STATE. BANK OF PATWA VS COMMISSIONER OF INCOME-TAX, 2000 PTD-PUNJAB-AND-HARYANA-HIGH-COURT-INDIA 2385 (1997)

Income-tax---

----Deduction of tax at source---Bank filing return showing amount of salary paid to each employee and amount of rebate claimed by each employee---In the case of two employees the Bank on the basis of information furnished by them deducting tax at source after giving rebate to investment in NSC Certificates and deposit in PPF account---Bank explaining to ITO source of investment made in NSC and PPF account---In the case of one employee money withdrawn from Bank a few days before investment and handed over to agent for investment---In the case of another employee withdrawal made from her overdraft account in Bank in which her salary was credited-- Investments proved and source of money explained---Bank has no authority to, enquire into source of investment or to disbelieve its genuineness-- Summary assessments in the cases of two employees completed and no demand created, instead employees receiving refunds ---ITO passing order holding employer responsible for short collection of tax---Order of ITO liable to be quashed---Commissioner directed to refund to employer the amount paid by it with interest against demand created---Indian Income Tax Act, 1961, Ss. 154, 192, 201 & 264.

The petitioner-bank filed a return for the financial year 1992-93 under section 206 of the Income Tax Act, 1961, in the prescribed Form No.24 along-with the TDS certificate. The Income-tax Officer took the view that the tax was not deducted by the bank as required by subsection (1) of section 192 of the Act. A notice was, therefore, issued to the bank requiring it to prove the source of investment in savings made by two employees, K and G. K had claimed rebate of tax under section 88 of the Act on a total amount of Rs.45,997, out of which savings of Rs.10,000 had been invested in the National Savings Certificates and another Rs.10,000 were deposited by him in the Public Provident Fund Account. G had claimed similar rebate of tax under section 88 on a gross amount of Rs.41,283 including Rs.5,500 invested in the National Savings Certificates and Rs.25,550 deposited in the Public Provident Fund Account. In response to the notice, the petitioner bank explained the source of investment- made. in NSC and PPF account by the aforesaid two employees. The Income-tax Officer found it to be not satisfactory, and' therefore passed an order under section 192 read with section 201 -against the petitioner-bank creating. a demand of Rs.11,650 including interest of Rs.1,520 charged under section 201(1 A). The petitioner-bank paid the amount so demanded but filed an application against the order of the Income-tax Officer before the Commissioner of Income-tax under section 264. The said application was rejected by the Commissioner. The petitioner-bank filed another application under section 154 of the Act seeking rectification of the order of the Commissioner of Income-tax but that too was rejected by the Commissioner. On a writ petition for quashing the orders passed by the Income-tax Officer under section 192 and of the Commissioner under sections 264 and 154 of the Act:

Held, (i) that withdrawal of money was made by K from his bank account a few days before making investments and it was explained before the Income-tax Officer that, after -withdrawal, K had handed over the money to the agent for the purpose of making investments. In the case of G, investments in NSC and PPF accounts were shown out of the money withdrawn from her overdraft account in the bank in which her ' salary had been credited.

(ii) That in the case of both the employees not only the, investments had been proved but the source of money invested had also been explained. The petitioner-bank had, as an employer, no reason, muchless the authority in law, to enquire into the employees' source of investment or to disbelieve its genuineness or to decide its admissibility. It was not within the powers of the bank, as employer, to examine as to whether investments had been made by the employee out of the taxable income of the current year. There was nothing before the employer- to raise a suspicion that investments were not made by the employees from their past or current savings. Even if there was reason to rise' a suspicion, the employer could not go any further to enquire into the source of investment. Section 192 did not vest any such power in the employer.

(iii) That since the purchase of NSC and the deposit of money in the PPF account were not found to be incorrect in the case of both the employees, the petitioner-bank could not be held responsible for short collection of tax.

(iv) That summary assessments were completed in the cases of the two employees under section 143(1)(a) of the Act and no demand was created against them. The employees on the other hand received refunds in their cases.

(v) That, therefore, the order passed by the income-tax Officer was wholly unjustified, arbitrary and untenable in law. The orders passed by the Income-tax Officer and the Commissioner were liable to be quashed.

Commissioner and Income-tax Officer directed to refund to the petitioner the amount paid by it with interest against the demand created.

A. K. Mittal for Petitioner.

R. P. Sawhney, Senior Advocate with S.K. Sharma for Respondent.

JUDGMENT

N.K. AGRAWAL, J.---This is a petition by the State Bank of Patiala under Article 226/227 of the Constitution of India for quashing:

(i) the order passed by the Income-tax Officer under section 192 of the Income Tax, Act, 1961 (for short "the Act"), and

(ii) the orders passed by the Commissioner of Income-tax under sections 264 and 154 of the Act.

The petitioner bank has also demanded refund of the amount of tax and interest collected from it.

The petitioner bank was liable to deduct income tax from the salaries paid to its employees. The bank filed the annual return for the financial year 1992-93 under section 206 of the Act in the prescribed Form No.24 on April 30, 1993, along-with the T.D.S. certificate. The Income-tax Officer (respondent No.2) was of the view that tax was not deducted by the bank as required under subsection (1) of section 192 of the Act. A notice. was, therefore, issued to the bank requiring it to prove the source of investment in savings made by two employees, Shri R. R. Khanna and Smt. Kanta Gaur. One of the employees, namely, Shari. R. R. Khanna, was the manager of the bank, and he had claimed rebate of tax under section 88 of the Act on a total amount of Rs.45,997 out of which savings of Rs.10,000 had been invested in the National Savings Certificates (N.S.C.) and another Rs.10,000 were deposited by him in the Public Provident Fund Account (PPF Account). Smt. Kanta Gaur had claimed a similar rebate of tax under section 88 of the Act on a gross amount of Rs.41,283 including Rs.5,500 invested in the, N:S.C. and Rs.25,550 deposited in the P.P.F. Account.

In response to- the notice, the petitioner-bank explained the source of investment made in N.S.C. and P.P.F. Account by the aforesaid two employees. It was considered by the Income-tax Officer to be not satisfactory. An order under section 192 read with section 201 of the Act was passed by the Income-tax Officer on December 15, 1993, against the petitioner-bank creating a demand of Rs.11,650 including interest of Rs.1,520 charged under section 201 (l A) of the Act. The petitioner-bank paid the amount so demanded but, at the same time filed an application against the order of the Income-tax Officer before the Commissioner of Income-tax under section 264 of the Act. The said application was rejected by the Commissioner. The petitioner-bank filed another application under section 154 of the Act seeking rectification of the order but that too was rejected by the Commissioner.

Shri A. K. Mittal, learned counsel for the petitioner, has argued that the order of the Income-tax Officer, was totally erroneous, perverse and untenable in law as the officer had passed the order exceeding his jurisdiction. The petitioner-bank had acted on the information furnished by the two employees in question and had deducted tax at source from their salaries in accordance with the provisions of the Act. Shri Mittal has contended that it was not open to the Income-tax Officer to question the bank about the deductions claimed by the employees. It was for the employees to explain the source of funds invested by them in the purchase of the N.S.C. and in the deposits made in P.P.F. Accounts. It is also pointed out that assessments were completed in the cases of the two employees under section 143(1)(a) of the Act and no demand was created. Those employees, on the other hand, received refunds in their cases.

It would be relevant to read the relevant parts of section 192 of the Act

"192. Salary. ---(I) Any person responsible for paying any income chargeable under the head 'salaries' shall, at the time of payment, deduct income-tax on the amount payable at the average rate of income-tax computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year ....

(3) The person responsible for making the payment referred to in subsection (1) or subsection (2) of or subsection (2A) or subsection (2B) may, at the time of making any deduction, increase or reduce the amount to be deducted under this section for the purpose of adjusting any excess or deficiency arising out of any previous deduction or failure to deduct during the financial year..."

The obligation of an employer under section 192 is, thus, to deduct income-tax at the average rate on the estimated income of the employee. It means that an estimate of the income under the head "salaries" for the financial year in which the payment was made, will have to be made. It is on the basis of that estimate that the amount of tax payable by the employee will have to be arrived at. At .the time of payment of salary, income-tax will have to be deducted by the employer from the amount payable. The rate of tax and the estimate of income will have to be calculated on an annual basis. Whatever is to be included under the head "salaries" will have to be taken into consideration for the purpose of making the estimate. Deduction of tax at source from salary income, shall, therefore, depend upon the rebate of tax claimed by the employee under section 88 of the Act.

An employer failing to pay the tax as required under the Act is liable to pay penalty as well as interest under section 201 of the Act, which reads as under:

"201. Consequences of failure to deduct or pay.---(1) If any such person and in the cases referred to in section 194, the-principal officer and the company of which he is the principal officer does not deduct or after deducting fails to pay the tax as required by or under this Act, he or it shall, without prejudice to any other consequences which he or it may incur, be deemed to be an assessee in default in respect of the talc:

Provided that no penalty shall be charged under section 221 from such person, principal officer or company unless the Assessing Officer is satisfied that such person or principal officer or company, as the case may be, has without good and sufficient reasons failed to deduct and pay the tax.

(lA) Without prejudice to the provisions of subsection (1), if any such person, principal officer or company as is referred to in that subsection does not deduct or after deducting fails to pay the tax as required by or under this Act, he or it shall be liable to pay simple interest at fifteen per cent per annum 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.

(2) Where the tax has not been paid as aforesaid after it is deducted, the amount of tax together with the amount of simple interest thereon referred to in subsection (1 A) shall be a charge upon all the assets of the person, or the company, as the case may be, referred to in subsection (1). "

The aforesaid section, thus, provides that where a person defaults in the fulfillment of the obligation to deduct tax at source and to pay it to the credit of the Central Government within the prescribed time, he will be treated as an assessee in default in respect of the tax. Such a defaulter is liable to the imposition of a penalty under section 221 in an amount not exceeding the amount of tax in arrears. However, the proviso of sub section (1) barred the imposition of a penalty on a person defaulting in fulfillment of his obligation to deduct and pay the tax unless the Income-tax Officer was satisfied that such person had failed to do so without good and sufficient reasons. Prior to the amendment by the Finance Act, 1966, the word "willfully" existed in the place of the words "without good and sufficient reasons". Thus, under the originally enacted proviso, a penalty under section 221 could be levied on a person who had willfully failed to deduction or to pay the tax deducted by him. Under the proviso, as amended by the Finance Act, 1966, penalty under section 221 is leviable on a defaulter, if the Income-tax Officer is satisfied that there were no good and sufficient reasons for the failure to deduct or for pay the deducted amount of tax.

From the facts emerging from the pleadings of the petitioner, it is apparent that the petitioner-bank had filed the return on April 30, 1993, in Form No.24 under section 206 of the Act, showing the amount of salary paid to each employee and the amount of rebate claimed under section 88 by each employee during the financial year ending on March 31, 1993. The Income tax Officer asked the petitioner to prove the source of investment in the savings by the two employees. Rebate of tax on the investment of Rs.20,000 claimed by Shri Khanna was refused on the ground that Shri Khanna had not withdrawn any money from his bank account on the dates of investments. Withdrawal of money was made by Shri Khanna from his bank account a few days before making investments. It was explained before the Income-tax Officer that, after withdrawal of money, Shri Khanna had handed over the money to the agent for the purpose of making investments. In the case of Smt. Kanta Gaur, investments of Rs.31,000 in N. S. C. and P. P. F. account were shown out of the money withdrawn from her overdraft account in the bank. The Income-tax Officer disallowed it also. It had- been explained before him that withdrawal of money was made by Smt. Gaur from her overdraft bank account in which her salary was also credited.

In the cases of both the employees, not only the investments had been proved but the source of money invested had also been explained. The petitioner-bank had, as an employer, no reason, much less the authority in law, to enquire into the employees' source of investment or to disbelieve its genuineness or to decide its admissibility. It was not within the powers of the bank, as employer, to examine as to whether investments had been made by the employee out of the taxable income of the current year. There was nothing before the employer to raise a suspicion that investments were not made by the employees from their past or current savings. Even if there was a reason to raise a suspicion, the employer could not go any further to enquire into the source of investment. Section 192 of the Act did not vest any such power in the employer.

The expression "on the estimated income of the assessee" occurring in subsection (1) of section 192 enabled-the employer to work out the estimate of income under the head "salaries" in the case of its employee. Final determination of income is to be made by the concerned Assessing Officer in the case of the employee during the course of his assessment as an individual. Once the investments made by the employee were found to be correct after verification, the employer had no further authority in law to examine the source and record its satisfaction. The investments have not been found to be incorrect. It is the source of funds invested in the N.S.C. and the P.P.F. account which has been doubted: The employees had claimed rebate under section 88 of the Act on different savings including those made in the N.S.C. and P.P.F. account. Since the purchase of N. S. C. and the deposit of money in the P.P.F. account were not found to be incorrect in the case of either of the two employees, there was no reason to hold the petitioner-bank responsible for short collection of tax. As has been seen, the proviso to subsection (1) of section 201 lays down that no penalty shall be charged unless the employer had, without good and sufficient reasons, failed to deduct and pay the tax. From the facts, it cannot be concluded that the petitioner-bank had failed in its duty to deduct tax from the two employees in question. There was nothing to enable the Assessing Officer to hold that the petitioner bank had, without good and sufficient reasons failed to deduct and pay tax. When the deposits stood verified, the employer cannot be held responsible for not looking into the source of funds invested by the employee in the- savings: As has been seen, summary assessments in the cases of the two employees under section 143(l)(a) of the Act, was also- made. A sum of Rs;1,490 was refunded to Shri. R. R. Khanna and a sum of Rs. 70 to Smt. Kanta Gaur.

The respondents have, in their joint reply, defended the order passed by the Income-tax Officer as well as the orders of-the Commissioner of Income-tax. It has been pleaded that an employer had to satisfy himself about the actual deposit of money in the investment made by an employee. Genuineness of the 'claim for rebate has to' be seen. The petitioner-bank-had not verified the genuineness of the investments made by the employees. Excess allowance of rebate was given tinder section' 88 `and thereby short deduction of tax at -source took place: It is also, explained in .the reply that notices under section 147/14.8 of the Act have been issued by the concerned Assessing Officer to the two employees in question for verifying the. rebate allowable for the financial year 1992-93.

From the facts, we find that the order passed by the Income-tax Officer is wholly unjustified, arbitrary arid untenable in law. When the employer bank had explained the investments made by the employees, there was no reason to hold the employer responsible for not verifying the source of investment. Even the source had been explained, but that too was not accepted. As has been seen, in the case of Shri R. R. Khanna, withdrawal of money had been made from the bank account a few days earlier to the investments. In the case of Smt. Kanta Gaur, withdrawal had been made from the bank account in which her salary was also deposited. In the face of the source having been explained; there was no reason for the employer to raise a further suspicion and to reject the rebate claimed by the two employees. The Income-tax Officer in the course of assessment of the employees, may decline to accept the source as genuine, but that power rests with the Income-tax Officer. The employer has been required to deduct tax at source from the "estimated income" of the employee. The petitioner's application seeking interference by the Commissioner also did not help the petitioner, though not only the investments made had been duly explained, but also the source of money so invested. The Commissioner also did not feel inclined to accept the petitioner's plea that, as an employer, the obligation cast on the petitioner had been discharged. Even a second attempt made by the petitioner by moving an application under section 154 of the Act proved futile. These facts, make out a case where the exercise of power has. to be held wholly arbitrary, unwarranted and in excess, of jurisdiction.

In the result, the writ petition is allowed and the order, dated December 15, 1993, passed by the Income-tax Officer under section 192 read with section 201 of the Act and the orders of the Commissioner, dated October 26, 1995, and. June 25,. 1996, rejecting the petitioner's applications under sections .264 and 154 'of the Act are quashed. The respondents (Commissioner of Income-tax, Patiala and the Income-tax Officer, Ward No.5 Patiala) are directed to refund, within two months from the date of this order; the amount paid 1by .the petitioner-bank against the demand created under section 02 read with section 201 of the Act with interest at 12 ,per cent, per annum from the date of the aforesaid payment made by the petitioner to the date of refund.

Costs are determined at Rs.5,000 payable by the respondents to the petitioner.

M.B.A./4128/FC Order accordingly.