The Hindu Business Line : Tax deduction on estimated income

Giving the legal requirement that tax should be deducted on the “estimated income of the assessee,” if tax is not deducted at source by the employer, he would be deemed to be an assessee in default.

H. P. Ranina

An employer is required to deduct tax at source on any income chargeable under the head “salaries” under Section 192 of the Income-Tax Act, 1961. This provision stipulates that tax would be withheld at the applicable rates in force for the relevant financial year “on the estimated income” of the employee.

If tax is not deducted at source by the employer, he would be deemed to be an assessee in default under Section 201(1-A). An interesting decision was given on the issue of short deduction of tax pertaining to performance incentive payable to an employee. The Income-Tax department invoked the provisions of Section 201(1-A) for not deducting the full amount of tax at source from such payment of performance incentive.

The facts in C.I.T. v. Marubeni India P. Ltd. (294 I.T.R. 157) were that for the financial year 1999-2000, the assessee claimed that since the precise amount of performance incentive could not be gauged while estimating the salary income, there was a short deduction of tax at source.

This was not accepted by the Deputy Commissioner on the ground that the expatriate employees were full-time employees of the assessee and were rendering services only to the assessee and no one else, and levied interest under Section 201(1-A) for the assessment year 2000-2001.

Short deduction

The Commissioner (Appeals) held that the performance incentive was paid every year and was in the knowledge of the company and, hence, tax at source ought to have been deducted by the assessee on that basis. The Tribunal held that it was not in the form of contractual payments accruing to the employees every month and, hence, the assessee could not be fastened with the vicarious liability of deducting tax on the basis of estimates. The Tribunal concluded that since the estimates were bona fide the assessee could not be held to be in default.

The Delhi High Court observed that the deduction of tax at source has to take place “at the time of payment” of such salary. Second, the tax required to be deducted would be the tax payable at the rates in force during that financial year “on the estimated income of the assessee” under the head “salary” for that financial year. The provision, therefore, envisages that the employer would proceed to deduct TDS on the estimated income.

The High Court held that the performance incentive cannot be a fixed mandatory payment made year after year. Since it is dependent on the performance of the employee in a given financial year, the payment of the incentive is not only uncertain but the amount is also likely to vary.

Giving the requirement of Section 192(1) that tax should be deducted on the “estimated income of the assessee”, the Court held that the company was not in default on account of the short deduction of the TDS from the salary of its employees relatable to the performance incentive. On the facts of the instant case, Section 201(1-A) was not attracted. This was not a case of non-deduction of tax but one of short deduction for bona fide reasons.

In Income-tax Officer v. Gujarat Narmada Valley Fertilisers Co. Ltd. (247 I.T.R. 305), the assessee filed returns under Section 206 of the Act for the financial year 1995-96 on May 24, 1996. The Assessing Officer, after a survey on July 19, 1996, found that certain payments were made to the employees on which tax was not deducted at source. The Assessing Officer held that the assessee was an “assessee deemed to be in default” within the meaning of Section 201(1) read with section 192 of the Act and this default attracted the provisions of Section 201(1-A).

The Commissioner of Income-tax (Appeals) confirmed the order but partly allowed relief in respect of the interest. The Tribunal held that the authorities had not proved that the action of the assessee in not deducting tax on the disputed payments was a mala fide one.

On appeal, the Gujarat High Court held that, ultimately, the liability was of the employees. When in respect of a payment to an individual employee, an order of rectification was made by the authorities in favour of the employee, the Tribunal could not be said to be wrong in recording a finding that there was honest and bona fide belief on the part of the assessee. The Tribunal had not committed any error of law and no substantial question of law arose.

Assessee in default

In C.I.T. v. Nestle India Ltd. (243 I.T.R. 435), the assessee while computing the income of its employees chargeable under the head “Salaries” did not include in their taxable salary the conveyance allowance granted to them. It was explained that the conveyance allowance was being paid as reimbursement to those employees who had not been provided with company vehicle and so could not be treated as perquisite under section 17(2) of the Income-tax Act, 1961, and the same was also exempt under notification dated June 8, 1989.

The Assistant Commissioner held the assessee to be in default in not treating the conveyance allowance as taxable and not deducting tax at source. He calculated the deduction for each of the financial years and directed the assessee to make payments of the same. He also levied interest under section 201(1-A) on the assessee.

The Tribunal held that the assessee was under a bona fide belief that conveyance allowance was not taxable and hence neither penalty under section 201 nor interest under section 201(1-A) was leviable. The Delhi High Court held that the conclusion arrived at by the Tribunal was correct in law.

In C.I.T. v. Oil and Natural Gas Corporation Ltd. (254 I.T.R. 121), the assessee had a scheme, approved by the Central Government, for reimbursement of expenditure towards maintenance by its employees of a conveyance. Under the scheme reimbursement was granted to an employee for one vehicle, subject to the employee giving a certificate that the expenditure actually incurred on official use was in excess of the amount claimed.

Reimbursement

While deducting tax at source on salaries paid to its employees, the assessee did not take into account the amount reimbursed under the scheme, as it considered that it was not taxable under section 10(14) of the Act.

The Gujarat High Court held that section 10(14) was applicable. Reimbursement was granted for use of one vehicle owned and possessed by the employee for expenses incurred in undertaking official journeys and reimbursement was made on the employee issuing a certificate that he incurred more expenses than the amount spent. That the amount was reimbursed only up to a limit did not detract from the fact that expenses were being paid towards actual expenses incurred by the employee.

It was also held that the fact that the employee, during the course of his assessment to tax, was found not entitled to full benefit under Section 10(14) did not in any way reflect on the estimate made by the employer of the tax payable on the income of the employee at the time when such amount was paid.

From the aforesaid decisions of the Courts, it is clear that when the employer has made a bona fide estimate of the income-tax in the hands of each employee, the employer would not be treated as an assessee in default and no interest would be chargeable. Under Section 201(1-A) of the Act, no proceedings can be initiated.

(The author, a Mumbai-based advocate specialising in tax laws, can be contacted at ranina@bom2.vsnl.net.in)