INCOME TAX REVIEW

1. General

   1. Deduction of tax at source ("TDS"), like advance tax, is just a mode in which taxes are paid by a taxpayer. TDS is not a charge of tax. This proposition is enshrined in the provisions of Sec.4 (2) of the Income Tax Act, 1961 ("the Act"). While Sec.4 (1) is a charging section, Sec.4 (2) specifies the modes in which the chargeable tax is to be discharged. TDS provisions are contained in Chapter XVIIB. This is because, same income cannot be taxed twice.
      The above general principles apply as much to TDS on Salaries as they apply to TDS on any other income.

   2. The above principle leads to another general proposition that when the recipient of income has paid his taxes, the payer of income cannot be once again called upon to deduct tax at source even though the payer has admittedly failed to deduct the tax at source as required under the provisions of Chapter XVII B of the Income Tax Act, 1961 ("the Act").
       

2. TDS on Salaries – Section 192
   Provisions relating to deduction of tax at source from income chargeable under the head" salaries" are contained in Sec. 192 of the Act. A broad outline of Section 192 is as follows:–

   • A person responsible for paying income chargeable under the head "salaries" is liable to deduct tax at source. Such person, generally, is the employer;

   • Such liability crystallizes at the time of payment;

   • Tax is required to be deducted on the amount payable at the average rate of income tax computed on the basis of rates in force for the relevant Financial Year;

   • Such tax is to be deducted on the estimated income of the assessee under the head "salaries";

   • Generally, tax is required to be deducted from the whole of chargeable salaries, which include perquisites. However, the section provides an option to the employer to bear the tax of the employee in respect of non-monetary perquisites. [Sec.192 (1A) / (1B)];

   • Where an employee is employed during a Financial Year with more than one employer, the employee may furnish the details of his salary income from one employer to the other employer (at his choice) in Form No.12B and thereupon the other employer is required to take into account the details so furnished for the purpose of TDS [Sec.192 (2) ];

   • A salary earner, in certain circumstances, is entitled to relief u/s. 89 (1) of the Act. Where the employee furnishes the particulars of such relief in Form No.10E to the employer, the employer is required to compute the relief on the basis of such particulars [Sec.192 (2A) ];

   • If the employee so desires, he may furnish the particulars of other income as also of the loss, if any, suffered by him under the head "income from house property". Such details may be furnished as per Rule 26B and the employer is required to take into account all such details in computing the TDS amount and verified by the employee [Sec.192 (2B) ];

   • The employer is duty bound to furnish to the employee a statement giving correct and complete particulars of perquisites and profits in lieu of salary and the value thereof in Form No.12BA. [Sec.192 (2C)];

   • The law provides for an enabling provision whereby any deficiency or excess in deducting tax at source arising out of deductions made during a Financial Year can be adjusted before the end of the Financial Year [(Sec.192 (3)];

   • In certain cases payments made by a Recognized Provident Fund are chargeable to tax as provided in the Fourth Schedule to the Act. In such cases, the trustees of the Recognized Provident Fund or a person authorised under the Fund’s Regulations is obliged to make deduction of tax at source [Sec.192 (4)];

   • In certain circumstances employees contribution to an approved Superannuation Fund and interest thereon are chargeable to tax in the hands of the employee as provided in the Fourth Schedule to the Act. In such circumstances the trustees of the approved Superannuation Fund are obliged to deduct tax at source [Sec.192 (5)];

   • Where salary is payable in foreign currency, tax is required to be deducted on the value in rupees of such salary in accordance with Rules 26 and 115 [Sec.192 (6)];

   The above is a broad outline of the provisions of Sec.192. In this article, an attempt is made to discuss some of the important issues arising in respect of TDS on Salaries in our day to day practice.
    

3. TDS "at the time of payment"
   Various provisions of Chapter XVII-B of the Act provide for deduction of tax at source at the time of making payments or at the time of crediting the account of the payee, whichever is earlier. Unlike other provisions of the Act, Sec.192 applies at the time of payment and not at the time of credit. Therefore, in a case where salary is accrued in the accounts but is not paid to the employee, the liability of the employer to deduct tax at source does not get crystallized. This is an important aspect which needs to be kept in view while dealing with issues concerning TDS on salaries. The most recent decision upholding this proposition is that of the Delhi Tribunal in the case of Tej Quebecor Printing Ltd. vs. JCIT 84 ITD 684 (Del-Trib).
    

4. Cases of Foreign Employers

   1. Section 204 (i) defines the expression "person responsible for paying" in the case of payments of income chargeable under the head "salaries" (other than payments by Government) as "the employer himself" and, in case where the employee is a company, "the company itself and the principal officer thereof".

   2. An interesting issue that often arises in day today practice may be discussed. Take a case where an employee of a foreign company is deputed to, say, an Indian subsidiary. The salary of such employee is paid only by the foreign employer. The question arises as to whether there exists any obligation on part of the Indian company to deduct tax at source u/s.192 of the Act.

   3. Now, in cases where there does not exist an employer-employee relationship between the deputed employee and the Indian company, clearly, the Indian Company cannot be regarded as a person responsible for paying income by way of salaries and hence cannot be held as liable to deduct tax at source. Recently, the Delhi Tribunal has held, in the case of UOP Inter American Inc. vs. DCIT 128 Taxman 158 (Del-Trib) that where no relationship of employer-employee existed between employees of assessee-foreign company and Indian customer, assessee was not under an obligation to deduct tax from the value of rent-free accommodation provided to its employees by Indian customer, treating it as salary.

   4. However, a question that still remains is as to whether the foreign employer could be regarded as the person responsible for paying the salaries and as such could it be held as liable to deduct tax at source.

   5. Section 192 does not make any distinction between a non-resident employer and a resident employer. Both the types of employers are liable to deduct tax at source u/s.192 if they make payments to employees in respect of salaries that are chargeable to tax in India. Technically, therefore, a foreign employer may be held as the person responsible for paying income by way of salaries chargeable to tax in India and hence liable to deduct tax u/s.192. In cases where foreign employers have established place of business in India, this would certainly be the position. For example, in respect of salaries paid by branches of a foreign bank in India, there would clearly be an obligation to deduct tax at source from salaries for which there cannot be any valid grievance. However, in cases where the foreign employer has merely deputed its employee and where the foreign employer has no place of business in India at all, it would surely be an onerous task for the foreign company to comply with all TDS requirements. It will not only have to deduct tax, but also apply for TAN, file annual TDS returns etc. This leads us to an important legal question as regards extra territorial application of the tax law. However, there does not seem to be any authoritative pronouncement of any Court on extraterritorial application of TDS provisions. In day today practice, however, the Tax Department holds either the Indian company or the foreign company as liable to deduct tax at source. This leads to orders being passed, at times, against the foreign company treating it as assessee in default and raising demand for TDS, interest and penalties. The author most humbly suggests that this aspect requires strong representation from the profession. There exists a strong case to exempt the foreign employers from the provisions of TDS in cases where the employee has paid his full taxes, either as advance tax or as self assessment tax.
       

5. Exercise of due diligence by the Employer

   1. Section 192 (1) requires the employer to deduct tax on the estimated income chargeable under the head "salaries" for the Financial Year. This is unlike other provisions dealing with TDS. The words "estimated income" need to be specifically made note of. These words would imply that the employer is not bound to compute the exact amount chargeable as salaries and deduct tax thereon. Instead, the law requires the employer to make an estimate of the income chargeable under the head "salaries" for the Financial Year. Courts have held that the estimate should be a bona fide one and that the employer should have exercised due diligence in estimating the income chargeable under the head "salaries". For this proposition, see for example, the following cases:

      • Gwalior Rayon Silk Co. Ltd. vs. CIT 140 ITR 832 (MP);

      • Nestle India Ltd vs. ACIT 61 ITD 444 (Del-Trib);

      • Mahindra & Mahindra Ltd. vs. ITO 55 TTJ 174 (Bom-Trib);

      • Rejection of Department’s SLP by the Supreme Court reported in CIT vs. Mahindra & Mahindra 242 ITR (St) 187.

   2. The above principle answers several issues that arise in the course of day-to-day practice. It is often found that the employees are paid some extra-ordinary income by way of bonus, incentives or commission in the middle of a year. If such extra-ordinary income is taken into account and the full year’s salary is computed, then, there is bound to be an apparent shortage of deduction of taxes at source in the initial part of the year before such extra-ordinary income is paid. It is often seen that the Tax Department seeks to impose interest on the employer u/s. 201 (1A) for the shortfall in TDS payments in the earlier period. Indeed, such a stand of the Department cannot be held as correct on basis of the foregoing principle that at the time of deducting tax from month-to-month, the employer is entitled only to make a bona fide estimate of chargeable income of the employee. Such an action of the Department can also be countered in view of the specific provision in Sec.192 (3), which permits adjustments of deficiency or excess in TDS within a given previous year.

   3. At times, the Tax Department takes a view that certain items of payments / perquisites are chargeable in the hands of the employees whereas the employer and the employee contend that such items are not chargeable based on some case law or past practice or otherwise. In all such cases, invariably, demands are raised on the employer for the alleged failure to deduct TDS. In such cases, apart from the merits that one would like to argue, the assessee may be well advised to contend that, in view of the decided cases or for other valid reasons, the employer was under a bona fide belief that the particular item is not chargeable to tax under the head "salaries" and hence merely because the Department takes a contrary view, the employer cannot be regarded as an assessee in default.

   4. At the same time, however, the employer is expected to exercise due diligence in forming any view as to whether tax needs to be deducted or not. The Hyderabad bench of the Tribunal, in the case of Dr. Reddy’s Laboratories 58 ITD 104 has held that certain fixed sum is paid to the employees as, say, allowance based merely on a self declaration, such sum cannot be treated as reimbursement of expenses and allowed as exempt. This implies that the employers ought to be a little more circumspect so as to reach the satisfaction that the amounts paid to the employees are in fact reimbursements and not mere allowances.
       

6. Deductions at lower rates
   Section 197 provides a mechanism by which the employee can make an application to the Assessing Officer if his total income justifies the deduction of income tax at lower rates or no deduction of tax at all. In such cases, the employer is entitled to apply the certified rate in place of the average rate required under the section for TDS purposes.
    

7. Mandatory quoting of PAN / TAN
   As per the provisions of section 203A of the Act, it is obligatory for all persons responsible for TDS, including the employers, to obtain and quote Tax-deduction account No. (TAN) in the challans, TDS-Certificates, returns etc. Similarly, as per the provisions of section 139A(5B), it is obligatory for such persons to quote PAN of the payees (employees in cases of salary income) in the statement to be furnished u/s. 192(2C) and in the TDS certificates and returns.
    

8. Tsunami related donations
   Let me wind up this article with a current issue. Some corporates have opted to deduct a certain contribution from their employees towards donation to Prime Minister’s National Relief Fund. Questions have arisen as to whether the employer is entitled to grant deduction while computing the TDS liability. The answer lies in the CBDT circular no. 6/2004 dated 6-12-2004. In para 5.4(6) it has been clarified that the employers may, after due verification, allow deduction for donation to certain bodies to the extent of 100% of the contribution. Prime Minister’s National Relief Fund is one of the permitted bodies.