Facts of the Case

M/s TEI Quebecor Printing Ltd., a joint venture company, employed Mr. Lester Garnett, a Canadian national, on a fixed remuneration package along with various perquisites such as rent-free accommodation, car with driver, and servant facilities.

During assessment proceedings, the Assessing Officer observed that:

  • No salary had allegedly been paid directly to Mr. Garnett.
  • No tax had been deducted at source (TDS) under Section 192.
  • Certain credits were reflected in the employee's bank account.
  • The assessee had not deposited TDS on the salary allegedly payable to the employee.

The Assessing Officer treated the company as an assessee in default under Sections 201(1) and 201(1A) and raised demand towards tax and interest.

The assessee challenged the order contending that no salary had actually been paid to the employee and therefore no obligation to deduct TDS arose under Section 192.

 

Issues Involved

  1. Whether TDS under Section 192 is required to be deducted merely because salary has accrued or become payable to an employee.
  2. Whether credit entries in the employee's bank account amount to actual payment of salary for the purpose of Section 192.
  3. Whether the assessee could be treated as an assessee in default under Sections 201(1) and 201(1A) where salary was not actually paid.
  4. Whether the principles laid down by the Supreme Court in Standard Triumph Motor Co. Ltd. and Raghava Reddi regarding taxation of credited income apply to TDS obligations under Section 192.

 

Petitioner’s Arguments (Revenue)

The Revenue contended that:

  • Once an amount is credited to the account of an employee, it amounts to receipt by the employee.
  • Such credit creates an obligation on the employer to deduct tax at source.
  • Reliance was placed upon the Supreme Court decision in Standard Triumph Motor Co. Ltd. v. CIT (201 ITR 391).
  • Since the amount stood credited to the employee's account, it should be treated as payment for purposes of Section 192.
  • Consequently, the assessee was liable for tax and interest under Sections 201(1) and 201(1A).

 

Respondent’s Arguments (Assessee)

The assessee argued that:

  • Section 192 specifically requires deduction of tax only at the time of actual payment of salary.
  • Mere accrual of salary or accounting entries do not trigger TDS liability.
  • The Act contains several provisions where Parliament expressly used the words “credit or payment”; however, Section 192 uses only the concept of payment.
  • Therefore, actual payment is a mandatory condition for deduction under Section 192.
  • Reliance was placed upon Y.S.C. Babu v. Syndicate Bank (253 ITR 1) (AP High Court) which held that accrual and payment must coexist before TDS liability arises under Section 192.

 

Court Order / Findings

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

The Court held that:

1. Section 192 Requires Actual Payment of Salary

The obligation to deduct tax under Section 192 arises only at the time of actual payment of salary.

Both:

  • Accrual of salary; and
  • Actual payment of salary

must coexist before TDS liability can arise.

Mere accrual of salary does not trigger deduction of tax at source.

2. Legislative Distinction Must Be Respected

The Court observed that Parliament consciously used different language in various TDS provisions.

Certain sections permit deduction upon:

  • Credit; or
  • Payment

Examples include Sections 193, 194A, 194C, 194D, 194E, 194G, 194H, 194I, 194J, 194K, 195, 196A, 196B, 196C and 196D.

However, Section 192 is different and requires deduction only when payment is made.

The Court refused to rewrite the statutory language by equating “payment” with “credit”.

3. Standard Triumph Motor Co. Ltd. Not Applicable

The Court distinguished the Supreme Court ruling in Standard Triumph Motor Co. Ltd. v. CIT (201 ITR 391).

That case dealt with:

  • Taxability of income under Section 5(2)(b), and
  • Whether credited royalty constituted receipt of income.

It did not concern deduction of tax at source under Section 192.

Hence, the principles governing taxation of income in the hands of the recipient could not automatically be imported into TDS provisions.

4. Revenue Failed to Prove Actual Salary Payment

The Tribunal had found as a matter of fact that:

  • The Revenue failed to establish that the assessee had actually paid salary to Mr. Garnett.
  • The credits found in the employee's bank account were not proved to have originated from the assessee.
  • Evidence indicated that the amounts had been advanced by Quebecor World, Canada, and were recoverable from the employee later.

The High Court accepted these factual findings and declined to interfere.

5. No Liability under Sections 201(1) and 201(1A)

Since no obligation to deduct TDS under Section 192 arose, the assessee could not be treated as an assessee in default under Sections 201(1) and 201(1A).

 

Important Clarification

The judgment draws a critical distinction between:

Taxability of Income

and

Obligation to Deduct Tax at Source

Even where an amount may be considered taxable in the hands of the recipient due to a credit entry, the employer's liability to deduct TDS under Section 192 arises only upon actual payment of salary.

Thus, for salary income:

Accrual alone is insufficient; actual payment is essential for TDS deduction under Section 192.

 

Sections Involved

  • Section 5(2)(b) – Scope of Total Income of Non-Residents
  • Section 140A – Self-Assessment Tax
  • Section 192 – TDS on Salaries
  • Section 201(1) – Assessee in Default
  • Section 201(1A) – Interest for Failure to Deduct/Pay TDS
  • Section 255(4) – Reference to Third Member of Tribunal
  • Section 260A – Appeal to High Court

Link to Download the Order

Delhi High Court Judgment – Commissioner of Income Tax v. M/s TEI Quebecor Printing Ltd.
https://delhihighcourt.nic.in/app/case_number_pdf/2006:DHC:24601-DB/61317012006ITA7242005_171106.pdf

 

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