(a) Income-tax---

----Deduction of tax at source---Interest---Bank---Interest on deposits of non-residents---No order treating Bank as agent of non-resident---Bank liable to deduct tax on interest---Indian Income Tax Act, 1961, Ss. 163 & 195.

Under the provisions of section 195 of the Income Tax Act, 1961, liability has been foisted upon any person responsible for paying to a non- resident, inter alia, any interest, not being "interest on securities" to deduct income-tax thereon at the rates in force. This liability will not arise if such person is himself liable to pay any income-tax thereon as an agent. The liability to pay as agent does not arise automatically but will depend upon certain steps that have to be taken in that regard by the Income-tax Officer. Unless the assessee is able to establish that it is liable to pay income-tax on the interest income as a statutory agent of the non-resident depositors, its obligation to deduct income-tax on the interest income remains.

In the event of the failure of any such person to deduct or to pay the tax on the sums payable to a non-resident or a company, section 201 provides that "such person" shall be deemed to be an assessee in default in respect of such tax. The plain effect of section 201 is that such a person who has either failed to deduct the tax or to pay the same t6 the credit of the Central Government may be subjected to the recovery proceedings which are available under the Act in respect of assessees in default.

(b) Income-tax---

----Deduction of tax at source---Delayed payment of tax deducted ---Interest-- Bank not paying in time tax on interest payable on deposits of non-residents-- Bank liable to pay interest under S. 201(1-A)---Recovery of tax to be deducted becoming time-barred---Bank still liable to pay interest under S.201(1-A)-- Indian Income Tax Act, 1961, S. 201.

The assessee was carrying on the business of banking through its numerous branches in India. In the course of its business, it allowed interest on deposits in savings bank accounts and fixed deposit accounts to a number of non-resident customers. The Income-tax Officer found that the tax deducted from the interest allowed to such customers was not paid to the credit of the Government of India. After he initiated enquiries in this behalf, the assessee paid the tax. He, therefore, levied interest under section 201(1-A) for delayed payment of tax. The Tribunal upheld this order. The assessee contended that the obligation to deduct tax under section 195 arises only at the time of payment of interest and not at the time of credit of the interest. The assessee also raised the plea that since the right to recover the tax by treating the appellant as an assessee in default had already become time-barred, no interest on it could be recovered by the Revenue. On a reference:

Held, (i) that, in the instant case, the Income-tax officer had not proceeded to assess the interest income of the non-resident depositors by treating the assessee-bank as the representative assessee of all the non-resident depositors. The assessee was itself liable to pay income-tax in respect of interest to be paid to its customers and the assessee was liable to deduct income-tax on such interest under section 195.

(ii) That the assessee-bank was liable to pay interest under section 201(1-A), even though, admittedly, the recovery of the tax to be deducted in the year in which the credit for interest was given to the non resident, had become time-barred.

Grindlays Bank Ltd. v. CIT (1992) 193 ITR 457 (Cal.) fol.

CIT v. Shyam Sundar Tea Co- (Pvt) Ltd. (1978) 114 ITR 116 (Gauhati) and Bunge & Co. Ltd. v. ITO (1971) 79 ITR 93 (Cal.) ref.

Dr. D. Pal for the Assessee.

S.K Mitra and D. K Shome for the Commissioner.

JUDGMENT

SUHAS CHANDRA SEN, J.---The Tribunal has referred the following questions of law to this Court at the instance of the assessee under section 256(1) of the Income-tax Act, 1961:

"(1)Whether, on the true and proper interpretation of section 195 of the Income Tax Act, 1961, the assessee was itself liable to pay any income tax in respect of interest to be paid to its customers as an agent and whether, on the facts and in the circumstances of the case, the assessee was liable to deduct income-tax on such interest under section 195 of the Income-tax Act, 1961?

(2)Whether, on the facts and in the circumstances of the case and on a true and correct interpretation of section 201(1-A) of the Act, the assessee-bank was liable to pay any interest under section 201(1-A) when admittedly, the amount of interest in respect of which the tax is to be deducted in the year in which the credit was given to the non resident had become time-barred?

(3)Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that it was primarily the duty of the assessee-bank to give the actual dates of payments to the non resident customers if it wanted to avoid liability on the ground that they were different from the dates of credit and, consequently, in not accepting the assessee's appeal in its entirety?

(4)Whether, on the facts and in the circumstances of the case, the Tribunal was justified in not quashing the order of the Income-tax Officer under subsection (1-A) of section 201 and instead sending it back to the Income-tax officer with the direction that he should ascertain the cases in which interest had been paid by the bank and yet tax had not been deducted by the bank in respect of the said interest and of profited in the Government Treasury and charge interest under subsection (1-A) of section 201 in respect of such cases only?"

The facts narrated in the statement of the case are as under:

"The assessee is carrying on the business of banking through its numerous branches in India. In the course of its business, it allowed interest on deposits in savings bank accounts and fixed deposit accounts to a number of non-resident customers. The Income-tax Officer found that the tax deducted from the interest allowed to such customers was not paid to the credit of the Government of India in respect of 24 branches of the assessee in accordance with rule 30 of the Income-tax Rules, 1962. After he initiated enquiries in this behalf, the assessee paid the tax In respect of one branch at 10, Parliament Street, New Delhi, alone, the tax which had been credited to the Government (but was deposited after the enquiries) amounted to Rs.4,54,979. As the assessee-bank did not furnish the particulars as prescribed in the Rules, the Income-tax Officer asked it to do so, i.e., to give the dates of credit of interest/payment of tax to the credit of the Government in respect of each account. The assessee took objection by its letter, dated July 1,1974, alleging that the obligation to deduct tax under section 195 arises only at the time of payment and not at the time of credit of the interest. Therefore, there was no default on its behalf. Regarding the other particulars, the assessee contended that it was physically impracticable to provide particulars in respect of each account of the non-resident customers which may embrace over five thousand accounts. The total amount of tax deducted but not credited to the Government as at the end of each financial year and the dates on which the tax was ultimately paid to the credit of the Government was, however, mentioned by the assessee. The Income-tax Officer, on further scrutiny and test-check, found that the interest had been credited to the parties' accounts on the due dates and later it was transferred to their current or savings accounts or included in the fixed deposits at the time of renewal and at least in one case interest was remitted to Lloyds Bank, London. On another occasion, the amount of interest had been transferred to the current account of the party concerned out of which withdrawals were made later on. In another case, interest amounting to Rs. 4,120 was credited in a fixed deposit account and this was remitted to the party through the Bank of Scotland. There were also similar credits and payments in respect of the branch at 19, Netaji Subhas Road, Calcutta. The Income-tax Officer also noticed that the bank itself had chosen to deduct tax from such interest and had debited the accounts of the parties concerned with such tax from which it was evident that the assessee was aware of its liabilities to deduct tax therefrom. Apparently, there was no reason as to why tax should not have been credited to the Government as per rules. In the absence of any specific particulars as to the payment of the interest to the non-resident customers which the bank was unable to furnish and in view of the facts mentioned above, he held that the bank had committed default in respect of the tax deducted at source out of the interest allowed to the non-resident customers under section 195 with regard to 24 branches as it did not credit to the Government the tax deducted at source within the time permissible under rule 30 of the Income Tax Rules, 1962. He, therefore, levied interest for delayed payment under section 201(1-A) of the Income-tax Act, 1961. As per detailed calculations in the chart annexed to the order, he computed the amount of such interest at Rs.4,06,013 for which he- issued a demand notice accordingly."

Being aggrieved by the order of the Income-tax Officer, the assessee went up in appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner, however, dismissed the appeal. The assessee preferred a further appeal to the Tribunal. The assessee contended before the Tribunal that the provisions of section 19155 of the Income-tax Act would not be applicable to the present case because the non-residents had received incomes by way of interest directly from the assessee, and therefore, the assessee was an agent for the purpose of the Income-tax Act. Therefore, it was liable to pay income-tax on the interest credited to the accounts of non residents as an agent and consequently, section 195 of the Income-tax Act was not at all applicable. The Tribunal rejected this contention.

The second plea raised by the assessee was that the recovery in question had become time-barred.

This controversy relates to the amounts credited to the accounts of the non-residents between April 1, 1969 and December 31, 1973. According to section 201, the assessee should be deemed to be in default in respect of the tax to be deducted in the year in which credit was given to the non-resident and therefore, recovery for all the years in dispute was time-barred. It was contended that since the right to recover the tax by treating the appellant to be an assessee in default had already become time-barred, no interest on it could be recovered by the Revenue. This again was rejected by the Tribunal with the following observation:

"This argument again seems to lose sight' of certain other salient features of the case. First, section 231 only bars the remedy of recovery and does not extinguish the right. According to section 232, the several modes of recovery specified in this Chapter shall not affect in any way any other law for the time being in force relating to the recovery of the debts due to the Government or the right of Government to institute a suit for the recovery of arrears due from the assessee. The Income-tax Officer or the Government, as the case may be, are within their rights to have recourse to any such law or suit notwithstanding that the tax due was being recovered from the assessee by any movie specified in this Chapter. Secondly, without prejudice to the provisions of subsection (1), if any person as is referred to in that subsection does not deduct or after deducting fails to pay the tax as required under this Act, he or it shall be liable to pay simple interest on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid. Now, the question of computation of interest would come in only when the tax is actually paid. It may be that the tax is not paid in accordance with the provisi8ns of Chapter XVII of the Income-tax Act but recovered in some other manner as contemplated by section 232 of the Act. In such a case; the liability to pay interest under section 201(1-A) would nevertheless be there because that liability is without prejudice to the provisions of subsection (1) of section 201. If any authority is required for this purpose, we may refer to the decision of the Gquhati High Court in CIT v. Shyam Sundar Tea Co. (Pvt.) Ltd. (1978) 114 ITR 116 (Cauhati) which is directly in point."

The last dispute relates to the assessee's liability to pay interest on the amounts for which it was to be treated as an assessee in default under section 201 of the Income-tax Act and the dates from which it was payable. The Tribunal concluded that the liability under section 195 arose from the actual dates of payment to the non-residents and not from the dates from which the interest income had been credited to their accounts. However, the Tribunal did not altogether cancel the orders passed by the authorities below but it only observed that the assessee would be at liberty to point out to the Income-tax Officer that the actual dates of payment of the amounts referred to by him were different from the dates of the credit in the account of the non-resident and that the interest under section 201(1-A) would be liable to be reduced accordingly. The Tribunal, however, was of the opinion that the responsibility for proving the difference between the dates of credit and the dates of actual payment was primarily on the assessee.

It has been argued by Dr. Pal that, having regard to the provisions of section 195, there was no liability on the assessee to deduct tax at source. It has been argued that the assessee had a business connection with the depositors. Any interest credited to the account of the business creditor can be assessed by treating the assessee as 'a representative assessee. My attention was drawn to section 161 of the Act which makes every representative assessee subject to the same duties, responsibilities and liabilities as if the income in respect of which he is a representative assessee were income received .by or accruing to or in favour of him beneficially. A representative assessee shall be liable to assessment in his own name in respect of that income. The tax should be levied upon and recovered from the representative assessee in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him. It has been argued that under section 163, an "agent" in relation to a non-resident will include any person in India who, inter alia, has any business connection with the non-resident or from whom or through whom the non-resident is in receipt of any income, whether directly or indirectly. Therefore, the assessee-bank is clearly a representative assessee in respect of the deposits kept by non-resident persons in the assessee bank. The interest on those deposits is payable to the non-residents by the assessee-bank. Therefore, the assessee is liable to be assessed under the provisions of section 161 in respect of the income accruing or arising to the non-resident as if he was the assessee in respect of that income. Therefore, by virtue of the provisions of section 161 read with section 163, the assessee is liable to be assessed and to pay tax in respect of the interest income which had accrued or- arisen to the non-residents who had deposits with the assessee bank:

It has been argued that, having regard to the provisions of section 195 of the Income-tax Act, since the assessee is a statutory agent and as such is liable to pay income-tax on the interest income of the non-residents as an agent, it has no duty to deduct income-tax from any interest income of the non residents.

In support of this contention, reliance was placed on the judgment of this Court in the case of Bunge & Co. Ltd. v. ITO (1971) 79 ITR 93 (Cal.).

In my view, this argument is entirely misconceived. Section 195 (1) provides as follows:

"195.(1) Any person responsible for paying to a non-resident, not being a company, or to a company which is neither an Indian company nor a company which has made the prescribed arrangements for the declaration and payment of dividends within India, any interest, not being `Interest on securities', or any other sum, not being dividends, chargeable under the provisions of this Act,' shall, at the time of payment, unless he is himself liable to pay any income-tax thereon as an agent, deduct income-tax thereon at the rates in force:

Provided that nothing in this subsection shall apply to any payment made in the course of transactions in respect of which a person responsible for the payment is deemed under the proviso to subsection (1) of section 163 not to be ah agent of the payee:

Provided further that the deduction of income-tax from any sum, being income chargeable under the head `Capital gains' relating to capital assets other than short-term capital assets, paid to a company which is neither an Indian company nor a company which has made the pre4cribed arrangements for the declaration and payment of dividends within India, shall be of an amount equal to the amount of income-tax on such sum calculated in accordance with the provisions of clause (i) of section 115."

Thus, it will be seen that the liability has been foisted upon any person responsible for paying to a non-resident, inter alia, any interest, not being "interest on securities", to deduct income-tax thereon at the rates in force. This liability will not arise if the assessee is himself liable to pay any income-tax thereon as an agent. The liability to pay as agent does not arise automatically but will depend upon certain steps that have to be taken in that regard by the Income-tax Officer. If the Income-tax Officer proceeds to treat the assessee as an agent of the non-resident depositors and proceeds to make assessment of the bank as a representative assesses of the depositors, then, possibly, the assessee will be able to take the plea that he is not liable to pay income-tax as an agent and, therefore, he has no duty to deduct income tax under section 195 of the Act. But that has not happened in this case. The Income-tax Officer has not proceeded to assess the interest income of the non-resident depositors by treating the assessee bank as a representative assessee of all the non-resident depositors. In fact, if this step is taken, the bank will be saddled with innumerable assessment cases on behalf of the depositors. I am not expressing any opinion oh the question as to whether this is permissible in law at all. But, since no step has been taken by the Income-tax Officer to treat the assessee as an agent of the non-resident depositors, there is no liability on the assessee to pay any income-tax on behalf of the non resident depositors.

Section 163(2) of the Income-tax Act clearly provides that "no person shall be treated as the agent of a non-resident unless he had an opportunity of being heard by the Income-tax Officer as to his liability to be treated as such". The Income-tax Officer, before treating the assessee as an agent and proceeding against the bank as an agent of the non resident depositors, will have first to serve a notice upon the assessee. If it can be established by the Income-tax Officer that the assesses-bank is an agent, then only con an assessment proceeding be commenced against the ,assesses.

Reliance was placed on Bunge & Co. Ltd. v. ITO (1971) 79 ITR 93 (Cal.) in support of the contention made by Dr. Pal. In my view, that judgment clearly goes against the contentions of the assessee. In that case, it was held that the same person cannot be treated as an agent under section 163 of the Act and proceeded against under section 201 of the Act simultaneously. In that case, a foreign company had an office at Calcutta. It carried on the business of exporting jute goods from India and had agents, some of whom were also the buyers in various foreign countries. The agents were non-residents. During the accounting year 1961-62, the company had remitted money to the foreign agents. The Income-tax Officer sent a notice to the company under section 163(2) of the Act proposing to treat the company as agent of the non resident under section 163 for the purpose of recovery of taxes under section 201 of the Act in respect of the sum remitted to the foreign agents. The arguments before the Court in that case on behalf of the company was as follows (at page 97):

'This group of sections of the Act, it is pointed out, contains a complete machinery for assessment and recovery of tax from a person who is an `agent' within the meaning of section 163 of the Act.

Turning to the other group of sections from sections 195 to 201 of the Act, it is pointed out that section 195 speaks of any person responsible for paying to a non-resident or to a company specified therein who is liable to deduct income-tax and super-tax on the sums so payable at the rates currently in force. Such person is also charged with the duty of making payment of the sums so deducted to the Revenue. In the event of the failure of any such person to deduct or to pay the tax on the sums payable to a non-resident or a company, section 201 provides that `such person' shall be deemed to be an assessee in default in respect of such tax. The plain effect of section 201 is that such a person who has either failed to deduct the tax or to pay the same to the credit of the Central Government spay be subjected to the recovery proceedings which are available under the Act in respect of assesses in default. .

The former group of sections from sections 160 to 163 and the latter group of sections from sections 195 to 201 of the Act, it is contended, are mutually exclusive and operate in different fields. Pointed reference is made in this connection to the proviso to section 195(1) of the Act which prescribes that nothing in section 195(1) shall apply to any payment made in the course of transactions in respect of which a person responsible for the payment is deemed to be an agent of the payee under the proviso to subsection (1) of section 163 of the Act. This, it is pointed out, puts the matter beyond the pale of controversy. It is clearly an expression of the legislative intention that these two groups of sections are entirely independent of each other and are mutually exclusive."

This argument was accepted by the Court land the Court observed as follows (at page 99):

"This is quite clear from the heading of the second notice which speaks of action under sections 163 and 201 of the Act and of `treatment as an agent'. Such an action, in my view, is plainly not permissible in law and the Court is entitled to restrain the. authorities from continuing proceedings on the basis of such a notice.

I make it clear, however, that it would be open to the income-tax authorities, if and when they make up their minds to elect as to whether the petitioner should be proceeded against either under the former group of sections of the Act or the latter which are, in my view, mutually exclusive."

In that case, the Income-tax Officer himself had not made up his mind whether the assessee should be proceeded against under the group of sections 195-to 201 or under the group of sections 160 to 163.

In the instant case, no action was taken by the Income-tax Officer under sections 160 to 163. There is no present liability of the assessee to pay any tax on behalf of the non-resident depositors. No proceeding has been taken against the assessee bank as ' representative of the non-resident depositors.

Dr. Pal has sought to argue that the liability may arise in future. The liability in section 195 must be construct in a way as to include any possible or any future liability.

I am unable to uphold this contention. Unless the assessee is able to establish that it is liable to pay income-tax on the interest income as statutory agent of the non-resident depositors, its obligation to deduct income tax on the interest income remains. It has not been shown how the assessee is itself liable to pay any income-tax on the interest income on the deposited amount.

Under the above circumstances, question No. 1 is answered in the affirmative and in favour of the Revenue.

Questions- Nos. 2 and 4 are concluded by the judgment delivered by this Court on September 5, 1989, in the assessee's own case, in Income-tax Reference No. 154 of 1983 (Grindlays Bank Ltd. v. CIT---since reported in (1992) 193 ITR 457). In view of the principles laid down in that judgment, questions Nos. 2 and 4 are also answered in the affirmative and in favour of the Revenue.

It has been stated on behalf of the assessee that it does not want to press question No. 3. Therefore, no answer is given to this question.

There will be no order as to costs.

BHAGABATI PRASAD BANERJEE, J.---I agree.

M.BA./2390/TReference answered.