Case: The Transmission Corporation of A.P. Ltd Vs. Commissioner of Income Tax, A.P

2. Before deciding the question involved, we would refer to a few facts of the matter :The appellant the Andhra Pradesh State Electricity Board (hereinafter referred to as the Board) made certain payments tot against the purchase of machinery and equipment and also against the work executed by thes in India of erecting and commissioning the machinery and equipment. The Board entered into two separate agreement with M/s. Charmilles Engineering Works Ltd., Geneva, Switzerland, one for the purchase of Nos. 95,000 BHP Francis Turbines and another for purchase of 2 Nos. Butterfly Valves. There were two other contracts of the assembly, erection and testing and commissioning of the aforesaid equipments. The payments were made to thet company for the financial year. The Board also entered into an agreement with Oerlikon Engineering Co., Zurich, Switzerland, for the purchase of 2 Nos. 60 MW generators and Indoor Switchgear for the Sileru Hydro Electric Scheme. Another contract was executed for the assembly, erection and testing and commissioning of the above equipments. The payments were made in the financial year. Third contract was entered by the Board with M/s. Sacheron Works Ltd., Ganeva, Switzerland for the purchase and erection of 7 nos. power transformers for the Sileru Hydro Electric Scheme. On the basis of the said contract in the financial year, the amount was paid to thet company. For the aforesaid payments, the question arose whether the Electricity Board was under as obligation to deduct tax at source from these payments under Section 195 of the Income Tax Act, 1961 (hereinafter referred to as the Act). These payments were made by the Electricity Board without deduction of tax at source. Owing to the failure of the Electricity Board to deduct such tax, it was deemed to be an assessee in default in respect of the tax deductible at source. Hence, Income Tax Officer passed orders determining the tax which, according to him, was deductible at source under Section 195 and the Electricity Board was required to pay such amounts. Against the order of the Income Tax Officer, appeals were filed by the assessee which were allowed by the Appellate Assistant Commissioner with the observation that the words any other sum chargeable under the provisions of this Act occurring in Section 195 of the Act do not contemplate inclusion of trade receipts in their ambit and that Section 195 applies only to cases where the sums paid are pure income profits. The Appellate Assistant Commissioner, therefore, allowed the appeals and set aside the orders passed by the Income Tax Officer. Against the said order, Revenue preferred appeals before the Income Tax Appellate Tribunal. The Income Tax Appellate Tribunal also dismissed the appeals filed by the Income Tax Officer on the ground that the provision of Section 195 of the Act are not applicable to payments of sums to a, which are not pure income profits. Thereupon, on the reference applications filed b y the Commissioner of Income Tax under Section 256(1) of the Act the Tribunal referred the following question of law for the decision of the High Court for the payments made to theR.C. NO. 205 of 1978 :Whether on the facts and in the circumstances of the case, the Superintending Engineer, Civil Circle, Upper Sileru, is liable to deductx u/s. 195 of thex Act, 1961 on the payments made to thet company for the assessment years3. Similar questions with regard to payments made to two others as stated above were also referred in R.C. Nos. 203 and 204 of 1978.4. At the time of hearing of the matter, the High Court stated that two fundamental question arise for consideration and they were : (a) whether the provisions of Section 195 of the Act are applicable to cases where the sum paid to thet does not wholly represent income; and (b) if Section 1995 is applicable in such cases, whether thex Officer could enforce deduction of tax at source on the gross amount of trading receipts or only in respect of that portion of the trading receipts which may be chargeable as income under the Act ? The Court observed that the question referred to deals with only first aspect mentioned above but the second aspect is an integral part of the first aspect and, therefore, it was necessary to reframe the question in order to bring real controversy between the partiesand decided the following question :Whether, on the facts and in the circumstances of the case, the Superintending Engineer, Civil Circle, Upper Sileur, is liable to deductx under Section 195 of thex Act, 1961 in respect of payments made tos viz., M/s. Charmilles Engineering Works Ltd., M/s. Sacheron Works Ltd., and M/s. Oerlikon Engineering Company and, if so, whether the tax deductable is liable to be determined on the gross sum of money paid to the6. Dealing with the contentions raised by the assessee and interpreting Section 195, the High Court held that it should be borne in mind that whatever tax is deducted at source under Section 195 from out of the gross sum is not irretrievably lost to the recipient; it is only a provisional payment which will be made to the Central Government to the credit of the recipient; the provisions of the Act enable the recipient, whether such recipient is a resident or, to file a return of income in the regular course and prove to the satisfaction of the ITO the income chargeable under the Act. The Court answered the reframed question as under :, who made the payments to the threes above referred, was under an obligation to deduct tax at source under Section 195 of the Act in respect of the sums paid to them under the contracts entered into2. The obligation of thee to deduct tax under Section 195 is limited only to the appropriate proportion of the Income chargeable under the Act forming part of the gross sums of money paid to the three3. While the Income Tax Officer was correct in the determination of tax under Section 195 in respect of the payments made to M/s. Sacheron Works Ltd., in R.C. No. 204, he was in error in determining the tax deductible under Section 195 in respect of the gross sums of money paid to M/s. Charmilles Engineering Works Ltd. in R.C. No. 203 and M/s. Oerlikon Engineering Company in R.C. No. 2057. Against the said judgment and order, the

Court's reasoning:
n (1), (2) and (3) of Section 195 and Section 197 leaves no doubt that the expression any other sum chargeable under the provisions of this Act would mean sum on whichx is leviable. In other words, the said sum is chargeable to tax and could be assessed to tax under the Act. Consideration would be whether payment of sum tot is chargeable to tax under the provisions of the Act or not ? That sum may be income or income hidden or otherwise embedded therein. If so, tax is required to be deducted on the said sum would be the income is to be computed on the basis of various provisions of the Act including provisions of computation of the business income, if the payment is trade receipt. However, what is to be deducted is income tax payable thereon at the rates in force. Under the Act, total income for the previous year would become chargeable to tax under Section 4.n (2) of Section 4 inter alia, provides that in respect of income chargeable undern (1), income tax shall be deducted at source where it is so deductible under any provision of the Act. If the sum that s to be paid to thet is chargeable to tax, tax is required to be deducted. The sum which is to be paid may be income out of different heads of income provided under Section 14 of the Act, that is to say, income from salaries, income from house property, profits and gains of business or profession, capital gains and income from other sources. The scheme of tax deduction at source applies not only to the amount paid which wholly bears income character such as salaries, dividends, interest of securities etc., but also to gross sums, the whole of which may not be income or profits of the recipient, such as payments to contractors ands and the payment of insurance commission. It has been contended that the sum which may be required to be paid to thet may only be a trading receipt, and, any contain a fraction of sum as taxable income. It is true that in some cases, a trading receipt may contain a fraction of sum as taxable income, but in other cases such as interest, commission, transfer of rights of patents, goodwill or drawings for plant and machinery and such other transactions, it may contain large sum as taxable income under the provisions of the Act. Whatever may be the position, if the income is from profits and gains of business, it would be computed under the Act as provided at the time of regular assessment. The purpose ofn (1) of Section 195 is to see that the sum which is chargeable under Section 4 of the Act for levy and collection of income tax, the payee should deduct income tax thereon at the rates in force, if the amount is to be paid to a. The said provision is for tentative deduction of income tax thereon subject to regular assessment and by the deduction of, rights of the parties are not, in any manner, adversely affected. Further, the rights of payee or recipient are fully safeguarded under Sections 195(2), 195(3) and 197. Only thing which is required to be done by them is to file an application for determination by the Assessing Officer that such sum would not be chargeable to tax in the case of recipient, or for determination of appropriate proportion of such sum so chargeable, or for grant of certificate authorising recipient to receive the amount without deduction of tax, or deduction ofx at any lower rates or no deduction. On such determination, tax at appropriate rate could be deducted at the source. If no such application is filed income tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such sum to deduct tax thereon before making payment. He has to discharge the obligation of tax deduction at source10. The High Court of Calcutta considered and interpreted similar provision Section 18(3B) of the Income Tax Act, 1922, in the case of Ray and Co. (India) Private Limited v. Mukherjee, ITO 1959(36 ITR 365, and rightly held :if chargeable under the provisions of this Act means actually liable to be assessed to tax, in other words, if the sum contemplated is taxable income a difficulty is undoubtedly created as to complying with the provisions of the section11. The High Court further held that section 18(3B) contemplated not merely amounts, the whole of which was taxable without deduction, but amounts of a mixed composition, a part of which only might turn out to be taxable income, as well; and the disbursement, which were of the nature of gross revenue receipts, were yet sums chargeable under the provisions of the Income Tax Act and came within the ambit of Section 18(3B) of the Act12. Hence, in our view there is no substance in the contention of the learned Counsel for the Appellant that the expression any other sum chargeable under the provisions of this Act would not include cases where any sum payable to thet is a trading receipt which may or may not include pure income. The language of Section 195(1) for deduction of income tax by the payee is clear and unambiguous and cats an obligation to deduct appropriate tax at the rates in force. We make it clear that the learned counsel for the parties have not advanced any submissions with regard to other findings given by the High Court13. In this view of the matter, the answer given by the High Court that (i) the assessee who made the payments to the threes was under obligation to deduct tax at source under Section 195 of the Act in respect of the sums paid to them under the contacts entered into; and (ii) the obligation of thee to deduct tax under Section 195 is limited only to appropriate proportion of income chargeable under the Act, are correct.