THE GREAT EASTERN SHIPPING CO. LTD ,MUMBAI vs. THE DEPUTY COMMISSIONER OF INCOME TAX, TDS, CIRCLE 2(3), MUMBAI

There is delay in filing this appeal, for which the assessee filed an application for condonation of delay and the contents of application for condonation of delay reads as under:

On the other hand, the ld DR could not rebut the facts submitted by the assessee before us for seeking condonation of delay.

We have considered the rival submissions as well as relevant material on record. As regards the sufficiency of cause for filing the appeals belatedly, it is settled principles of law that the Courts have to take liberal approach while interpreting the expression ‘sufficient cause’ for condonation of delay. In case of Collector, Land Acquisition Vs. Mst. Katiji (1987) 167 ITR 471, the Hon’ble Supreme Court has laid down the principle that the power to condone the delay provided under the statute is to enable the Courts to do substantial justice to the parties by disposing of the matter on merits, therefore, while considering the matters for condonation of delay, the law must be applied in a meaningful manner which subserves ends of justice and technical considerations should not come in the way of cause of substantial justice. There is no quarrel that the explanation and reasons explained for delay must be bonafide and not merely a device to cover an ulterior purpose such as laches on the part of the litigant or an attempt to save limitation in the underhand way. If the party who is seeking condonation of delay has not acted in malafide manner and reasons explained are factually correct then the Court should be liberal in construing the sufficient cause and lean in favour of such party. A justice-oriented approach has to be taken while deciding the matter for condonation of delay. However, this does not mean that a litigant gets free right to approach the court at its will.

If we apply the settled principles as laid down by the Hon’ble Supreme Court as well as other courts on the facts of the present case we find that the assessee has explained cause of delay, therefore, in the facts and circumstances of the case, we condone the delay in filing the present appeal and admit the appeal for hearing.

Ground Nos. 1 to 4 raised by the assessee are inter related and inter connected and relates to challenging the order of CIT(A) in confirming the levy of interest u/s 201(1A) of the Act in respect of late deduction of tax at source on salaries paid to floating staff members. Therefore, we have decided to adjudicate these grounds through the present consolidated order.

Ld. AR appearing on behalf of the assessee reiterated same arguments as were raised by him before the revenue authorities. The Ld. AR also relied upon the statement of facts filed along with the appeal memo which are at page 25 to 29 the same are reproduced herein below:

Under section 192 of the Income-tax Act, persons responsible for paying salary and other incomes chargeable under Income-tax Act under the head "Salaries" are required to deduct income-tax from such income at the time of payment. For this purpose, the amount of tax to be deducted is computed at the average rate of income-tax arrived at by applying the rates in force for the financial year in which the payment is made on the estimated income of the person to whom salary is paid. Since, as explained above, in the case of members of crew of foreign-going Indian ships, who are not likely to be in India for a period or periods exceeding 182 days in a year, income which accrues or arises outside India and is also received outside India is not liable to tax in India, the shipping companies and other persons responsible for paying salary to such members of crew may take these factors into account while computing the amount to be deducted as tax and deduct only so much of tax as would be chargeable on the estimated income liable to tax in India. If the shipping company or other person responsible for paying to such members of crew subsequently finds that any person who was earlier considered as not likely to be resident in India and deduction of tax at source was made on that basis is now likely to be resident in India, the shipping company or the other person responsible for making the payment, may increase the deduction so as to adjust any deficiency arising out of an earlier short deduction or non- deduction during the same financial year."

It is true that sub-section (1) of section 192 of the Act contemplates deduction of income- tax at the time of payment and at the same time, section 201(14) deals with a situation when tax is not deducted, but sub-section (3) of section 192 is a part of section 192 required to be read with sub-section (1) thereof, for nothing has been expressed in the Act to treat sub- section (3) as a separate provision. The object and purpose of sub-section (3) is to permit the person obliged to deduct to make adjustments. Sub- section (3) does not stop while authorising adjustment in case of excess or deficient deduction, but also authorises adjustment in case of total failure to deduct during the financial year. Sub- section (3). therefore, makes it abundantly clear that if there is a failure to deduct in a financial year, the same can be deducted by way of adjustment during the financial year. In those circumstances, the obligation to deduct at the time of payment, which is the mandate of sub- section (1) of section 192, stands extended up to the end of the financial year by virtue of the provisions contained in sub-section (3) of section 192 of the Act. The right to adjust, granted by sub-section (3) does not extend beyond the financial year.

The learned counsel for the appellants submitted that in view of the pronouncement as above, the provisions of section 201(14) of the Act would become otiose. We do not think so. Section 201(1A) applies only when during the financial year whole or any part of the tax deductible has not been deducted. We accordingly, conclude the matter and answer the question, as above, in favour of the assessee, while dismissing the appeal."

This very issue based on identical facts has been decided in favour of the Appellant by the learned Commissioner of Income Tax (Appeals)-59, Mumbai, in the case of Greatship (India) Ltd.

The Ld. DR relied upon the orders passed by the revenue authorities.

We have heard the counsels of both the parties and perused the material placed on record, judgments cited by the parties and also orders passed by the revenue authorities. 11. The entire controversy in the present appeal is with regard to levy of interest by the AO u/s 201(1A) of the Act @ 1.5 pm. As per AO the assessee has not followed the approach envisaged in sub-section (1) of section 192 of the Income Tax Act which mandates an employer to estimate salary income of the employee for the entire year and deduct monthly TDS on prorate basis. 12. To adjudicate the controversy in question, it is necessary to evaluate the factual as well as legal aspect of the present case. 13. As per the facts of the present case the assessee is a shipping company and its employees are broadly divided in to two categories i.e first category is of on shore staff and the second category is of floating staff. Since the on shore staff of the assessee is the office staff which handles accounts, finance etc., from the assessee office in Mumbai, and are permanently stationed in the office. Therefore determining the residential status of on shore staff was not an issue and thus there was no delay in deducting and depositing the TDS u/s 192 of the Act in respect of salaries paid to on shore staff. Whereas the second category i.e the floating staff of employees who are deployed on board vessels and the vessels of the assessee are deployed within Indian waters as well as foreign waters and the assessee has duly deducted TDS on salaries of employees for the period when the vessel was in Indian waters. However, in respect of period when the vessels were deployed in foreign waters, then the assessee was unable to determine at the start of financial year as to which of the floating staff would be non-resident and which staff become resident during the financial year on account of their stay in Indian water or on Indian soil.

Apart from this many of the employees of the assessee are contractual employees to take up employment for 60 days at a time. In such cases, the employees declare that they are non-residents, and if the vessel on which such employees are deployed, continues to work outside India, then the employees remains a non-resident. In this way the salary earned outside Indian water by non-resident employee is not liable to tax in India and as such salaries do not accrue or arise in India nor are such salaries deemed to accrue or arise in India as the salaries of the floating staff are paid outside India.

In this way, as per assessee, it was virtually impossible to determine the residential status of such staff members at the start of the year or even midyear, as the actual status becomes apparent only towards the end of the year. Thus, under the above discussed circumstances as per the assessee, it was unable to follow the approach envisaged in sub-section (1) of section 192 of the Act, which requires an employer to estimate the salary income of the employee for the entire year and deduct monthly TDS on a prorata bases and therefore it is only towards the end of the year that picture regarding the residential status of the floating staff becomes clear. In this regard, it was further submitted by Ld. AR that the assessee keeps track of the number of days each of the floating staff has spent in India. In the absence of clarity of the residential status the assessee has deducted TDS in a bonafied manner on a best estimate basis in respect of the floating staff and the final liability in respect of floating staff is determined only in the last quarter of the financial year and tax is deducted and deposited on the same by the end of the financial year. Even otherwise as per Ld. Ld.AR, the appellant discharges the entire TDS liability with the due date as prescribed by the Act.

Before we proceed, further we would like to evaluate the provisions section 192 sub-clause 3 of the Act which reads as under; "The person responsible for making the payment referred to in sub-section (1) or sub-section (1A) or sub-section (2) or sub-section (2A) or sub-section(2B) may, at the time of making any deduction, increase or reduce the amount to be deducted under this section for the purpose of Aadjusting any excess or deficiency arising out of any previous deduction or failure to deduct during the financial year."

In our view, the object and purpose of sub-section (3) of section 192 is that the person who is required to deduct tax The Appellant submits that the object and purpose of sub- section (3) of section 192 is that the person who is required to deduct tax at source in respect of salaries is permitted to make adjustments i.e. any shortfall in deduction of TDS under section 192 in the initial months of the year can be made good in the later months or in the last month of the financial year. Sub- section (3) not only authorizes adjustment in case of excess or deficient deduction, but also authorizes adjustment in case of total failure to deduct tax during the financial year. Sub- section (3), therefore, makes it abundantly clear that if there is a failure to deduct tax in a financial year, the same can be deducted by way of adjustment during the financial year. In those circumstances, the obligation to deduct tax at the time of payment, which is the mandate of sub-section (1) of section 192, extends up to the end of the financial year by virtue of the provisions contained in sub-section (3) of section 192.

Our attention was further drawn to Circular No. 586 dated 18.11.2022 and the relevant extract thereof is reproduced hereunder; "Circular: No. 586, dated 28-11-1990 Clarification regarding liability to income-tax in India and deduction of tax at source of members of the crew of foreign going Indian ship

Under section 192 of the Income-tax Act, persons responsible for paying salary and other incomes chargeable under Income-tax Act under the head "Salaries" are required to deduct income-tax from such income at the time of payment. For this purpose, the amount of tax to be deducted is computed at the average rate of income-tax arrived at by applying the rates in force for the financial year in which the payment is made on the estimated income of the person to whom salary is paid. Since, as explained above, in the case of members of crew of foreign-going Indian ships, who are not likely to be in India for a period or periods exceeding 182 days in a year, income which accrues or arises outside India and is also received outside India is not liable to tax in India, the shipping companies and other persons responsible for paying salary to such members of crew may take these factors into account while computing the amount to be deducted as tax and deduct only so much of tax as would be chargeable on the estimated income liable to tax in India. If the shipping company or other person responsible for paying to such members of crew subsequently finds that any person who was earlier considered as not likely to be resident in India and deduction of tax at source was made on that basis is now likely to be resident in India, the shipping company or the other person responsible for making the payment, may increase the deduction so as to adjust any deficiency arising out of an earlier short deduction or non- deduction during the same financial year.

The Ld. AR also relied upon the decision in the case of Coordinate Bench of the ITAT, Mumbai in the case of Vinsons Vs. ITO reported in [2004] 89 TDS 267 (Mum), wherein it was held as under:

We have carefully considered the rival submissions and perused the record. Section 192(1) of the Income-tax Act, 1961 speaks of deduction of tax at source 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. The section no-where mandates that each installment of TDS recovered should be exactly 1/12 of the total tax deductible at source. A conjoint reading of sections 192(1) and 192(3) of the Income-tax Act, 1961 makes it further clear that TDS installments of each month need hot necessarily be accurate, as otherwise the expression or reduce the amount to be deducted under this section for the purpose of adjusting any excess or deficiency arising out of any previous Increase deduction of failure to deduct during the financial year." will have no meaning. Let us take an example of a salaried employee, who is supposed to pay annual tax of Rs 30,000 based on the salary come earned in the month of April of the financial year. The employer has to deduct, according to the revenue authorities, tax at the rate of Rs. 2,500 per month. If, in the month of December the employee gets arrears of salary: bonus etc. which doubles the tax liability, the employer would be liable to deduct Rs. 5,000 towards tax every month as against Rs. 2,500 deducted earlier. Neither the assessee nor the employer could have anticipated this position in the month of April. The only recourse is to deduct higher tax from the month of December onwards so as to cover up the deficiency. Under these circumstances, can it be said that the employer is a defaulter and failed to deduct the tax, as to charge interest at the rate of 15% on the alleged short deduction, Rs. 2,500 per month? In our considered opinion, that could not have been the intention of the Legislature To meet such eventualities sub-section (3) provides for adjustment of excess or deficiency arising out of any previous months or failure to deduct during the financial year. Any other interpretation would render section 192(3) nugatory and an employer would be put to undue burden of payment of interest for no fault of him. From this analysis, it is apparent that on mere short deduction of tax at source from the salaries paid to the employees, section 201(1A) cannot be invoked unless the total tax deducted by the end of the year is less than the tax deductible on the salary paid to the employee in that year. In the instant case, the assessee has reasonably estimated the income and in view of the workers insistence and other circumstances, there is a short deduction of tax at the beginning of the financial year which is adjusted in the later months.

Therefore, in our considered opinion, interest is not chargeable for mere short deduction in the initial months. In the result, the appeals filed by the assessee are allowed.

And also the decision of Uttarakhand High Court in the case of CIT VS. Enron Expat Services Inc. reported in [2010] 194 taxman 70. wherein it was held as under:

It is true that sub-section (1) of section 192 of the Act contemplates deduction of income-tax at the time of payment and at the same time, section 201(1A) deals with a situation when tax is not deducted, but sub- section (3) of section 192 is a part of section 192 required to be read with sub-section (1) thereof, for nothing has been expressed in the Act to treat sub-section (3) as a separate provision. The object and purpose of sub- section (3) is to permit the person obliged to deduct to make adjustments. Sub- section (3) does not stop while authorising adjustment in case of excess or deficient deduction, but also authorises adjustment in case of total failure to deduct during the financial year. Sub- section (3), therefore, makes it abundantly clear that if there is a failure to deduct in a financial year, the same can be deducted by way of adjustment during the financial year. In those circumstances, the obligation to deduct at the time of payment, which is the mandate of sub-section (1) of section 192, stands extended up to the end of the financial year by virtue of the provisions contained in sub-section (3) of section 192 of the Act. The right to adjust, granted by sub-section (3) does not extend beyond the financial year.

The learned counsel for the appellants submitted that in view of the pronouncement as above, the provisions of section 201(1A) of the Act would become otiose. We do not think so. Section 201(1A) applies only when during the financial year whole or any part of the tax deductible has not been deducted. We accordingly, conclude the matter and answer the question, as above, in favour of the assessee, while dismissing the appeal.

After having considered the factual as well as legal proposition as discussed by us above, we are of the view that if there are bonafied reasons in deducting lower tax in the earlier months of financial year and the same is made good immediately after noticing such shortfall, then in that eventuality section 192 Sub-Clause (3) would save the employer from the liability of making payment of interest. As in the present case on ascertaining the financial status of the employer the entire TDS is duly deducted by the end of the financial year and the same was also deposited in time. Thus a co-joint reading of Sec. 192(1) and 192(3) of the Income Tax Act makes it further clear that TDS installments of each month need not necessarily be accurate, as otherwise the expression “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” will have no meaning.

In our view if there are bonafide reasons in deducting a lower tax in earlier months of financial year and the same is made get immediately after noticing such shortfall, then in the eventuality section 192 sub-section (3) would save the employer from the liability of making payment of interest. Thus, to meet such eventualities sub-section (3) provides for adjustment of excess or deficiency arising out of the any previous months or failure to deduct in the financial year. Any other interpretation would render Sec. 192(3) nugatory and an employer would be put to undue burden of payment of interest for no fault of him. From this analysis, it is apparent that on mere short deduction of tax at source from the salaries paid to the employees, Sec. 201(1A) cannot be invoked, unless the total tax deducted by the end of the year is less than the tax deductable from the salary paid to the employee in that year. Since, in the instance case the assessee has reasonably estimated the income and in view of the above circumstances there was a short deduction of tax at the beginning of financial year which is adjusted in the later months. Therefore in our considered view interest is not chargeable for mere short deduction in the initial months. Thus these grounds raised by the assessee are allowed.

After having gone through the provisions of Sec. 220 sub- clause (2) of the Act, we are of the considered view that the same is applicable only where the amounts specified in the notice of demand issued u/s 156 of the Act is not paid within the stipulated period. But in the present case the provisions of Sec. 220 sub-clause (2) of the Act are not applicable as no order or notice of demand was ever issued in respect of the aforesaid assessment year. Therefore, the assessee would not have any liability with regard to levy of interest u/s 220(2) of the Act and therefore the levy of interest u/s 220(2) of the Act stands deleted and this ground raised by the assessee stands allowed.

As the facts and circumstances in these appeals are identical to for the A.Y 2012-13 (except variance in figures) and the decision rendered in above paragraph would apply mutatis mutandis for these appeals also. Accordingly, we allow the grounds of appeal of the assessee.

In the result, all the eight appeals filed by the assessee are allowed.

उप/सहायक पंजीकार ( Asst. Registrar) आयकर अपीलीय अिधकरण, मु�बई मु�बई / ITAT, Mumbai मु�बई मु�बई