By TIOL News Service

NEW DELHI, JULY 05, 2017: THE ISSUE BEFORE THIS COURT IS - Whether an employer can be saddled with the demand & interest u/s 201(1A), without verifying the correctness of allegations that 'higher amounts were deducted from the salaries given to employees but a lesser amount was deposited with the government'. NO is the verdict.

Facts of the case:

The assessee used to operate scheduled airlines. It however closed down that business in 1996 due to which its staff, including pilots were laid-off. For AY 1997-98, the assessee's case was picked up for scrutiny and assessment was completed u/s 143(3). The assessee thereafter filed TDS returns u/s 206 in Form 24 on 26.03.1998, declaring the TDS, and deposited Rs. 1,06,89,369/-. The AO observed that Capt. J.H. Patel who was an Executive Pilot for four months in 1996, had complained that he was paid a net salary of Rs. 7,72,500/- after TDS of Rs. 5,32,380/- and Provident Fund of Rs. 32,250/- but no Form-16 was issued. The AO stated that similar information was received from the Ludhiana Special Range office of the Income Tax authorities in relation to Capt. A.K. Vohra that though his gross salary was Rs. 15,28,058/- of which TDS was Rs. 6,15,980/-, yet Form-16 issued by the company reflected gross income of Rs. 7,71,600/- and TDS of Rs. 2,75,640/-. The AO also observed that a complaint was received from the Economic Intelligence Bureau of the Department of Revenue, stating that larger sums were deducted towards TDS but the entire amounts were not paid to the authorities. To verify the genuineness of the complaints and the information, the AO scrutinized the assessee's Form 24 and asked it to furnish relevant information. After seeking several dates towards accommodation, the assessee stated that its relevant records were destroyed in fire and that it was unable to supply the information. The AO asked a specific query with respect to the variation in TDS amounts shown in the salary slips issued by the assessee to three individuals, i.e. Capt. A.K. Vohra, Capt. S.C. Mehta and Capt. J.H. Patel and the actual TDS amounts deposited in respect of such individuals. Thereafter, the assessee informed that salary was a subject matter within the domain of M/s. Lufthansa, and its Senior Vice President. It was also stated that salaries depended on the individual contracts entered into between the employer and the officer concerned. The AO observed on the basis of information furnished by the three Executive Pilots and further information through pay slip furnished by Capt. B.S. Sandhu that larger or higher amounts were deducted from the salaries given to such employees but a lesser amount was deposited. On the basis of analysis of the materials furnished by such pilots, the AO concluded that there was a liability of tax to the tune of Rs. 67,90,382/- in respect of 31 pilots. In addition to that amount determined as the assessee's liability, the AO calculated interest u/s 201(IA) to the extent of Rs. 60,66,265/-. On appeal, the ITAT concluded that the adverse findings with respect to collection of higher amounts but deposit of much smaller amounts was not based upon any credible findings.

On appeal, the HC held that,

++ the heart of the allegations leveled by the assessee against the Revenue in this case is that Rs. 2,01,89,369/- deposited as TDS was not the entire amount but that further amounts had in fact been deducted from the salaries of no less than 31 pilots and unlawfully detained by it. The direction of the enquiry was triggered by the complaints made by three individual pilots and later by one Capt. Sandhu during the course of the proceedings. The AO as well as CIT primarily went by the documents provided by the three complainants, i.e. Capt. J.H. Patel, Capt. A.K. Vohra and Capt. S.C. Mehta. The AO's order discusses the relevant details in respect of Capt. A.K. Vohra alone. During the course of the AO's proceedings, the entire enquiry was extended to include allegations leveled by one Capt. Sandhu. Basing itself upon the conclusions and analysis arising out of the amounts mentioned by the complainants, the AO found that over Rs. 67 lakhs was payable as balance TDS that should have been deposited and a further sum in excess of Rs. 60 lakhs was due as interest. A careful reading of the AO's order would show that whilst the initial part deals with allegations of one Capt. J.H. Patel, the only basis for concluding that higher amounts were deducted from the salaries is premised upon allegations leveled by Capt. A.K. Vohra. Capt. Vohra claimed that he had worked for eight months in 1996 and that his gross salary was Rs. 15,28,085/- out of which the amount deducted from his salary was Rs. 6,15,980/- but that the Form 16 issued showed that his gross salary was much lesser and the TDS too was Rs. 2,75,640/-. The assessee company's stand was that the pilots were paid according to their individual contracts, copies of which were made available to the Revenue. The assessee also highlighted that each of the pilots had signed on Form 16 which signified the actual amount paid and at no stage did they say that larger amounts were deducted or that lesser amounts of salary was reflected but higher amounts were paid. In other words, at the time of receiving the salaries and signing on the documents which reflected the TDS, the alleged complainants never stated that the documents reflected any incorrect picture. In the case of Capt. B.S. Sandhu, the ITAT noticed that the tenor of his letter and his grievance was that he was not paid salary for substantial periods, rather than complaining that amounts lesser than what was deducted were in fact deposited with the Revenue. As against this, significantly, in reply to the summons issued to all pilots u/s 131, there was no response. Furthermore, there was no attempt on the part of Revenue to reconcile the records as it were and verify whether in the individual tax returns filed by the pilots, larger amounts were reflected. This failure, in the opinion of the Court, cannot result in penalizing the assessee;

++ the ITAT's reasoning that the Revenue's findings were essentially based upon conjectures and complaints rather than evidence or material is reasonable and sound. The AO's order is primarily premised upon the complaints of Capt. J.H. Patel and Capt. A.K. Vohra and a later letter received from Capt. Sandhu. In their cases too, an attempt to reconcile between the amounts declared by them in the tax returns and the amounts shown in the returns and the TDS returns of the assessee, was never made. These individuals too did not make their submissions or answer any reply to the summons issued u/s 131. The entire tenor of the AO's order is accusatory and prosecutorial in requiring the assessee to discharge almost a presumption that it had not paid the amounts. The AO first had to establish the foundational fact that in respect of each of the 31 pilots, the amounts actually paid or deposited were less than the amounts deducted from the salary. Such a determination had to be preceded by the procedure known to law, i.e. in the form of show cause notice outlining the exact amounts and the basis for such amounts. Instead, the AO merely acted upon the basis of some complaints and refused to look into all material factors. There is no discussion for instance, as to the contractual amount in the agreement signed by each pilot and the assessee; the AO has ignored the important fact that no pilot joined the proceeding and answered summons u/s 131 and most importantly, to reject the Form 24 furnished by the assessee, mere complaints were insufficient. If the assessee's explanation about lack of records due to fire seemed suspicious, nevertheless, the AO was under a duty to cross-check and reconcile the returns filed by the individual pilots from the concerned Wards and Circles before rendering its findings. If there were facts that corroborating the allegations that larger amounts were deducted but only a part thereof was in fact deposited with the Revenue, then and then alone would the findings be justified. However, that was not so in the circumstances of the case. For the foregoing reasons, this Court is of the opinion that there is no infirmity with the findings in the impugned order of the ITAT.

(See 2017-TIOL-1248-HC-DEL-IT)