Special Court Orders on Tax Deduction Prevail from Ordinance Date, High Court Rules

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Case Name:

Ethnic Holdings (P.) Ltd. vs Income Tax Officer, TDS (High Court of Gujarat)

Tax Appeal No. 955, 956 & 966 of 2005

Date: 16th December 2014

Key Takeaways:

1. Special Court orders on tax matters under the Special Court Act apply from the date the Act came into force, not from later court ruling dates.

2. The Special Court Act's provisions prevail over other laws like the Income Tax Act in cases of conflict.

3. Companies restrained from deducting TDS by Special Court orders cannot be held liable for non-deduction.

4. TDS is not considered income of the tax department, but of the person from whose income it is deducted.

Issue:

Whether the Income Tax Appellate Tribunal (ITAT) was correct in holding that the appellant companies were liable to deduct tax at source under Section 194A (of Income Tax Act, 1961), despite contrary orders from the Special Court?

Facts:

- The appellant companies had taken loans from Fairgrowth Financial Services Ltd (FFSL) in March 1992.

- In June 1992, the Special Court (Trial of Offences Relating to Transactions in Securities) Ordinance was promulgated, and FFSL was notified under it.

- The Special Court passed orders stating that provisions of TDS do not apply to payments made pursuant to its orders and directions.

- The Special Court also ruled that the Income Tax Department has no priority above payments under the Special Court Act.

- Despite these orders, the Income Tax authorities held the appellants liable for not deducting TDS on interest payable to FFSL.

Arguments:

For the Appellants:

- The Special Court orders prohibited them from deducting TDS.

- The Supreme Court had directed maintenance of status quo in related appeals.

- The dispute over ownership of shares pledged for the loan was still pending, making it difficult to determine exact rights and obligations.

For the Revenue:

- The restraining order was passed on September 9, 1996, and should apply only from Assessment Year 1997-98 onwards.

- Section 158 (of Income Tax Act, 1961) does not apply in this case.

Key Legal Precedents:

- Sir Joseph Kay, K.B.E. v. Commissioner Income Tax [1956] 29 ITR 774

- Held that TDS is income of the person from whose income it is deducted, not of the tax department.

Judgement:

The High Court allowed the appeals and set aside the orders of the ITAT, CIT(A), and Assessing Officer . The court held:

1. Any clarificatory order by the Special Court regarding interpretation of law will have effect from the date on which the Act or Ordinance comes into force.

2. The Tribunal erred in holding that the Special Court's order would apply only from the date of the Supreme Court order (September 9, 1996).

3. The Special Court Act's purpose will prevail over other laws.

4. The Tribunal's interpretation that TDS is income of the department is misconceived.

5. The appellants were not liable to deduct tax at source as required under Section 194A (of Income Tax Act, 1961), in light of the Special Court's orders.

FAQs:

Q1: Why did the High Court overturn the ITAT's decision?

A1: The High Court found that the ITAT had erred in interpreting the law, particularly in holding that the Special Court's orders only applied from a later date.

Q2: What is the significance of the Special Court Act in this case?

A2: The Special Court Act was created for fast-tracking the economy, and its provisions prevail over other laws in cases of conflict.

Q3: How does this judgment affect the understanding of TDS?

A3: It reinforces that TDS is not income of the tax department, but of the person from whose income it is deducted.

Q4: What is the key principle established by this judgment?

A4: Orders of the Special Court under the Special Court Act have effect from the date the Act came into force, not from later court ruling dates.

Q5: How does this judgment impact companies dealing with notified entities under the Special Court Act?

A5: It clarifies that such companies cannot be held liable for non-deduction of TDS if they were restrained from doing so by Special Court orders.

1. Since all these appeals arise from the common judgment and order of the Income Tax Appellate Tribunal, Ahmedabad, they are being disposed of by this common judgment.

2. By way of these appeals, the appellant- assessees have challenged the common Judgment and order dated 08.09.2003 passed by the Income Tax

Appellate Tribunal, Ahemabad, [ for the “the Tribunal”] in ITA Nos. 2263, 2264, 2268, 2269, 2273, 2274, 2278, 2279, 2283, 2284, 2288 and 2289/ Ahd/ 2002, whereby the appeals preferred by the assessees were partly allowed by the Tribunal and held that the appellant-assessees were required to deduct TDS for the Assessment Year 1995-96 and 1996-97.

3. While admitting these appeals on 20.04.2006, the Court formulated the following substantial question of law:-

“Whether in the facts and circumstances of the case, the ITAT was right in law in holding that inspite of the Special Court’s direction the appellant was liable to deduct tax at source as required u/s. 194A (of Income Tax Act, 1961) ?”

4. To adjudicate the question framed as

above, the basic facts shorn off unnecessary

details are required to be noticed. The present

appellants-assessee entered into an agreement

with Fairgrowth Financial Services Ltd

[hereinafter referred to as “the FFSL). On

28.03.1992, loan of different amounts were

sanctioned by the FFSL in favour of the

appellants-assessee and the same was accepted by

the appellants-assessees on 30th March, 1992. The

appellants-assessees had taken loan of

Rs.14,98,2500/- from the FFSL against the pledge

of 3,28,000 shares of United Phosphorous Ltd.

(hereinafter referred to as “the UPL”). As per

the terms of the agreement the appellants have to

repay 20% within 60 days and balance 80% within

180 days. The appellants-assesees handed over

3,28,000 shares of UPL together with duly

executed transfer form to FFSL since as per the

agreement the appellants have to repay 20% amount

within 60 days i.e. before 30th May 1992. In the

meantime, on 5/12.05.1992 and 4.06.1992, FFSL

illegally sold 2,28,000 shares to Syndicate Bank

and sub-pledged 1,00,000 shares to NHB, which is

the part of the record.

4.1. In the month of June, 1992, the

Government promulgated Special Court ordinance,

1992. On 2nd July, 1992, custodian appointed for

FFSL. On 10.08.1992, the Syndicate Bank purchased

2,28,000/- shares and presented before UPL for

registering the transfer. On 13.08.1992 UPL

received intimation of sub-pledge of 1,00,000

shares with NHB. On 14.08.1992, the appellants

and other assessees filed Misc. Petition No.10 of

1992 against the Custodian, FFSL, Syndicate Bank,

NHB and UPL. The prayers of the said Misc

petitions read as under:-

“The petitioner therefore pray:-

(a) that it be declared that the said

shares described in schedules being Ex.

“A” and “B” did not and do not belong to

the 2nd respondents as owners thereof and

that attachment of the said shares under

the said Ordinance constitutes only a

limited attachment restricted to the

rights of the 2nd Respondents as pledges

only of the said shares.

(b) that it be declared that the 2nd

Respondents and/or 1st Respondents and/or

bound and liable to return to the

respective petitioners said 3,50,000

shares listed in the schedules being

Ex.”A” and “B” hereto against payment of

balance debt in accordance with

contractual terms to the 1st Respondent

the 2nd Respondent or to such person as

this Hon’ble court directs;

(c) that without prejudice to prayer (b)

above declared that out of said 3,50,000

shares to or the 2nd Respondents or to

such person as the extent of 23.76 per

cent thereof stand and have stood duly

and validly redressed and that the

petitioners, or such of them as may be

held entitled, are entitled to forthwith

to deliver of said 23.76 per cent shares

out of 3,50,000 shares described in

schedules being Ex. “A” and “B” hereto.

(d) That the limited attachment in

respect of 23.76 per cent of the said

shares described in Ex. “A” and “B” be

raised and/or be ordered to be or stand

raised forthwith and the said 23.76 per

cent shares be ordered and directed to be

forthwith delivered and handed over to

the petitioners or such of them as may be

found entitled thereto by either of the

Respondents Nos.1 to 5.

(e) without prejudice to the prayer (d)

above the limited attachment on all the

3,50,000 shares described in schedules

being Ex. “A” and “B” hereto be raised

and Respondents Nos. 1 to 5 be ordered

and directed to deliver all the said

shares to the respective payment of

balance debt and interest in accordance

with contractual terms to such persons as

this Hon’ble Court directs;

(f) This Hon’ble Court be pleased to give

directions to the petitioners in respect

of the payment of the balance debt on the

due dates to the 1st or 2nd Respondents

against delivery to the respective

petitioners of the shares listed in the

schedule being Ex. “A” and “B” hereto.

(g) That it be declared that 3rd and 4th

Respondents respectively have not

acquired and are not entitled to any

right title or interest in the said

2,50,000 shares described in Exhibit “A”

hereto and the 1,00,000 shares described

in Exhibit “B” hereto or any part

thereof.

(h) that it be declared that purported

sale or transfer of 2,50,000 shares

described in schedule Ex. “A” hereto by

2nd Respondents to the 3rd Respondents and

the purported sale or transfer of

1,00,000/- shares in exhibit “B” hereto

by the 2nd to the 4th Respondents are

illegal, null void of no effect or not

binding on the petitioners or any one of

them.

(I) that without prejudice to prayer (g)

and/or (h), the purported sale or

transfer of 2,50,000 shares described in

schedule being Ex. “A” hereto by 2nd

Respondents to the 3rd Respondents and the

purported sale of transfer of 1,00,000/-

shares described in Exhibit “B” hereto by

Respondent 2 to Respondent 4 be set aside

and/or cancelled.

(j) that 3rd and 4th Respondents

respectively by themselves their servants

and agents be restrained from in any

manner selling and/or transferring and/or

dealing with disposing of or parting with

possession of or alienating or creating

any right title or interest in favour of

anyone else in respect thereof or

claiming or exercising any right title,

interest or benefit in respect of the

2,50,000/- shares described in Exhibit

“A” and the 1,00,000 shares described in

Exhibit”B” hereto or acting on the basis

of relative transfer forms executed by

the respective petitioners and handed

over to the second Respondents in respect

of the said 3,50,000 shares.

(k) That the 5th Respondent by themselves

their servants or agents be restrained

from in any manner transferring from the

names of the respective petitioners to

the names of 3rd and/or 4th Respondents

respectively or any one else the said

2,50,000 described in Exhibit “A” and/or

1,00,000 shares described in Ex.”B” or

any part thereof and/or from acting on

the basis of any transfer form/s lodged

with them in relation to any of the said

3,50,000 shares described in Exhibit “A”

and “B” hereto.

(l) that pending the hearing and final

disposal of this petition interim reliefs

in terms of prayer (j) and (k) above be

granted.

(m) that pending the hearing and final

disposal of this petition, the Court

Receiver, High Court, Bombay or some

other fit and proper person be appointed

Receiver of said 3,50,000/- shares

described in the schedules being Exh. ”A”

and “B” hereto and of the relative

transfer forms and all rights and

benefits attached to and incidental to

the said shares with all powers under

Order XL: rule 1 (of Income Tax Rules, 1962) of the Code of Civil

Procedure, 1908 including power to take

actual physical possesion of the said

3,50,0000 shares described in the

schedules being Ex.”A:” and “B” hereto

(from whomsoever they may be lying with)

and of the relative share certificates

and the relative transfer form (from

whomsoever they may be lying with) and to

hand over to the respective petitioners

against tender of balance debts and

interest by the petitioners in such

manner as this Hon’ble Court may direct

and to exercise voting and all right

attached and/or incidental to all the

said shares according to the instructions

of the respective petitioner-holders

thereof.

(n) for ad-interim reliefs in terms of

prayers (l) and (m) above.

(o) for costs of this petition

and

(p) for such other and further reliefs as

this Hon’ble Court may deem fit in the

circumstances of the case.

4.2. On 18.08.1992, the Ordinance was

replaced by the Special Court Act, 1992. In some

of the matters, the Special Court held that

provisions of TDS do not apply to “payments made

pursuant to Orders and Directions of Court” and

directed the party to recover on its own TDS paid

from Income Tax department and not to deduct tax

at source. On 15/20.08.1994, the Special Court

passed an order and accepted the ownership of the

appellants-assessee but restrained the

appellants-assessee from transferring the shares

in any manner whatsoever. On 4th April, 1994, the

Special Court clarified that the earlier order

was not an interim order, but the same was in the

nature of final order.

4.3. Against the order of the Special Court,

the Syndicate Bank as well as the appellants-

assessees filed appeals before the Supreme Court

of India under the statute. The Apex Court vide

order dated 12.09.1994 and 07.10.1994, admitted

both the appeals and directed both the parties in

each appeal to maintain status quo. However,

subsequently, on 20th February, 1995, in one of

the matters, Special Court has framed a ruling

that Income Tax Department has no priority above

the payments under the Special Court Act and the

said order is passed after hearing IT department

and FFSL Custodian. Relevant paragraph of the

said judgment read as under:-

...thus no penalty or interest can

be imposed for non-fulfillment of an

act which a Notified party is

prevented from doing by reason of

the Special Court Act. In such cases

even though the provisions of some

other Act or contract lay down

consequences for non-performance,

the provisions of the Special Courts

Act will prevail. This is because in

such cases there would be a conflict

between the provisions of the

Special Courts Act and that other

law and/or contract. In cases of

such conflict, the provisions of the

special Court Act must prevail. To

take an example, under Section 234B (of Income Tax Act, 1961)

of the Income Tax Act, every

assessee is liable to pay advance

tax. All parties were Notified

between June, 1992 to August 1992.

All of them would be liable to

advance taxes for the financial year

ending March 1992 and for the

subsequent years. However, as seen

earlier, taxes only upto Assessment

Year 1992-93 and for the subsequent

year. However, as seen earlier in

priority. Those would have to rank

as ordinary debts under Section

11(2)(c). this therefore, can only

be released after the entire

distribution has taken place. Even

if the Notified party were to

advance tax, the Court would refused

it. Thus monies for payment of

advance tax have not been released.

Thus a Notified party has been

prevented from paying advance tax.

Thus, under the Special Courts Act,

there is a legal disability to pay

advance Tax. Yet under the Income

Tax Act there is a compulsion to pay

advance tax. There is a conflict

between the provision of the Special

courts Act and the Income Tax Act.

The provisions of the Special Courts

Act must prevail. Under the Income

Tax Act if Advance tax is not paid,

for such non-payment interest can be

levied. This obviously on the

footing that the assessee is in

default. However a Notified party

has been prevented by law from

paying Advance Tax. He is not a

defaulting party. He has not paid

advance Tax because of legal

restraint on him. The law has

prevented him from paying advance

Tax. In my view, in such cases i.e.

where there is a conflict between

the provisions of the Special Courts

Act and some other Act/contract, the

contrary provisions must necessarily

give way. If there is this legal

disability, then there is no

question of the Notified party being

foisted with the liability to pay

interest and/or penalty. Similarly

under Section 220(2) (of Income Tax Act, 1961), a Demand Notice may have

been served on a party. That demand

Notice may be for tax, interest

and/or penalty. Under the Income Tax

Law, the sum specified in the Notice

must be paid within 30 days. Under

the Income Tax Act, if the same is

not paid within 30 days, the

assessee is liable to pay interest

at 1.5% per month. Here again by

reason of the legal disability,

imposed by the special Courts Act,

the Notified party is not in a

position to pay the amounts demand

by that demand Notice. If that is

so, then the Notified party cannot

be said to be default. Then there is

no question of the Notified party

become liable to pay interest under

Section 220(2) (of Income Tax Act, 1961)....”

4.4. Thereafter, on 29.03.1995, Special Court

passed an order in the suit filed by the

Syndicate Bank wherein the Syndicate Bank wanted

to declare that it is the owner of the shares or

that it must get back the purchase price paid by

it. The said suit was stayed by the Court.

Therefore, the question of repayment of loan of

interest was out of question.

4.5. The Special Court gave another ruling in

continuation of the 1st ruling after hearing the

advocates for the CBDT, Income Tax Department and

FFSL that its 1st decision has apply even in case

of TDS payment and that no one can pay over to

Income Tax Department any amount of TDS in spite

of status quo order passed by the Apex Court in

case of the petitioner on 12.09.1994 and

7.10.1994. On 13.05.1998, the Apex Court disposed

of the both the appeals against the 1st ruling by

dismissing the appeal. The Apex Court in

paragraph No.26 and 26 observed as under:-

26. Every kind of tax liability of

the notified person for any other

period is not covered by Section

11(2) (a), although the liability may

continue to be the liability of the

notified persons. Such tax liability

may be discharged either under the

directions of the Special Court under

Section 11(2)(c) (of Income Tax Act, 1961), or the taxing

authority may recover the same from

any subsequently acquired property of

a notified person (vide Tejkumar

Balakrishna Ruia v. A.K. Menon

(1997) 9 SCC 123) or in any other

manner from the notified person in

accordance with law. The priority,

however, which is given under Section

11(2)(a) to such tax liability only

covers such liability for the period

1.4.1991 to 6.6.1992.

27. At what point of time should

this tax liability have become

quantified by a legal assessment

which is final and binding on the

notified person concerned ? It is

contended before us by some of the

parties that only that liability

which has become ascertained by final

assessment on the date of the Act

coming into force should be paid

under Section 11(2)(a) (of Income Tax Act, 1961). Others

contended that it should have been so

ascertained on the date of the

notification. The third contention is

that it should have been so

ascertained on the date of

distribution. Since we have held that

tax liability under Section 11(2)(a) (of Income Tax Act, 1961)

refers only to such liability for the

period 1.4.1991 to 6.6.1992, it would

not be correct to hold that the

liabilities arising during this

period should also be finally

assessed before 6.6.1992 (the date of

the Act) or the date of the

notification. It must refer to the

date of distribution. The date of

distribution arrives when the Special

Court completes the examination of

claims under section 9-A (of Income Tax Act, 1961). If on that

date, any tax liability for the

statutory period is legally assessed,

and the assessment is final and

binding on the notified person, that

liability will be considered for

payment under Section 11(2)(a) (of Income Tax Act, 1961),

subject to what follows.

4.6. Thereafter, on 3.05.1999, Special Court

gave further direction in the Misc. petition

No.28 of 1999 that there can be no deduction of

tax at source and that payers must make payments

without deduction of tax at source and that the

whole income is to be paid over to the Custodian.

Paragraph No.8 of the said order of the Special

Court reads as under:-

8. The law is now well settled by

the Supreme Court judgment dated 13th

May, 1998 in Civil Appeal No.5326 of

1995. The Income Tax Department can

get no priority in respect of any tax

which is not for the statutory period

i.e. 1st April 1991 to 6th June, 1992.

As has been held by the Supreme Court

tax for a subsequent or any other

period can only be recovered by the

Income Tax Authorities under Section

11(2)(c) or from subsequently

acquired property or income of the

Notified party which do not stand

attached. The tax Deduction at source

is on interest and dividend accruing

on attached assets. Interest and

dividends on attached assets are also

attached assets. Tax for a subsequent

period is sought to be deducted in

priority. Attached assets are sought

to be taken away in a priority not

envisaged by the said Act. Provisions

regarding advacne tax and tax

deduction at source or in direct

conflict with the provisions of

Section 11 of the Income Tax Act, 1961. By virtue

of Section 13 of the Income Tax Act, 1961, the

provisions of the said Act must

prevail. The reasoning given in this

behalf in the Order dated 20th

February 1995 applies fully over

here.”

4.7. Thus, by the impugned judgment and

order, the appellants-assessees were directed to

deduct the tax at source and pay the same to the

credit of the Central Government. Being aggrieved

and dissatisfied with the same, the appellants-

assessees have filed these appeals.

5. Mr. Soparkar, learned senior advocate

for the appellants-assessees submitted that the

appellants-assessees have an obligation to pay

interest to the Custodian of FFSL, which is

notified party. The Special Court conclusively

held that the provisions of TDS do not apply to

the alleged liability to pay interest to the

Custodian by order dated 14.08.1993, 20.2.1995

and 9.9.1996 and 3.5.199. Therefore, he submitted

that in view of the above orders, there is no

question of the appellants’ being guilty of non-

deduction of tax at source.

5.1. He further submitted that the Apex Court

while admitting the appeals filed by the

appellants and Syndicate Bank directed the

parties to maintain status quo. Therefore, the

appellants were not obliged to pay over the

amount of TDS in a separate account or to the

Custodian.

5.2. According to the learned senior advocate

for the appellants, in view of the order dated

14th August, 1993, i.e. much before 31st March

1994, the date on which the alleged TDS liability

arose, passed by the Special Court in Misc.

Application No.158 of 1993, the appellant was

bonafidly under the impression that there was no

obligation cast upon him to deduct any tax at

source.

5.3. Learned senior advocate for the

appellants-assessee further submitted that the

dispute between the Syndicate Bank and the

appellants-assessee is pending where Syndicate

Bank claims to be the owner of the shares.

Therefore, it is difficult to determine the exact

rights and obligations of the parties and

ultimately, if the said suit is decreed and it is

held that the appellant has sold away its shares

to the said Bank, then in that event the amount

of loan received by the appellants would not be

regarded as a loan at all.

5.4 Learned senior counsel for the appellant

has submitted that considering the aforesaid

facts, it is very clear that the appellants-

assessees were constrained/restrained/prohibited

under the statute and by the orders of the

Special Court and the Supreme Court. In spite of

that the Tribunal while considering the issue in

paragraph No.49, 50, 53, 54, 55 observed that the

order of the Special Court would not prohibit the

appellants in any manner whatsoever.

5.5. He has relied on the provisions of

Section 198 (of Income Tax Act, 1961) and 199 of the Income Tax Act, which

reads as under:-

Tax deducted is income received.

198. All sums deducted in accordance

with the foregoing provisions of this

Chapter shall for the purpose of

computing the income of an assessee be

deemed to be income received.

Provided that the sum being the tax

paid, under sub-section (1A) of

section 192 (of Income Tax Act, 1961) for the purpose of

computing the income of an assessee,

shall not be deemed to be income

received.

Credit for tax deducted.

199. (1) Any deduction made in

accordance with the foregoing

provisions of this Chapter and paid

to the Central Government shall be

treated as a payment of tax on behalf

of the person from whose income the

deduction was made, or of the owner,

or of the depositor or of the owner

of property or of the unit-holder, or

of the shareholder, as the case may

be.

(2) Any sum referred to in sub-

section (1A) of section 192 (of Income Tax Act, 1961) and paid

to the Central government shall be

treated as the tax paid on behalf of

the person in respect of whose income

such payment of tax has been made.”

5.6. Mr. Soparkar, learned senior advocate

has strongly relied on the decision of the Bombay

High Court in the case of Sir Joseph Kay, K.B.E.

v. Commissioner Income Tax, reported in [1956] 29

ITR 774.

5.7. By relying on the above decision,

learned senior counsel for the appellants-

assessees submitted that all the authorities

namely the Assessing Officer, the Commissioner of

Income Tax (Appeals) and the Tribunal have

committed grave error in directing the

appellants-assessees to deduct TDS, which is

contrary to order of the Special Court, which was

confirmed by the Supreme Court. Therefore, he

urged that this Court may allow these appeals and

quash and set aside the the orders of all the

authorities below.

6. On the other hand, Mr. Mehta, learned

advocate for the respondent-revenue has supported

the impugned judgment and order of the Tribunal

and submitted that the submissions canvassed by

the learned senior advocate for the appellants-

assessees does not deserve consideration since

the order of restrainment was passed on 9th

September, 1996 and the same shall apply from the

Assessment Year 1997-98 onwards. He submitted

that Section 158 (of Income Tax Act, 1961) shall not

apply in the case of the appellants-assessess,

but it is in the case of third party.

6.1. He further submitted that the present

appeals deserve to be dismissed in view of the

concurrent findings of the authorities below as

also the Tribunal. Therefore, he urged that this

Court may dismiss the present appeals and confirm

the order of the Tribunal.

7. We have heard Mr. Soparkar, learned

senior advocate appearing for the appellants-

assessee and Mr. Mehta, learned advocate

appearing for the respondent-revenue and perused

the material on record. It is not in dispute that

Special Court Ordinance came into force on 30th

June, 1992 and the Custodian was appointed on 2nd

July, 1992. Needless to say that the provisions

of a Special statute would come into force from

the date on which the Notification is issued. Any

clarificatory order by Special Court or Supreme

Court which is in the nature of interim order or

final order regarding interpretation of law will

have an effect from the date on which the Act or

Ordinance comes into force.

8. In the present case, we find that the

Tribunal has committed serious error in

interpreting the provisions of law. It goes

without saying that Special Court was created for

fast tracking the economy. The purpose for which

the Special Court was enacted will prevail over

the other law. Hence, we are of the opinion that

the Tribunal has committed grave error in holding

that the order of the Special Court will not

prevail and that the TDS is required to be

deducted by interpreting that it will apply only

from the date of the order of the Supreme Court

i.e. 9th September, 1996. In our view, the

Tribunal has committed an error of law in

restraining / prohibiting / constraining. Apart

from that the appellants-assessees have not made

any payment to the Department but have so simply

made provision for it.

9. Further, the observations of the

Tribunal that TDS is income of the department,

in our view is contrary to the observations of

the Bombay High Court in the case Sir Joseph Kay,

K.B.E. (supra), wherein it is held in as under:-

“ What is urged by Mr. Palkhivala is

that under this rule there is no

liability upon Sir Joseph Kay to pay

the tax. It is not his liability to

pay the tax that is being discharged

by the insurance companies. He say

that the law imposes a liability upon

the payer himself and it is that

liability, a substantive liability,

which is being discharged when the

payer pays tax to the revenue in

England. The contention therefore is

put forward that what Sir Joseph kay

is entitled to in view of this

provision of law is not 500 pound but

only 225 pound. Attention is drawn to

the provisions of Section 18 (of Income Tax Act, 1961) of our

Act and it is pointed out that the

scheme of deduction under the two

Acts is fundamentally different. It

is said that under Section 18 (of Income Tax Act, 1961),

although an obligation is cast upon

the payer of salaries etc. to deduct

the tax at the source, the person who

is entitled to the salary still

remains liable to pay the tax if the

tax has not been deducted, and it is

made clear by section 18 (of Income Tax Act, 1961) that the

person deducting the tax at the

source is deducting it on behalf of

the person entitled to the salary. It

is also pointed out that under

section 18(4) (of Income Tax Act, 1961) it is expressly

provided:-

“All sums deducted in accordance

with the provisions of this

section shall, for the purpose

of computing the income of an

assessee, be deemed to be income

received.”

It is said that in absence of these

provisions under the English law the

only part of the annuity which became

the income of Sir Joseph kay is 225

pound and not 500 pound, that when

the insurance companies deducted 275

pound they were not deducting the sum

on behalf of Sir Joseph Kay in order

that they should pay the tax on

behalf of Sir Joseph Kay, but they

were deducting it because the English

statute cast an obligation upon the

insurance companies to retain this

sum and it was by reason of this

statutory obligation that this sum

was being paid. What we must really

look at is the substance of the legal

provisions to which reference has

been made and on which reliance has

been place and we must look at the

substance of the matter from only one

simple point of view. Whose income

was this 275 pound which was retained

by the Insurance companies under the

provisions of rule 19 (of Income Tax Rules, 1962) ? It is clear

that the tax was payable on the

annuity due to Sir Joseph Kay and it

was by a legal fiction that the

income of Sir Joseph Kay was deemed

to be the income of the insurance

companies. That legal fiction was

imported by the English law in order

to collect the tax from the prayer of

the annuity rather than from the

annuitant himself. But the legal

fiction cannot be possibly changed

the patent fact that the annuity is

that of Sir Joseph Kay and the whole

of 500 pound is the income of Sir

Joseph Kay and no part of it is the

income of the Insurance companies. It

is then urged that even though 500

pounds may be due as a debt by the

insurance companies to Sir Joseph

Kay, the fact that a debt had accrued

to Sir Joseph Kay did not result in

law in an income accruing to Sir

Joseph Kay. That proposition of law

is perfectly sound. A distinction has

been drawn (See Seth Lalbhai v.

Commissioner of Income Tax [1952] 22

ITR 13) between a debt accruing or

arising and an income accruing or

arising, and the debt does not become

income till it comes in, or put in a

different language, the debt does not

become income till it has been

discharged. What Mr. Palkhivala

argues is that although the debt

might have been 500 pounds, 275

pounds were extinguished by statute

and only 225 pounds was discharged by

the insurance companies, and

therefore, the only amount which

became the income of Sir Joseph Kay

was 225 pounds and not 500 pounds.

This is completely misreading both

the position in law and the actual

facts that emerge in this reference.

This is no extenguishment of the debt

of part of it by statute. What the

statute provides is that on the

insurance companies statute. What the

statute provides is that on the

insurance companies paying 225 pound

to Sir Joseph Kay the full debt is

discharged because the insurance

companies have retained 275 pound

which are to be paid as tax on 500

pound. Therefore, this is not a case

of extinguishment of part of the debt

viz. 275 pound but a discharge of the

debt in the manner provided by law.

Nor is Mr. Palkhivala right when he

contends that the debt is only partly

paid and not fully paid. He says that

even if there is no extinguishment,

only part of the debt in fact has

been paid to Sir Joseph Kay and that

part is 225 pounds and not the whole

of 500 pound. In substance the whole

debt of 500 pound has been paid to

Sir Joseph Kay. The mode of payment

is this. 225 pounds have been

actually paid in case to Sir Joseph

Kay, and the balance of 275 pounds is

retained by the insurance companies

in order to pay the tax which is

payable on the sum of 500 pound. It

is difficult to understand how the

position is different from what it

would have been if the insurance

companies had paid the full sum of

500 pounds to Sir Joseph Kay and Sir

Joseph Kay would have paid 275 to the

Income Tax authorities which he was

liable to pay. Surely Mr. Palkhivala

then could not have contended that

the full sum of 500 pounds has not

been paid to him or that the debt has

not been discharged. Instead of

permitting the insurance companies to

pay the full sum of 500 pounds to

Sir Joseph Kay and then collecting

275 from him, the taxing machinery

set up in England provides that the

taxing authorities will recover 275

pounds from the Insurance companies

themselves and permit the insurance

companies only to pay 225 pounds to

Sir Joseph Kay, but you cannot get

away from the salient fact that they

are paying 275 pounds on the income

of Sir Joseph Kay and not on their

own income.

It is pointed out that in the

absence of provision like section

18(4) you cannot consider 275 pound

as the income of Sir Joseph Kay.

Section 18(4) (of Income Tax Act, 1961) does not make

something, which is not the income of

the person to whom the salary is due,

his income. The legal fiction

introduced by section 18(4) (of Income Tax Act, 1961) is that

the person, part of whose salary has

been deducted at the source, shall be

deemed to have received that part of

the income for the purpose of tax.

But what he is deemed to have

received was his income and to

repeat, there is no fiction

introduced in section 18(4) (of Income Tax Act, 1961) which

makes something the income of the

person which was not in fact his

income. But the fiction that has been

introduced in the English law is that

the income of Sir Joseph Kay is to be

considered the income of the payer of

the annuity. But what we are

concerned with is not the fiction but

the fact and the fact remains and no

argument can undermine that fact that

500 pound was the income of Sir

Joseph Kay and no part of it was the

income of the payer or of any one

else.

Any doubt that there might be

with regard to the true position is

completely set at rest by the

provisions to which our attention has

been drawn with regard to the refund

of income tax. If Sir Joseph Kay was

not liable to pay tax on this sum of

500 pound which tax has been paid by

the insurance companies by reason of

his total income, he would be

entitled to get either a refund of

the full amount or a proportionate

refund. It is impossible to contend

that sir Joseph Kay should obtain a

refund with regard to payment of tax

in respect of something which is not

his income. The answer given by Mr.

Palkhivala is that the Income Tax Act

of 1918, Schedule V, paragraph 17,

statutorily makes the deduction which

has been made by the payer of the

annuity part of the total income of

the annuitant, and it is because of

this that the annuitant becomes

entitled to claim the refund. But the

very reason why the annuitant is

allowed to include in his total

income the deduction made by the

payer is that the payer is paying tax

out of the income of the annuitant

and when the annuitant prepares a

statement of his total income he is

entitled to include in it what has

been deducted out of his income for

the purpose of payment of tax.

Therefore, looking to the whole

scheme both of deduction and of

provisions with regard to refund, it

is clear that the English law does

not overlook or ignore the fact that

the annuity payable is the income of

the annuitant. Indeed it would be

extraordinary if the British

Parliament overlooked the obvious

fact, and that the annuity being the

income of the annuitant the easier

and the more convenient way of rather

than from the annuitant himself. But

having made that provision it

proceeds to make it clear that the

annuitant has received the full

amount of the annuity, that the payer

receives a proper discharge, and that

in proper cases the annuitant is

entitled to refund of tax if he was

not liable to pay tax which the payer

of the annuity has paid. “

10. In that view of the matter, the

interpretation put forward by the Tribunal that

TDS is income of the Department is misconceived.

Therefore, in our view, restrained TDS could not

have been deducted.

11. In that view of the matter, we are of

the considered opinion that the Tribunal was not

right in passing the impugned judgment and in

holding that appellants-assessees were liable to

deduct tax at source as required under under

Section 194A (of Income Tax Act, 1961), in spite of the order of

the Special Court.

12. For the foregoing reasons, all these

appeals deserve to be allowed and the same are

accordingly accordingly. The impugned judgment

and order of the Tribunal as well as the order of

the Assessing Officer and CIT(A) are hereby

quashed and set aside. Accordingly, we hold that

the Tribunal was not right in law in holding that

the the appellants-assessess were liable to

deduct tax at source as required u/s. 194A (of Income Tax Act, 1961) of the

Act

(K.S.JHAVERI, J.)

(K.J.THAKER, J)