Facts of the Case

The respondent-company, M/s TEJ Quebecor Printing Ltd., employed Mr. Lester Garnett, a Canadian national, on a fixed remuneration package along with perquisites including rent-free accommodation, car with driver and domestic help.

Mr. Garnett filed his individual income-tax returns and paid taxes thereon under Section 140A of the Income-tax Act. During assessment proceedings, the Assessing Officer observed from the employee’s bank account and the assessee's TDS returns that no salary had actually been paid by the company and no tax had been deducted at source under Section 192.

The Assessing Officer nevertheless treated the assessee as an assessee-in-default under Sections 201(1) and 201(1A) and raised 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 arose under Section 192.

Issues Involved

1.      Whether an employer is liable to deduct tax at source under Section 192 merely because salary has accrued or been credited, even when no actual payment has been made?

2.      Whether the assessee could be treated as an assessee-in-default under Sections 201(1) and 201(1A) for non-deduction of tax where salary was not actually paid?

3.      Whether credit entries in an employee’s bank account can be treated as payment of salary for purposes of Section 192?

Petitioner’s Arguments (Revenue)

The Revenue contended that:

·         A substantial question of law arose regarding interpretation of Section 192.

·         Once an amount is credited to the account of an employee, it amounts to receipt by the employee.

·         Reliance was placed upon:

o    Standard Triumph Motor Co. Ltd. v. Commissioner of Income Tax (201 ITR 391)

o    Raghava Reddi v. Commissioner of Income Tax (44 ITR 720)

·         It was argued that if a credit entry constitutes receipt for purposes of Section 5(2)(b), the same principle should apply for deduction of tax at source under Section 192.

·         Therefore, the assessee ought to have deducted tax and should be held liable under Sections 201(1) and 201(1A).

Respondent’s Arguments (Assessee)

The assessee submitted that:

·         Section 192 requires actual payment of salary before TDS liability can arise.

·         Mere accrual or accounting entry is insufficient.

·         There is a clear distinction between:

o    Taxability of income in the hands of the employee; and

o    Employer’s obligation to deduct tax at source.

·         Various TDS provisions specifically use the expression “credit or payment”, whereas Section 192 uses only the concept of payment.

·         Reliance was placed on:

o    Y.S.C. Babu v. Syndicate Bank (253 ITR 1) (AP High Court)

The assessee argued that both accrual and actual payment must coexist before Section 192 can operate.

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 Operates Only Upon Actual Payment

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

Mere accrual of salary does not trigger TDS liability.

2. Parliament Intentionally Used Different Language in Different TDS Provisions

The Court observed that several provisions such as Sections 193, 194A, 194C and 195 specifically permit deduction at the time of either:

·         Credit to account; or

·         Actual payment.

However, Section 192 does not contain similar language.

Therefore, courts cannot rewrite Section 192 to include “credit” when Parliament deliberately omitted it.

3. Actual Payment and Accrual Must Coexist

For Section 192 to apply:

·         Salary must have accrued; and

·         Salary must also have been actually paid.

Without actual payment, deduction at source cannot be enforced.

4. Standard Triumph Motor Co. Decision Was Distinguishable

The Court clarified that:

·         Standard Triumph Motor Co. dealt with taxability under Section 5(2)(b).

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

·         Taxability of income and TDS liability are separate legal concepts.

Therefore, the Supreme Court decision did not support the Revenue’s case.

5. No Evidence of Salary Payment by the Assessee

The Tribunal had recorded a factual finding that:

·         Revenue failed to establish that the assessee had paid salary to Mr. Garnett.

·         Amounts credited in the employee's foreign bank account were shown to have been advanced by Quebecor World, Canada.

·         Such advances were recoverable from the employee and did not constitute salary paid by the assessee.

The High Court refused to interfere with this factual finding.

Important Clarification

This judgment establishes an important principle:

For Salary Income under Section 192

✔ Salary accrued + Salary actually paid = TDS obligation arises.

Mere Salary Accrued or Credited

✘ No actual payment = No TDS obligation under Section 192.

The decision highlights the distinction between:

·         Taxability of income in the employee’s hands; and

·         Employer’s obligation to deduct tax at source.

A credit entry may result in taxability under Section 5(2)(b), but does not automatically create liability under Section 192.

 Sections Involved

·         Section 192 – Tax Deduction at Source (TDS) on Salary

·         Section 201(1) – Consequences of Failure to Deduct Tax

·         Section 201(1A) – Interest for Failure to Deduct or Pay Tax

·         Section 260A – Appeal to High Court

·         Section 255(4) – Reference to Third Member of Tribunal

·         Section 5(2)(b) – Taxability of Income Received or Deemed to be Received

·         Section 140A – Self-Assessment Tax

Link to Download the Order

https://delhihcourt.nic.in/app/case_number_pdf/2006:DHC:24600-DB/61317012006ITA7152005_170944.pdf

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