P. Sam Koshy, J.
1. Heard Mr. S.R.R. Vishwanath, learned counsel for the petitioner; and Mr. Swaroop Oorilla, learned Special Government Pleader for State Tax.
2. The instant Writ Petition under Article 226 of the Constitution of India has been filed by the petitioner challenging the action of the respondent No.1, dated 22.09.2009, in demanding the Tax Deducted at Source (for short ‘TDS’) amounting to Rs.79,08,309/- under the Andhra Pradesh Value Added Tax Act, 2005 (for short ‘APVAT Act, 2005’) and further challenging the demand raised being arbitrary, contrary to law and without jurisdiction.
3. The facts of the case are that the petitioner company, registered under the Companies Act, 1956 was stated to be constructing a Five Star Hotel and was a VAT registered dealer on the rolls of the respondent No.1, bearing TIN 28156516035. For the said construction, it had engaged the respondent No.4 as its works’ contractor under a formal agreement dated 31.01.2007. The respondent No.4 was itself registered as a VAT dealer under the APVAT Act, 2005 bearing TIN 28630271935, and was on the rolls of the respondent No.2. Between June, 2007 and August, 2009, the petitioner company paid the respondent No.4 as consideration for the works contract, a sum of Rs.27,66,68,012/- though the impugned order of the respondent No.1 had erroneously computed this figure with a difference of Rs.57,71,577/- on account of a calculation mistake. While making the said payments, the petitioner company had failed to effect deduction of tax at source as required under Section 22 of the APVAT Act, 2005, a lapse asserted to be the result of innocent inadvertence rather than any deliberate default. Upon audit, the respondent No.1 noticed the omission and issued a show cause notice in Form VAT 305A, dated 31.8.2009, proposing to demand the amount that ought to have been deducted at source under Section 22(3) of the APVAT Act, 2005. In response, the petitioner company remitted a sum of Rs.25,00,000/- under cover of its letter dated 09.09.2009, addressed to the respondent No.1, and simultaneously, by a separate letter of the same date objected to the proposal insofar as it sought to demand TDS at 4% on the entire consideration, contending that the correct rate applicable under Rule 18 of the APVAT Rules, 2005 was 2.8%.
4. The petitioner company thereafter informed the respondent No.1 of the non-deduction of tax and of the show cause notice issued by the respondent No.1. By letter dated 15.9.2009, received by the petitioner company on 17.9.2009, the respondent No.4 responded asserting that it had discharged its tax liability in full up to July, 2009 and enclosed the Assessment Order in Form VAT 305 passed in its favour by the respondent No.2 for the period 01.09.2005 to 31.03.2008. Respondent No.4 accordingly requested that no amount be deducted towards tax for the past period as its liability for the said period having already stood discharged. It further pointed out, by way of a statement enclosed with the said letter, the calculation error committed by the respondent No.1 in the impugned order, noting that the correct aggregate ought to have been Rs.27,66,68,012/- as against the inflated figure of Rs.28,24,39,589/- arrived at in the impugned order, resulting in an overstatement of Rs.57,71,577/-.
5. It was the petitioner’s case that where the assessee upon whom the principal liability to pay tax rested had discharged that liability in full; the tax authorities could not thereafter demand the TDS amount from the person who had failed to deduct it in the past. Reliance was placed on the similarity between Section 22 of the APVAT Act, 2005 and Section 201 of the Income Tax Act, 1961 (for short the ‘Act of 1961’) and it was pointed out that the relevant provisions of Section 22 and Rule 18 of the APVAT Act and Rules were in pari-materia with Sections 200 and 201 of the Act of 1961. Reference was also made to the consistent view taken by various High Courts under Section 201 of the Act of 1961 that ‘where the person on whom the principal liability rested had discharged the same, the deductor who had failed to effect TDS could not be also directed to deduct and remit the said amount for the past period to the Government’.
6. It was contended that the demand raised by the respondent No.1 for the TDS amount, notwithstanding the complete discharge of tax liability by respondent No.4 was unfair and without jurisdiction and amounted to exacting the tax liability twice over. Reliance was placed on Rule 18(2) read with Section 22 of the APVAT Act, 2005 to submit that any TDS amount now deducted and paid by the petitioner company for the past period would have to be treated as payment of tax on behalf of respondent No.4 with credit being given to it upon production of the requisite certificate. That since the respondent No.4 had already discharged its liability up to July, 2009 by paying tax along with its VAT 200 returns; the present demand would amount to double payment. It was further urged that if the TDS amount for the past period were forcibly collected from the petitioner company despite the tax already having been paid by the respondent No.4, it would inevitably result in a refund of the same amount to the respondent No.4, rendering the entire exercise of collection and refund unnecessary and redundant.
7. It was submitted that since the respondent No.4 had already discharged its liability, the demand for TDS for the past period amounted to demanding tax where none was due and that collection of tax in the absence of any liability would be contrary to law, even if the amount were eventually to be refunded. It was also urged that forcible collection of the TDS amount for the past period in the face of the respondent No.4 having already discharged its liability, would adversely affect the financial position of both the petitioner company and the respondent No.4, and in particular, would have an adverse impact on the petitioner company’s upcoming project.
8. Contending that there existed no effective alternative remedy, and that the action of the respondent No.1 in demanding the TDS amount for the past period despite the respondent No.4 having discharged its liability in full was without jurisdiction, patently unfair and unjust, and violative of the petitioner company’s rights under Articles 14 and 21 of the Constitution of India, the present writ petition came to be filed.
9. Learned counsel for the petitioner submitted that the impugned order under which TDS amount is demanded from the petitioner company for the past period for which the respondent No.4 had already discharged its liability completely for the very same period is absolutely unfair and unjust. Under Rule 18(3) of the APVAT Rules read with section 22 of the APVAT Act, 2005, the TDS collected, if any, from the petitioner company should be treated as payment on behalf of the respondent No.4 for the period for which the amount was so deducted. Since the respondent No.4 had already discharged its liability for the very same period the amount so collected must be refunded making the entire process of collection only to effect refund would be unnecessary.
10. Learned counsel for the petitioner relied on the following judgments wherein it was outrightly held that when liability is discharged by the assessee on whom the principal liability exists, the employer who had not effected the TDS cannot be directed to effect TDS for the past period and remit the same to the government.
a) CIT vs. Divisional Manager, New India Assurance Co. Ltd. ((1983) 140 ITR 818)
“5. In view of our aforesaid decision, it must be held that the Tribunal was right in law in holding that where a regular assessment of an employee had been completed and the amount of tax fully paid by him, the ITO, Salary Circle (TDS), had no jurisdiction under s. 201 of the Act to demand further tax from the employer in respect of the tax short deducted relating to such employee.”
b) CIT vs. Rathi Gum Industries ((1995) 213 ITR 98)
2. The relevant facts so far as the aforesaid questions are concerned, are that the Income-tax Appellate Tribunal came to the conclusion that proceedings for interest under section 201 need not be initiated in the hands of the assessee specially when there is no loss of revenue to the Department as the recipients of these interest amounts have duly paid their taxes on such income received from the firm. The assessee entered into contracts with several suppliers whereby they were to provide the raw material at the proper time and at the rates agreed to see that the assessee is not put to loss either due to non-availability of raw material or due to fluctuations in the prices. The assessee did not deduct any interest from the payments made to the various parties on the plea that it was in the nature of commission and the quantum relating to finance not being severable from the contract. The fact of the recipient having shown the income received by the assessee and having paid due tax thereon was brought to the notice of the Income-tax Officer. It was contended that if the assessee has deducted any amount by way of tax, it would have resulted in a refund in the hands of the recipient. Alternatively, it was argued before the Income-tax Officer that the intention of the Legislature was to recover the legitimate taxes from various assessees and since this intention has been fulfilled in the shape of the recipients having paid their due taxes, the proceedings are of mere academic interest with no purpose and therefore be dropped. Reliance was also placed on the decision of the Kerala High Court in the case of CIT v. Kannan Devan Hill Produce Co. Ltd., [1986] 161 ITR 477, where on account of failure to deduct the tax by an employer by not including certain amount in total income, when the proceedings for reopening of assessment were initiated, it was held that the employer could not be deemed to be an assessee in default within the meaning of section 201 of the Income-tax Act, 1961, for not deducting at source tax payable on the amount. The provisions of section 201 require deduction of tax at source in respect of the matters referred to therein and failure to deduct the tax makes the person responsible by treating him as the assessee in default. Sub-section (1A) of the said section fastens the liability to pay simple interest at the rate of 12 per cent per annum on the amount of tax from the date on which the tax was deductible till the date the tax was actually paid. The Finance Act of 1966 has made certain amendments by which the words “without good and sufficient reasons” were substituted for “wilfully”. Persons responsible for paying the salary, etc., are required to deduct the tax at source from the amount of such payment. The tax so deducted has to be deposited with the Central Government Rule 30 of the Income-tax Rules prescribes the time for such deposit. The object of this rule is not only to ensure the payment to the Central Government but also to deduct the tax at source and to credit it in time. By a deeming fiction a person who is a defaulter is considered even an assessee in default in respect of the tax and, therefore, even the proceedings for realisation of such amount of tax can be initiated against him. The amount has to be credited to the account of the Central Government within the time specified under the rules. The submission of the return and payment of tax by the recipient is at a subsequent and later stage. Payment of tax at the specified time under the Act cannot be waived by the taxing authorities. The interest is to compensate the Revenue for the loss which it has suffered on account of late receipt of the tax. It has not been stated in the present case that the recipient has deposited the tax received within the time at which the assessee was required to deduct and deposit the tax. The Tribunal has ignored the fact that the provisions of interest are mandatory and automatic and interest has to be paid from the date on which the tax was deductible till the date on which the tax is actually paid. In the present case, the assessee who has entered into agreements with different persons, it cannot be possible nor it has been discussed or found as a fact by the Tribunal that the tax amount was deposited in time. The view which has been taken by the Tribunal following the decision of the Kerala High Court referred to above is not applicable to the facts of the present case as that was a case where the assessment was already completed and the tax was paid and thereafter proceedings under section 201 were initiated to demand further tax/interest from the employer. Looking to this interpretation of section 201 which we have taken, we are of the view that the Tribunal was not justified in concluding that interest under section 201 need not be levied on the assessee for non-deduction of tax at source for payments covered under section 194A on the reasoning that it would serve no useful purpose as the Revenue authorities have been fully satisfied of the taxes that would have been collected in the hands of the recipients. The provision of section 201 provides not only for collection of tax which has not been deducted but ‘for levy and charge of interest also. If the tax has already been paid by the recipient on such income it may not be justified to recover the said amount of tax, but so far as the liability of interest is concerned, that cannot be considered to be non-existent on account of deposit of tax by the recipient at a subsequent or later stage.
c) CIT vs. Manager, Madhya Pradesh State Coop. Development Bank Ltd. ((1982) 137 ITR 230)
“5. Section 4 of the I.T. Act is the charging section which provides that income-tax should be charged for every assessment year in respect of the, total income of the previous year of every person. Sub-section (2) of s. 4 provides that income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of the said Act. The principal liability for payment of income-tax is, therefore, that of the person who receives income. Chapter XVII of the Act provides for deduction of tax at source. Section 192(1) lays down that any person responsible for paying any income chargeable under the head “Salaries” shall, at the time of payment, deduct income-tax computed on the basis of the rates in force, on the estimated income of the assessee under this head for that financial year. Section 201(1) of the Act provides that if such person (person responsible for paying salary and deducting tax at source) does not, deduct or after deducting fails to pay tax, he will be deemed to be an assessee in default in respect of the tax. In the case under reference it was not the case of the department that the assessee, i.e., the Manager, M.P. State Co-operative Development Bank Ltd., Bhopal, did not deduct tax at source from the salary paid to his employees. The ITO in charge of TDS, however, was not satisfied with the various deductions which were taken into consideration at the time of computing the tax payable at source. Further, as the statement of case shows, the regular assessment of the employees had been completed and the amount of tax was fully paid by them. The ITO, Salaries Circle (TDS), could not, therefore, demand further tax from the employer in respect of the income of the employees, which was the salary of the employees chargeable to tax when the same had been fully paid.
6. We, therefore, hold that the Tribunal was right in taking the view that where the regular assessment of an employee had been completed and the amount of tax fully paid by him, the ITO, Salaries Circle (TDS), had no jurisdiction under s. 201 of the Act to demand further tax from the employer in respect of the tax short deducted relating to such employee. The question is answered in the affirmative and against the department.”
11. On the other hand, the learned Special Government Pleader for State Tax argued that it is incorrect to say that if they deduct tax on works contract payments, it will become double payment to the Department and will entitle them to get refunds from the Department if the contractors assessments are taken up. According to the learned Special Government Pleader, it is a statutory obligation on the part of the contractee under Section 22(3) of the APVAT Act, 2005 to deduct from the amount payable by them in respect of works contract executed for them, an amount calculated at such rate and such tax so deducted at source shall be remitted to the Government. Therefore, the contractee company shall be bound by the provision of law and to discharge its statutory obligation, but not the contractors version. The contractee is in no way concerned with whether the contractor gets refund if the deductions are made or not. Moreover, if the contractee does not deduct or after deducting fails to pay tax shall be deemed to have not paid the tax within the time under the provisions of the act and all the provisions of the act shall apply mutatis mutandis. It is on the part of the contractor to follow the procedures and the provisions of the Act and present their case before their jurisdictional authority if they feel that they get refund from the Department.
12. Learned Special Government Pleader for State Tax further argued that it is also not correct to say that at present there is no amount payable to the contractor and whatever they are paying is from their own funds, as the contractee, as per the provisions under Section 22(3) of the APVAT Act, 2005 shall deduct TDS from the payments made by the contractee and remit the said tax deduction within fifteen (15) days from the date of payments to the contractor and issue Form VAT 501A to the contractor and failing to do so, shall be deemed to have not paid the tax within time under the provisions of the APVAT Act, 2005.
13. Having heard the contentions put forth on either side and on perusal of records, the question that falls for consideration is “whether the respondent No.1 could nonetheless proceed to demand and recover, from the petitioner the amount of tax deductible at source under Section 22(3) of the APVAT Act, 2005 in respect of the payments made to respondent No.4 during that period?”
14. It would be relevant to refer to Section 22 of the APVAT Act, 2005 as also the Rule 18 of the APVAT Rules, 2005, which for ready reference are reproduced hereunder:
“22. Due date for payment of Tax.
(1)The tax payable in respect of a tax period along with a return and the tax assessed under the Act shall be payable in such manner and within such time as may be prescribed.
18. Tax deduction at source
1. a) Where a works contract is awarded to a VAT dealer by any contractee other than Government or local authority, the tax shall be deducted from the payment made to the contractor at the rate of * (two percent) four percent of the amount paid or payable to the contractor at the time of each payment as specified in sub-section (4) of Section 22;
*(substituted by the G.O.Ms.nO.1614, Revenue (CT.II), 31st August, and 2005 w.e.f 31-8-2005)
b) The contractee shall complete Form VAT 501A supplied by the contractor indicating the TIN, the amount of tax deducted and details of the related contract. The Contractor, VAT dealer shall send the Form VAT 501A to the authority prescribed together with proof of payment within fifteen days from the date of each payment made to the contractor.
c) Where the VAT dealer has opted to pay tax by way of composition, he shall declare on the Form VAT 200 the value of the amount received and the tax due. The amount of tax deducted by the Contractee should be declared on Form VAT 501A and any balance of tax payable shall be paid by the contractor. In the case where the amount of TDS exceeds the liability the prescribed authority shall issue a notification for a credit to be claimed on the Form VAT 200.
d) Where the VAT dealer pays tax on the value of the goods incorporated in the contract he shall declare on Form VAT 200 the value of the goods and tax due on the goods incorporated in the contract. The appropriate adjustment for the tax deducted by the Contractee shall be carried out as in clause (c);”
Prima facie Section 22 of the APVAT Act, 2005 and Rule 18 of the APVAT Rules, 2005 cast an obligation on a contractee, such as the petitioner, to deduct tax at source from payments made to a works contractor and to remit the same to the Government. It is not in dispute that this is, in essence, a mechanism to ensure timely collection of tax that would otherwise be payable by the contractor on the value of the works executed; the deduction at source does not create an independent or additional tax liability distinct from the contractor’s own liability, but is only a means of collecting in advance an amount that is to be given credit against that very liability. This is evident from Rule 18(3) itself which contemplates that any amount deducted and remitted by the contractee shall be treated as payment of tax on behalf of the contractor entitling the latter to credit upon production of the requisite certificate.
15. Viewed in this light, the object of Section 22 is entirely defeated. Whereas here, the contractor (respondent No.4) has already discharged its tax liability for the very period in question by paying entire tax along with its VAT 200 returns, and has furnished proof thereof, including the Assessment Order in Form VAT 305 passed in its favour by respondent No.2 for the period 01.09.2005 to 31.03.2008. Once the principal liability itself stands discharged, there remains no further tax due against which a TDS deduction could be credited. Nonetheless to compel the petitioner to deduct and remit the very same amount over again, would result in the State receiving tax twice over on one and the same works contract, once directly from respondent No.4, and second time indirectly through the petitioner, a result that neither Section 22 of the Act nor Rule 18 of the Rules contemplates, and one that would, if permitted, necessitate a subsequent refund to respondent No.4, rendering the entire exercise of collection circular, wasteful, and devoid of purpose.
16. We find considerable force in the reliance placed by learned counsel for the petitioner on the line of authority under Section 201 of the Act of 1961, a provision in pari-materia with Section 22 of the APVAT Act, 2005 and Section 200 of the Act of 1961 insofar as the underlying scheme of TDS is concerned. In case of Divisional Manager, New India Assurance Co. Ltd (supra) and in the case of Manager, Madhya Pradesh State Co-operative Development Bank Ltd. ( supra), it was held in terms squarely applicable here, that where the regular assessment of the person on whom the principal tax liability rests has been completed and the tax fully paid, the deducting authority has no jurisdiction to demand further tax from the person responsible for deduction in respect of the very same income or transaction. Even in the case of Rathi Gum Industries (supra) by necessary implication in defending the impugned demand, this Court’s attention is drawn to the fact that the Rajasthan High Court itself recognised that ‘once tax stands paid by the recipient, recovery of the tax component from the deductor may not be justified’. The only distinction drawn in that case being as to the deductor’s independent liability to pay interest for the period of default, a liability that is not the subject matter of the present demand and does not arise for our consideration here.
17. We are unable to accept the submission of learned Special Government Pleader for State Tax that the petitioner’s statutory obligation under Section 22(3) of the APVAT Act, 2005 operates independently of, and without regard to, whether the contractor has already discharged the underlying tax liability and that the petitioner’s remedy, if any, is confined to seeking a refund after first suffering the deduction. Such a construction elevates the mechanism of collection over the substance of the liability it is designed to secure and would require the petitioner to first pay an amount admittedly not due to the State in the hope of recovering it later, a proposition that sits uneasily with the basic principle that tax can be levied and collected only in accordance with and to the extent authorised by law. Whereas here, the fact of complete discharge of the underlying liability by respondent No.4 was placed before respondent No.1 well before the impugned order came to be passed, together with documentary proof in the form of the Assessment Order in Form VAT 305. It was incumbent upon respondent No.1 to have verified this position and confined the demand if any, to what was genuinely outstanding, rather than mechanically proceeding to demand the entire TDS amount over again. It is also worth mentioning that the authorities have not initiated any proceeding for interest or penalty penalizing for the default in not making the timely deduction of TDS.
18. It is a matter of some concern that respondent No.1 notwithstanding the petitioner’s detailed objections dated 09.09.2009 and the subsequent letter of respondent No.4, dated 15.09.2009, which squarely brought to its notice both the complete discharge of tax by respondent No.4 for the relevant period and the arithmetical error in computation, proceeded to pass and sustain the impugned demand without any application of mind to this material. The tax administration cannot be reduced to a mechanical exercise of raising demands without regard to material that squarely negates the very premise of the demand. Where an assessee places on record clear and unrebutted proof that the tax sought to be recovered has already been paid by the very entity on whose account it is sought to be collected, the least that is expected of the authority is a reasoned consideration of that material, rather than its wholesale disregard.
19. For all the aforesaid reasons, we are of the considered view that the demand raised by respondent No.1 vide the impugned order dated 22.09.2009 is unsustainable, both on the ground that it seeks to recover tax already discharged by respondent No.4 for the very same period, resulting in an impermissible double taxation, and on the independent ground of the arithmetical error in computation of the consideration paid. The question of law framed is accordingly answered in favour of the petitioner and against the Revenue.
20. In the result, the Writ Petition stands allowed and the impugned order dated 22.09.2009, passed by respondent No.1, demanding TDS of Rs.79,08,309/- from the petitioner is hereby set aside.
21. As a sequel, miscellaneous petitions pending if any, shall stand closed. However, there shall be no order as to costs.
