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 that included rent-free accommodation, a car with driver, and domestic servant facilities.

Mr. Garnett independently filed his income tax returns in India and paid taxes under Section 140A of the Income Tax Act. During scrutiny, the Assessing Officer observed that no salary had been directly paid by the assessee company to Mr. Garnett and no tax had been deducted at source under Section 192.

The Assessing Officer concluded that the assessee was in default under Sections 201(1) and 201(1A) and raised demands for tax and interest on the ground that salary payments had effectively been made.

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

 

Issues Involved

  1. Whether an employer is liable to deduct tax at source under Section 192 when salary has accrued but has not been actually paid to the employee?
  2. Whether mere credit or availability of funds in the employee's account amounts to payment for the purpose of Section 192?
  3. Whether the employer can be treated as an assessee in default under Sections 201(1) and 201(1A) when no actual salary payment has been made?
  4. Whether principles relating to taxability of income under Section 5(2)(b) can be applied while determining liability to deduct tax at source under Section 192?

 

Petitioner’s Arguments (Revenue)

The Commissioner of Income Tax contended that:

  • The amount credited to the employee's account constituted receipt of income by the employee.
  • Once the amount was credited, it amounted to payment for purposes of tax deduction at source.
  • Reliance was placed on the Supreme Court judgment in Standard Triumph Motor Co. Ltd. v. Commissioner of Income Tax (201 ITR 391).
  • The Revenue argued that the distinction drawn by the Tribunal between actual payment and credit was erroneous.
  • The assessee should therefore be treated as an assessee in default under Sections 201(1) and 201(1A).

 

Respondent’s Arguments (Assessee)

M/s TEI Quebecor Printing Ltd. submitted that:

  • Section 192 specifically mandates deduction of tax at source only at the time of actual payment of salary.
  • Salary had not been paid by the assessee to Mr. Garnett.
  • The concepts governing taxability of income under Section 5(2)(b) are distinct from the obligation to deduct tax at source under Section 192.
  • Various provisions of the Income Tax Act expressly provide for deduction on payment or credit, whereas Section 192 refers only to payment.
  • Reliance was placed on Y.S.C. Babu v. Syndicate Bank (253 ITR 1) (AP High Court), wherein it was held that accrual and payment must coexist before TDS liability under Section 192 arises.

 

Court Order / Findings

The Delhi High Court dismissed the Revenue's appeals and upheld the majority view of the Income Tax Appellate Tribunal.

The Court held that:

1. Actual Payment is Mandatory Under Section 192

Section 192 requires deduction of tax only at the time of payment of salary.

The expression "payment" must be given its ordinary meaning and cannot be equated with mere accrual or book entries.

2. Accrual Alone Does Not Trigger TDS Liability

The Court observed that both:

  • Accrual of salary, and
  • Actual payment of salary

must coexist before liability to deduct tax at source under Section 192 arises.

3. Legislative Distinction Must Be Respected

The Court noted that several TDS provisions such as Sections 193, 194A, 194C and 195 expressly require deduction at the time of payment or credit.

In contrast, Section 192 refers only to payment.

Therefore, Parliament intentionally created a distinction, which cannot be ignored by judicial interpretation.

4. Standard Triumph Motor Case Not Applicable

The Supreme Court's decision in Standard Triumph Motor Co. Ltd. v. CIT dealt with taxability of income under Section 5(2)(b), not with TDS obligations under Section 192.

Hence, the decision could not be relied upon for determining TDS liability on salary.

5. Revenue Failed to Prove Actual Payment

The Tribunal had found that the Revenue failed to establish that the assessee had actually paid salary to Mr. Garnett.

The Delhi High Court accepted this factual finding and declined to interfere.

 

Important Clarification

The judgment clearly distinguishes:

Taxability of Income

and

Obligation to Deduct Tax at Source

The Court held that even if an amount may be regarded as received or taxable in the hands of an employee, it does not automatically create an obligation upon the employer to deduct tax under Section 192 unless actual payment of salary is made.

Accordingly:

  • Mere accrual of salary is insufficient.
  • Mere credit entries are insufficient.
  • Actual payment is essential for TDS liability under Section 192.

Sections Involved

  • Section 192 – Deduction of Tax at Source from Salary
  • Section 201(1) – Consequences of Failure to Deduct Tax
  • Section 201(1A) – Interest for Failure to Deduct Tax
  • Section 260A – Appeal to High Court
  • Section 255(4) – Reference to Third Member of ITAT
  • Section 5(2)(b) – Taxability of Income Received or Deemed Received
  • Section 140A – Self-Assessment Tax

Link to Download the Order

https://delhihighcourt.nic.in/app/case_number_pdf/2006:DHC:24387-DB/61317012006ITA7252005_144806.pdf

 

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