rules and under the
terms of agreement entered with the advertising agency and INS
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8
under which it is obligatory for the news agency to give 15% trade
discount and as per Rules of INS and terms of agreement entered
between INS and advertising agency, the advertising agency acts
as agent of the advertiser. The advertising agency carry on
business of advertising and is not an agent appointed by the
petitioner. No agreement with any advertising agency has been
entered into by the petitioner nor there is any other relevant factor
on the basis of which it can be said that the advertising agency is
agent of the petitioner. It is submitted that the Rules of INS, as well
as terms and conditions as mentioned above, clearly prove that
advertising agency is not an agent of the petitioner and the
jurisdictional facts as required under section 194H being not
present, the entire proceedings are without jurisdiction. Learned
Counsel for the petitioner further submits that the question as to
whether 15% trade discount allowed to the news agency invites
deduction of tax at source was raised by Income Tax Department
with regard to news paper publication namely; M/s Living Media
Ltd. Which publishes the magazines India Today, Business today
etc. An order against M/s Living Media Ltd. under sections 201 and
201 (1A) was passed by the assessing authority on the ground that
advertising agencies are agent of the news agencies and 15%
trade discount is commission with regard to which tax at source is
required to be deducted by the news agency. The matter was taken
before the Income Tax Appellate Tribunal by the Department and
Income Tax Appellate Tribunal held that there was no liability of the
news agency to deduct tax at source with regard to 15% trade
discount and advertising agency is not the agent of news agency. It
was held that news agency was not liable to deduct tax. The
Department took up the matter before the Delhi High Court and
Delhi High Court vide its judgment and order dated 6.5.2008 has
dismissed the writ petition of the Department holding that contract
between the news agency and advertising agency was on principal
to principal basis and trade discount allowed to advertising agency
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9
was as per Rule 32 of the INS Rules and there was no commission
paid to advertising agency and the provisions of section 194H was
not attracted. Although in the counter affidavit (paragraphs 21 and
41) filed by the Department, it was stated that judgment of the Delhi
High Court has not accepted by CBDT and the same has been
challenged by the Department by means of Special Leave Petition
No. 3433 of 2009 but it was not mentioned that Special Leave
Petition had been dismissed. Learned Counsel for the petitioner
has produced the order of the apex Court dated 11.12.2009 by
which the Special Leave Petition (Civil) 3433 Commissioner of
Income Tax Vs. M/s Living Media India Ltd. has been dismissed.
Learned Counsel for the petitioner submits that the issue having
already been decided by the Delhi High Court in the aforesaid case,
the initiation of the proceedings under section 201/201 (1A) on the
same allegations are nothing but harassment of the petitioner and
the proceedings so initiated are without jurisdiction. Learned
Counsel for the petitioner submitted that the judgment of the Kerala
High Court relied by the Department in [2010] 325 ITR 205
Commissioner of Income Tax Vs. Director Prasar Bharti, is not
applicable in the present case and although distinguishing facts
were submitted in writing by the petitioner but still the said judgment
has been relied and the judgment of the Delhi High Court which
was directly applicable has been brushed aside on the flimsy
ground that judgment of the Kerala High Court is recent in point of
time. Learned Counsel for the petitioner further submitted that the
assessment orders dated 28.3.2012 and 29.3.2012 and the
demand raised for tax which according to the respondents ought to
have been deducted at source is wholly without jurisdiction.
It is further submitted that under sections 201 and 201(1A),
in a case where tax is not deducted at source, the only proceedings
which can be initiated are proceedings for realisation of interest and
penalty and the liability to pay tax cannot be fastened on deductor.
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As per Section 191 read with Section 4 of the Act, such tax has to
be directly paid by the assessee i.e. advertising agency and the
assessment orders dated 28.3.2012 and 29.3.2012 demanding
payment of tax are wholly without jurisdiction. The petitioner could
not have been treated to be an assessee in default with regard to
tax which according to the respondents was required to be
deducted unless a finding is returned that assessee has not paid
the tax. In the entire assessment order, there is no finding that
assessee has not paid the tax on the aforesaid trade discount
(alleged commission) hence, the entire order is without jurisdiction.
Learned Counsel for the petitioner further submits that there
is no agreement between the petitioner and the advertising agency
on the basis of which the assessing officer can conclude that
advertising agency was an agent of the petitioner. It is further
submitted that rules of INS have not been adverted to by the
assessing authority which were relevant to find out the nature of
transaction between the petitioner and the advertising agency and
without adverting to the said Rules in its entirety, an erroneous
inference has been drawn by the assessing officer that advertising
agency was agent of the petitioner. It is further submitted that
instead of reliance on circular of the Board dated 8.8.1995 as
clarified on 12.9.1995, the assessing authority has relied on an
article published in the newspaper 'Business Standard' on
31.10.2006, which article contain some opinion of the Central Board
of Direct Taxes that deduction of tax at source is to be made on
commission or brokerage given to the advertising agency. It is
submitted that the aforesaid article was wholly irrelevant, which
vitiates the order of the assessing authority.
Learned counsel for the petitioner lastly contended that the
Department has violated the principles of natural justice, while
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proceeding under sections 201 and 201 (IA). It is submitted that
notices were issued on 19.3.2012 and 21.3.2012, requiring
submission of details regarding trade discount given to various
advertising agencies by 22.3.2012, which was nothing but denial of
adequate opportunity since in the accounting practice adopted by
the petitioner, only revenue receipts were recorded in its account
and there was no separate account maintained for trade discount
given to the advertising agencies. The order of authorities asking
the petitioner to give the details of trade discount within three days,
given to the advertising agencies from its various centres
throughout the country, from where the newspapers are published,
which could have run in more than 1,80,000 items is nothing but
denial of adequate opportunity to the petitioner. The compilation of
the said data was a herculean task and the request by the
petitioner to grant reasonable time, was denied. Had the petitioner
been given adequate opportunity, it would have established that tax
on the income of 15% trade discount, has already been paid and
there was no occasion to impose liability upon the petitioner but the
respondent rushed through the proceedings which was completed
within ten days from issue of notice.
Sri Govind Krishna, learned counsel for the Department
refuting the submissions of learned Counsel for the petitioner,
contended that the petitioner is not entitled to invoke the jurisdiction
of this Court under Article 226 of the Constitution of India since the
assessment order has already been passed and the petitioner be
relegated to avail the alternative remedy of statutory appeal as
provided under the Act. He submits that the judgment of the Kerala
High Court in Prasar Bharti's case is fully applicable and there is no
lack of the jurisdiction in the authorities in initiating the proceedings
under sections 201 and 201 (1A) of the Act. He submits that the
payment which is being made by the petitioner to the advertising
agency in the name of 15% trade discount is nothing but payment
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of commission to advertising agency in lieu of services which are
being rendered by the advertising agency to the petitioner in
bringing business to the petitioner i.e. advertisements. It is
submitted that the assessing officer has rightly recorded finding in
paragraph 30 of the order that jurisdictional facts as required for
applicability of Section 194H, are fully present and neither the
initiation of the proceedings were without jurisdiction nor the
assessment order can be held to be without jurisdiction. The
petitioner, inspite of giving opportunity could not provide details of
monthwise trade discount allowed by it to different advertising
agencies hence, no error has been committed in assessing the tax
liability on 15% of gross receipts of revenue from advertising
agency, which amount has been disclosed by the petitioner himself
in the survey on 15.3.2012. It is submitted that if the advertising
agency could not have rendered services to the petitioner, it cound
not have received any discount or payment and the advertising
agency acts on behalf of the news agency since it is a news
agency, which decides as to what type of advertisement it publishes
e.g. it does not publish advertisement of alcoholic drinks. There is a
contract between the news agency and advertising agency through
INS, since the petitioner are members of the INS and INS enters
into an agreement with the advertising agency for accrediting the
said agency thus, there is a implied contract between the petitioner
and advertising agency. It is further submitted that principal and
agent relationship can also exist without any written or codified
agreement. The assessing order has rightly referred to recent stand
of Central Board of Direct Taxes in its judgment as such, the order
of the assessing officer was based on recent stand of CBDT.
Advertising Agency Institution of India (AAAI) in its rules also
provide for payment of 15% commission to the advertising agency.
Thus, the payment of commission by the news agencies to
advertising agencies is fully proved. The logic and reasons are not
relevant, while interpreting a tax statute. Since the petitioner is
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allowing the discount/commission, the petitioner is payer and liable
under section 204 (iii). Under section 201, the deductor, who fails to
deduct the tax at source, is an assessee in default and apart from
interest and penalty, the tax which was not deducted can very well
be recovered from the deductor. He submits that if there is any
mistake in the order of the assessment, it is open for the petitioner
to invoke section 154 of the Act for correction of mistake, if any.
Learned Counsel for the petitioner replying the objections of
learned Counsel for the respondent regarding relegating the
petitioner to statutory appeal, submitted that the present is not a
case where the petitioner be denied relief under Article 226 of the
Constitution of India. It is submitted that when the Income Tax
authorities assumed jurisdiction without there being jurisdictional
facts available for initiating the proceedings under section
201/201(1A), the notice initiating the proceeding can very well be
challenged through writ proceedings. It is further submitted that by
the order impugned huge liability has been imposed on the
petitioner and apart from assessment order, proceedings under
section 147 of the Act have also been initiated. The notice under
section 147 has been issued for several assessment years. It is
further submitted that assessment order directing for realisation of
tax, which according to the respondent was not deducted at source
by the petitioner is without jurisdiction since under section 201/201
(1A) at best proceeding could have been initiated only for recovery
of interest and penalty. He submits that when the order of
assessing authority directing for recovery of tax is without
jurisdiction, the writ petition be not thrown out on the ground of
alternative remedy. Apart from above reason, huge illegal demand
would have a cascading effect on the petitioner company. Penalty
proceedings have also been initiated including proceedings for reopening
of all completed assessment and total tax liability may be
more than 100 crores, which may adversely and irreparably effect
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the petitioner business and its shares. The pre-determined and
void orders cannot withstand judicial scrutiny of this Court hence,
the present is not a fit case in which the petitioner be relegated to
alternative remedy.
Learned Counsel for the parties have relied on various
judgements of the apex Court, this Court and other High Courts
which shall be referred to while considering the submissions in
detail.
We have considered the submissions of learned counsel for
the parties and have perused the record.
From the submissions of learned counsel for the parties
following are the issues which arise for consideration:
1. Whether in the facts and circumstances of the present case,
the petitioner is entitled to invoke the writ jurisdiction of this
Court under Article 226 of the Constitution of India for the
reliefs sought or the petitioner be relegated to avail the
statutory remedy of appeal in view of the fact that the
assessment order has already been passed during the
pendency of the writ petition?
2. Whether condition precedent as contemplated by Section
194H making liable the petitioner to deduct tax at source for
15% trade discount allowed by it to Advertising Agency is
present so as to give jurisdiction to the authorities to initiate
proceedings under section 201/201 (1A) of the Income Tax
Act, 1961?
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3. Whether between the petitioner and the advertising agency
there is a relationship of principal and agent?
4. Whether the advertising agency is rendering services to the
petitioner or they are rendering services to advertiser as their
agent?
5. Whether 15% trade discount allowed by the petitioner to
advertising agencies is payment of commission within the
meaning of Section 194H Explanation (i).
6. Whether the Judgement of the Kerala High Court in 325 ITR
205 was attracted in the present case or the judgment of the
Delhi High Court in ITA 1264/07, The Commissioner of
Income Tax Vs. Living Media India Ltd. decided on
6.5.2008 was applicable?
7. Whether against a deductor who fails to deduct the tax at
source, the liability of payment of tax can also be fastened
against the deductor under section 201 apart from liability of
interest and penalty?
8. Whether with regard to tax which was required to be
deducted at source, the liability is of the assessee with
regard to whose income the tax was required to be deducted
at source or the liability is of deductor for payment of tax
which could not be deducted?
9. Whether according to Section 191 read with Section 201, a
deductor, who fails to deduct tax at source can be deemed to
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be an assessee in default without adverting to the issue and
recording a finding that assessee who is liable to pay tax
directly had not paid tax?
10.Whether the assessing authority has taken into consideration
all relevant materials for taking the decision and has not
taken into consideration any irrelevant material ?
11.Whether the assessing authority has violated the principle of
natural justice in the proceeding under section 201 and 201
(1A)?
12.To what relief, if any the petitioner is entitled in the present
writ petition?
The first issue, which is to be answered, is as to whether the
petitioner can be permitted to invoke the jurisdiction of this Court
under Article 226 of the Constitution of India for challenging the
notices dated 19th March, 2012 and 21st March, 2012 and the
subsequent assessment order dated 28th/29th March, 2012 on the
principal ground that there were no foundational facts to assume
jurisdiction by the Income Tax authorities to proceed under Section
201/201(1A) of the Act. The next challenge of the petitioner to the
assessment order is on the ground that assessment order directing
for recovery of tax, which according to the respondents was not
deducted by the petitioner at source, is without jurisdiction. The
submission is that under Section 201 read with Section 191 of the
Act the liability of the tax, which was required to be deducted at
source, cannot be fastened on the deductor and in the event the tax
has not been deducted the primary liability to pay such tax is on the
assessee and the assessment order framing assessment of tax on
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the petitioner was beyond the jurisdiction and was outside the
provisions of Section 201 of the Act.
The question as to whether sufficient grounds have been
made out for exercise of writ jurisdiction by this Court under Article
226 of the Constitution of India or the petitioner has to be
necessarily relegated to avail the statutory remedy of appeal under
the Income tax Act, 1961 is dependent on various issue which have
been raised in this writ petition and are to be answered by us. We
thus are of the view that first issue be answered after considering
the various grounds of attack and submissions of learned counsel
for the parties which have arisen in the writ petition.
Issues No.2, 3, 4,5 and 6 are interrelated and are being taken
together.
The proceedings under Section 201/201(1A) of the Act have
been initiated against the petitioner on the ground that the
petitioner, who was required to deduct tax at source with regard to
payment of 15% trade discount (alleged commission) given to
advertising agency, having failed to deduct the tax on the said
payment is liable to pay interest and tax. The proceedings are
founded on Section 194H of the Act. Section 194H of the Act is
quoted below:-
“194H. Commission or brokerage. Any person,
not being an individual or a Hindu undivided
family, who is responsible for paying, on or after
the 1st day of June, 2001 to a resident, any
income by way of commission (not being
insurance commission referred to in section
194D) or brokerage, shall, at the time of credit of
such income to the account of the payee or at the
time of payment of such income 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 rate of ten per cent.
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Provided that no deduction shall be made under
this section in a case where the amount of such
income or, as the case may be, the aggregate of
the amount of such income credited or paid or
likely to be credited or paid during the financial
year to the account of, or to, the payee, does not
exceed five thousand rupees.
Provided further that an individual or Hindu
undivided family, whose total sales, gross
receipts or turnover from the business or
profession carried on by him exceed the
monetary limit specified under Clause (a) or
Clause (b) of Section 44AB during the financial
year immediately preceding the financial year in
which such commission or brokerage is credited
or paid, shall be liable to deduct income tax
under this Section.
Provided also that no deduction shall be made
under this section on any commission or
brokerage payable by Bharat Sanchar Nigam
Limited or Mahangar Telephone Nigam Limited to
the public call office franchisees.
Explanation : For the purposes of this section, -
(i) "Commission or brokerage" includes any
payment received or receivable, directly or
indirectly, by a person acting on behalf of another
person for services rendered (not being
professional services) or for any services in the
course of buying or selling of goods or in relation
to any transaction relating to any asset, valuable
article or thing, not being securities;
(ii) the expression "professional services" means
services rendered by a person in the course of
carrying on a legal, medical, engineering or
architectural profession or the profession of
accountancy or technical consultancy or interior
decoration or such other profession as is notified
by the Board for the purposes of section 44AA;
(iii) the expression “securities” shall have the
meaning assigned to it in clause (h) of section 2
of the Securities Contracts (Regulation) Act, 1956
(42 of 1956);
(iv) Where any income is credited to any account,
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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.”
The case of the department against the petitioner is that
allowing 15% trade discount to advertising agencies by the
petitioner during the relevant assessment year is nothing but
payment of commission within the meaning of Section 194H
Explanation-(i) and the petitioner was liable to deduct tax at source.
The commission or brokerage has been defined in explanation. As
per definition for payment to be treated as commission, following
three conditions are required to be fulfilled:-
(1) payment received or receivable directly or indirectly;
(2) by a person acting on behalf of another person;
(3) for services rendered (not being professional services).
The Condition Nos. (2) and (3) , which are interrelated, are
being taken first. The Condition Nos.2 and 3 contemplate that
person receiving payment should be acting on behalf of another
person i.e. he must be agent of the principal and secondly payment
should be for the services rendered by the agent. Thus the test is
as to whether person receiving commission is agent of the principal
and he is receiving commission in lieu of services. The above are
jurisdictional facts which have to be found out in the proceeding to
be taken under Section 201/201(1A) of the Act. What are the
jurisdictional facts and what is the scope of entertaining such
challenge in proceeding under Article 226 of the Constitution of
India needs to be first examined before proceeding further to
examine the facts of the present case.
The Apex Court in the case of Calcutta Discount Co. Ltd.
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vs. Income Tax Officer reported in 1961(41) ITR 191 had occasion
to consider the aforesaid issue in context of the provisions of
Income Tax Act, 1922. It is useful to note the facts of the said case
in some detail. The appellant in the aforesaid case was assessed to
income tax for the assessment year 1942-43, 1943-44 and 1944-45
by three separate orders. Three notices purporting to be under
Section 34 of the Income Tax Act, 1922 for re-assessment was
issued. Notices were replied by the appellant and it challenged the
proceedings by means of writ petition under Article 226 of the
Constitution of India on the ground - “The said pretended notice
was issued without the existence of the necessary conditions
precedent which confers jurisdiction under section 34
aforementioned, whether before or after the amendment in 1948”.
Learned Single Judge held that the above ground was not made
out but being of the opinion that Amending Act, 1948 was not
retrospective,held the notices without jurisdiction and issued a writ
of prohibition to the Income Tax Officer from continuing the
assessment proceedings any further. In the Letter Patent Appeal,
the Division Bench set-aside the order of learned Single Judge and
the writ petition was dismissed. The appeal was filed in the Apex
Court. The Apex Court laid down following:-
“To confer jurisdiction under this section to
issue notice in respect of assessments beyond
the period of four years, but within a period of
eight years, from the end of the relevant year two
conditions have therefore to be satisfied. The first
is that the Income-tax Officer must have reason
to believe that income, profits or gains
chargeable to income- tax have been underassessed.
The second is that he must have also
reason to believe that such " under assessment "
has occurred by reason of either (i) omission or
failure on the part of an assessee to make a
return of his income under s. 22, or (ii) omission
or failure on the part of an assessee to disclose
fully and truly all material facts necessary for his
assessment for that year. Both these conditions
are conditions precedent to be satisfied before
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the Income-tax Officer could have jurisdiction to
issue a notice for the assessment or reassessment
beyond the period of four years but
within the period of eight years, from the end of
the year in question.”
The Apex Court considered the facts of the case including the
affidavits filed in the High Court as well as before the Apex Court.
The Apex Court took the view that one of the preconditions for
initiating proceedings under Section 34 that there had been any
material non-disclosure by reason of which under assessment was
taken place, was not there before the Income Tax Officer, hence he
had no jurisdiction to issue notice. In this context following was held
by the Apex Court:-
“It must therefore be held that the Incometax
Officer who issued the notices had not before
him any non-disclosure of a material fact and so
he could have no material before him for
believing that there had been any material nondisclosure
by reason of which an underassessment
had taken place.”
It is relevant to note that before the Apex Court also counsel
for the department contended that company would have sufficient
opportunity to raise the question before the Income Tax Officer and
in the event it is unsuccessful there is appellate jurisdiction under
Section 66(2) of the Income Tax Act, 1922, hence the High Court
ought not to have entertained the writ petition. Repelling the said
submission, following was laid down by the Apex Court:-
“Mr. Sastri mentioned more than once the
fact that the company would have sufficient
opportunity to raise this question, viz., whether
the Income-tax Officer had reason to believe that
under assessment had resulted from nondisclosure
of material facts, before the Incometax
Officer himself in the assessment
proceedings and, if unsuccessful there, before
the appellate officer or the appellate tribunal or in
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the High Court under section 66(2) of the Indian
Income-tax Act. The existence of such alternative
remedy is not however always a sufficient reason
for refusing a party quick relief by a writ or order
prohibiting an authority acting without jurisdiction
from continuing such action.”
The next case to be considered is the judgment of the Apex
Court in the case of Raza Textiles Ltd. vs. Income Tax Officer,
Rampur reported in (1973)87 ITR 539. In the said case Income Tax
Officer, Rampur directed the appellant to pay tax on a sum of
Rs.2,00,000/- remitted by it as a selling commission to M/s.
Nathirmal and Sons, Djakarta (Indonesia) during the year ending on
December 31, 1951 which was a non-resident firm. After being
unsuccessful before the appellate authorities, the writ petition under
Article 226 of the Constitution of India was filed. The learned Single
Judge held that M/s. Nathirmal and Sons is not a non-resident firm
and the appellant was not required to act under Section 18(3-B) of
the Income Tax Act, 1922. The revenue went in appeal before the
High Court. The High Court allowed the appeal against which
judgment the appellant filed an appeal before the Apex Court. While
reversing the judgment of the Division Bench of the High Court,
following was laid down by the Apex Court:-
“..... The single Judge after going into the
matter in detail came to the conclusion that M/s.
Nathirmal and Sons is not a non-resident firm
and that being so the appellant was not required
to act under Section 18(3B). He accordingly, set
aside the order impugned. The revenue went up
in appeal against the order of the learned single
Judge to the Appellate Bench. That Bench
allowed the appeal with the observations, "In the
present case the question before the Income-tax
Officer, Rampur, was whether the firm Nathirmal
and Sons was non-resident or not. There was
material before him on this question. He had
jurisdiction to decide the question either way. It
cannot be said that the officer assumed
jurisdiction by wrong decision on this question of
residence". The Appellate Bench appears to have
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been under the impression that the Income-tax
Officer was the sole judge of the fact whether the
firm in question was resident or non-resident.
This conclusion, in our opinion, is wholly wrong.
No authority, much less a quasi-judicial authority,
can confer jurisdiction on itself by deciding a
jurisdictional fact wrongly The question whether
the jurisdictional fact has been rightly decided or
not is a question that is open for examination by
the High Court in an application for a writ of
certiorari. If the High Court comes to the
conclusion, as the learned single Judge has done
in this case, that the Income-tax Officer had
clutched at the jurisdiction by deciding a
jurisdictional fact erroneously, then the assesses
was entitled for the writ of certiorari prayed for by
him. It is incomprehensible to think that a quasijudicial
authority like the Income-tax Officer can
erroneously decide a jurisdictional fact and
thereafter proceed to impose a levy on a citizen.
In our opinion the Appellate Bench is wholly
wrong in opining that the Income-tax Officer can
"decide either way".”
The Apex Court in the said case held that it is
incomprehensible that a quasi-judicial authority like the Income Tax
Officer can erroneously decide a jurisdictional fact and thereafter
proceed to impose levy on a citizen.
The Apex Court in the case of Shrisht Dhawan (Smt.) vs.
M/s Shaw Brothers reported in (1992)1 SCC 534 had again laid
down that jurisdictional fact is one on existence or non-existence of
which depends assumption or refusal to assume jurisdiction by an
authority. Following was laid down in paragraph 9 of the said
judgment:-
“9. ..... A jurisdictional fact is one on
existence or non-existence of which depends
assumption or refusal to assume jurisdiction by a
Court, tribunal or an authority. In Black's Legal
Dictionary it is explained as a fact which must
exist before a court can properly assume
jurisdiction of a particular case. Mistake of fact in
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relation to jurisdiction is an error of jurisdictional
fact. No statutory authority or tribunal can
assume jurisdiction in respect of subject matter
which the statute does not confer on it and if by
deciding erroneously the fact on which
jurisdiction depends the court or tribunal
exercises the jurisdiction then the order is
vitiated. Error of jurisdictional fact renders the
order ultra vires and Wade Administrative Law;
bad. In Raza Textiles Raza Textile v. Income Tax
Officer, Rampur it was held that a court or
tribunal cannot confer jurisdiction on itself by
deciding a jurisdictional fact wrongly. ..... Error in
assumption of jurisdiction should not be confused
with mistake, legal or factual in exercise of
jurisdiction. In the former the order is void
whereas in the latter it is final unless set aside by
higher or competent court or authority. An order
which is void can be challenged at any time in
any proceeding.....”
The next case to be considered is the judgment of the Apex
Court in the case of Siemens Ltd. vs. State of Maharashtra and
others reported in (2006)12 SCC 33. In the said case demand of
payment of cess was issued to the appellant’s company which was
challenged in the High Court on the ground that no jurisdictional
fact exists for the levy. By the notice the appellant was directed to
make payment of cess with interest. The writ petition was dismissed
by the High Court on the ground that the petitioner may file reply to
the show cause notice. The Apex Court held that although writ
Court may not exercise its discretionary jurisdiction in entertaining a
writ petition challenging the notice unless the same appears to have
been without jurisdiction, but the question herein has to be
considered from a different angle. Following was laid down by the
Apex Court in paragraphs 6, 8 and 9:-
“6. A writ petition was filed by the appellant
herein questioning the said purported notice. By reason
of the impugned order, the High Court refused to
exercise its jurisdiction under Article 226 of the
Constitution of India stating:
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"Challenge is to a show cause notice issued by
the Corporation demanding certain payment of
cess on the value of goods imported from
Aurangabad and Daman. Petitioners may file
their reply to the show cause notice and produce
the relevant documents within two weeks. In
case the order is adverse to the petitioner no
recovery shall be made for a period of four weeks
from the date of service of the order on the
petitioner."
8. The question as to whether jurisdictional
fact existed for issuance of the said notice order passed
by the respondent was in question in the said writ
petition.
9. Although ordinarily a writ court may not
exercise its discretionary jurisdiction in entertaining a
writ petition questioning a notice to show cause unless
the same inter alia appears to have been without
jurisdiction as has been held by this Court in some
decisions including State of Uttar Pradesh v. Brahm
Datt Sharma and Anr. AIR 1987 SC 943, Special
Director and Another v. Mohd. Ghulam Ghouse and
Another, (2004) 3 SCC 440 and Union of India and
Another v. Kunisetty Satyanarayana, 2006 (12) SCALE
262], but the question herein has to be considered from
a different angle, viz, when a notice is issued with premeditation,
a writ petition would be maintainable. In
such an event, even if the courts directs the statutory
authority to hear the matter afresh, ordinarily such
hearing would not yield any fruitful purpose [See K.I.
Shephard and Others v. Union of India and Others
(1987) 4 SCC 431 : AIR 1988 SC 686]. It is evident in
the instant case that the respondent has clearly made
up its mind. It explicitly said so both in the counter
affidavit as also in its purported show cause notice.”
The next case to be considered is the judgment of the Apex
Court in the case of Arun Kumar and others vs. Union of India
and others reported in (2007)1 SCC 732. The question of
applicability of Section 17(2)(ii) of the Income Tax Act, 1961 and
Rule 3 of the Income Tax Rules, 1962 came for consideration. Rule
3 provided for method of computing valuation of perquisite under
Section 17(2). In context of the said challenge, following was laid
down by the Apex Court in paragraphs 74, 75, 76, 77, 78, 82, 83,
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84 and 85:-
“74. A "jurisdictional fact" is a fact which must
exist before a Court, Tribunal or an Authority
assumes jurisdiction over a particular matter. A
jurisdictional fact is one on existence or nonexistence
of which depends jurisdiction of a
court, a tribunal or an authority. It is the fact upon
which an administrative agency's power to act
depends. If the jurisdictional fact does not exist,
the court, authority or officer cannot act. If a
Court or authority wrongly assumes the existence
of such fact, the order can be questioned by a
writ of certiorari. The underlying principle is that
by erroneously assuming existence of such
jurisdictional fact, no authority can confer upon
itself jurisdiction which it otherwise does not
posses.
75. In Halsbury's Laws of England, it has been
stated;
"Where the jurisdiction of a tribunal is dependent
on the existence of a particular state of affairs,
that state of affairs may be described as
preliminary to, or collateral to the merits of, the
issue. If, at the inception of an inquiry by an
inferior tribunal, a challenge is made to its
jurisdiction, the tribunal has to make up its mind
whether to act or not and can give a ruling on the
preliminary or collateral issue; but that ruling is
not conclusive".
76. The existence of jurisdictional fact is thus
sine qua non or condition precedent for the
exercise of power by a court of limited
jurisdiction.
77. In Raja Anand Brahma Shah v. State of
U.P. & Ors., AIR 1967 SC 1081 : (1967) 1 SCR
362, sub-section (1) of Section 17 of the Land
Acquisition Act, 1894 enabled the State
Government to empower Collector to take
possession of 'any waste or arable land' needed
for public purpose even in absence of award. The
possession of the land belonged to the appellant
had been taken away in the purported exercise of
power under Section 17(1) of the Act. The
appellant objected against the action inter alia
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contending that the land was mainly used for
ploughing and for raising crops and was not
'waste land', unfit for cultivation or habitation. It
was urged that since the jurisdiction of the
authority depended upon a preliminary finding of
fact that the land was 'waste land', the High Court
was entitled in a proceeding for a certiorari to
determine whether or not the finding of fact was
correct.
78. Upholding the contention and declaring the
direction of the State Government ultra vires, this
Court stated;
"In our opinion, the condition imposed by s. 17(1)
is a condition upon which the jurisdiction of the
State Government depends and it is obvious that
by wrongly deciding the question as to the
character of the land the State Government
cannot give itself jurisdiction to give a direction to
the Collector to take possession of the land
under s. 17(1) of the Act. It is well-established
that where the jurisdiction of an administrative
authority depends upon a preliminary finding of
fact the High Court is entitled, in a proceeding of
writ of certiorari to determine, upon its
independent judgment, whether or not that
finding of fact is correct". (emphasis supplied)
82. A question under the Income Tax Act, 1922
arose in Raza Textiles Ltd. v. Income Tax Officer,
Rampur, (1973) 1 SCC 633 : AIR 1973 SC 1362.
In that case, the ITO directed X to pay certain
amount of tax rejecting the contention of X that
he was not a non-resident firm. The Tribunal
confirmed the order. A single Judge of the High
Court of Allahabad held X as non-resident firm
and not liable to deduct tax at source. The
Division Bench, however, set aside the order
observing that:
"..... ITO had jurisdiction to decide the
question either way. It cannot be said that the
Officer assumed jurisdiction by a wrong decision
on this question of residence". X approached this
Court.
83. Allowing the appeal and setting aside the
order of the Division Bench, this Court stated;
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"The Appellate Bench appears to have been
under the impression that the Income-tax Officer
was the sole judge of the fact whether the firm in
question was resident or non- resident. This
conclusion, in our opinion, is wholly wrong. No
authority, much less a quasi-judicial authority,
can confer jurisdiction on itself by deciding a
jurisdictional fact wrongly The question whether
the jurisdictional fact has been rightly decided or
not is a question that is open for examination by
the High Court in an application for a writ of
certiorari. If the High Court comes to the
conclusion, as the learned single Judge has done
in this case, that the Income-tax Officer had
clutched at the jurisdiction by deciding a
jurisdictional fact erroneously, then the assesses
was entitled for the writ of certiorari prayed for by
him. It is incomprehensible to think that a quasijudicial
authority like the Income-tax Officer can
erroneously decide a jurisdictional fact and
thereafter proceed to impose a levy on a citizen."
(emphasis supplied)
84. From the above decisions, it is clear that
existence of 'jurisdictional fact' is sine qua non for
the exercise of power. If the jurisdictional fact
exists, the authority can proceed with the case
and take an appropriate decision in accordance
with law. Once the authority has jurisdiction in the
matter on existence of 'jurisdictional fact', it can
decide the 'fact in issue' or 'adjudicatory fact'. A
wrong decision on 'fact in issue' or on
'adjudicatory fact' would not make the decision of
the authority without jurisdiction or vulnerable
provided essential or fundamental fact as to
existence of jurisdiction is present.
85. In our opinion, the submission of Mr. Salve
is well founded and deserves to be accepted that
"concession" under clause (ii) of sub-section (2)
of Section 17 of the Act is a 'jurisdictional fact'. It
is only when there is a 'concession' in the matter
of rent respecting any accommodation provided
by an employer to his employee that the mode,
method or manner as to how such concession
can be computed arises. In other words,
concession is a 'jurisdictional fact'; method of
fixation of amount is 'fact in issue' or 'adjudicatory
fact'. If the assessee contends that there is no
'concession', the authority has to decide the said
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question and record a finding as to whether there
is 'concession' and the case is covered by
Section 17 (2) (ii) of the Act. Only thereafter the
authority may proceed to calculate the liability of
the assessee under the Rules. In our considered
opinion, therefore, in spite of the legal position
that Rule 3 is intra vires, valid and is not
inconsistent with the provisions of the parent Act
under Section 17 (2) (ii) of the Act, it is still open
to the assessee to contend that there is no
'concession' in the matter of accommodation
provided by the employer to the employee and
hence the case did not fall within the mischief of
Section 17 (2) (ii) of the Act.”
The proposition of law deducible from the aforesaid
pronouncement is that unless pre-conditions for exercise of
jurisdiction exists in an authority assumption of jurisdiction on
assuming wrong fact can always be questioned in a writ Court and
the mere fact that income tax authorities have assumed jurisdiction
and proceeded to pass an order does not preclude the scrutiny that
whether jurisdictional facts to assume jurisdiction were present or
not.
Now we again revert to the facts of the present case to find
out as to whether preconditions to proceed under Section
201/201(1A) of the Act were present or not.
As noted above, two conditions, which are required to be
fulfilled before holding a person liable for deduction at source, are
the payment is received by a person as agent of principal and
secondly payment is for services rendered (not being professional
services). The petitioner’s contention is that relationship between
the petitioner i.e. newspaper agency and the advertising agency is
not on the basis of principal and agent, rather is on the basis of
principal to principal. It has been submitted that there is no
agreement between the petitioner and the advertising agency from
which any assumption can be inferred nor at any point of time the
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petitioner has employed the advertising agency as its agent
whereas the contention of the department is that advertising
agencies are agent of the petitioner since they are bringing
advertising business which are services rendered by them to the
petitioner and payment of trade discount to the advertising agency
is nothing but commission in lieu of services rendered. We now
proceed to examine as to what are the tests for finding out
relationship of principal and agent.
Section 182 of the Indian Contract Act, 1872, which defines
“Agent” and “Principal”, is quoted below:-
“182."Agent" and "principal" defined.-An
"agent" is a person employed to do any act for
another or to represent another in dealings with
third persons. The person for whom such act is
done, or who is so represented, is called the
"principal".
The rule as to agency is expressed in maxim “qui facit per
alium, facit per se”. It is founded on a contract, express or implied,
by which one of the parties confides to the other, the management
of some business to be transacted in his name or on his account
and by which the other assumes to do the business and renders an
account of it. A Division Bench of this Court had occasion to
consider Section 182 of the Indian Contract Act in the case of Loon
Karan Sohan Lal vs. Firm John and Co. and others reported in
A.I.R. 1967 Alld. 308. Following was laid down in paragraphs 5 and
6:-
“6. ..... The court must examine the true
nature of the agreement and the subsequent
dealings between the parties, and then decide
whether it established a relationship of agency
under the law. It is common experience that the
word 'agent' is frequently used to describe a
relationship which is not an agency in law. In
several cases, a person described as an agent in
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the agreement or his letter of appointment was
held to be not an agent according to law. Some of
these cases are cited in Halsbury's Laws of
England, 3rd edition, Vol. 1 p. 146, in a foot-note
to the following observation:
"351. Agency Depends on True Nature of
Relationship In order to ascertain whether the
relation of agency exists, the true nature of the
agreement or the exact circumstances of the
relationship between the alleged principal and
agent will be regarded and if it is found that such
agreement in substance contemplates the
alleged agent acting on his own behalf, and not
as an agent in the agreement, the relation of
agency will not have arisen."
The cases cited in the foot-note are: Re Nevill, Ex
parte White, (1871) 6 Ch. App. 397; Towle (John)
and Co v. White, (1873) 29 LT 78; Livingstone v.
Ross. 1901 AC 327; Micheline Tyre Co. v.
Macfarlane (Glasgow) Ltd., (1917) 55 Sc L. R.
35; Kitson v. King (P. S.) and Son, Ltd. (1919) 36
T. L. R. 162, Lamb (W T.) & Sons v. Goring Brick
Co. (1932) K. B. 710.
6. I have examined these cases except the
one reported in 55 Sc. L. R. 35 which is not
available. They establish the principle that in
determining legal nature of relationship between
the alleged principal and agent the use or
omission of the word "agent" is not conclusive.
American Law is similar:
"the manner in which the parties designate the
relationship is not controlling, and if an act done
by person on behalf of another is in its essential
nature one of agency, the one is the agent of
such other notwithstanding he is not so called.
Conversely the mere use of the word by agent in
the contract cannot have to be held the effect of
making one agent, who, in fact is not such."
American Jurisprudence, IInd edition Vol. 3 page
431. The foot-note on this page refers to a case
in which it was held that the use of the words
"agency agreement" and "agent" by the parties in
a contract does not necessarily establish a
relationship of agency in the legal sense.
McCarty v. King County Medical Service Corp. 26
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Wash 2d 660, 175 P2d 658. The law in India is
the same. It has been held in several decisions
that the fact that the parties have called their
relationship an agency is not conclusive, if the
incidence of this relationship, as disclosed by
evidence does not justify a finding of agency, and
that the court must examine the true nature of the
relationship and the functions and responsibilities
of the alleged agent: Banaras Bank v. Ram
Prasad, AIR 1930 All 573, Phool Chand v.
Agarwal B. M. Co., AIR 1938 Lah 814;
Suryaprakasaraya v. Matheson's Coffee Works,
(1913) 14 Mad L. T. 249. What is the real nature
of the relationship created between the plaintiff
and the Government of Assam under the socalled
agreement of agency Ex. C-1. Before
analysing this agreement, it is necessary to state
the essential characteristic of an agency in law.
Section 182 of the Contract Act defines an agent
as "a person employed to do any act for another
or to represent another in dealings with third
person." The section defines a principal as "the
person for whom such act is done or who is so
represented." According to this definition, an
agent never acts on his own behalf but always on
behalf of another. He either represents his
principal in any transaction or dealing with a third
person, or performs any act for the principal. In
either case, the act of the agent will be deemed in
law to be not own but of the principal. The crucial
test of the status of an agent is that his acts bind
the plaintiff.
A Division Bench of Madras High Court in the case of P.
Krishna Bhatta and others vs. Mundila Ganapathi Bhatta and
others, AIR 1955 Madras 648 laid down following in paragraph 36:-
“36. ..... Looked at from this point of view,
an agency is a contract of employment for the
purpose of bringing another-in legal relation with
a third party or in other words, the contract
between the principal and agent is primarily a
contract of employment to bring him into legal
relation with a third party Or to contract such
business as may be going on between him and
the third party. An agent is thus a person either
actually or by law held to be authorised and
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33
employed by any person to bring hint into
contractual or other legal relations with a third
party. He is a representative vested with
authority, real or ostensible, to create voluntary
primary obligations for his principal by making
promises or representations to third persons
calculated induce them to change their legal
relations. Representative character and
derivative authority may briefly be said to be the
distinguishing features of an agent.”
The Apex Court in the case of Chiarman, Life Insurance
Corporation vs. Rajiv Kumar Bhasker reported in (2005)6 SCC
188 had occasion to consider various sections of Indian Contract
Act including Sections 182, 186 and 187. The Apex Court in the
said case held that an agency can be created expressly or by
necessary implications. Followings were laid down in paragraphs
26, 27 and 28:-
“26. The definition of 'agent' and 'principal' is
clear. An agent would be a person employed to
do any act for another, or to represent other in
dealings with third parties and the person for
whom such act is done or who is so represented
is called the principal. It may not be obligatory on
the part of the Corporation to engage an agent in
terms of the provisions of the Act and the rules
and regulations framed thereunder, but
indisputably an agent can be appointed for other
purposes. Once an agent is appointed, his
authority may be express or implied in terms of
Section 186 of the Contract Act.
27. For creating a contract of agency, in view
of Section 185 of the Indian Contract Act, even
passing of the consideration is not necessary.
The consideration, however, so far as the
employers are concerned as evidenced by the
Scheme, was to project their better image before
the employees.
28. It is well-settled that for the purpose of
determining the legal nature of the relationship
between the alleged principal and agent, the use
of or omission of the word "agent" is not
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34
conclusive. If the employee had reason to believe
that his employer was acting on behalf of the
Corporation, a contract of agency may be
inferred.”
Now after having taken note of the propositions as laid down
in the aforesaid judgments regarding tests to be applied for finding
out as to whether particular relationship is of a principal and agent
or not, we proceed to look into the relevant facts and materials
which have been brought on the record to examine the above
question.
As noted above, the assessment order has already been
passed by the assessing authority holding that relationship between
the petitioner and advertising agency is that of principal and agent
and the relevant materials and facts, which have been relied for
coming to the said conclusion, have been expressly referred to in
the assessment order and have been reiterated in the counter
affidavit filed by the department. The entire case of the department
having come on the record, it is useful to refer to and rely on the
said materials for determining the above jurisdictional question.
The assessment order itself noticed the three conditions,
which were required to be satisfied for principal and agent
relationship, and finding has been returned that all the said three
conditions are fulfilled. The relevant findings and observation are
contained in paragraphs 21, 27, 30 and 31, which are to the
following effect:-
“21. The gist of the above para is that it is a
principal agency relationship because the advertising
agents canvass advertisement for the media house at
tariff prescribed by the media house. In this
connection, it would be relevant to quote para 4 of the
Standard of Practice for Advertising Agencies (As
approved by the Advertising Agencies Association of
India, Bombay) as under:
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“No member shall pay or undertake or
allow to an advertiser or his agent or
representative, the whole or any portion of the
standard rate of commission resulting or to result
to such member from any advertising medium
nor promise or procure or undertake to procure
advertising or at a reduced rate nor supply free
or partly free to any advertiser, any advertising
material, including finished drawings, or other art
work, photographs, blocks, stereos, matrices or
the like, typesetting or printing nor defray in
whole or in part the salary of any employee of an
advertiser, nor grant any allowances, discount or
the like nor render any service having the effect
of rebating the commission allowed by an
advertising medium. The sharing of commission
with member or overseas agency or with agent
by this Association shall, however, be permitted.”
27. It can be said that an agent can conduct
the business of his principal according to the custom
which prevails in doing business. Therefore, the
assessee’s argument that since it has no codified
agreement with the advertising agency, the advertising
agency cannot be treated as its agent, does not hold
good. The principal-agent relationship can also exist
without any written or codified agreement. The
assessee has himself admitted that the INS as an apex
trade body for governing newspaper publishers also
govern newspaper relations with advertising agencies.
Since, assessee is a part of INS it is implied that it also
has a contract/agreement with the advertising agent
though it may not be codified agreement between the
assessee and the advertising agency.
30. In order to satisfy the requirements of
principal-agent relationship, certain condition laid down
in explanation (I) to section 194H are required to be
fulfilled:
1. There should be payment received or
receivable directly or indirectly.
2. It should be received or receivable by a
person acting on or behalf of another person.
3. The payment should be received or
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36
receivable for:
(a) Services rendered (not being professional
services) or
(b) For any services in the course of buying or
selling of goods or
(c) In relation to any transaction relating to
any asset, valuable articles or thing not being
securities.
All these three conditions are fulfilled in the
instant case:-
1. In the Jagran Prakashan Ltd. case the
advertising agent is receiving payment indirectly
under the name of “discount”. This discount is
nothing but an amount deducted from the gross
amount receivable by the principal i.e. Jagran
Prakashan Ltd. If the advertising agent would
have not rendered services to the Jagran
Prakashan Ltd. it would have not received any
discount or payment.
2. This discount or payment was received by
the advertising agent for procuring/providing
advertisements to Jagran Prakashan Ltd. The
advertisements were given as per the space
available in the Jagran Newspaper. Therefore,
the publication of the advertisement is strictly
subject to the availability of space in the
newspaper. The advertising agency is providing
advertisements on the basis of requirement of
the newspaper. The newspaper also decides
what type of advertisements it will publish. For
example, newspapers don’t publish the
advertisement for alcoholic drinks. Thus, it is the
newspaper which decides that what type of
advertisement it will publish and in how much
space. Thus, the advertising agency is acting on
behalf of the Jagran Prakashan Ltd. and
receiving payment in the name of discount from
the gross amount accruing to the Jagran
Prakashan Ltd.
3. The advertisement agency is rendering a
service to Jagran Prakashan Ltd. by procuring
and supplying the advertisement to the later and
for this service it is receiving its payment from the
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Jagran Prakashan Ltd. under the name
‘discount’.
31. From the above discussion, it can be appreciated
that the advertising agency is acting on behalf of
Jagran Prakashan Ltd. and receiving payments for the
services it has rendered to the Jagran Prakashan Ltd.
Thus, the existence of principal-agent relationship visa-
vis assessee and advertising agencies is established.
The provisions of section 194 H of the I.T. Act, 1961 are
applicable in such cases. Accordingly, the commission
paid by the assessee to various accredited advertising
agencies in the guise of “trade discount” is liable to
TDS.”
It is the case of the department, as apparent from the
impugned assessment order as well as from the counter affidavit,
that there is no inter se contract between the petitioner and any
advertising agency, rather the case of the department is that
principal-agent relationship can exist even if there is implicit
agreement. The conclusions have been recorded in the
assessment order in paragraph 34, which is to the following effect:-
“34. In conclusion, the whole discussion of this
order is summarised as under:-
A. There is a implicit agreement
between the Jagran Prakashan Ltd. and the
advertising agencies via Indian Newspaper
Society (INS) or otherwise.
B. There is a principal-agent
relationship between the Jagran Prakashan Ltd.
and the advertising agencies and the advertising
agencies act on behalf and as per the
requirement of the Jagran Prakashan Ltd.
C. There is payment from the Jagran
Prakashan Ltd. to advertising agencies in the
name of so called ‘discount’. The source of this
discount is nothing but the ad revenue generated
by the Jagran Prakash Ltd.
D. This payment from Jagran
Prakashan Ltd. to the advertising agencies is
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entirely for the services of advertisement
procurement by the advertising agencies.
E. That the Jagran Prakashan Ltd. visa-
vis INS and AAAI have devised a cosmetic and
artificial methodology to circumvent the clear
provisions of section 194H.”
The petitioner is member of Indian Newspapers Society (INS)
by whom the advertising agencies are granted accreditation.
According to the Rules of INS the advertising agencies while being
granted accreditation are required to enter into an agreement. The
department submits that since the petitioner is bound by Rules of
INS by whom the accreditation was granted to advertising agencies
after entering into an agreement, there is implicit contract between
the petitioner and the advertising agencies and the relationship of
principal-agent exists between them.
The petitioner has brought on the record Rules governing
accreditation of advertising agencies and the proforma of the
agreement which is entered between the advertising agencies and
the INS. The aforesaid rules have also been referred to in the
assessment order. On the basis of Rules of INS of which petitioner
is also a member and with whom the advertising agency enters into
an agreement, the department has concluded that there is implicit
contract between the petitioner and the advertising agencies from
which relationship of principal-agent can be found out. The
assessment order also refers to Standard of Practice for Advertising
Agencies as approved by the Advertising Agencies Association of
India, Bombay. Apart from abovesaid two materials, no other
material has been referred to in the order impugned. The
proposition is well settled that relationship of principal and agent
can be founded either expressly or by implication. Even if there is
no agreement between the principal and agent, the relationship can
exist. To find out the real relationship between the petitioner and the
advertising agency, the Rules of INS and the agreement entered
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39
between the advertising agencies and the INS has to be carefully
looked into. The petitioner has brought on record as Annexure RA-
2, copy of the Rules governing accreditation (INS Press Handbook
2010-11). The aforesaid rules delineate the clear picture of
relationship between the newspaper agencies and advertising
agencies. It is useful to refer to certain rules of INS which clearly
negate the relationship of principal and agent between the
newspaper agency and the advertising agency. Under the heading
“Rules and Regulations Governing Accreditation of Advertising
Agencies”, Rule 10 clearly indicates that there is no control of
newspapers agency on the advertising agency whereas in a
relationship of principal and agent principal retains full control over
the activities of agent. Rule 10(1), 10(b) and 10(c) are quoted
below:-
“10(a). It is free from control or interference
of any business or person who owns or controls
any newspaper or other advertising medium or
media.
(b) Its principal or principals are not the
proprietor/partners/salaried employees of any
advertiser or publisher of a newspaper or an
advertising medium.
(c) Any of its Directors, Proprietor,
Partners or Chief Executives do not hold any
share or equity in any publication or any other
form of advertising media and have no
connection financially or otherwise, with any
publication or with any firm of advertising media
such as outdoor, hoardings, cinemas, radio, etc.
or with any advertiser except as an advertising
agent. Such persons can hold a small number of
shares in public limited client companies.”
When Rule 10, as quoted above, clearly provides that
advertising agency is free from control or interference from
any business or person who owns or controls newspaper, the
newspaper agency cannot be treated to be principal and advertising
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agency as agent.
Rule 32, which provides for payment of trade discount has
been referred by the department, is to the followign effect:-
“32. Payment of Trade Discount. As and
from the date of accreditation as above, the
accredited advertising agency shall be entitled to
receive from the members of the Society the
maximum and minimum Trade Discount of 15%
in respect of advertisement business placed by it
with such members. In the case of the
provisionally accredited advertising agency, the
maximum and minimum Trade Discount shall be
10% of the advertisement business.”
Rule 45 prohibits the members of the society from appointing
advertising agency as their representatives. Rule 45 is quoted
below:-
“45. Member’s Representation by
Advertising Agency. Members of the Society
are free to appoint whomsoever they like as their
representative provided the said representatives
are not classified as “advertising agents” and do
not function as advertising agencies.”
A agency is a contract of employment for the purpose of
bringing another in legal relation with a third party or in other words,
the contract between the principal and agent is primarily a contract
of employment to bring him into legal relation with a third party or to
contract such business as may be going on between him and the
third party. In publication of advertisement submitted by advertising
agency, the responsibility to make payment of bills of the
newspaper is on the advertising agency and there is no
responsibility of advertiser to make payment to the newspaper
agency and no privity of contract took place between the
newspaper agency and the advertiser and had the advertising
agency being agent of newspaper agency, the advertiser was to be
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liable for payment to the newspaper agency. Rule 56(a) of the
Rules clearly contemplates that it is the advertising agency which is
responsible for payment even if the advertiser has not paid to the
advertising agency. Rule 56(a) of the Rules is quoted below:-
“56. Defaulting Clients. (a) where an advertiser
fails to pay and in consequence the agency is
unable to pay publications, INS upon being
authentically informed by the agency and being
so satisfied will advise its member publications to
suspend the advertisements of the concerned
advertiser until payment is realised. This is
without prejudice to the agency’s clear liability to
pay its dues even if its client has not paid.”
In the form of application, which is provided in Appendix-II to
the Rules, advertising agency is required to attach a list of the
names and addresses of clients whose advertisement is handled by
the advertising agency, which clearly indicates that in fact the
advertising agency is working for the advertisers/clients. Column 26
of the form of application is as follows:-
“Attach a list of the names and addresses
of clients whose advertisement is handled by you
and products/services as advertised along with
letters of appointment issued by the clients as
also with other documentary evidence.”
The most important material is format of contract between the
advertising agency and the INS, which is in Appendix-III to the
Rules. The contents of first paragraph of the contract clearly
indicates that object is to secure the best advertising service for
the advertiser. Thus the accreditation of advertising agency is for
the object of providing better service to the advertiser and it is not
engaged as agent of the newspaper agency and advertising
agency, in fact, is running its advertising business and while
conducting the said business it acts on behalf of their client i.e.
advertiser. The first paragraph of the agreement is as follows:-
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“(1) BY THE SOCIETY: ‘That the Society
accredits the Agency and includes its name in
the list of accredited agents published from time
to time.”
Clause 2 of the agreement clearly indicates that advertising
agency works in the interest of consumer and advertisers. Clause
2(a), (b), (c) and (d) are quoted below:-
“(2) BY THE AGENCY: In consideration
of the accreditation herein afforded and of the
trade discount to which the Agency is entitled by
reasons of such accreditation.
(a) The Advertising Agency shall maintain a
properly equipped office and shall fully abide by
the Standards of Service by Advertising Agencies
in the interest of consumers and Advertisers set
out in the Society’s Rules and Regulations on
Accreditation of Advertising Agencies.
(b) The Advertising Agency shall ensure
that all advertisements placed by it are legal,
clean, honest and truthful and it shall render the
best possible advertising service to the advertiser
and encourage the development of new
advertisement accounts and it shall fully adhere
in this respect to the advertisement ethics and the
Code of Ethics and Standards set out in the
Society’s Rules and Regulations on Accreditation
of Advertising Agencies.
(c) The Advertising Agency shall be paid trade
discount in accordance with the Society’s Rules
and Regulations on Accreditation of the
Advertising Agencies.
(d) That it will retain full trade discount earned
as an advertising agency from Member
Publications and that it will at no time pay or
otherwise allow any part of such trade discount to
any advertiser or representative of any advertiser
for whom it may be acting, or has acted as an
advertising agency.”
In the agreement Clause 2(q) mentions about 15% trade
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discount which advertising agency is entitled from newspaper
agency. Clause 2(q) is quoted below:-
“2(q). As and from the date of
accreditation, the Advertising Agency shall be
entitled to receive from the Members of the
Society the maximum and minimum trade
discount of 15% in respect of advertisement
business placed by it with such Members. In the
case of provisional accreditation the Advertising
Agency shall be entitled to receive maximum and
minimum trade discount of 10% only.”
According to Clause (3) of the agreement the advertising
agencies whose accreditation application is accepted by the society
are bound by the contract to be entered in Appendix-III.
The second precondition, which is required to be fulfilled for
applicability of Section 194H of the Act is that the person receiving
payment has rendered service to the deductor. A perusal of the INS
Rules clearly indicates that advertising agencies are rendering
service to the advertisers/customers and they are accredited by the
society not as an agent of newspaper agency but to provide service
to the advertisers/its clients. The aforesaid is clear from the
following part of the Rules.
A bare reading of Rule 20 indicates that advertising agencies
are rendering service to the advertisers i.e. their clients. Rule 20 of
the Rules is quoted below:-
“20. No Rebating. The Trade Discount
allowed to the agency by the members shall be
retained in full by the agency and shall not be
shared or rebated to any other person, firm or
company, directly or indirectly except:
When an agency rebates full Trade Discount to
its clients and is paid a service fee for its services
provided that the amount of the service fee so
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received shall not be less than 15%, such service
fee being levied on the gross and not on the net
amount.”
Column 26 of the application form, as quoted above, which
require the advertising agencies to submit the list of names and
addresses of clients whose advertisement is handled by them with
the letters of appointment issued by the clients (advertisers) clearly
mean that advertising agencies act for the advertisers who are their
client and they cannot be treated to be an agent of the newspaper
agency. The format of agreement in Appendix-III Clause (2) subclause
(d), as quoted above, which provides that advertising
agency shall retain full trade discount earned as an advertising
agency from member publications and it will at no time pay or
otherwise allow any part of such trade discount to any
advertiser or representative of any advertiser for whom it may
be acting, or has acted as an advertising agency. Thus the said
clause clearly indicates that advertising agencies act for the
advertisers who are their client and they are not the agent of the
News Agency.
In paragraph 21 of the assessment order, paragraph 4 of the
Standard of Practice for Advertising Agencies as approved by the
Advertising Agencies Association of India, has been relied and
referred to. Paragraph 4 of the Standard of Practice for Advertising
Agencies, provides a rule that no advertising agency shall pay or
undertake to pay any part of its commission received from
newspaper agency or promise or procure or undertake to procure
advertising at a reduce rate or to provide free or partly free any
advertising material to the advertiser. The said clause is with
different object and has no relevance in finding out the relationship
of newspaper and advertising agency as principal and agent. The
observation in the assessment order that advertising agency is
providing advertisements on the basis of requirement of newspaper,
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for example, the newspaper do not publish advertisement for
alcoholic drinks and thus it is the newspaper which decides that
what type of advertisement it will publish and hence the advertising
agency is acting on behalf of the Jagran Prakashan Ltd. and
receiving payment in the name of discount from the gross amount
accruing to the Jagran Prakashan Ltd. The fact that advertisement
for alcoholic drinks is prohibited is in view of the prohibition
contained in the executive orders and statutory provisions to which
every newspaper is bound to follow and on the aforesaid factor
inference of agency which has been drawn by the respondents is
wholly misplaced. The observation that advertisement agency is
rendering service to Jagran Prakashan Ltd. is also without any
basis and foundation.
From the aforesaid , it is clear that no foundational fact exists
on the basis of which any inference can be drawn that advertising
agencies are agent of the petitioners and further advertising
agencies render any service to the newspaper. The above two
foundational facts being non existent, the proceedings under
Section 201/201(1A) of the Act were clearly not permissible.
Now comes another factor (first factor) which is required to
be established for applicability of Section 194H of the Act i.e. as to
whether any payment was made to the advertising agency as
commission. The case of the petitioner throughout has been that
petitioner has been paying a trade discount at the rate of 15% as
per Rule 32 of the Rules. The sample bills, which were collected by
the department at the time of survey and are part of the
assessment order, mention the total amount paid to advertising
agency and the discount provided for and the net bill amount. The
petitioner’s case is that trade discount has been provided by the
petitioner throughout as a part of trade practice. The trade discount
is claimed to be given in normal business practice which has been
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recognised in several cases. Reliance has been placed on the
judgment of the Apex Court in the case of Moped India Ltd. vs.
Assistant Collector of Central Excise, Nellore and others
reported in (1986)1 SCC 125. In the said case the appellant,
manufacturer of moped, allowed commission to its dealer. The
central excise duty was paid on the price list after deducting the so
called commission to the dealer. The Central Excise Department
took the view that they were not entitled for deduction of the
aforesaid amount and demand of central excise was issued. The
Apex Court held in the said judgment that the said amount was
trade discount. Following was laid down in paragraph 7 of the said
judgment:-
“7. That takes us to the second question,
namely, whether the Division Bench was right in
taking the view that the Commission of Rs. 110,
145 and 165 per moped in respect of different
varieties of mopeds sold to the dealers could not
be said to be trade discount. Mr. Nariman,
Learned Counsel appearing on behalf of the
appellants contended that this Commission
allowed to the dealers was clearly trade discount
and was, therefore, liable to be deducted in
determining the exciseable value of the mopeds
by reasons of sub section (b) (ii) of Section 4 of
the Act. Now it is true that this amount allowed to
the dealers has been referred to in the
agreement as commission but the level given by
the parties cannot be determinative because it is
for the court to decide whether the amount is
trade discount or not, whatever be the name
given to it. If we look at the terms of the
agreement, it is clear that the agreement was
between the appellants and the dealers on
principal to principal basis. The clauses of the
agreement which we have set out above clearly
show beyond doubt that under the agreement,
the mopeds were sold by the appellants to the
dealers and the dealers did not act as agents of
the appellants for the purpose of effecting sales
on behalf of the appellants. It is clear from clause
5 (a) of the agreement that the bills in respect of
the mopeds delivered to the dealers were to be
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sent by the appellants through their bankers and
it was the responsibility of the dealers to retire
the bills for the purpose of taking delivery of the
mopeds. Clause 5 (b) of the agreement laid an
obligation on the dealers to insure the mopeds
against all risks, pilferage, non-delivery and
SRCC including breakage from the time the
mopeds left the factory or stockyard of the
appellants until they arrived at the premises of
the dealer and this again would show that the
dealers acted as principal to principal in
purchasing the mopeds from the appellants. The
dealers were also liable under Clause 6 of the
agreement to maintain adequate organisation for
sale and service of the mopeds including service
stations, repair shops, spare parts. salesmen etc.
and the mechanics were also to be trained at the
cost of the dealers. The relationship between the
appellants and the dealers was clearly on
principal to principal basis and in the
circumstances it is difficult to see how the
amount of Rs. 11 , 145 and 165 allowed to the
dealers. in respect of different varieties of
mopeds could be regarded as anything other
than trade discount. The appellants charged to
the dealer the price of the mopeds sold to them
less the amount of Rs. 110, Rs. 145 and Rs. 165
in respect of different varieties of mopeds. These
amounts allowed to the dealers were clearly
trade discount liable to be deducted from the
price charged to the dealers for the mopeds.
purpose of arriving at the exciseable value of the
moped.”
Another judgment relied by the petitioner is in the case of
Commissioner of Central Excise, New Delhi vs. DCM Textiles
reported in (2006)9 SCC 349 where the amount paid to dealer was
treated to be trade discount. In the aforesaid case under the
agreement with the dealer a payment of commission was
contemplated. The Apex Court rejected the argument that dealer
was agent of the appellant and further the amount to be paid to the
dealer was trade discount. Followings were laid down in paragraphs
8 to 12:-
“8. Respondent has entered into different
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but similar agreements with its dealers in
connection with the sale of cotton yarn
manufactured by it and one of the agreement
was produced during the course of proceedings
before the original authority for the purposes of
ascertaining the terms and conditions at which
the goods were supplied by the respondent to
its dealers. The agreement purports to be a
dealership agreement. The relevant clauses of
the agreement are reproduced hereunder:
"2. That the Cotton Yarn will be delivered to the
dealer on his requisitions placed in company's
office at Delhi, Ex-company's Delhi Godown
subject to availability of the stock with company
in their said godown.
3. That the dealer shall be wholly and solely
responsible for making full payment to the
company of all stocks of Cotton Yarn
received from the company.
xx xx xx
xx xx xx
8. That the company shall pay the dealer
commission of 1.5% including brokerage, if any,
on the net value of the sale. The
commission payable shall be worked out at
the end of every quarter and remitted to the
dealer.....
9. The dealer shall be paid ½% cash discount if
cheque/pay order/draft is issued and handed
over to company's staff by the dealer within one
day of date of the sale invoice. The cash
discount will be 0.25% if the payment is
made by the dealer by cheque/pay order/draft
within four days of the date of sale invoice.
10. No interest shall be levied if the payment is
made by the dealer by cheque/pay order/draft
within seven days of the date of the sale invoice
for payment delayed beyond seven days of the
date of sale invoice interest will be recoverable
from 8th day of the sale invoice till the date of
issue of cheque/draft/pay order and handed
over to the company's staff. The interest shall be
recovered at the end of every month.
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11. That the dealer shall arrange to lift the
stocks of cotton yarn purchased by the dealer
as per the agreed schedule failing which the
company may issue the sale invoice in dealer's
favour. In such event, terms of cash
discount/interest free period and interest
recoverable shall start from the date of sale
invoice itself.
xx xx xx
13. That the dealer shall keep with the
company a security deposit of Rs.50,000/-
as security which shall carry on interest of 15%
per annum which will be payable yearly.
xx xx xx
xx xx xx
16. If at any time this agreement is terminated
in accordance with the conditions of this
agreement, the accounts shall be finalised and
settled within one week from the date of
its termination.
9. A bare perusal of the above-noted clauses
clearly shows that the agreement entered into
between the respondent and dealers was on
'principal to principal basis' and it was an
absolute sale made by the respondent in
favour of the dealers. The dealer is required to
make full payment of the cotton yarn purchased
by him forthwith and he is given half percent
cash discount if the payment is made within one
day, 0.25 per cent if the payment is made within
four days and if the payment is not made within
seven days then from 8th day onwards the dealer
becomes liable to pay interest on the delayed
payment. This indicates that there was an
absolute sale made by the respondent to its
dealers and the sale was on 'principal to principal
basis'.
10. This Court in Union of India & Others v.
Bombay Tyres International Pvt. Ltd. reported in
1984 (17) ELT 329 (SC) on further arguments
held trade discount to mean:
“1. Trade Discounts - Discounts allowed in
the Trade (by whatever name such discount is
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described) should be allowed to be deducted
from the sale price having regard to the nature
of the goods, if established under agreements
or under terms of sale or by established
practice, the allowance and the nature of the
discount being known at or prior to the removal
of the goods. Such Trade Discounts shall not be
disallowed only because they are not payable at
the time of each invoice or deducted from the
invoice price."
11. It was held that discount allowed in the trade,
if established under agreements or under terms
of sale or by established practice, the allowance
and the nature of the discount being known at or
prior to the removal of the goods, then the same
shall amount to a trade discount provided the
sale is from 'principal to principal basis'. It was
further observed that such trade discount shall
not be disallowed only because they are not
payable at the time of each invoice or deducted
from the invoice value.
12. Original authority as well as
Commissioner (Appeals) had stressed upon the
point that since the trade discount was not paid
to the dealer at the time of the preparation of the
invoice and was to be paid later based on the net
sale value of the sale effected (½ per cent of the
net sale value); that the agreement between the
parties amounting to be an agency agreement
and not the dealership agreement and the sale
was not from principal to principal basis. We
agree with the Tribunal that this view is not
sustainable on the facts of this case.”
Heavy reliance was placed by the learned counsel for the
petitioner on the judgment of the Delhi High Court in I.T.A. No.1264
of 2007 (The Commissioner of Income Tax XVII Mvs. Living
Media India Ltd.), dated 6th May, 2008. The facts of the aforesaid
case need to be noted in detail. The petitioner has already brought
on the record copy of the judgment of the Income Tax Appellate
Tribunal in Assistant Commissioner of Income Tax vs. Living
Media India Limited as well as the judgment of the High Court
along with the letter dated 14th August, 2008 of the Indian
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Newspaper Society as Annexure-1 to the writ petition. The Indian
Newspaper Society has issued the letter dated 14th August, 2008 on
the reference “TDS on advertising agency trade discounts under
Section 194H of the Income Tax Act”. Following was circulated to all
the members of the Indian Newspaper Society:-
“Re: TDS on advertising agency trade discounts
under Section 194H of the Income Tax Act.
Several of our member publications have reported
having received a demand for depositing TDS against
the trade discounts permitted by them to advertising
agencies from whom member publications received
advertising releases.
In this connection, we are enclosing copies of the
following Court orders in the case of Living Media Ltd
vs Asstt. Commissioner of Income Tax Circle 50(1),
New Delhi.
1. Order No.I.T.A.No.3807/Del/2005 by the
Appellate Tribunal Delhi Bench H, New Delhi,
which held that the advertising agency was not
an agent of the assessee and the amount
deducted out of the gross payment received by
the agency from the advertiser cannot be treated
as payment of commission by the assessee to
agency. Thus it was held that the assessee was
not liable to deduct TDS on payment received by
the agency.
2. Order No. ITA No. 1264 of 2007 by the
High Court of Delhi, New Delhi upholding the
judgment passed by the Appellate Tribunal Delhi
Bench H, New Delhi.
These orders may be of use in dealing with such notices.”
M/s Living Media Limited is a publisher, which is publishing
various magazines like India Today, Business Today, Cosmopolitan
etc. The company had been generating income through space
selling (advertisement) in its magazines which was done through
advertising agency or directly through advertiser. The Company
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used to pay 15% discount as per Rule 32 of the INS Rules. Similar
notices were issued to Living Media Ltd. asking for similar details
and alleging non deduction of tax at source under Section 194H.
Copy of the order of Tribunal has been enclosed at Page 26 of the
writ petition which notes these facts in paragraph 4. The Tribunal
dismissed the appeal of the department against which a writ petition
was filed by the department. The Delhi High Court dismissed the
writ petition of the department. The Delhi High Court held that there
is no liability of deduction of tax at source under Section 194H with
regard to trade discount of 15% given to the advertising agency.
Following was laid down in paragraph 6 to 10 of the judgment of
Delhi High Court:-
“6. It is contended by learned counsel for the
Revenue that the CIT (A) had determined the
payment of 15% to the advertising agency by the
Assessee as commission and this was not
challenged by the Assessee. Consequently, the
provisions of Section 194H of the Act would
come into play. While this is factually so, we are
of the opinion that the conclusion arrived at by
the CIT (A) really turns the argument upside
down.
7. What is first required to be seen is the
nature of the contract between the parties and
after that determination, it is necessary to find out
what is the nature of the payment. What the
CIT(A) has done is to determine the nature of the
payment and then to determine the nature of the
contract. This, we think, is incorrect.
8. On a reading of the contract as well as the
order passed by the CIT (A) and the Tribunal, we
find that the two authorities below have held it to
be a principal to principal contract. That being so,
by its very definition, the payment made by the
Assessee to the advertising agency cannot be
classified as commission. The payment may be
called a trade discount or may be described as a
concession but since Rule 32 of the INS Rules
described it as a trade discount, we have to
proceed on that basis and by merely describing
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the trade discount as commission, the Revenue
cannot seek to invoke the provisions of Section
194H of the Act.
9. There is a concurrent finding of the CIT (A)
as well as the Tribunal that the contract was a
principal to principal contract and in terms of that
contract what was given by the Assessee to the
advertising agency was trade discount as per
Rule 32 of the INS Rules.
10. Under the circumstances, we are of the
view that the Tribunal was not in error in coming
to the conclusion that commission was not paid
by the Assessee to the advertising agency and
therefore, the provisions of Section 194H of the
Act could not be invoked by the Revenue.”
It is relevant to note that the Income Tax Department filed
Special Leave to Appeal (Civil) No.3433 of 2009 against the
judgment of the Delhi High Court dated 6th May, 2008 which special
leave to appeal was dismissed by the Apex Court vide its order
dated 11th December, 2009. The petitioner has relied on the
aforesaid judgment extensively and the assessing authority has
distinguished the judgment of the Delhi High Court stating that
Kerala High Court has delivered a judgment in the case of CIT
Thiruvanathapuram vs. Director, Prasar Bharati reported in 325
ITR 205, which is more recent judgment, hence the recent
judgment is to be preferred. The aforesaid reasoning by assessing
authority is wholly erroneous. The judgment of the Delhi High Court
was fully applicable on the facts of the present case and the
department was obliged to take into consideration the said
judgment specially when the special leave to appeal filed by the
department was dismissed by the Supreme Court.
Now we come to the judgment of the Kerala High Court
(supra) on which much reliance has been placed by the assessing
authority. The Prasar Bharati is fully owned Government of India
undertaking engaged in telecast of news, various sports,
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entertainments, cinemas and other programmes. The
advertisements were canvassed through agents under the
agreement with them. The advertising agencies and the Director,
Prasar Bharati were principal and agent as per the agreement and
the Doordarshan provided 15% discount on the basis of which it
was contended that no deduction at source was required. The
Tribunal held that there was no liability for deduction of tax at
source under Section 194H which judgment was reversed by the
Kerala High Court. From the facts of the aforesaid case, it is clear
that Doordarshan had appointed agents i.e. advertising agencies
and there was agreement entered between them. In the aforesaid
circumstances 15% advertisement charges collected and remitted
was held to be in the form of commission payable to the agent by
Doordarshan. There was explicit agreement between the agency
and the Doordarshan where both understood that payment made to
the agency was liable to tax deduction. It is useful to quote following
observations of the judgment of Kerala High Court:-
“Respondent is a fully owned Government of
India undertaking engaged in telecast of news,
various sports, entertainments, cinemas and
other programmes. Advertisement income is a
major source of revenue for all telecasting
companies including the respondent.
Advertisements are canvassed through agents
appointed by the respondent under agreement
with them. Advertising agencies recognised by
the respondent are of two types, the unregistered
agencies which are not entitled to any credit
facility and the other type are registered agencies
which are given accredition and credit facility with
Doordarshan. In other words, while the first
category will be able to telecast advertisment
programmes canvassed from customers only on
advance payment, the other category can have
telecast done before making payments.
Advertisement charges are based on air-time
used for telecasting advertisement material.
Rates are also varying depending upon the time
of advertisment. However, these matters have no
relevance for the purpose of deciding this case
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because the issue involved is whether the
commission paid at the rate of 15% by the
respondent on advertisement charges remitted
by the advertising agencies is subject to tax
deduction at source as commission under
Section 194H of the Act.
From the above it is very clear that parties
have understood their relationship as Principal
and Agent and what is paid to the agent by
Doordarshan is 15% of advertisement charges
collected and remitted to it by the agent which is
in the form of commission payable to the Agent
by Doordarshan. Counsel for the respondent
referred to one of the agreements where the
commission is referred to as standard discount
and contended that the arrangement between
respondent and advertising agency is not agency
but is a Principal to Principal arrangement of
sharing advertisement charges. We are unable to
accept this contention because advertisement
contract entered into between the customer and
the agency is for telecasting advertisement in
Doordarshan channels. The agent canvasses
advertisement on behalf of Doordarshan under
agreement between them and the advertisement
charges recovered from the customers are also
in accordance with tariff prescribed by
Doordarshan which is incorporated in the
agreement. Further it is specifically stated in the
agreement that advertisement material should
also conform to the discipline introduced by
Doordarshan which is nothing but a Government
agency which cannot telecast all what is desired
to be telecast by advertising agencies. In fact,
Doordarshan is bound by advertisement contract
canvassed by advertising agencies and it is their
duty under the agreement between them and the
advertising agencies to telecast advertisement
material in terms of the contract which the
agency signs with the customer. In our view, the
transaction is a pure agency arrangement
between the respondent and the advertising
agencies because one acts for the other and the
act of the agent binds the respondent in their
capacity as Principal of the agent. It is pertinent
to note that commission or brokerage defined
under explanation (i) to Section 194H has a wide
meaning and it covers any payment received or
receivable directly or indirectly by a person acting
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on behalf of another person for services
rendered. In this case, no one can doubt that
15% commission paid to advertising agencies by
the Doordarshan is for canvassing
advertisements on behalf of the respondent. So
much so, the payment of 15%, by whatever
name called, whether discount or commission,
falls within the definition of "commission" as
defined under Explanation (i) to Section 194H of
the Act.
The next question to be considered is
whether the provision in the agreement
permitting advertising agencies to retain 15% of
the advertising charges payable by them to the
respondent towards commission from out of the
charges received for advertising services from
customers will exonerate the respondent from
their liability to deduct tax at source under
Section 194H of the Act. In this context, it is
pertinent to refer to clause 2(e) of Annexure A
agreement which is extracted hereunder:
(e) The Agency shall retain in full all
discount earned as an advertising agency and
that it will at no time pay or otherwise allow
directly or indirectly any part of such
discount or remuneration to any person,
advertiser or representative of any advertiser for
whom it may be acting or has acted as an
advertising agency.
Agency agrees to pay the TDS/Income Tax
liability as applicable under the Income Tax Law
on the discount retained by him. For this purpose
agency agrees to make payment to Doordarshan
Commercial Service by means of
cheque/demand draft for the TDS on 15%
discount retained by them. This cheque/demand
draft will be drawn separately and should not be
included in the telecast fee/advertisement
charges.
It is very clear from the above provision that the
advertising agency clearly understood the
agreement as an agency arrangement and the
commission payable by the respondent to such
agency is subject to tax deduction at source
under the Income Tax Act and so much so the
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provision in the agreement was for the agent
after retaining 15% to give cheque or demand
draft for TDS amount which was originally 5%
until it was enhanced to 10% by Finance Act
2007 with effect from 1.6.2007...”
In the aforesaid case, the relationship of principal and agent
was fully established since the advertising agency was appointed
as agent by written agreement and there was specific clause that
tax shall be deductible at source on payment of trade discount. In
the said circumstances the Kerala High Court held that Section
194H of the Income Tax Act was applicable. In the present case,
there is no agreement between the petitioner and the advertising
agency and the advertising agency has never been appointed as
agent of the petitioner. Thus the above case of Kerala High Court is
clearly inapplicable and the reliance on the said judgment for
fastening the liability of tax and interest on the petitioner is wholly
untenable. The judgment of the Kerala High Court thus does not
help the respondents in the present case.
Issues No. 7,8 and 9 are interrelated hence, they are being
taken together. The ground of challenge of the petitioner is that
under section 201 of the Act, the Income Tax authorities cannot
direct for payment of tax from the person, who was obliged to
deduct the tax at source and at best only interest and penalty can
be recovered on failure of deductor to deduct the tax at source.
Elaborating the submission, it is submitted that the orders of the
assessing authority directing for payment to the extent of amount
which was deductible under section 194H from the petitioner is
without jurisdiction and beyond the scope of provisions of section
201. The order being without jurisdiction, the petitioner can very
well invoke the jurisdiction of this court praying for quashing of such
an order which is void and in excess of the jurisdiction of the
authorities. Before answering the aforesaid issues, the scheme of
the Act including the scheme of collection and recovery of tax have
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to be looked into.
Section 4 of the Act is charging section which provides that
income tax is chargeable in respect of the total income of the
previous year of every person. The charge of the income tax is thus
on the income of a person. Person has been defined in Section 2
(31). Section 4 of the Act is quoted as below:
“ 4 (1) Where any Central Act enacts that incometax
shall be charged for any assessment year at
any rate or rates, income-tax at that rate or those
rates shall be charged for that year in accordance
with, and subject to the provisions (including
provisions for the levy of additional income-tax) of,
this Act in respect of the total income of the
previous year of every person :
Provided that where by virtue of any provision of
this Act income-tax is to be charged in respect of
the income of a period other than the previous
year, income-tax shall be charged accordingly.
(2) In respect of income chargeable under subsection
(1), income-tax shall be deducted at the
source or paid in advance, where it is so
deductible or payable under any provision of this
Act.”
Interpreting the similar provisions of the Income Tax Act,
1922, the Federal Court in 15 ITR 302 Chatturam Vs.
Commissioner of Income Tax held that section imposes income
tax upon a person in respect of his income. While interpreting
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Sections 3,4 and 22 of Income Tax Act, 1922 following was laid
down by the Federal Court:
“ The liability to pay tax is founded on Sections 3
and 4 of the Income Tax Act, which are the
charging sections. Section 22 etc. are the
machinery sections to determine the amount of
tax. Lord Dunedin in Whitney Vs. Commissioners
of Inland Revenue stated as follows:- “ Now, there
are three stages in the imposition of a tax. There
is the declaration of liability, that is the part of the
statute which determines what persons in respect
of what property are liable. Next, there is the
assessment. Liability does not depend on
assessment, that ex hypothesi has already been
fixed. But assessment particularizes the exact sum
which a person liable has to pay. Lastly, come the
methods of recovery if the person taxed does not
voluntarily pay.” In W.H. Cockerline & Co. V.
Commissioners of Inland Revenue, Lord
Hanworth, M.R., after accepting the passage from
Lord Dunedin's judgment quoted above, observed
as follows:- “Lord Dunedin, speaking, of course,
with accuracy as to these taxes, was not unmindful
of the fact that it is the duty of the subject to whom
a notice is given to render a return in order to
enable the Crown to make an assessment upon
him; but the charge is made in consequence of the
Act, upon the subject; the assessment is only for
the purpose of quantifying it.” He quoted with
approval the following passage from the judgment
of Sargant, L.J., in the case of Williams:- “ I cannot
see that the non-assessment prevents the
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incidence of the liability, through the amount of the
deduction is not ascertained until assessment. The
liability is imposed by charging section, namely,
Section 38 (of the English Act) the words of which
are clear. The subsequent provisions as to
assessment and so on are machinery only. They
enable the liability to be quantified, and when
quantified to be enforced against the subject, but
the liability is definitely and finally created by the
charging section and all the materials for
ascertaining it are available immediately.” In
Attorney-General V. Aramayo and others, it was
held by the whole Court that there may be a waiver
as to the machinery of taxation which inures
against the subject. In India these well-considered
pronouncements are accepted without reservation
as laying down the true principles of taxation under
the Income-tax Act.”
The apex Court had occasion to consider section 4 of the
Income Tax Act in (1993) 201 ITR 88 Universal Radiators Vs.
Commissioner of Income Tax. Following was laid down by the
apex Court:
“But liability to pay tax under the Act arises on the
income accruing to an assessee in a year. The
word 'income', ordinarily in normal sense, connotes
any earning or profit or gain periodically, regularly
or even daily in whatever manner and from
whatever source. Thus it is a word of very wide
import. Clause (24) of Section 2 of the Act is
legislative recognition of its elasticity. Its scope has
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been widened from time to time by extending it to
varied nature of income. Even before it was
defined as including profits, gains, dividends and
contributions received by a trust it was held to be a
word, 'of broadest connotation' which could not be
'understood in restricted or technical sense'. The
wide meaning of the word was explained by this
Court in Raghuvanshi Mills Ltd., Bombay v.
Commissioner of Income Tax, Bombay City MANU/
SC/0043/1952 : [1952]22ITR484(SC) and it was
emphasised that the expression, 'from whatever
source derived' widened the net. But exigibility to
tax is not the same as liability to pay tax. The
former depends on charge created by the Act and
latter on computation in accordance with the
provisions in the Act and the rules.”
Chapter XVII of the Act deals with collection and recovery of
tax. Section 190 provides for deduction at source and advance
payment. Section 190 is quoted below:
“190 (1) Notwithstanding that the regular
assessment in respect of any income is to be
made in later assessment year, the tax on such
income shall be payable by deduction or collection
at source or by advance payment or by payment
under sub-section (1A) of Section 192, as the case
may be, in accordance with the provisions of this
Chapter.
(2) Nothing in this section shall prejudice the
charge of tax on such income under the provisions
of sub-section (1) of section 4.”
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Section 190 thus, provides mode of collection and recovery
of tax and under sub-section (1) of Section 190, the tax is payable
by deduction or collection at source.
Section 191 provides that in the case of income in respect of
which either provision is not made for deduction at source or where
income tax has not been deducted in accordance with the
provisions of this Chapter, income-tax shall be payable by the
assessee direct. Section 191 is quoted below:
“ 191. In the case of income in respect of which
provision is not made under this Chapter for
deducting income-tax at the time of payment, and
in any case where income-tax has not been
deducted in accordance with the provisions of this
Chapter, income-tax shall be payable by the
assessee direct.
Explanation.—For the removal of doubts, it is
hereby declared that if 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 after so
deducting fails to pay, or does not pay, the whole
or any part of the tax, as required by or under this
Act, and where the assessee has also failed to pay
such tax directly, then, such person shall, without
prejudice to any other consequences which he
may incur, be deemed to be an assessee in default
within the meaning of sub-section (1) of section
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201, in respect of such tax.”
Section 194H provides for payment of commission or
brokerage where income tax is to be deducted at source by the
person responsible for paying such commission or brokerage.
Section 201 provides for consequence of failure to deduct or pay.
Section 201 is quoted as below:
“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 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.
(1A) Without prejudice to the provisions of subsection
(1), if any such person, principal officer or
company as is referred to in that sub-section does
not deduct the whole or any part of the tax or after
deducting fails to pay the tax as required by or
under this Act, he or it shall be liable to pay simple
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interest,—
(i) at one per cent for every month or part of a
month on the amount of such tax from the date on
which such tax was deductible to the date on
which such tax is deducted; and
(ii) at one and one-half per cent for every month
or part of a month on the amount of such tax from
the date on which such tax was deducted to the
date on which such tax is actually paid,
and such interest shall be paid before furnishing
the statement in accordance with the provisions of
sub-section (3) of section 200.
(2) Where the tax has not been paid as aforesaid
after it is deducted, the amount of the tax together
with the amount of simple interest thereon referred
to in sub-section (1A) shall be a charge upon all
the assets of the person, or the company, as the
case may be, referred to in sub-section (1).
(3) No order shall be made under sub-section (1)
deeming a person to be an assessee in default for
failure to deduct the whole or any part of the tax
from a person resident in India, at any time after
the expiry of—
(i) two years from the end of the financial year in
which the statement is filed in a case where the
statement referred to in section 200 has been filed;
(ii) four years from the end of the financial year in
which payment is made or credit is given, in any
other case :
Provided that such order for a financial year
commencing on or before the 1st day of April, 2007
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may be passed at any time on or before the 31st
day of March, 2011.
(4) The provisions of sub-clause (ii) of subsection
(3) of section 153 and of Explanation 1 to
section 153 shall, so far as may, apply to the time
limit prescribed in sub-section (3).”
The main issue to be answered is as to whether in event, the
person who is responsible to deduct tax at source fails to deduct
the tax at source, what are the consequences? Whether the tax
which was required to be deducted at source by such deductor, can
also be recovered from the deductor or recovery can confine only to
interest and penalty. The Income Tax Act is an integrated Act
delineating a scheme for payment of income tax. For interpreting
provisions of Section 201 of the Act, other related provisions have
to be looked into to find out the scheme of section 201.
Sections 190 and 191 of Chapter XVII under which chapter
Section 201 also falls need a closure scrutiny. Section 190(1)
provides that tax on income shall be payable by deduction or
collection at source or by advance payment. Sub-section (2) of
section 190 starts with a negative injunction i.e. “nothing in this
section shall prejudice the charge of tax on such income under the
provisions of sub-section (1) of Section 4.” Sub-section (1) of
section 4 as noted above, provides that charge of the income tax
shall be on the income of a person. Sub-section (2) of Section 190
clearly mandates that despite of mode and manner of collection
and recovery of tax i.e. by deduction or collection at source as
envisaged under section 190 (1), the charge of payment of income
tax is on a person, whose income is to be taxed.
Section 191 provides that in the case of income in respect of
which provision is not made under this Chapter for deducting
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income tax at source and where income tax has not been deducted
in accordance with the provision of this chapter, income tax shall be
payable by the assessee direct. Thus, both the conditions i.e. (i) in
the case of income in respect of which provision is not made under
chapter XVII for deducting income tax at the time of payment and
(ii) in case where income tax has not been deducted in accordance
with the provisions of Chapter XVII, the Income tax is payable by
the assessee direct. Section 191 thus re-enforces that primarily the
liability of payment of income tax is on the person, whose income is
to be taxed as delineated under sub-section (1) of section 4 and
sub-section (2) of section 190. The explanation to Section 191
provides that where a deductor who was required to deduct income
tax at source does not deduct or after deduction does not pay and
where the assessee has also failed to pay such tax directly then
such person shall without prejudice to any other consequence be
deemed to be an assessee in default within the meaning of subsection
(1) of Section 201 in respect of such tax. The explanation
to section 191 thus has to be read into section 201 (1).
Sub-section (1) of Section 201 provides that where deductor
does not deduct or does not pay after deduction 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.
The language of the explanation to Section 191 and sub-section (1)
of Section 201 is almost similar except with one difference. In
Explanation to Section 201, the deductor shall be deemed to be an
assessee in default where the assessee has also failed to pay such
tax directly, whereas in sub-section (1) of Section 201, the above
condition is not mentioned. While interpreting the provisions of
sections 191 and sub-section (1) of Section 201, a harmonious
construction has to be adopted and such interpretation is to be put
which gives meaning and purpose to both the provisions.
Explanation to section 191 specifically mentions “....be deemed to
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be an assessee in default within the meaning of sub-section (1) of
section 201 in respect of such tax.” The above meaning thus has to
be read in sub-section (1) of section 201, which has been
specifically provided for. Not repeating the said condition again in
section 201 (1) is inconsequential. Thus, deductor who fails to
deduct income tax at source shall be deemed to be an assessee in
default only when the assessee has also failed to pay such tax
directly. Thus, it flows that there is no occasion to treat the deductor
as an assessee in default unless the assessee has not paid the tax
directly.
The apex Court in (2010) 10 SCC 29 GE India Technology
Centre Private Limited Vs. Commissioner of Income Tax, had
occasion to consider Section 195 of the Act, which also provides for
deduction of income tax. In the aforesaid case, words “chargeable
under the provisions of the Act” contained in Section 195 came for
interpretation. In the above context, the apex Court had held that
charging provisions of the Act form one single integral inseparable
code. It is useful to quote paragraphs 16,17 and 18:
“ 16. The fact that the Revenue has not obtained
any information per se cannot be a ground to
construe Section 195 widely so as to require
deduction of TAS even in a case where an amount
paid is not chargeable to tax in India at all. We
cannot read Section 195, as suggested by the
Department, namely, that the moment there is
remittance the obligation to deduct TAS arises. If
we were to accept such a contention it would mean
that on mere payment income would be said to
arise or accrue in India. Therefore, as stated
earlier, if the contention of the Department was
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accepted it would mean obliteration of the
expression “sum chargeable under the provisions
of the Act” from Section 195(1). While interpreting
a Section one has to give weightage to every word
used in that section. While interpreting the
provisions of the Income Tax Act one cannot read
the charging Sections of that Act dehors the
machinery Sections. The Act is to be read as an
integrated code.
17. Section 195 appears in Chapter XVII which
deals with collection and recovery. As held in the
case of C.I.T. Vs. Eli Lilly &Co. (India) (P.) Ltd. [312
ITR 225] the provisions for deduction of TAS which
is in Chapter XVII dealing with collection of taxes
and the charging provisions of the I.T. Act form one
single integral, inseparable Code and, therefore,
the provisions relating to TDS applies only to those
sums which are “chargeable to tax” under the I.T.
Act. It is true that the judgment in Eli Lilly (supra)
was confined to Section 192 of the I.T. Act.
However, there is some similarity between the two.
If one looks at Section 192 one finds that it
imposes statutory obligation on the payer to deduct
TAS when he pays any income “chargeable under
the head salaries”. Similarly, Section 195 imposes
a statutory obligation on any person responsible
for paying to a non- resident any sum “chargeable
under the provisions of the Act”, which expression,
as stated above, do not find place in other
Sections of Chapter XVII. It is in this sense that we
hold that the I.T. Act constitutes one single integral
inseparable Code. Hence, the provisions relating
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to TDS applies only to those sums which are
chargeable to tax under the I.T. Act.
18. If the contention of the Department that any
person making payment to a non-resident is
necessarily required to deduct TAS then the
consequence would be that the Department would
be entitled to appropriate the moneys deposited by
the payer even if the sum paid is not chargeable to
tax because there is no provision in the I.T. Act by
which a payer can obtain refund. Section 237 read
with Section 199 implies that only the recipient of
the sum, i.e., the payee could seek a refund. It
must therefore follow, if the Department is right,
that the law requires tax to be deducted on all
payments. The payer, therefore, has to deduct and
pay tax, even if the so-called deduction comes out
of his own pocket and he has no remedy
whatsoever, even where the sum paid by him is
not a sum chargeable under the Act. The
interpretation of the Department, therefore, not
only requires the words “chargeable under the
provisions of the Act” to be omitted, it also leads to
an absurd consequence. The interpretation placed
by the Department would result in a situation
where even when the income has no territorial
nexus with India or is not chargeable in India, the
Government would nonetheless collect tax. In our
view, Section 195(2) provides a remedy by which a
person may seek a determination of the
“appropriate proportion of such sum so
chargeable” where a proportion of the sum so
chargeable is liable to tax.”
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Sri Govind Krishna, learned counsel for the Department
relied on judgment of the apex Court on statutory interpretation
namely; AIR 1972 S.C. 2319 Azam Jha Bahadur Vs. Expenditure
Tax Officer for the proposition that logic or reason cannot be of
much avail in interpreting a tax statute. There cannot be any
dispute to the proposition as laid down by the apex Court in the
aforesaid case.
While interpreting the provisions of charging section of the
Income Tax Act and the machinery part both have to be treated as
integrated code as held by the apex Court in GE India
Technology Centre Private Limited Vs. Commissioner of
Income Tax (supra). Sri Govind Krishna further relied on the
judgment of the apex Court in Civil Appeal No. 1507 of 2007 of
2007 M/s Sharma Transports Vs. The State of Maharashtra
decided on 2.8.2011 for the proposition that if a particular method
is prescribed for doing a certain thing by the Statute, it rules out any
other method. For the same proposition reliance has been placed
on the judgment of the apex Court in Dr. Ram Deen Maurya Vs.
State of U.P. & others Civil Appeal No. of 2009 (arising out of
Special Leave Petition (C) No. 22330 of 2007), decided on
17.4.2009, wherein same proposition was laid down i.e. when rules
prescribed a particular procedure to be followed, the same requires
to be followed and any deviation would disentitle the applicant to
claim relief. There cannot be any dispute to the proposition laid
down by the apex Court in the aforesaid two cases. However, the
present is not a case of non compliance of any procedural
requirement.
The apex Court had occasion to consider provisions of
Section 201 in (2007) 8 SCC 463 Hindustan Coca Cola Beverage
(P) Ltd. Vs. Commissioner of Income Tax. In the aforesaid case,
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the appellant entered into an agreement with M/s Pradeep Oil
Corporation for use of their premises for receipt, storage and
dispatch of goods belonging to the appellant-company. Tax was
deducted under Section 194C @ 2% in respect of ware housing
charges. The Assessing Officer took the view that warehousing
charges were in the nature of rent and tax was to be deducted at
the rate of 20% under section 194-I. The Assessing Officer
accordingly determined the amount of short deduction of tax and
also levied interest payable thereon under Section 201 (1A) of the
Act. The Tribunal held that there can be no recovery of tax alleged
to be in default from the appellant considering the fact that Pradeep
Oil Corporation had already paid taxes on the amount received
from the appellant. High Court however, interfered with the order of
the Tribunal. The view of the Tribunal was affirmed by the apex
Court reversing the order of the High Court. It is useful to quote
paragraphs 6,7,8,9 and 10:
“6. The Tribunal upon rehearing the appeal held
that though the appellant-assessee was rightly
held to be an 'assessee in default', there could be
no recovery of the tax alleged to be in default once
again from the appellant considering that Pradeep
Oil Corporation had already paid taxes on the
amount received from the appellant. It is required
to note that the department conceded before the
Tribunal that the recovery could not once again be
made from the tax deductor where the payee
included the income on which tax was alleged to
have been short deducted in its taxable income
and paid taxes thereon. There is no dispute
whatsoever that Pradeep Oil Corporation had
already paid the taxes due on its income received
from the appellant and had received refund from
the tax department. The Tribunal came to the right
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conclusion that the tax once again could not be
recovered from the appellant (deductor- assessee)
since the tax has already been paid by the
recipient of income.
7. The High Court interfered with the order passed
by the Tribunal on the ground that the order dated
12.7.2002 of the Income-Tax Appellate Tribunal
has attained its finality since the appeal filed
against the same by the appellant was dismissed
by the High Court on 21.5.2004; the point based
on Ground No. 7 was not taken up in the appeal
preferred by the appellant in the High Court. The
High Court further held that the Income-tax
Appellate Tribunal's order dated 12.7.2002 got
itself merged into the order passed by it on
21.5.2004 dismissing the appeal of the appellant
herein. The High Court came to the conclusion
that the Tribunal could not have reopened the
matter for any further hearing.
8. We have already noticed that the order passed
by the Tribunal to reopen the matter for further
hearing as regards ground No. 7 has attained its
finality. In the circumstances, the High Court could
not have interfered with the final order passed by
the Income-tax Appellate Tribunal.
9. Be that as it may, the circular No. 275/201/95-
IT(B) dated 29.1.1997 issued by the Central Board
of Direct Taxes, in our considered opinion, should
put an end to the controversy. The circular
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declares "no demand visualized under Section 201
(1) of the Income- tax Act should be enforced after
the tax deductor has satisfied the officer-in-charge
of TDS, that taxes due have been paid by the
deductee-assessee. However, this will not alter the
liability to charge interest under Section 201 (1A)
of the Act till the date of payment of taxes by the
deductee-assessee or the liability for penalty
under Section 271C of the Income-tax Act."
10. In the instant case, the appellant had paid
the interest under Section 201 (1A) of the Act and
there is no dispute that the tax due had been paid
by deductee- assessee (M/s Pradeep Oil
Corporation). It is not disputed before us that the
circular is applicable to the facts situation on
hand.”
From the above, it is clear that deductor cannot be treated an
assessee in default till it is found that assessee has also failed to
pay such tax directly. In the present case, the Income tax
authorities had not adverted to the Explanation to Section 191 nor
had applied their mind as to whether the assessee has also failed
to pay such tax directly. Thus, to declare a deductor, who failed to
deduct the tax at source as an assessee in default, condition
precedent is that assessee has also failed to pay tax directly. The
fact that assessee has failed to pay tax directly is thus, foundational
and jurisdictional fact and only after finding that assessee has failed
to pay tax directly, deductor can be deemed to be an assessee in
default in respect of such tax. It is relevant to notice here that
Explanation to Section 191 is confined only to the amount of tax
which was required to be deducted.
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The point next to be considered is as to whether under
Section 201, the Income Tax Authorities could have fastened the
liability of tax which was not deducted at source by the petitioner
and the said tax can be recovered from the petitioner. From the
assessment orders which have been brought on the record, it is
clear that with regard to assessment year 2009-10, the amount of
tax which was required to be deducted at source under section
194H has been determined as Rs. 10,49,60,865 and adding the
interest on the said short deductions total amount directed to be
recovered has been arrived at Rs. 13,57,31,472 similarly with
regard to the financial year 2008-09 total amount on which tax was
required to be deducted at source under section 194H has been
determined as Rs. 2,40,31,583 and after adding interest recovery
has been issued for Rs. 3,26,82,953. The challenge is that there is
no liability of deductor to pay the tax not deducted from assessee
and it is the assessee, who is liable to pay the said tax on the
aforesaid income and liability, if any, of the deductor is of interest
and penalty.
Section 201 (1) provides that where any person who is
required to deduct tax at source does not deduct, or does not pay,
or after so deducting fails to pay, the whole or any part of the tax,
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.
Section 201 (1A) contains a specific provision for payment of
simple interest by any such person who does not deduct whole or
any part of the tax or after deducting fails to pay the tax. Subsection
(2) of Section 201 provides that where tax has not been
paid after it is deducted the amount of tax together with simple
interest shall be a charge upon all the assets of the person or the
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company as may be, referred to under sub-section (1). Sub-section
(2) thus, although enact a provision that in case where tax after
deduction has not been paid by the deductor, the amount of the tax
together with the amount of simple interest thereon shall be a
charge upon all the assets of the deductor, whereas nothing has
been said in sub-section (2) with regard to such charge on a
deductor, who fails to deduct the tax. The reason is obvious, in a
case where deductor fails to deduct the tax, the consequences are
different as compared to in a case where deductor deducts the tax
and does not pay to the Government. It is relevant to notice that
Section 201 (1A) specifically provides for payment of only simple
interest when tax has not been deducted or not paid. Sub-section
(2) provides for creating a charge on the assets of the deductor, if
the tax deducted is not paid. But nothing under section 201 can be
read as to mean that when the tax has not been deducted by the
deductor, the tax not deducted can be realised from the deductor.
No such provision is made under section 201 obviously because
the liability to pay income tax is on the assessee direct in whose
case, the tax has not been deducted. In the present case, the
income tax authorities in proceeding under section 201 apart from
directing recovery of interest from the petitioner has also directed
for recovery of tax which is alleged to be short deducted, which is
beyond the scope of section 201 and is an action of the authorities
without jurisdiction.
A Full Bench of Uttarakhand High Court had considered the
provisions of Section 190,191,201 and other provisions of the Act in
(2011) 334 ITR 79 Director of Income Tax Vs. MAERSK Co. Ltd.
The question arose for consideration was as to when no deduction
for payment of advance tax has been made by the employer,
whether the assessee is liable to pay interest under section 234B
of the Act. The Full Bench considering the provisions of the Act had
held that under the scheme of the Act provisions relating to
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payment of tax and payment of interest operate in two different
areas. It is useful to quote following relevant extract from the
judgment:
“Part A of Chapter XVII of the Act deals with the
general provision for the collection and recovery of
tax. Section 190(1) of the Act provides that
notwithstanding the fact that the regular
assessment in respect of any income is to be
made in a later assessment year, the tax on such
income shall be payable by deduction at source or
by advance payment in accordance with the
provisions of this Chapter. Section 191 of the Act
provides that in the case of income in respect of
which a provision is not made under this Chapter
for deducting income tax at the time of payment
and, in any case, where income tax has not been
deducted in accordance with the provisions of this
Chapter, income tax shall be payable by the
Assessee directly.
xxxxx
Section 201 of the Act provides the consequences
of failure to deduct the tax at source or failure to
pay the tax deducted to the Government. If the
person responsible to deduct the tax at source
fails to deduct the whole or any part of the tax or
after deducting fails to pay the tax as required
under the Act, the person responsible would be
treated as an Assessee in default in respect of the
tax. Section 201(1A) of the Act provides that
without prejudice to the provision of Sub-section
(1), if such person does not deduct the tax or
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having deducted, failed to pay the tax, he or it shall
be liable to pay simple interest @ 15 % per annum
on the amount of such tax from the date on which
it was deductible to the date on which it was
actually paid. Under Section 204 of the Act, the
expression "the person responsible for paying" in
the case of payment of income chargeable under
the head "Salaries" means, the employer.
xxxxxxxxx
Thus, from a combined reading of Section 190,
191, 192, 198, 200, 201, 203 and 204 of the Act, it
is clear that as soon as tax is deducted at source
by the person responsible to make the payment,
the liability of the Assessee to pay the tax gets
discharged. If the tax is not deducted, it remains
payable by the Assessee direct as provided under
Section 191 of the Act. Further, the liability to pay
interest under Section 201(1A) is on the person
who fails to deduct the tax at source is absolute
and is upon the person responsible for deducting
tax at source till the date it was actually paid.
xxxxxx
When the tax is not deducted, the Assessee is
required to pay the tax directly which would be at
the stage of self assessment and not by way of
advance tax. The liability to pay the interest will
however remain upon the person responsible to
deduct the tax at source. The statute has taken
care of the liability for the Assessee under Section
191 of the Act to pay the tax deductible at source
directly if it has not been deducted by the person
responsible for making such deduction. The loss of
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interest on the amount of tax suffered by the
revenue would be compensated by the person
responsible for making such deduction, namely, in
the present case, by the employer as provided
under Section 201(1A) of the Act.
xxxxxxxx
The statute has taken care of the liability to pay tax
by the Assessee under Section 191 of the Act
directly if the tax has not been deducted at source.
xxxxxxxxxx
Looking into the scheme of Chapter XVII of the
Act, it is clear that the provisions relating to
payment of tax and payment of interest operate in
two different areas. If the tax has not been
deducted at source, the liability is upon the
Assessee to pay directly as per Section 191 of the
Act and upon failure to deduct the tax at source,
the liability is upon the employer to pay interest
under Section 201(1A) of the Act. An Assessee
whose income is liable to be deducted at source is
not liable to pay advance tax under Section 208 of
the Act and consequently is not liable to pay
interest under Section 234B of the Act. The
contention of the Appellant that it is open to the
department to proceed against the employer or
against the employee for the recovery of interest is
patently misconceived and, in any case, would not
make the Assessee jointly and severally liable to
pay interest on the amount of tax which was not
deducted at source on the income by the
employer.”
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The Full Bench of Uttarakhand High Court had clearly laid
down that in event the tax at source is not deducted, the liability of
the deductor is to pay interest.
The similar view was been taken by the Gujrat High Court in
(1999) 235 ITR 433 Commissioner of Income Tax Vs. Ranoli
Investment P. Ltd. And others, while considering the provisions of
Sections 201, 190,191 and other provisions of the Act. Following
was laid down in the aforesaid judgment:
“The consequences of failure to deduct the tax at
source or failure to pay the tax deducted to the
Government, are provided for in s. 201 of the Act
as per which, if no deduction is made or if the
deducted amount is not paid as required by the
Act, the person whose duty it was to deduct the tax
at source and to pay, is to be treated as an
assessee-in-default in respect of the tax, but no
penalty is to be charged under s. 221 from such
person, if the ITO is satisfied that the failure to
deduct and pay the tax had occurred due to good
and sufficient reasons. As provided by sub-s. (1)A
of s. 201, without prejudice to the provisions of
sub-s. (1), if such person did not deduct the tax or
having deducted, fails to pay the tax, he or it shall
be liable to pay simple interest at 12 per cent. per
annum on the amount of such tax from the date on
which it was deductible to the date on which it was
actually paid. The liability to pay interest under
sub-s. (1A) of s. 201 imposed on the person who
fails to deduct the tax at source or does not pay the
tax deducted, is absolute and runs throughout the
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period from the date when the tax was deductible
till the date it was actually paid. When the tax is not
deducted at source, it is required to be paid by the
assessee directly but in such a case the liability to
pay interest consequent upon failure to deduct tax
at source will nonetheless remain with such person
who was duty-bound to deduct, till the date when
the tax is actually paid by the assessee or on his
behalf. It is only when the tax has not been paid
after it is deducted, that the amount of the tax
together with the amount of simple interest thereon
referred to in sub-s. (1A) of s. 201 shall be a
charge upon all the assets of the person who has
failed in his duty to pay the tax deducted, as
provided by sub-s. (2) of s. 201. The power to levy
tax by deduction at source is without prejudice to
any other mode of recovery, as stated in s. 202 of
the Act. It will thus, be seen that where the tax is
not deducted, the liability to pay the tax directly will
be on the assessee, but so far as the interest is
concerned, the liability has been fastened on the
person who had failed to deduct the tax while
crediting the interest income to the assessee.”
It is relevant to note that Chapter XVII Part BB, which deals
with collection at source contains a provision under section 206C
(6) which provide that any person responsible for collecting the tax
who fails to collect the tax shall be liable to pay the tax to the credit
of the Central Government. Section 206C deals with “profits and
gains from the business of trading in alcoholic liquor, forest
produce, scrap, etc.” Section 206C (6) is as follows:
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“206C (6) Any person responsible for collecting the
tax who fails to collect the tax in accordance with
the provisions of this section, shall, notwithstanding
such failure, be liable to pay the tax to the credit of
the Central Government in accordance with the
provisions of sub-section (3).”
From the above provision, it is thus, clear that wherever the
liability to pay tax was fastened on the person who failed to deduct
the tax at source a are specific provision was made for that
purpose.
In view of the foregoing discussions, we are of the
considered opinion that in a case where tax has not been deducted
at source, the short deducted tax cannot be realised from the
deductor and the liability to pay such tax shall continue to be with
the assessee direct, whose income is to be charged and a person
who fails to deduct the tax at source, at best is liable for interest
and penalty only. The above issues thus, are decided in favour of
the petitioner.
Now comes issue no. 10 which is in two parts; (i) whether
the assessing authority has taken into consideration all relevant
materials, while passing the assessment order ? (ii) whether the
assessing authority has taken into consideration any irrelevant
material, while passing the assessment order. The petitioner in the
writ petition has specifically referred to and relied on the Circular
issued by the Central Board of Direct Taxes being Circular No. 715
dated 8.8.1995. The said circular was clarified vide letter dated
12.9.1995 of Central Board of Direct Taxes. Copy of the said
Circulars along with letter dated 12.9.1995 have been filed as
Annexure-10 to the writ petition. The clarification was issued on the
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subject “ Circular No. 715 dated 8-8-1995 regarding applicability of
TDS provisions.”. Paragraph 4 of the letter dated 12.9.1995 has
been specifically relied and pleaded in paragraph 32-O of the writ
petition, which is quoted below:
“32-O. That TDS is already deducted on the
amount paid by the advertiser to the advertising
agency under section 194C of the Act and as duly
clarified by the Central Board of Direct Taxes in its
Circular No. 715 dated 8.8.1995. The CBDT has
further clarified the aforesaid circular dated
8.8.1995 in its letter F. No. 133/19/95-tPl-111 dated
12.9.1995 that:
'4. In a situation where the media raises only a bill for
an advertising contract including therein inter-alia
commission at the specified percentage to be retained
by the advertising agency out of the gross payment
received/collected from the advertiser, the media is not
required to deduct tax at source @ 1% under section
194C since such payment is subject to TDS by the
advertiser at the time of payment as clarified in reply to
Question No. 17. Of course, where the media makes a
direct payment to the advertising agency in respect of
professional or technical services, it shall deduct tax at
source @ 5% under section 194J of the Act as clarified
in reply to Question No. 27'. True copies of the
Circular No. 715 dated 8.8.1995 and of the letter dated
12.9.1995 is being filed herewith and marked
collectively as Annexure-10 to this writ petition.
As such the amount of trade discount allowed by the
petitioner to the advertising agencies has already been
subjected to TDS on the payment of the gross amount
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by the advertisers to the advertising agencies. The
same amount cannot be subjected to TDS again and
again by any strained and illegal interpretation of any
other provision of the Act by assuming/deeming the
existence of the jurisdictional facts necessary for the
applicability of the provision.”
Paragraph 32-O has been replied in counter affidavit in
paragraph 40, which is quoted below”
“40. That with regard to the contents of para 32 O
of the affidavit filed in the amendment application it
is submitted that it refers to the CBDT circular
dated 08.08.1995. The order dated 28.03.2012
and 29.03.2012 has made reference to the recent
stand of the CBDT on page no. 15&16. The
remaining allegation has been suitably replied in
the above preceding paragraph need not to be
repeated here again.”
Paragraph 40 of the counter affidavit does not deny the
issuance of the Circular dated 8.8.1995 and the clarification issued
by the Central Board of Direct Taxes on 12.9.1995 but nothing has
been said as to why the said clarification be not be applicable. The
assessing authority in its assessment order has not adverted to the
aforesaid circular dated 8.8.1995 and its clarification dated
12.9.1995, which was the most relevant material while deciding the
issues. Thus, the assessing authority has not applied its mind to a
relevant material i.e. the clarification issued by the CBDT dated
12.9.1995, which clinches the issues.
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While considering issues No. 2 to 6, we have already
observed that the assessing authority has not adverted to the
relevant Rules of INS, which were required to be adverted for
finding out the relationship of principal and agent. We thus,
conclude that assessing authority has not considered the relevant
materials while passing the assessment order which clearly vitiates
the assessment order.
Learned Counsel for the petitioner has submitted that
assessing authority has placed reliance on a wholly irrelevant
material i.e. an article published in newspaper 'Business Standard'
on 31.10.2006. In Paragraph 32 of the order of assessment, the
article has been reproduced. The said article refers to some
correspondences of CBDT with INS. It is useful to quote paragraph
32 of the assessment order which contains the article as follows:
“ It would not be out of context at this juncture to
mention an article published in “Business
Standard” on 31st October 2006. The title of the
article is “Newspaper' ad payments liable to be
taxed”. The article is reproduced as under:
'The Central Board of Direct Taxes has informed
the Indian Newspaper Society that Tax Deducted
at Source (TDS) is liable to be deducted by
newspapers on payments made by them to
advertising agencies.
The CBDT has written to the INS following a
clarification sought by the latter on whether TDS
was deductible on payments made by them to
advertising agents.
The contention of INS was that such payments are
not in the nature of a commission but a discount.
Since the payment was actually a discount, no
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TDS was liable on such payments, it had said.
However, revenue department officials said the
CBDT was of the view that such payments were
covered by the definition of the term ‘commission
or brokerage’ given in Section 194H of the Income
Tax Act and hence liable to TDS.
Section 194H defines ‘commission or brokerage’
as any payment received or receivable, directly or
indirectly, by a person acting on behalf of another
person for services rendered or for any services in
the course of buying or selling of goods or in
relation to any transaction relating to any asset,
valuable article or thing, not being securities.
“The board examined the contention of the INS
that such payment is in the nature of a discount. A
discount is given on sale or purchase of an article
in which there is no agreement between the seller
and the buyer. The board found that the INS
granted accreditation to the advertising agencies
and usually the newspapers would enter into an
agreement with the agencies. Hence, the
newspapers and the agencies were not acting
independently and the agency was in fact an agent
of the newspaper and was being paid a
commission for the services rendered,” an official
said.
It was also observed by the board that the agency
did not book ad space from the newspapers and
sell the space, in turn, to the advertisers, the
officials said.
“The model used by the newspapers is that the
agency informs the newspapers about the
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advertisement and then the paper slots the
advertisement. Hence, once again, the agency is
merely being paid for the services it renders, which
is why such payment is liable to TDS,” the official
added.”
Learned Counsel for the petitioner is right in his submission
that reliance on the said article published in a newspaper was an
irrelevant material. The assessing authority from the aforesaid
article has relied on the opinion of CBDT as disclosed in the said
article to the effect that members of the society are liable to deduct
tax at source on payments made by them to advertising agency. In
paragraph 40 of the counter affidavit as quoted above, the said
stand of the CBDT has also been relied. We are of the view that the
said article was an irrelevant material, which was not required to be
relied by the assessing authority, while passing the assessment
order.
After having considered and answered the issues No. 2 to
10, now we revert on the first submission of learned counsel for the
Department that the writ petition be not entertained and the
petitioner be asked to avail the statutory remedy of appeal provided
under the Act. Learned Counsel for the respondent in support of his
submission that the petitioner be relegated to avail the alternative
remedy, have placed reliance on several judgements which need to
be referred to. Learned Counsel for the respondent has relied on
judgment of the apex court reported in AIR 2001 S.C. 3208 Punjab
National Bank Vs. O.C. Krishnan and others. In the aforesaid
case, a suit was filed by the bank for recovery of money from the
principal debtor as well as the guarantors, which was transferred to
the Debts Recovery Tribunal and was decreed against the principal
debtor and guarantors. The Recovery Officer was directed to
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proceed to realise the amount. The guarantor filed a petition under
Article 227 before the High Court. In said circumstances, the apex
Court laid down following in paragraphs 5 and 6:
“5. In our opinion, the order which was passed by
the Tribunal directing sale of mortgaged property
was appealable under Section 20 of the Recovery
of Debts Due to Banks and Financial Institutions
Act, 1993 (for short "the Act"). The High Court
ought not to have exercised its jurisdiction under
Article 227 in view of the provision for alternative
remedy contained in the Act. We do not propose to
go into the correctness of the decision of the High
Court and whether the order passed by the
Tribunal was correct or not has to be decided
before an appropriate forum.
6. The Act has been enacted with a view to provide
a special procedure for recovery of debts due to
the banks and the financial institutions. There is
hierarchy of appeal provided in the Act, namely,
filing of an appeal under Section 20 and this fast
track procedure cannot be allowed to be derailed
either by taking recourse to proceedings under
Articles 226 and 227 of the Constitution or by filing
a civil suit, which is expressly barred. Even though
a provision under an Act cannot expressly oust the
jurisdiction of the court under Articles 226 and 227
of the Constitution, nevertheless when there is an
alternative remedy available judicial prudence
demands that the court refrains from exercising its
jurisdiction under the said constitutional provisions.
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This was a case where the High Court should not
have entertained the petition under Article 227 of
the Constitution and should have directed the
respondent to take recourse to the appeal
mechanism provided by the Act.”
There cannot be any dispute to the proposition as laid down
by the apex Court in the aforesaid case. In the aforesaid case, the
rights were already adjudicated in the suit which was decreed. In
the said circumstances, the apex court observed that petition under
article 227 ought not to have been entertained and the guarantor
should have been relegated to take recourse to the appeal. The
present is a case where the proceedings have been challenged on
the ground that there was no jurisdictional facts on the basis of
which the income tax authorities could have assumed jurisdiction
under section 201 and further there was no jurisdiction to direct for
recovery of tax which according to the respondent was short
deducted by the deductor. Thus, the present case is clearly
distinguishable. It is further relevant to note that in the present
case, the assessing authority has relied on an article published in
the newspaper namely; 'Business Standard' which article quoted
the opinion of CBDT that the news agency is liable to deduct tax at
source while making payment to advertising agency for
advertisement. Although there are no material brought on the
record by the Department to indicate as to when and in what
circumstances, the CBDT has expressed the said opinion. As noted
above, Delhi High Court in its judgment in the case of M/s Living
Media (supra) has already turned down the stand of the
Department that Section 194H is applicable with regard to payment
to advertising agency by the news agency and the special leave
petition filed by the Department against the Division Bench
judgment of Delhi High Court has been dismissed on 11.2.2009. No
distinguishing feature could be pointed out by the Department as to
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why the said view of the Delhi High Court should not be followed by
the Department. We are of the view that it is not a fit case in which
the petitioner be relegated to remedy of appeal.
Further more, as submitted by learned counsel for the
petitioner, huge liability running in several crores have been
fastened on the petitioner and on the basis of the assessment
order, reassessment notice dated 30.3.2012 has been issued by
the Department for reopening the assessment for the years 2005-
06, 2006-07, 2007-08, 2008-09 and 2009-10, which will again
expose the petitioner, which proceedings would be nothing but
multiplicity of proceedings to be faced by the petitioner which may
prolong years increasing the sufferings of the petitioner, whereas
under law section 194 H of the Act is not applicable in the facts of
the present case. Taking into consideration over all facts and
circumstances of the present case, and the answers given by us,
while deciding the issues No. 2 to 10, we are of the view that the
petitioner has rightly invoked the jurisdiction of this Court under
Article 226 and the petition cannot be thrown out on the ground of
alternative remedy.
The issue next to be considered is as to whether there has
been violation of principles of natural justice in the proceedings
undertaken by the respondents. Learned Counsel for the petitioner
submits that the respondent did not provide adequate opportunity to
the petitioner to place relevant materials and have denied
reasonable time to bring the details, which were asked for from the
petitioner. It is submitted that notice was issued on 19.3.2012 and
within ten days opportunity, hearing and proceedings were
concluded and completed. Whereas, the petitioner was required to
give details pertaining to each and every payments made to
advertising agencies during the relevant period which were in
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numbers more than 1,80,000. The petitioner submits that there are
various centres spread throughout the country which have separate
offices and the petitioner having not maintained any detail of the
TDS discount account, which is being given to the advertising
agencies, the informations were required to be compiled and it was
a herculean task requiring atleast one month's time. In 2004 (266)
ITR 283 V.K. Packaging Industries Vs. Tax Recovery Officer
and others, a Division Bench has made following observation:
“Before parting with the case we would like to state
that we cannot appreciate this practice of the
Income-tax Department of hurriedly passing
assessment orders shortly before the limitation
period is about to expire and justifying this practice
by saying that there was shortage of time and
hence it was impossible to verify the facts properly,
and hence the additions were being made. It is
common knowledge that when the limitation for
making an assessment is about to expire (usually
on 31st March) there is a sudden rush and
scramble to complete the assessments. If this
practice is countenanced the citizens of the
country will be put to great harassment as
exorbitant demands can be made against them
merely by saying that there was shortage of time
and hence additions were being made for this
reason without verifying the facts correctly. It is the
duty of the Department to make a correct
assessment and not to make an excessive
assessment merely on the ground of shortage of
time.
No doubt the Department has to assess and
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collect the correct tax, but for this purpose it
should devise and set up a rational scheme in
accordance with law. It should certainly not make
assessments hurriedly merely by saying that there
is shortage of time (as often happens), thus putting
the citizens to great harassment.”
The caution given by the Division Bench in the aforesaid
case is fully applicable in the facts of the present case. Suddenly in
second quarter of March, the proceedings are started and
concluded within ten days. The Department has rushed through the
proceedings to complete it before 31.3.2012, which evidences
infraction of rules of natural justice. We thus, conclude that the
adequate opportunity to which the petitioner was entitled was not
provided for by the Department and the Department rushed through
the proceedings.
In the result of foregoing discussions, the petitioner is entitled
for the reliefs as claimed in the writ petition. The proceedings
initiated vide notices dated 193.2012 and 21.3.2012 culminated into
assessment orders dated 28.3.2012 and 29.3.2012 are set aside.
The writ petition is allowed.
The parties shall bear their own costs.
Order Date :- 23.5.2012
LA/Rakesh
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