Facts of the Case

M/s Tej Quebecor Printing Ltd., a joint venture company, employed Mr. Lester Garnett, a Canadian national, at a fixed remuneration along with various perquisites including rent-free accommodation, car with driver and servant facilities. Mr. Garnett filed his individual income-tax return and paid taxes under Section 140A of the Income-tax Act.

During assessment proceedings, the Assessing Officer noticed that no salary had been paid directly by the assessee to Mr. Garnett and no tax had been deducted at source under Section 192. Based on entries found in the employee's bank account and TDS records, the Assessing Officer concluded that the assessee had defaulted in deducting tax at source and consequently treated the company as an assessee in default under Sections 201(1) and 201(1A), raising tax and interest demands.

The assessee challenged the order, contending that no salary had actually been paid to the employee and therefore no obligation to deduct tax at source had arisen.

 

Issues Involved

  1. Whether tax was required to be deducted at source under Section 192 where salary had accrued but had not been actually paid to the employee.
  2. Whether mere credit entries or alleged credits in the employee's account amounted to payment of salary for the purposes of Section 192.
  3. Whether the assessee could be treated as an assessee in default under Sections 201(1) and 201(1A) for non-deduction of tax at source.
  4. Whether the principles governing taxability of income under Section 5(2)(b) could be applied while determining TDS liability under Section 192.

 

Petitioner’s Arguments (Revenue)

The Revenue argued that:

  • A substantial question of law arose regarding interpretation of Section 192.
  • Once an amount was credited to the account of the employee, it amounted to receipt of income by the employee.
  • Reliance was placed upon Standard Triumph Motor Co. Ltd. v. Commissioner of Income Tax (201 ITR 391) and Raghava Reddi v. CIT (44 ITR 720).
  • It was contended that if crediting an amount constitutes receipt for purposes of Section 5(2)(b), the same principle should apply for Section 192, thereby attracting TDS liability.
  • The Revenue further argued that the salary had effectively been received by Mr. Garnett outside India and the plea of non-payment was only an attempt to avoid TDS consequences.

 

Respondent’s Arguments (Assessee)

The assessee submitted that:

  • Section 192 mandates deduction of tax only at the time of actual payment of salary.
  • There is a clear distinction between taxability of income in the hands of the recipient and the obligation of the payer to deduct tax at source.
  • While some TDS provisions permit deduction upon credit or payment, Section 192 specifically contemplates deduction only upon payment.
  • Reliance was placed on Y.S.C. Babu v. Syndicate Bank (253 ITR 1) (AP High Court), wherein it was held that both accrual and actual payment must coexist for attracting TDS under Section 192.
  • No salary had actually been paid by the assessee to Mr. Garnett and therefore no TDS liability arose.

 

Court Order / Findings

The Delhi High Court dismissed the Revenue's appeals and upheld the Tribunal's majority decision in favour of the assessee.

The Court held that:

1. Section 192 Requires Actual Payment

The language of Section 192 requires deduction of tax "at the time of payment." The expression "payment" must be given its ordinary meaning.

Accordingly:

  • Mere accrual of salary is insufficient.
  • Actual payment of salary is necessary.
  • Accrual and payment must coexist before TDS liability under Section 192 arises.

2. Legislative Distinction Cannot Be Ignored

The Court observed that several TDS provisions such as Sections 193, 194A, 194C, 194D, 194E, 194G, 194H, 194I, 195 and others specifically provide for deduction at the time of credit or payment.

In contrast, Section 192 does not contain such language.

Therefore, Parliament consciously distinguished between provisions requiring deduction upon credit and those requiring deduction only upon payment. Courts cannot rewrite Section 192 to include credit entries within its scope.

3. Standard Triumph Motor Co. Decision Distinguished

The Court held that Standard Triumph Motor Co. Ltd. v. CIT (201 ITR 391) dealt with the taxability of income under Section 5(2)(b), not with deduction of tax at source under Section 192.

The question of whether income is taxable in the hands of the recipient is entirely different from the question of whether the payer is obliged to deduct tax at source.

Hence, the Revenue's reliance on Standard Triumph Motor Co. was misplaced.

4. Revenue Failed to Prove Actual Payment

The Tribunal had found that the Revenue merely assumed that amounts credited in Mr. Garnett's bank account represented salary paid by the assessee.

Evidence showed that the amounts were advanced by Quebecor World, Canada, to enable Mr. Garnett to meet his Indian tax obligations and were recoverable from him upon receipt of salary.

The Revenue failed to establish that the assessee had actually paid salary to Mr. Garnett during the relevant assessment years. The High Court declined to interfere with this factual finding.

 

Important Clarification

This judgment draws a critical distinction between:

Taxability of Income

and

Obligation to Deduct Tax at Source

The Court clarified that:

  • Income may be regarded as received or taxable under Section 5(2)(b) even upon credit in certain circumstances.
  • However, such taxability does not automatically create TDS liability under Section 192.
  • For Section 192, actual payment of salary is an essential condition.
  • Mere accrual of salary or accounting entries do not trigger TDS obligations.

Link to Download the Order

https://delhihighcourt.nic.in/app/case_number_pdf/2006:DHC:24515-DB/61317012006ITA7262005_160101.pdf

 

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