Supreme Court clarifies interest liability on advance tax for non-residents: Director of Income Tax vs. Mitsubishi Corporation (2021)

Introduction

Date of the Judgment: 17 September 2021
Citation: 2021 INSC 620
Judges: L. Nageswara Rao, J. and Aniruddha Bose, J.

Can a non-resident company be penalized for the failure of the payer to deduct tax at source, leading to a shortfall in advance tax payments? The Supreme Court of India recently addressed this critical question in a batch of appeals, clarifying the liability of non-resident assessees for interest on short payment of advance tax. The core issue revolved around whether a non-resident company is liable to pay interest under Section 234B of the Income-tax Act, 1961, when the payer fails to deduct tax at source. This judgment clarifies the interplay between the obligations of the payer and the payee in the context of advance tax.

The judgment was delivered by a two-judge bench comprising Justice L. Nageswara Rao and Justice Aniruddha Bose. Justice L. Nageswara Rao authored the opinion for the bench.

Case Background

The case originated from assessment orders passed against M/s. Mitsubishi Corporation, a non-resident company incorporated in Japan with operations in India. The Income Tax Department determined that a portion of the company’s income was taxable in India. Despite the company’s objections, the Assessing Officer (AO) passed an assessment order on 24.03.2006 for the assessment years 1998-99 to 2004-05, attributing income to its Indian activities and levying interest under Section 234B of the Income-tax Act, 1961.

The company appealed the interest levy, arguing that it should not be penalized for the payer’s failure to deduct tax at source. The Commissioner of Income Tax (Appeals) (CIT) dismissed the appeals on 10.02.2009. The Income Tax Appellate Tribunal (ITAT) overturned this decision on 23.06.2009, holding that the company was not liable for interest under Section 234B when tax was deductible at source. The High Court upheld the ITAT’s decision on 30.08.2010, leading to the appeal before the Supreme Court by the Income Tax Department.

The Assessing Officer examined the structure of the Respondent-Assessee which was engaged in carrying out trading activities in carbon crude oil, LPG, ferrous products, industrial machinery, mineral, non-ferrous metal and products, textiles, automobiles etc. through its liaison offices in India.

The assessment order was challenged before the CIT, restricted to the imposition of interest under Section 234B of the Act.

The appeals were dismissed by the CIT as not being maintainable. The appeals filed by the Respondent-Assessee against the order of the CIT were disposed of by the ITAT on 16.11.2007 by remanding the appeals for the assessment years 1998-99 to 2004-05 to the CIT to be decided on merits.

Timeline:

Course of Proceedings

The Commissioner of Income Tax (Appeals) (CIT) initially dismissed the appeals filed by the Respondent-Assessee against the assessment order. Subsequently, the Income Tax Appellate Tribunal (ITAT) remanded the matter back to the CIT for a decision on merits. On remand, the CIT framed two questions: (a) whether the Appellant is liable to pay interest under Section 234B of the Act, in case tax which was deductible at source has not been deducted; and (b) whether in the facts and circumstances of the case there was any tax deductible at source from the receipts of the appellant so as to apply the ratio of the ITAT decision in appellant’s own case for assessment year 2005-06.

The CIT, despite acknowledging the ITAT’s order in the assessment year 2005-06, concluded that the Respondent was liable to pay advance tax under Section 191 of the Income-tax Act, 1961, and consequently, interest under Section 234B for default in payment of advance tax.

The ITAT, however, allowed the appeals, relying on its earlier decision in the Respondent’s case for the assessment year 2005-06, as well as decisions of the Uttarakhand High Court and the Bombay High Court, which held that interest under Section 234B cannot be imposed on the payee-assessee for the payer’s failure to deduct tax at source. The High Court upheld the ITAT’s decision, stating that interest under Section 234B cannot be imposed on an assessee for the payer’s failure to deduct tax at source when Section 201 provides for consequences of such a failure.

Legal Framework

The core legal provisions at play in this case are from Chapter XVII of the Income-tax Act, 1961, which deals with the collection and recovery of tax. Section 190 states that tax on income is payable either by deduction or collection at source or by advance payment. Section 195 mandates that any person responsible for paying to a non-resident must deduct income tax at the rates in force. Section 200 requires that the deducted amount be paid to the Central Government. Section 201 details the consequences of failing to deduct tax or pay the tax after deduction.

The key provisions for this case are Section 209(1) and Section 234B of the Income-tax Act, 1961, as they stood prior to the Finance Act, 2012:

Section 209(1) of the Income-tax Act, 1961, outlines the computation of advance tax. It states:

“209. Computation of advance tax. —(1) The amount of advance tax payable by an assessee in the financial year shall, subject to the provisions of sub- sections (2) and (3), be computed as follows, namely:-
(a) where the calculation is made by the assessee for the purposes of payment of advance tax under sub-section (1) or sub-section (2) or sub-section (5) or sub-section (6) of section 210, he shall first estimate his current income and income-tax thereon shall be calculated at the rates in force in the financial year;
(b) where the calculation is made by the Assessing Officer for the purpose of making an order under sub-section (3) of section 210, the total income of the latest previous year in respect of which the assessee has been assessed by way of regular assessment or the total income returned by the assessee in any return of income furnished by him for any subsequent previous year, whichever is higher, shall be taken and income-tax thereon shall be calculated at the rates in force in the financial year;
(c) where the calculation is made by the Assessing Officer for the purpose of making an amended order under sub-section (4) of section 210, the total income declared in the return furnished by the assessee for the later previous year, or, as the case may be, the total income in respect of which the regular assessment, referred to in that sub-section has been made, shall be taken and income-tax thereon shall be calculated at the rates in force in the financial year;
(d) the income- tax calculated under clause (a) or clause (b) or clause (c) shall, in each case, be reduced by the amount of income- tax which would be deductible or collectible at source during the said financial year under any provision of this Act from any income (as computed before allowing any deductions admissible under this Act) which has been taken into account in computing the current income or, as the case may be, the total income aforesaid; and the amount of income-tax as so reduced shall be the advance tax payable.”

Section 234B of the Income-tax Act, 1961, deals with interest for defaults in payment of advance tax. It states:

“234B. Interest for defaults in payment of advance tax. —(1) Subject to the other provisions of this section, where, in any financial year, an assessee who is liable to pay advance tax under section 208 has failed to pay such tax or, where the advance tax paid by such assessee under the provisions of section 210 is less than ninety per cent. of the assessed tax, the assessee shall be liable to pay simple interest at the rate of one per cent. for every month or part of a month comprised in the period from the 1st day of April next following such financial year to the date of determination of total income under sub-section (1) of section 143 and where a regular assessment is made, to the date of such regular assessment, on an amount equal to the assessed tax or, as the case may be, on the amount by which the advance tax paid as aforesaid falls short of the assessed tax.
Explanation 1.—In this section, “assessed tax ” means the tax on the total income determined under sub-section (1) of section 143 and where a regular assessment is made, the tax on the total income determined under such regular assessment as reduced by the amount of,—
(i) any tax deducted or collected at source in accordance with the provisions of Chapter XVII on any income which is subject to such deduction or collection and which is taken into account in computing such total income;
(ii) any relief of tax allowed under section 90 on account of tax paid in a country outside India;
(iii) any relief of tax allowed under section 90A on account of tax paid in a specified territory outside India referred to in that section;
(iv) any deduction, from the Indian income-tax payable, allowed under section 91, on account of tax paid in a country outside India; and
(v) any tax credit allowed to be set off in accordance with the provisions of section 115JAA.
Explanation 2.—Where, in relation to an assessment year, an assessment is made for the first time under section 147 or section 153A, the assessment so made shall be regarded as a regular assessment for the purposes of this section.
Explanation 3.—In Explanation 1 and in sub-section (3), “tax on the total income determined under sub-section (1) of section 143” shall not include the additional income-tax, if any, payable under section 143.”

The interplay between these provisions determines the liability of an assessee to pay interest on short payment of advance tax.

Arguments

The Revenue argued that the obligation of the assessee to pay advance tax is independent of the payer’s obligation to deduct tax at source. They contended that under Sections 190 and 191 of the Income-tax Act, 1961, this obligation continues even if the payer fails to deduct tax. The Revenue submitted that Section 234B is compensatory, meant to cover the government’s loss due to unpaid tax. They argued that when there are two modes of recovery (from the assessee and the payer), the Revenue’s choice of recovery mode cannot be restricted.

The Revenue further argued that the phrase “deductible or collectible at source” in Section 209(1)(d) does not include tax that was not actually deducted. They relied on Explanation 1 to Section 234B(1), which defines “assessed tax” as tax on total income reduced by tax actually deducted or collected at source. The Revenue contended that Section 234B is a standalone provision and the words used in Section 209(1)(d) cannot be imported into Section 234B.

The Respondent-Assessee argued that Section 234B cannot be read in isolation and must be construed with Section 209 of the Income-tax Act, 1961. They cited *Ian Peter Morris v. Assistant Commissioner of Income Tax* (2020) 15 SCC 123, arguing that advance tax provisions do not apply once it is determined that tax should have been deducted at source. They relied on judgments from the Uttarakhand, Bombay, and Madras High Courts to support their claim that the assessee cannot be penalized for the payer’s default.

The assessee emphasized that for interest under Section 234B to apply, there must be an established liability to pay advance tax and a subsequent default. They argued that Section 209(1)(d) was complied with, and they had no advance tax liability.

Issues Framed by the Supreme Court

The Supreme Court addressed the following issue:

1. Whether a non-resident assessee is liable to pay interest under Section 234B of the Income-tax Act, 1961, for short payment of advance tax, when the payer fails to deduct tax at source.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

The Supreme Court also considered the following legal provisions:

• Section 190 of the Income-tax Act, 1961, which states that tax on income is payable by deduction or collection at source or by advance payment.
• Section 191 of the Income-tax Act, 1961, which deals with direct payment of tax.
• Section 195 of the Income-tax Act, 1961, which mandates that any person responsible for paying to a non-resident must deduct income tax at the rates in force.
• Section 200 of the Income-tax Act, 1961, which requires that the deducted amount be paid to the Central Government.
• Section 201 of the Income-tax Act, 1961, which details the consequences of failing to deduct tax or pay the tax after deduction.
• Section 209(1) of the Income-tax Act, 1961, which outlines the computation of advance tax.
• Section 234B of the Income-tax Act, 1961, which deals with interest for defaults in payment of advance tax.

Judgment

The Supreme Court held that for the period prior to the financial year 2012-13, the assessee was not liable to pay interest under Section 234B of the Income-tax Act, 1961, when the payer failed to deduct tax at source. The Court reasoned that Section 209(1)(d) of the Income-tax Act, 1961, as it stood before the amendment, allowed the assessee to reduce the amount of income tax deductible at source from the current income, even if tax was not actually deducted at source.

The Court observed that the language of Section 209(1)(d) was clear and unambiguous. The provision required the assessee to reduce the amount of income tax deductible at source from the current income. The Court held that the words “deductible or collectible at source” in Section 209(1)(d) did not mean “actually deducted or collected at source.” The Court noted that the legislature had used the words “actually deducted or collected at source” in Explanation 1 to Section 234B.

The Court noted that the Finance Act of 2012 amended Section 209(1)(d) to replace the words “deductible or collectible at source” with “actually deducted or collected at source.” The Court held that this amendment was a significant change and that the language of the unamended Section 209(1)(d) was clear. The Court stated that it is a well-settled principle of interpretation that subsequent legislation may be looked at to see the proper construction of an earlier Act where the earlier Act is ambiguous.

The Court stated that the legislative intent behind the amendment was to clarify the position and make it clear that the assessee would be liable to pay interest under Section 234B even when the payer has failed to deduct tax at source. The Court emphasized that the amendment was not to be read retrospectively and that the earlier position was that the assessee was not liable to pay interest under Section 234B if the payer failed to deduct tax at source.

The Court also clarified that the liability to pay advance tax arises under Section 208 of the Income-tax Act, 1961, and the computation of advance tax is done under Section 209. The Court held that the assessee was not liable to pay advance tax for the period prior to the financial year 2012-13, as the amount of tax deductible at source was to be deducted from the total income while computing the advance tax.

The Court observed that the Revenue’s interpretation would lead to an anomalous situation where the assessee would be penalized for the payer’s default. The Court stated that the law does not require the assessee to pay tax twice, once as a deduction at source and again as advance tax. The Court observed that Section 201 provided for the consequences of the failure of the payer to deduct tax at source, and the assessee could not be penalized for the same.

Decision

The Supreme Court dismissed the appeals filed by the Revenue. The Court held that the assessee was not liable to pay interest under Section 234B of the Income-tax Act, 1961, for the period prior to the financial year 2012-13 when the payer failed to deduct tax at source. The Court clarified that the amendment to Section 209(1)(d) by the Finance Act of 2012 was prospective and did not affect the position before the amendment.

Conclusion

The Supreme Court’s judgment in *Director of Income Tax vs. Mitsubishi Corporation* (2021) provides significant clarity on the liability of non-resident assessees for interest on short payment of advance tax when the payer fails to deduct tax at source. The Court’s interpretation of Section 209(1)(d), as it stood before the 2012 amendment, established that non-resident assessees were not liable for interest under Section 234B if the tax was deductible at source but not actually deducted by the payer. This decision is a crucial win for non-resident companies, ensuring they are not penalized for the payer’s default.

The judgment highlights the importance of considering the legislative intent behind tax provisions and ensuring that tax laws are interpreted in a way that is fair and equitable to all parties involved. The Supreme Court’s decision also underscores the principle that a taxpayer should not be penalized for the default of another party, particularly when the law provides specific consequences for such default.

This case serves as a landmark judgment in the area of income tax law, particularly concerning non-resident taxation and the interplay of various sections of the Income-tax Act, 1961. It emphasizes the need for a clear and consistent interpretation of tax laws and the importance of considering the context and purpose of each provision.

Flowchart of the Case