M/S KPTCL ,HUBLI vs. ITO(OSD)(TDS)LTPU , BANGALORE

“Section-201: Consequences for failure to deduct or pay.

(1) Where any person, including the principal officer of a company,— (a) who is required to deduct any sum in accordance with the provisions of this Act; or (b) referred to in sub-section (1A) of section 192, being an employer, does not deduct, or does not pay, or after so deducting fails to pay, the whole or any part of the tax, as required by or under this Act, then, such person, shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default in respect of such tax: ………….. (1A) Without prejudice to the provisions of sub-section (1), if any such person, principal officer or company as is referred to in that sub-section does not deduct the whole or any part of the tax 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,— (i) at one per cent for every month or part of a month on the amount of such tax from the date on which such tax was deductible to the date on which such tax is deducted; and (ii) at one and one-half per cent for every month or part of a month on the amount of such tax from the date on which such tax was deducted to the date on which such tax is actually paid, and such interest shall be paid before furnishing the statement in accordance with the provisions of sub-section (3) of section 200:] ………………..”

“Section 10: Incomes not included in total income. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included— ……………………….

(10AA) (i) any payment received by an employee of the Central Government or a State Government, as the cash equivalent of the leave salary in respect of the period of earned leave at his credit at the time of his retirement whether on superannuation or otherwise; (ii) any payment of the nature referred to in sub-clause (i) received by an employee, other than an employee of the Central Government or a State Government, in respect of so much of the period of earned leave at his credit at the time of his retirement whether on superannuation or otherwise as does not exceed ten months, calculated on the basis of the average salary drawn by the employee during the period of ten months immediately preceding his retirement whether on superannuation or otherwise, subject to such limit as the Central Government may, by notification in the Official Gazette, specify in this behalf having regard to the limit applicable in this behalf to the employees of that Government:

(i) Assumption of jurisdiction by the respondent in all these appeals is bad in law and hence the orders passed u/s.201(1) & 201(1A) of the Act are invalid. (ii) The orders passed u/s.201(1) & 201(1A) of the Act are beyond the period of limitation and hence barred by time.

(iii) The payments in question for which KPTCL was treated as “Assessee in default” for not deducting tax at source were not in the nature of income within the meaning of Sec.17(1)(va) of the Act and therefore there was no obligation on the part of the Assessee to deduct tax at source; (iv) The provisions of Sec.10(10AA)(i) of the Act are applicable in the case of the Assessee as the employees of KPTCL are to be regarded as employees of State Government; (v) The provisions of Sec.201(1) & 201(1A) of the Act are not attracted in the present case because the non deduction of tax at source by KPTCL was under the bonafide belief that it was not obliged to deduct tax at source on payments in excess of Rs.3 lacs towards unutilized leave period as it believed that its employees were employees of State Government and therefore the applicable provisions will be only Sec.10(10AA)(i) of the Act.

“11. We have heard the parties on proposition (iv) and (v) alone as there are decisions of ITAT Bangalore Bench on identical facts and identical issues. As far as proposition No. (iv) is concerned, it was submitted by the learned DR that this Tribunal in the case of Central Food Technological Research Institute Vs. The ITO (TDS), Mysore, to 1611/Bang/2013 order dated 4.7.2014 this Tribunal has already taken a view on identical facts and circumstances of the case of the Assessee that employees of Statutory Corporations cannot be regarded as employees of the State or Central Government. In view of the aforesaid decision of the Tribunal, we hold that there is no merit in proposition No.(iv) canvassed by the parties before us.

13. In view of losses incurred by KEB, Government of Karnataka came out with general policy proposing fundamental and radical reforms in the power sector. Accordingly, Karnataka Electricity Reforms Act, 1999 (KERA) was enacted by the Karnataka State Legislature which advocated division of the functions of generation, transmission & Distribution of electricity and each function to be performed was entrusted to various statutory corporations. The function of generation of electricity was transferred to Visweshwaraiah Vidyuth Nigama Limited way back in 1970. By Section 14(3) of KERA, KPTCL was incorporated and the function of transmission and distribution of electricity was transferred to KPTCL. Subsequently the distribution function was given to four independent distribution companies in 2002 viz., BESCOM, MESCOM, HESCOM, GESCOM. Employees of KEB became employees of KPTCL.

14. It is the plea of KPTCL that after its inception till AY 2012- 13 it has been deducting TDS by considering its employees as employees of State Government in view of the historical background under which KPTCL came into existence. The revenue has accepted in the past the manner in which tax was deducted at source by KPTCL by considering the employees of KPTCL as employees of State Government. It was pointed out that it is only in AY 2012-13, that the revenue took the stand that employees of KPTCL were not to be regarded as employees of State Government because employment under KPTCL cannot be equated with an office or post in connection with the affairs of such State. It was for the first time that the revenue took the stand that Statutory Corporations such as KPTCL were not to be regarded as State Government. It has also been contended that the Assessee has been filing return of TDS for AY 2013-14 in the status of Statutory body (State Govt.) in form No.27A.

15. The learned counsel for KPTCL drew our attention to the Tripartite Agreement dated 31.7.1999 under the provisions of Sub-Section 2 of Section 15 of the Karnataka Electricity Reform Ordinance, 1999 between the Government of Karnataka and KEB and KEB Employees Union, wherein on corporatization of the transmission and distribution business by forming KPTCL employees of erstwhile KEB expressed apprehension that their services will be privatized. KEB under the tripartite agreement allayed their fears and assured them that all that the employees will get as employees of KEB will continue to be available even after formation of KPTCL. Attention was drawn to some of the documents in the paper book filed regarding the extent of control and protection that the employees of the restructured corporate entities of the erstwhile KEB were subject to or given by the State Government.

17. The learned counsel for the Assessee pointing out the above circumstances submitted that u/s.192(1) of the Act the obligation of the employer is only to deduct tax on the estimated income of the Assessee under the head Salaries for that financial year. If the estimate is made bonafide and tax deducted on such bonafide estimate then there can be no proceedings treating the person responsible for deducting tax at the time of payment, as “Assessee in default”. The learned Counsel for KPTCL placed reliance on a decision of the ITAT Bangalore Bench in the case of Indian Institute of Science Vs. DCIT for AY 2010-11 order dated 27.2.2015 on identical facts. In the aforesaid decision, the Tribunal took the view that the estimate of income under the head salary made by the Assessee on the belief that its employees were to be equated with State Government employees was a bonafide estimate and therefore the Assessee has discharged its obligation u/s.192 of the Act and hence proceedings u/s.201(1)( & 201(1A) of the Act were to be quashed. Reliance was also placed on the decision of the Hon’ble Bombay High Court in the case of CIT Vs. Kotak Securities Ltd. 340 ITR 333 (Bombay) wherein the Hon’ble Bombay High Court took the view that when the question whether there was an obligation to deduct tax at source or not on a particular payment, is highly debatable then the Assessee cannot be held to be a defaulter for not deducting tax at source and consequently no disallowance u/s.40(a)(ia) of the Act for non deduction of tax at source should be made.

18. The learned DR submitted that no attempt whatsoever was made by KPTCL to show that the estimate of income under the head salaries made by it was bonafide. According to him there is always an option u/s.197 of the Act for the Assessee to approach the AO to clarify doubts regarding the correct rate of tax or the income on which tax has to be deducted. We observe that Sec.197 of the Act is only with regard to rate of tax or non deduction of tax at source and probably not applicable to resolve the question whether an item of income is taxable or not taxable. According to him KPTCL should have obtained estimate from the employees and only then their action can be said to be bonafide. The learned DR further placed reliance on the following decisions.

(i) SBI Vs. ACIT to 1412, 1424 to 1426, 1456 to 1458/Bang/2018 order dated 6.4.2018. (ii) Syndicate Bank Vs. ACIT ITA No.1398 to 1403 and 1435 to 1477/Bang/2016 dated 6.4.2017. (iii) CIFCO Finance Ltd. Vs. ITO (2007) 13 SOT 376 (Mum) (iv) Ernakulam District Co-operative Bank Vs. ACIT (2005) 142 Taxman 98 (Kerala) (v) CIT(TDS) Vs. Director, DPS (2011) 14 Taxman.com 45 (P & H) (vi) Drawing & Disbursing Officer Vs. ACIT 115 ITD 411 (All)

19. It was submitted on identical facts such as the Assessee the ITAT Bangalore Bench confirmed orders u/s.201(1) of the Act in the case of Central Food Technological Research Institute (supra) and CSIR National Aerospace Laboratories Vs. ACIT to 456/Bang.2014 order dated 27.8.2014.

20. We have very carefully considered the rival submissions. We are of the view that the facts and circumstances of the present case are identical to the case of Indian Institute of Science(supra) decided by the ITAT Bangalore Bench. In the said case the deduction of tax at source was u/s.192 of the Act. The question was valuation of perquisites in the form of rent free accommodation provided to employees of a statutory corporation such as the Assessee. The Assessee in that case took similar plea of bonafide belief as raised by KPTCL in the present proceedings. The Tribunal considered the submissions and firstly found that the law on the issue of bonafide belief in the matter of estimating of income under the head “salaries” for the purpose of Secc.192 of the Act, was explained in a decision of ITAT Bangalore in the case of ACIT Vs. Infosys BPO Ltd. 150 ITD 132 (Bang) in the following manner:-

“26. It is no doubt true that TDS is to be made at the time of payment of salary and not on the basis of salary accrued. Sec.192(3) of the Act permits the employer to increase or reduce the amount of TDS for any excess or deficiency. We have already noticed that the fact that bills/evidence to substantiate incurring of expenditure on medical treatment up to Rs.15,000/- and the availing of the LTC by the employees and the fulfilment of the conditions contemplated by Sec.10(5) of the Act for availing exemption by the employees so availing LTC, have not been disputed by the AO. Even assuming the case of the AO, that at the time of payment the Assessee ought to have deducted tax at source, is sustainable; the Assessee on a review of the taxes deducted during the earlier months of the previous year is entitled to give effect to the deductions permissible under proviso (iv) to Sec.17(2) or exemption u/s.10(5) of the Act in the later months of the previous year. What has to be seen is the taxes to be deducted on income under the head ‘salaries’ as on the last date of the previous year. The case of the AO is that LTC and Medical reimbursement should be paid at the time the expenditure is incurred or after the expenditure is incurred by way of reimbursement and not at an earlier point of time. If it is so paid, then, even though the payment would not form part of taxable salary of an employee, the employer has to deduct tax at source treating it as part of salary, is contrary to the provisions of Sec.192(3) of the Act and cannot be sustained. The reliance placed by the AO on the expression “actually incurred” found in Sec.10(5) of the Act and proviso (iv) to Sec.17(2) of the Act, in our view cannot be sustained. In any event, the interpretation of the word “actually paid” is not relevant while ascertaining the quantum of tax that has to be deducted at source u/s.192 of the Act. As far as the Assessee is concerned, his obligation is only to make an ”estimate” of the income under the head “salaries” and such estimate has to be a bonafide estimate.

incurred by the employees, or Rs. 15,000/- whichever is lower. The exemption is granted even if the payment precedes the incurrence of expenditure. The requirements/conditions of section 10(5) and proviso to section 17(2) are meticulously followed before extending the deduction/exemption to an employee. No tax can be recovered from the employer on account of short deduction of tax at source under section 192 if a bona fide estimate of salary taxable in the hands of the employee is made by the employer, is the ratio of the following decisions. CIT vs. Nicholas Piramal India Ltd (2008) 299 ITR 0356 (BOMBAY); CIT v. Semiconductor Complex Ltd [2007] 292 ITR 636 (P&H) CIT vs. HCL Info System Ltd. [2006] 282 ITR 263 (Del) CIT v Oil and Natural Gas Corporation Ltd [2002] 254 ITR 121 (Guj) ITO v Gujarat Narmada Valley Fertilizers Co. Ltd [2001] 247 ITR 305 (Guj) CIT v Nestle India Ltd (2000) 243 ITR 0435 (DEL) Gwalior Rayon Silk Co. Ltd. v. CIT [1983] 140 ITR 832 (MP) ITO v G. D. Goenka Public School (No. 2) [2008] 306 ITR (AT) 78 (Del) Usha Martin Industries Ltd. V. ACIT (2004) 086 TTJ 0574 (KOL) Nestle India Ltd. v. ACIT (1997) 61 ITD 444 (Del) Indian Airlines Ltd. v ACIT (1996) 59 ITD 353 (Mum)”

12. We find the facts and circumstances in these appeals are similar and the proceedings in these appeals and the appeals already decided by the Tribunal started simultaneously as evidenced by the Chart filed by the learned counsel for the Assessee, which is placed on record. The learned Standing counsel for the revenue, however, submitted that the following contentions which were not put forth in the appeals decided by the Tribunal and the contentions in the Miscellaneous Application seeking rectification of the earlier order of the Tribunal (copies of which were filed before us), may be considered. Similar submissions were already considered by this Tribunal in MP No.175/Bang/2018 to 252/Bang/2018 in to 2300/Bang/2017 by order dated 4.1.2019. We shall now deal with the contentions of the revenue.

16. The learned DR mentioned that the Tribunal erred in concluding that the estimate made by the Assessee of income of its employees under the head salaries was bonafide. According to him, the employees of the Assessee were not employees of State and therefore the leave encashment salary was exempt only upto Rs.3 lacs. To the extent of payment of leave encashment above Rs.3 lacs by the Assessee to its employees the same was not exempt and ought to have been considered while estimating income of the Assessee. In this regard, he drew our attention to a decision of the Hon’ble Karnataka High Court in the case of Karnataka Electricity Board ILR 2006 KAR 3384 = 2007(1) Kar LJ 147, wherein the question was whether the benefit of free power can be denied to the future employees KPTCL when such benefit was available to erstwhile employees of KEB who became employees of Statutory corporation KPTCL by law passed by State Legislature. The contention was that there was discrimination between employees who continued in service in the erstwhile KEB and those who would become employees of KPTCL in future. The Hon’ble Court held that there was no such discrimination as the two set of employees formed a distinct class and therefore could be treated differently and that there was no violation of Article 14 of the Constitution. It is the contention of the learned standing counsel that in the light of this decision rendered as early as 26.7.2006 in the case relating to the Assessee would show that the Assessee must be having sufficient knowledge that its employees cannot be equated with employees of State Government and therefore the plea of bonafide belief while estimating income of employee ought not to have been accepted by the Tribunal.

20. For the reasons given above and respectfully following the decision of the Tribunal referred to paragraph-11 of this order, we hold that KPTCL has discharged its obligation u/s.192 and hence proceedings u/s.201(1) & 201(1A) of the Act deserves to be quashed and are hereby quashed. All the appeals of KPTCL are allowed.

Pronounced in the open court on this 4th day of June, 2019.