BALIA, J. - (1.) AT the instance of Revenue on the application made under Section 256 (2) of the Income Tax Act, 1961 the following two sets of questions have been referred impugning upon two controversies relating to recovery of interest in respect of tax not deducted at source by the assessee and the levy of penalty in respect of the same default. RA Nos. 194 to 201/jp/91 "1. Whether on the facts and in the circumstances of the case, the ITAT was justified in invoking provisions of Sec. 231 of the I. T. Act, 1961 and thus holding the levy of penalty under Sec. 221 for non-payment of tax deductible at source as barred by time? 2 Whether on the facts and in the circumstances of the case, the ITAT was justified in holding that no penalty under Sec. 221 is leviable on the tax deductible at source and non- deduction of tax being held for good and sufficient reasons. " RA Nos. 202 to 209/jp/91 1. Whether on the facts and in the circumstances of the case the ITAT was justified in invoking provisions of Section 231 of I. T. Act, 1961 and thus holding the levy of interest as barred by time? Whether on the facts and in the circumstances of the case the ITAT was justified in holding that no interest under Section 201 (1a) is leviable on the tax deductible at source, the on- deduction of tax being held for good and sufficient reasons?"
(2.) THE respondent assessee is a registered firm which carried on business as contractors and taken contractors from the PWD and Irrigation Department of the State Government. THE assessee was also sub-letting these contracts to sub-contractors for which commission @ 3% was charged, which was declared as his taxable income. Section 194-C was inserted in Income Tax Act 1961 by Finance Act 1972 w. e. f. 1. 4. 1972. Under sub-section (1) of Section 194-C any person responsible for paying any sum to any resident for carrying out any work (including supply of labour for carrying out any work) in pursuance of contract between the contractor and the various other persons enumerated in the Provisions is required to make deduction from payments made by contractors to sub-contractors @ 1% as income tax on income comprised therein at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of cheque or draft or by any other mode which ever is earlier. Sub-section (2) of Section 194-C casts a similar obligation on the contractor to deduct tax at source from payments made to sub contractors. It envisages that any contractor referred to in sub-section (1) who is other than the individual or Hindu Undivided Family and responsible for paying any sum to any resident in pursuance of a contract with the sub-contractor for carrying out or for the supply of labour for carrying out the whole or any part of the work under taken by the contractor or for supplying, whether wholly or partly, and labour which the contractor has undertaken to supply, shall, at the time of credit of such sum to the account of sub-contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode to his sub-contractor deduct 1% such sum as income tax on the income comprised therein. The duty to deduct the tax at source is statutory and arises at the time when the credit is made to account or payment is made. Sub-section (3) of Section 194-C of the Act made an exception to the general rule that until such payments as and when made does not exceed the limit prescribed therein the obligation to deduct the tax at source does not arise while the provision initially prescribed the limit of credit or payment up to which duty to deduct tax at source did not arise was Rs. 5,000/ -. This limit was enhanced to Rs. 10,000/- w. e. f. 1. 6. 1982 by Finance Act 1982 and was further enhanced to Rs. 20,000/- by act No. 22 of Finance Act, 1995 w. e. f. 1. 7. 1995. In this reference we are concerned with the assessment periods 1974-75 to 1981-82. The last of the previous year in relation to which obligation for deduction of tax at source may have arisen expired on 31. 3. 1981. For these assessment years for the first time two consolidated notices were issued to the assessee one under Section 221 and another under Section 201 (1-A) on 26. 2. 1983 calling upon the assessee to show cause why simply interest @ 12% p. a. be not charged under Section 201 (1a) upto the date of the credit of payment in account of sub-contractor and why penalty under Section 221 be not levied on the assessee. The assessee had replied that notice issued on 26. 2. 1983 for recovery of any amount relating to non-deduction of tax at source up to financial year closing on 31. 3. 1981 was barred by time a terms of Section 231. It was contended that the assessee has not deducted tax at source from those sub-contractors who did not have taxable income.
(3.) WHILE assessing officer found vide order dated 1. 11. 1984 that assessee had deducted tax at source in respect of three sub- contractors who had taxable income namely M/s. Sushil Construction Company, M/s. Sanjay Construction Company and M/s. Ramesh Construction Company. On these points the ITO said in his order that the default in respect of which the assessee has failed to deduct the tax as per provisions of Section 194 C read with Section 201 (1-A) of the Income Tax Act, 1961 without any good and sufficient reason and, therefore, penalty of varying sum was imposed for each assessment year between 1974-75 to 1980-81. Similarly, interest was also calculated for same period and it was also levied on the sum so computed which ought to have been deducted at source, but which has not been so deducted by assessee for each assessment year. The interest in all these separate orders was charged from the last date of ending on previous year's 31st March relevant to assessment year in relation to which assessee was required to deduct tax at source and deposit it with Central Govt. within time prescribed up to the date of the order. The ITO has not expressed his opinion to the questions of limitation at all, and has rest contended with saying that the arguments have been taken for the sake of arguments only having no force. On appeal the Assistant Commissioner (Appeals) deleted the penalty and interest charged for assessment ear 1974-75 to 1979- 80. In respect of assessment year 1974-75 and 1979-1980 the first Appellate Authority upheld the assessee's contention that assessee has not bonafidely deducted tax against the amount payable to those sub-contractors who did not have taxable income and, therefore, the assessee could not be held responsible for such non-deduction. The First Appellate Authority also held the initiation of recovery proceedings for the assessment year 1974- 75 as barred by time under Section 231. However, in relation to assessment years 1980-81 and 1981-82 the First Appellate Authority found initiation of proceedings for said years within limitation provided under Section 231 and sustained the imposition of penalty and charge of interest in respect of tax not deducted at source. On further filing of the appeal, the Tribunal allowed the assessee's appeal in respect of assessment Year 1981-82 and dismissed the appeal of the Revenue for assessment Year 1974-75 to 1979-80. It was held by the Tribunal that charging of interest under Section 201 in this case was not permissible for the simple reason that ITO has not brought on record any material to controvert the appellant's assertion regarding good and sufficient reasons for not deducting the tax at source. It was also found that the position in relation to the penalty under Section 221 is similar. The penalty could not have been imposed automatically and secondly because there was a disobedience beyond section 194 (a), (c) (2) ;