(delivered by hon'ble ashok bhushan, j.) · 2018-03-25 · 1 reserved on 04.5.2012 delivered...

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Reserved on 04.5.2012Delivered on 23.5.2012

Case :- WRIT TAX No. - 388 of 2012

Petitioner :- Jagran Prakashan LimitedRespondent :- The Deputy Commissioner Of Income Tax (Tds)Petitioner Counsel :- Ritvik UpadhyaRespondent Counsel :- Bharat Ji Agrawal,B. Agarwal,Govind Krishna

Hon'ble Ashok Bhushan,J.Hon'ble Prakash Krishna,J.

(Delivered by Hon'ble Ashok Bhushan, J.)

This writ petition by a public Ltd. Company, publishing a

Hindi daily newspaper “Dainik Jagaran” has invoked the jurisdiction

of this Court under Article 226 of the Constitution of India

challenging the initiation of proceedings under sections 201 and

201 (1A) of Income Tax Act, 1961 (hereinafter referred to as 'Act')

vide notices dated 19.3.2012 and 21.3.2012 on the allegation that

although the petitioner had allowed trade discount of 15% to

advertising agencies in the assessment years in question but had

failed to deduct the tax at source hence, the petitioner may show

cause as to why it may not be declared as an asessee in default of

such tax. The petitioner replied the notices. During the pendency of

the writ petition assessment orders dated 28.3.2012 (Financial Year

2009-10) and 29.3.2012 (Financial Year 2008-09) were passed

fastening liability of Rs.13,15,31,472 and Rs.3,26,82,953

respectively, which orders were also challenged in this writ petition

by means of an amendment application, which was allowed on

18.4.2012.

The brief facts giving rise to this writ petition are; the

petitioner is engaged in the business of printing and publishing

newspapers 'Dainik Jagaran' and 'I-next' from different centres

across the country. The registered office of the petitioner's

company is situate at Kanpur Nagar. The major source of revenue

http://www.itatonline.org

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of the petitioner is generated from advertisements published in the

said newspapers. The petitioner is also member of Indian

Newspaper Society (hereinafter referred to as INS). The petitioner

has been giving 15% trade discount to accredited advertising

agency and trade discount of 10% to 15% to non-accredited

advertising agency as per Rules and Regulations of INS for last

several years. On 15.3.2012, the respondent conducted a survey

under section 133A of the Act at the premises of the petitioner at

Kanpur Nagar and recorded statement of General Manager

Taxation and Legal. The notice dated 19.3.2012 for the financial

year 2009-2010 was issued to the petitioner stating that during the

course of survey on 15.3.2012, it has been gathered that the

petitioner has failed to deduct tax at source under section 194 H of

the Act on the payment received from advertising agencies after

allowing 15% trade discount, which is as well a deemed

commission. Details of monthwise amount of payment of discount

were required to be submitted. The petitioner was asked to show

cause as to why order under section 201 (1) and 201(1) A of the

Act be not passed declaring the petitioner as an assessee in default

in respect of such taxes and interest thereon. The petitioner was

asked to appear on 22.3.2012. Another notice dated 21.3.2012 for

the financial year 2008-09 was issued requiring details as

mentioned therein including monthwise amount of payment of trade

discount by the petitioner along with copy of the bills from January

to March 2009. The petitioner filed a reply to the notices dated

19.3.2012 and 21.3.2012 on 22.3.2011. On 22.3.2012, the

petitioner was required to submits monthwise bills of the

advertisements received and trade discount given thereon by the

next date i.e. on 23.3.2012. On 23.3.2012, another notice was

issued by the respondent calling the petitioner to submit reply along

with documents called for by 12:00 noon on 26.3.2012 positively.

The petitioner was also informed by the same notice that Kerala

High Court in 325 ITR 205 on the similar issue had decided that


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advertising agency has acted as an agent of the principal hence

trade discount allowed can be considered as commission or

brokerage defined under Explanation (i) of Section 194H of the Act.

This writ petition was filed in this Court on 23.3.2012 praying for

quashing the notice dated 29.3.2012 and 21.3.2012. The writ

petition was heard on 19.3.2012 on which date following order was

passed.

“Supplementary affidavit filed today is taken on

record.

On a mention made by learned counsel for the

petitioner, the matter is taken up in the presence of

learned counsel appearing for the department.

By means of this petition, the petitioner has prayed

for quashing the notice dated 19.3.2012 and

21.3.2012 issued by the respondent ( Annexure

No. 4 and 5 to the writ petition) by which the

petitioner has been asked to furnish certain

informations as required.

Learned counsel for the petitioner challenging the

notice contended that notices do not furnish any

jurisdiction to the authority to proceed under

section 201 of the Income Tax Act. as no TDS.

was deductible on 15% trade discount.

He submits that the trade discount can not be

treated as commission so as to liable for any

deduction. He has placed reliance on the decision

of Delhi High Court passed in the case of I.T.A.

No. 1264 of 2007,Commissioner of Income Tax

Vs. Living Media India Limited filed as Annexure

No. 1 to the writ petition at page 33.

He has submitted that there is no material with the

respondent to proceed under section 201 of the


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Income Tax Act.

Shri Govind Krishna, learned counsel appearing

for the respondent submits that by notice

impugned only informations have been called from

the petitioner and there is no lack of jurisdiction in

the authority to proceed. He further submits that at

this state, the writ petition be not entertained.

Learned counsel for the petitioner further placed

reliance on the decision of Supreme Court passed

in the case of Siemens Ltd. Vs. State of

Maharashtra and others reported in (2006)12

Supreme Court Cases 33.

Be that as it may, in view of the fact that the

assessment order is to be passed on or before

31.3.2012 as indicated in the notice, we are of the

view that the petitioner may appear and submit

necessary information as required and respondent

may proceed to pass appropriate orders in

accordance with law.

It shall be open for the parties to bring on record

the order passed by the respondent.

Respondent is allowed three weeks' time to file

counter affidavit.

List thereafter.”

On 26.3.2012, the petitioner again submitted a letter to the

Department stating therein that information sought for is not readily

available and it needs a herculean manual exercise of compilation

of more than 1,80,000 bills. On 28.3.2012, the petitioner again

submitted a letter stating therein that relationship of the petitioner

with the advertising agency is principal to principal and not as


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principal and agent. Reliance was also placed on the order of the

Kerala High Court dated 9.12.2005, passed in writ petition No.

26871/2005, The Malayala Manorama Co. Ltd. Vs. The Income

Tax Officer & others, wherein on identical facts, the proceedings

of the department initiated under section 201/201 (1A) had been

stayed. It was further stated that the judgment of the Kerala High

Court reported in 325 ITR 205 was not applicable and points of

distinction from the said judgment were specifically pointed out in

the reply. It was stated that there is no liability of the petitioner to

deduct tax at source.

On 28.3.2012 an assessment order for the financial year

2009-10 has been passed by the Deputy Commissioner of Income

Tax holding the petitioner to be an assessee in default for non

deduction of tax at source for an amount of Rs. 10,94,60,865 under

section 201 (1) of the Act on which interest under section 201 (1A)

amounting to Rs. 2,62,70,607/- making the total amount to Rs.

13,57,31,472/-. A demand notice was issued on 29.3.2012.

Proposal for initiating penalty proceeding was also sent to Joint

Commissioner Income Tax TDS Kanpur separately. Another order

dated 29.3.2012 for the Financial Year 2008-09 was passed holding

the petitioner to be an assessee in default for non deduction of TDS

for an amount of Rs. 2,40,31,583 and on which interest was also to

be chargeable making the total amount of Rs. 3,26,82,953/-.

Penalty proceeding was to be separately initiated under Section

271C. The demand notice was also issued on 29.3.2012. The

petitioner filed an application for amendment of the writ petition

praying for adding paragraphs, grounds and reliefs in the writ

petition for challenging the assessment orders dated 28.3.2012

and 29.3.2012. The amendment application was allowed by this

Court on 18.4.2012 and the petitioner was permitted to challenge

the assessment orders in this writ petition. Counter affidavit has

also been filed by the Department to the writ petition and amended

pleadings to which rejoinder affidavit has also been filed. Following


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are the reliefs which have been claimed in the writ petition including

the reliefs prayed for by means of amendment application :

“i) a suitable writ, order or direction in the

nature of Certiorari calling for the records of the

case and to quash the impugned notices dated

19.03.2012 and 21.03.2012 issued by the

respondent (Annexures-4 and 5 to this writ

petition).

ii) a suitable writ, order or direction in the

nature of Certiorari calling for the records of the

case and to quash the impugned order dated

28.03.2012 along with the notice of demand dated

28.03.2012 (Annexure-6 to this writ petition) and

the impugned order dated 29.3.2012 along with

the notice of demand dated 29.03.2012

(Annexure-7 to this writ petition).”

We have heard Sri V.K. Upadhyay learned senior Advocate,

assisted by Sri Ritvik Upadhyay, for the petitioner, Sri Govind

Krishna for the respondent Income Tax Department and have

perused the record.

Learned Counsel for the petitioner challenging the notices

dated 19.3.2012 and 21.3.2012 contended that there were no

foundational facts on the basis of which the respondent could have

assumed jurisdiction under sections 201 and 201(1A) for initiating

the proceedings. He submits that the petitioner allowed trade

discount to advertising agencies on the advertisements received in

accordance with the established trade practice and allowing of


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trade discount cannot be termed as commission paid by the

petitioner to the advertising agency for any service. It is submitted

that an advertising agency is not an agent of the petitioner and the

transaction between the petitioner and advertising agency is on

principal to principal basis. Advertising Agency infact acts as an

agent of the advertisers. Section 194H is not attracted on trade

discount allowed by the petitioner to advertising agency and the

proceeding initiated under section 201/201 (1A) are without

jurisdiction. The Income Tax Authorities have wrongly assumed

jurisdictional facts although no such jurisdictional facts exist so as

to enable the respondent Department to initiate proceedings under

section 201/201 (1A) of the Act. The initiation of the proceedings by

the Department is wholly without jurisdiction. The jurisdictional facts

as required by Section 194H does not exist in the present case.

Circular issued by Central Board of Direct Taxes dated 8.8.1995

clarifies that commission received from advertising agency by

media would require deduction of tax at source under section 194J

of the Act. The above circular was clarified by the CBDT vide

subsequent letter dated 12.9.1995, clarifying that where the media

raises only a bill for an advertising contract including therein inter-

alia commission at the specified percentage to be retained by

advertising agency, the media is not required to deduct tax at

source since such a payment is subjected to TDS by the advertiser

at the time of payment. Further where the media makes a direct

payment to the advertising agency in respect of professional or

technical services, it shall deduct tax at source @ 5% under section

194J.

Learned Counsel for the petitioner submits that the petitioner

being a member of INS is required to pay trade discount of 15%

according to the rules of INS. The advertising agency which are

accredited by INS are also bound to follow the rules and under the

terms of agreement entered with the advertising agency and INS


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under which it is obligatory for the news agency to give 15% trade

discount and as per Rules of INS and terms of agreement entered

between INS and advertising agency, the advertising agency acts

as agent of the advertiser. The advertising agency carry on

business of advertising and is not an agent appointed by the

petitioner. No agreement with any advertising agency has been

entered into by the petitioner nor there is any other relevant factor

on the basis of which it can be said that the advertising agency is

agent of the petitioner. It is submitted that the Rules of INS, as well

as terms and conditions as mentioned above, clearly prove that

advertising agency is not an agent of the petitioner and the

jurisdictional facts as required under section 194H being not

present, the entire proceedings are without jurisdiction. Learned

Counsel for the petitioner further submits that the question as to

whether 15% trade discount allowed to the news agency invites

deduction of tax at source was raised by Income Tax Department

with regard to news paper publication namely; M/s Living Media

Ltd. Which publishes the magazines India Today, Business today

etc. An order against M/s Living Media Ltd. under sections 201 and

201 (1A) was passed by the assessing authority on the ground that

advertising agencies are agent of the news agencies and 15%

trade discount is commission with regard to which tax at source is

required to be deducted by the news agency. The matter was taken

before the Income Tax Appellate Tribunal by the Department and

Income Tax Appellate Tribunal held that there was no liability of the

news agency to deduct tax at source with regard to 15% trade

discount and advertising agency is not the agent of news agency. It

was held that news agency was not liable to deduct tax. The

Department took up the matter before the Delhi High Court and

Delhi High Court vide its judgment and order dated 6.5.2008 has

dismissed the writ petition of the Department holding that contract

between the news agency and advertising agency was on principal

to principal basis and trade discount allowed to advertising agency


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was as per Rule 32 of the INS Rules and there was no commission

paid to advertising agency and the provisions of section 194H was

not attracted. Although in the counter affidavit (paragraphs 21 and

41) filed by the Department, it was stated that judgment of the Delhi

High Court has not accepted by CBDT and the same has been

challenged by the Department by means of Special Leave Petition

No. 3433 of 2009 but it was not mentioned that Special Leave

Petition had been dismissed. Learned Counsel for the petitioner

has produced the order of the apex Court dated 11.12.2009 by

which the Special Leave Petition (Civil) 3433 Commissioner of

Income Tax Vs. M/s Living Media India Ltd. has been dismissed.

Learned Counsel for the petitioner submits that the issue having

already been decided by the Delhi High Court in the aforesaid case,

the initiation of the proceedings under section 201/201 (1A) on the

same allegations are nothing but harassment of the petitioner and

the proceedings so initiated are without jurisdiction. Learned

Counsel for the petitioner submitted that the judgment of the Kerala

High Court relied by the Department in [2010] 325 ITR 205

Commissioner of Income Tax Vs. Director Prasar Bharti, is not

applicable in the present case and although distinguishing facts

were submitted in writing by the petitioner but still the said judgment

has been relied and the judgment of the Delhi High Court which

was directly applicable has been brushed aside on the flimsy

ground that judgment of the Kerala High Court is recent in point of

time. Learned Counsel for the petitioner further submitted that the

assessment orders dated 28.3.2012 and 29.3.2012 and the

demand raised for tax which according to the respondents ought to

have been deducted at source is wholly without jurisdiction.

It is further submitted that under sections 201 and 201(1A),

in a case where tax is not deducted at source, the only proceedings

which can be initiated are proceedings for realisation of interest and

penalty and the liability to pay tax cannot be fastened on deductor.


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As per Section 191 read with Section 4 of the Act, such tax has to

be directly paid by the assessee i.e. advertising agency and the

assessment orders dated 28.3.2012 and 29.3.2012 demanding

payment of tax are wholly without jurisdiction. The petitioner could

not have been treated to be an assessee in default with regard to

tax which according to the respondents was required to be

deducted unless a finding is returned that assessee has not paid

the tax. In the entire assessment order, there is no finding that

assessee has not paid the tax on the aforesaid trade discount

(alleged commission) hence, the entire order is without jurisdiction.

Learned Counsel for the petitioner further submits that there

is no agreement between the petitioner and the advertising agency

on the basis of which the assessing officer can conclude that

advertising agency was an agent of the petitioner. It is further

submitted that rules of INS have not been adverted to by the

assessing authority which were relevant to find out the nature of

transaction between the petitioner and the advertising agency and

without adverting to the said Rules in its entirety, an erroneous

inference has been drawn by the assessing officer that advertising

agency was agent of the petitioner. It is further submitted that

instead of reliance on circular of the Board dated 8.8.1995 as

clarified on 12.9.1995, the assessing authority has relied on an

article published in the newspaper 'Business Standard' on

31.10.2006, which article contain some opinion of the Central Board

of Direct Taxes that deduction of tax at source is to be made on

commission or brokerage given to the advertising agency. It is

submitted that the aforesaid article was wholly irrelevant, which

vitiates the order of the assessing authority.

Learned counsel for the petitioner lastly contended that the

Department has violated the principles of natural justice, while


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proceeding under sections 201 and 201 (IA). It is submitted that

notices were issued on 19.3.2012 and 21.3.2012, requiring

submission of details regarding trade discount given to various

advertising agencies by 22.3.2012, which was nothing but denial of

adequate opportunity since in the accounting practice adopted by

the petitioner, only revenue receipts were recorded in its account

and there was no separate account maintained for trade discount

given to the advertising agencies. The order of authorities asking

the petitioner to give the details of trade discount within three days,

given to the advertising agencies from its various centres

throughout the country, from where the newspapers are published,

which could have run in more than 1,80,000 items is nothing but

denial of adequate opportunity to the petitioner. The compilation of

the said data was a herculean task and the request by the

petitioner to grant reasonable time, was denied. Had the petitioner

been given adequate opportunity, it would have established that tax

on the income of 15% trade discount, has already been paid and

there was no occasion to impose liability upon the petitioner but the

respondent rushed through the proceedings which was completed

within ten days from issue of notice.

Sri Govind Krishna, learned counsel for the Department

refuting the submissions of learned Counsel for the petitioner,

contended that the petitioner is not entitled to invoke the jurisdiction

of this Court under Article 226 of the Constitution of India since the

assessment order has already been passed and the petitioner be

relegated to avail the alternative remedy of statutory appeal as

provided under the Act. He submits that the judgment of the Kerala

High Court in Prasar Bharti's case is fully applicable and there is no

lack of the jurisdiction in the authorities in initiating the proceedings

under sections 201 and 201 (1A) of the Act. He submits that the

payment which is being made by the petitioner to the advertising

agency in the name of 15% trade discount is nothing but payment


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of commission to advertising agency in lieu of services which are

being rendered by the advertising agency to the petitioner in

bringing business to the petitioner i.e. advertisements. It is

submitted that the assessing officer has rightly recorded finding in

paragraph 30 of the order that jurisdictional facts as required for

applicability of Section 194H, are fully present and neither the

initiation of the proceedings were without jurisdiction nor the

assessment order can be held to be without jurisdiction. The

petitioner, inspite of giving opportunity could not provide details of

monthwise trade discount allowed by it to different advertising

agencies hence, no error has been committed in assessing the tax

liability on 15% of gross receipts of revenue from advertising

agency, which amount has been disclosed by the petitioner himself

in the survey on 15.3.2012. It is submitted that if the advertising

agency could not have rendered services to the petitioner, it cound

not have received any discount or payment and the advertising

agency acts on behalf of the news agency since it is a news

agency, which decides as to what type of advertisement it publishes

e.g. it does not publish advertisement of alcoholic drinks. There is a

contract between the news agency and advertising agency through

INS, since the petitioner are members of the INS and INS enters

into an agreement with the advertising agency for accrediting the

said agency thus, there is a implied contract between the petitioner

and advertising agency. It is further submitted that principal and

agent relationship can also exist without any written or codified

agreement. The assessing order has rightly referred to recent stand

of Central Board of Direct Taxes in its judgment as such, the order

of the assessing officer was based on recent stand of CBDT.

Advertising Agency Institution of India (AAAI) in its rules also

provide for payment of 15% commission to the advertising agency.

Thus, the payment of commission by the news agencies to

advertising agencies is fully proved. The logic and reasons are not

relevant, while interpreting a tax statute. Since the petitioner is


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allowing the discount/commission, the petitioner is payer and liable

under section 204 (iii). Under section 201, the deductor, who fails to

deduct the tax at source, is an assessee in default and apart from

interest and penalty, the tax which was not deducted can very well

be recovered from the deductor. He submits that if there is any

mistake in the order of the assessment, it is open for the petitioner

to invoke section 154 of the Act for correction of mistake, if any.

Learned Counsel for the petitioner replying the objections of

learned Counsel for the respondent regarding relegating the

petitioner to statutory appeal, submitted that the present is not a

case where the petitioner be denied relief under Article 226 of the

Constitution of India. It is submitted that when the Income Tax

authorities assumed jurisdiction without there being jurisdictional

facts available for initiating the proceedings under section

201/201(1A), the notice initiating the proceeding can very well be

challenged through writ proceedings. It is further submitted that by

the order impugned huge liability has been imposed on the

petitioner and apart from assessment order, proceedings under

section 147 of the Act have also been initiated. The notice under

section 147 has been issued for several assessment years. It is

further submitted that assessment order directing for realisation of

tax, which according to the respondent was not deducted at source

by the petitioner is without jurisdiction since under section 201/201

(1A) at best proceeding could have been initiated only for recovery

of interest and penalty. He submits that when the order of

assessing authority directing for recovery of tax is without

jurisdiction, the writ petition be not thrown out on the ground of

alternative remedy. Apart from above reason, huge illegal demand

would have a cascading effect on the petitioner company. Penalty

proceedings have also been initiated including proceedings for re-

opening of all completed assessment and total tax liability may be

more than 100 crores, which may adversely and irreparably effect


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the petitioner business and its shares. The pre-determined and

void orders cannot withstand judicial scrutiny of this Court hence,

the present is not a fit case in which the petitioner be relegated to

alternative remedy.

Learned Counsel for the parties have relied on various

judgements of the apex Court, this Court and other High Courts

which shall be referred to while considering the submissions in

detail.

We have considered the submissions of learned counsel for

the parties and have perused the record.

From the submissions of learned counsel for the parties

following are the issues which arise for consideration:

1. Whether in the facts and circumstances of the present case,

the petitioner is entitled to invoke the writ jurisdiction of this

Court under Article 226 of the Constitution of India for the

reliefs sought or the petitioner be relegated to avail the

statutory remedy of appeal in view of the fact that the

assessment order has already been passed during the

pendency of the writ petition?

2. Whether condition precedent as contemplated by Section

194H making liable the petitioner to deduct tax at source for

15% trade discount allowed by it to Advertising Agency is

present so as to give jurisdiction to the authorities to initiate

proceedings under section 201/201 (1A) of the Income Tax

Act, 1961?


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3. Whether between the petitioner and the advertising agency

there is a relationship of principal and agent?

4. Whether the advertising agency is rendering services to the

petitioner or they are rendering services to advertiser as their

agent?

5. Whether 15% trade discount allowed by the petitioner to

advertising agencies is payment of commission within the

meaning of Section 194H Explanation (i).

6. Whether the Judgement of the Kerala High Court in 325 ITR

205 was attracted in the present case or the judgment of the

Delhi High Court in ITA 1264/07, The Commissioner of

Income Tax Vs. Living Media India Ltd. decided on

6.5.2008 was applicable?

7. Whether against a deductor who fails to deduct the tax at

source, the liability of payment of tax can also be fastened

against the deductor under section 201 apart from liability of

interest and penalty?

8. Whether with regard to tax which was required to be

deducted at source, the liability is of the assessee with

regard to whose income the tax was required to be deducted

at source or the liability is of deductor for payment of tax

which could not be deducted?

9. Whether according to Section 191 read with Section 201, a

deductor, who fails to deduct tax at source can be deemed to


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be an assessee in default without adverting to the issue and

recording a finding that assessee who is liable to pay tax

directly had not paid tax?

10.Whether the assessing authority has taken into consideration

all relevant materials for taking the decision and has not

taken into consideration any irrelevant material ?

11.Whether the assessing authority has violated the principle of

natural justice in the proceeding under section 201 and 201

(1A)?

12.To what relief, if any the petitioner is entitled in the present

writ petition?

The first issue, which is to be answered, is as to whether the

petitioner can be permitted to invoke the jurisdiction of this Court

under Article 226 of the Constitution of India for challenging the

notices dated 19th March, 2012 and 21st March, 2012 and the

subsequent assessment order dated 28th/29th March, 2012 on the

principal ground that there were no foundational facts to assume

jurisdiction by the Income Tax authorities to proceed under Section

201/201(1A) of the Act. The next challenge of the petitioner to the

assessment order is on the ground that assessment order directing

for recovery of tax, which according to the respondents was not

deducted by the petitioner at source, is without jurisdiction. The

submission is that under Section 201 read with Section 191 of the

Act the liability of the tax, which was required to be deducted at

source, cannot be fastened on the deductor and in the event the tax

has not been deducted the primary liability to pay such tax is on the

assessee and the assessment order framing assessment of tax on


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the petitioner was beyond the jurisdiction and was outside the

provisions of Section 201 of the Act.

The question as to whether sufficient grounds have been

made out for exercise of writ jurisdiction by this Court under Article

226 of the Constitution of India or the petitioner has to be

necessarily relegated to avail the statutory remedy of appeal under

the Income tax Act, 1961 is dependent on various issue which have

been raised in this writ petition and are to be answered by us. We

thus are of the view that first issue be answered after considering

the various grounds of attack and submissions of learned counsel

for the parties which have arisen in the writ petition.

Issues No.2, 3, 4,5 and 6 are interrelated and are being taken

together.

The proceedings under Section 201/201(1A) of the Act have

been initiated against the petitioner on the ground that the

petitioner, who was required to deduct tax at source with regard to

payment of 15% trade discount (alleged commission) given to

advertising agency, having failed to deduct the tax on the said

payment is liable to pay interest and tax. The proceedings are

founded on Section 194H of the Act. Section 194H of the Act is

quoted below:-

“194H. Commission or brokerage. Any person, not being an individual or a Hindu undivided family, who is responsible for paying, on or after the 1st day of June, 2001 to a resident, any income by way of commission (not being insurance commission referred to in section 194D) or brokerage, shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of ten per cent.


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Provided that no deduction shall be made under this section in a case where the amount of such income or, as the case may be, the aggregate of the amount of such income credited or paid or likely to be credited or paid during the financial year to the account of, or to, the payee, does not exceed five thousand rupees.

Provided further that an individual or Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limit specified under Clause (a) or Clause (b) of Section 44AB during the financial year immediately preceding the financial year in which such commission or brokerage is credited or paid, shall be liable to deduct income tax under this Section.

Provided also that no deduction shall be made under this section on any commission or brokerage payable by Bharat Sanchar Nigam Limited or Mahangar Telephone Nigam Limited to the public call office franchisees.

Explanation : For the purposes of this section, - (i) "Commission or brokerage" includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities;

(ii) the expression "professional services" means services rendered by a person in the course of carrying on a legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or such other profession as is notified by the Board for the purposes of section 44AA;

(iii) the expression “securities” shall have the meaning assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956);

(iv) Where any income is credited to any account,


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whether called "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.”

The case of the department against the petitioner is that

allowing 15% trade discount to advertising agencies by the

petitioner during the relevant assessment year is nothing but

payment of commission within the meaning of Section 194H

Explanation-(i) and the petitioner was liable to deduct tax at source.

The commission or brokerage has been defined in explanation. As

per definition for payment to be treated as commission, following

three conditions are required to be fulfilled:-

(1) payment received or receivable directly or indirectly;

(2) by a person acting on behalf of another person;

(3) for services rendered (not being professional services).

The Condition Nos. (2) and (3) , which are interrelated, are

being taken first. The Condition Nos.2 and 3 contemplate that

person receiving payment should be acting on behalf of another

person i.e. he must be agent of the principal and secondly payment

should be for the services rendered by the agent. Thus the test is

as to whether person receiving commission is agent of the principal

and he is receiving commission in lieu of services. The above are

jurisdictional facts which have to be found out in the proceeding to

be taken under Section 201/201(1A) of the Act. What are the

jurisdictional facts and what is the scope of entertaining such

challenge in proceeding under Article 226 of the Constitution of

India needs to be first examined before proceeding further to

examine the facts of the present case.

The Apex Court in the case of Calcutta Discount Co. Ltd.


20

vs. Income Tax Officer reported in 1961(41) ITR 191 had occasion

to consider the aforesaid issue in context of the provisions of

Income Tax Act, 1922. It is useful to note the facts of the said case

in some detail. The appellant in the aforesaid case was assessed to

income tax for the assessment year 1942-43, 1943-44 and 1944-45

by three separate orders. Three notices purporting to be under

Section 34 of the Income Tax Act, 1922 for re-assessment was

issued. Notices were replied by the appellant and it challenged the

proceedings by means of writ petition under Article 226 of the

Constitution of India on the ground - “The said pretended notice

was issued without the existence of the necessary conditions

precedent which confers jurisdiction under section 34

aforementioned, whether before or after the amendment in 1948”.

Learned Single Judge held that the above ground was not made

out but being of the opinion that Amending Act, 1948 was not

retrospective,held the notices without jurisdiction and issued a writ

of prohibition to the Income Tax Officer from continuing the

assessment proceedings any further. In the Letter Patent Appeal,

the Division Bench set-aside the order of learned Single Judge and

the writ petition was dismissed. The appeal was filed in the Apex

Court. The Apex Court laid down following:-

“To confer jurisdiction under this section to issue notice in respect of assessments beyond the period of four years, but within a period of eight years, from the end of the relevant year two conditions have therefore to be satisfied. The first is that the Income-tax Officer must have reason to believe that income, profits or gains chargeable to income- tax have been under-assessed. The second is that he must have also reason to believe that such " under assessment " has occurred by reason of either (i) omission or failure on the part of an assessee to make a return of his income under s. 22, or (ii) omission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment for that year. Both these conditions are conditions precedent to be satisfied before


21

the Income-tax Officer could have jurisdiction to issue a notice for the assessment or re-assessment beyond the period of four years but within the period of eight years, from the end of the year in question.”

The Apex Court considered the facts of the case including the

affidavits filed in the High Court as well as before the Apex Court.

The Apex Court took the view that one of the preconditions for

initiating proceedings under Section 34 that there had been any

material non-disclosure by reason of which under assessment was

taken place, was not there before the Income Tax Officer, hence he

had no jurisdiction to issue notice. In this context following was held

by the Apex Court:-

“It must therefore be held that the Income-tax Officer who issued the notices had not before him any non-disclosure of a material fact and so he could have no material before him for believing that there had been any material non- disclosure by reason of which an under-assessment had taken place.”

It is relevant to note that before the Apex Court also counsel

for the department contended that company would have sufficient

opportunity to raise the question before the Income Tax Officer and

in the event it is unsuccessful there is appellate jurisdiction under

Section 66(2) of the Income Tax Act, 1922, hence the High Court

ought not to have entertained the writ petition. Repelling the said

submission, following was laid down by the Apex Court:-

“Mr. Sastri mentioned more than once the fact that the company would have sufficient opportunity to raise this question, viz., whether the Income-tax Officer had reason to believe that under assessment had resulted from non- disclosure of material facts, before the Income-tax Officer himself in the assessment proceedings and, if unsuccessful there, before the appellate officer or the appellate tribunal or in


22

the High Court under section 66(2) of the Indian Income-tax Act. The existence of such alternative remedy is not however always a sufficient reason for refusing a party quick relief by a writ or order prohibiting an authority acting without jurisdiction from continuing such action.”

The next case to be considered is the judgment of the Apex

Court in the case of Raza Textiles Ltd. vs. Income Tax Officer,

Rampur reported in (1973)87 ITR 539. In the said case Income Tax

Officer, Rampur directed the appellant to pay tax on a sum of

Rs.2,00,000/- remitted by it as a selling commission to M/s.

Nathirmal and Sons, Djakarta (Indonesia) during the year ending on

December 31, 1951 which was a non-resident firm. After being

unsuccessful before the appellate authorities, the writ petition under

Article 226 of the Constitution of India was filed. The learned Single

Judge held that M/s. Nathirmal and Sons is not a non-resident firm

and the appellant was not required to act under Section 18(3-B) of

the Income Tax Act, 1922. The revenue went in appeal before the

High Court. The High Court allowed the appeal against which

judgment the appellant filed an appeal before the Apex Court. While

reversing the judgment of the Division Bench of the High Court,

following was laid down by the Apex Court:-

“..... The single Judge after going into the matter in detail came to the conclusion that M/s. Nathirmal and Sons is not a non-resident firm and that being so the appellant was not required to act under Section 18(3B). He accordingly, set aside the order impugned. The revenue went up in appeal against the order of the learned single Judge to the Appellate Bench. That Bench allowed the appeal with the observations, "In the present case the question before the Income-tax Officer, Rampur, was whether the firm Nathirmal and Sons was non-resident or not. There was material before him on this question. He had jurisdiction to decide the question either way. It cannot be said that the officer assumed jurisdiction by wrong decision on this question of residence". The Appellate Bench appears to have


23

been under the impression that the Income-tax Officer was the sole judge of the fact whether the firm in question was resident or non-resident. This conclusion, in our opinion, is wholly wrong. No authority, much less a quasi-judicial authority, can confer jurisdiction on itself by deciding a jurisdictional fact wrongly The question whether the jurisdictional fact has been rightly decided or not is a question that is open for examination by the High Court in an application for a writ of certiorari. If the High Court comes to the conclusion, as the learned single Judge has done in this case, that the Income-tax Officer had clutched at the jurisdiction by deciding a jurisdictional fact erroneously, then the assesses was entitled for the writ of certiorari prayed for by him. It is incomprehensible to think that a quasi-judicial authority like the Income-tax Officer can erroneously decide a jurisdictional fact and thereafter proceed to impose a levy on a citizen. In our opinion the Appellate Bench is wholly wrong in opining that the Income-tax Officer can "decide either way".”

The Apex Court in the said case held that it is

incomprehensible that a quasi-judicial authority like the Income Tax

Officer can erroneously decide a jurisdictional fact and thereafter

proceed to impose levy on a citizen.

The Apex Court in the case of Shrisht Dhawan (Smt.) vs.

M/s Shaw Brothers reported in (1992)1 SCC 534 had again laid

down that jurisdictional fact is one on existence or non-existence of

which depends assumption or refusal to assume jurisdiction by an

authority. Following was laid down in paragraph 9 of the said

judgment:-

“9. ..... A jurisdictional fact is one on existence or non-existence of which depends assumption or refusal to assume jurisdiction by a Court, tribunal or an authority. In Black's Legal Dictionary it is explained as a fact which must exist before a court can properly assume jurisdiction of a particular case. Mistake of fact in


24

relation to jurisdiction is an error of jurisdictional fact. No statutory authority or tribunal can assume jurisdiction in respect of subject matter which the statute does not confer on it and if by deciding erroneously the fact on which jurisdiction depends the court or tribunal exercises the jurisdiction then the order is vitiated. Error of jurisdictional fact renders the order ultra vires and Wade Administrative Law; bad. In Raza Textiles Raza Textile v. Income Tax Officer, Rampur it was held that a court or tribunal cannot confer jurisdiction on itself by deciding a jurisdictional fact wrongly. ..... Error in assumption of jurisdiction should not be confused with mistake, legal or factual in exercise of jurisdiction. In the former the order is void whereas in the latter it is final unless set aside by higher or competent court or authority. An order which is void can be challenged at any time in any proceeding.....”


Court in the case of Siemens Ltd. vs. State of Maharashtra and

others reported in (2006)12 SCC 33. In the said case demand of

payment of cess was issued to the appellant’s company which was

challenged in the High Court on the ground that no jurisdictional

fact exists for the levy. By the notice the appellant was directed to

make payment of cess with interest. The writ petition was dismissed

by the High Court on the ground that the petitioner may file reply to

the show cause notice. The Apex Court held that although writ

Court may not exercise its discretionary jurisdiction in entertaining a

writ petition challenging the notice unless the same appears to have

been without jurisdiction, but the question herein has to be

considered from a different angle. Following was laid down by the

Apex Court in paragraphs 6, 8 and 9:-

“6. A writ petition was filed by the appellant herein questioning the said purported notice. By reason of the impugned order, the High Court refused to exercise its jurisdiction under Article 226 of the Constitution of India stating:


25

"Challenge is to a show cause notice issued by the Corporation demanding certain payment of cess on the value of goods imported from Aurangabad and Daman. Petitioners may file their reply to the show cause notice and produce the relevant documents within two weeks. In case the order is adverse to the petitioner no recovery shall be made for a period of four weeks from the date of service of the order on the petitioner."

8. The question as to whether jurisdictional fact existed for issuance of the said notice order passed by the respondent was in question in the said writ petition.

9. Although ordinarily a writ court may not exercise its discretionary jurisdiction in entertaining a writ petition questioning a notice to show cause unless the same inter alia appears to have been without jurisdiction as has been held by this Court in some decisions including State of Uttar Pradesh v. Brahm Datt Sharma and Anr. AIR 1987 SC 943, Special Director and Another v. Mohd. Ghulam Ghouse and Another, (2004) 3 SCC 440 and Union of India and Another v. Kunisetty Satyanarayana, 2006 (12) SCALE 262], but the question herein has to be considered from a different angle, viz, when a notice is issued with pre-meditation, a writ petition would be maintainable. In such an event, even if the courts directs the statutory authority to hear the matter afresh, ordinarily such hearing would not yield any fruitful purpose [See K.I. Shephard and Others v. Union of India and Others (1987) 4 SCC 431 : AIR 1988 SC 686]. It is evident in the instant case that the respondent has clearly made up its mind. It explicitly said so both in the counter affidavit as also in its purported show cause notice.”


Court in the case of Arun Kumar and others vs. Union of India

and others reported in (2007)1 SCC 732. The question of

applicability of Section 17(2)(ii) of the Income Tax Act, 1961 and

Rule 3 of the Income Tax Rules, 1962 came for consideration. Rule

3 provided for method of computing valuation of perquisite under

Section 17(2). In context of the said challenge, following was laid

down by the Apex Court in paragraphs 74, 75, 76, 77, 78, 82, 83,


26

84 and 85:-

“74. A "jurisdictional fact" is a fact which must exist before a Court, Tribunal or an Authority assumes jurisdiction over a particular matter. A jurisdictional fact is one on existence or non-existence of which depends jurisdiction of a court, a tribunal or an authority. It is the fact upon which an administrative agency's power to act depends. If the jurisdictional fact does not exist, the court, authority or officer cannot act. If a Court or authority wrongly assumes the existence of such fact, the order can be questioned by a writ of certiorari. The underlying principle is that by erroneously assuming existence of such jurisdictional fact, no authority can confer upon itself jurisdiction which it otherwise does not posses.

75. In Halsbury's Laws of England, it has been stated;

"Where the jurisdiction of a tribunal is dependent on the existence of a particular state of affairs, that state of affairs may be described as preliminary to, or collateral to the merits of, the issue. If, at the inception of an inquiry by an inferior tribunal, a challenge is made to its jurisdiction, the tribunal has to make up its mind whether to act or not and can give a ruling on the preliminary or collateral issue; but that ruling is not conclusive".

76. The existence of jurisdictional fact is thus sine qua non or condition precedent for the exercise of power by a court of limited jurisdiction.

77. In Raja Anand Brahma Shah v. State of U.P. & Ors., AIR 1967 SC 1081 : (1967) 1 SCR 362, sub-section (1) of Section 17 of the Land Acquisition Act, 1894 enabled the State Government to empower Collector to take possession of 'any waste or arable land' needed for public purpose even in absence of award. The possession of the land belonged to the appellant had been taken away in the purported exercise of power under Section 17(1) of the Act. The appellant objected against the action inter alia


27

contending that the land was mainly used for ploughing and for raising crops and was not 'waste land', unfit for cultivation or habitation. It was urged that since the jurisdiction of the authority depended upon a preliminary finding of fact that the land was 'waste land', the High Court was entitled in a proceeding for a certiorari to determine whether or not the finding of fact was correct.

78. Upholding the contention and declaring the direction of the State Government ultra vires, this Court stated;

"In our opinion, the condition imposed by s. 17(1) is a condition upon which the jurisdiction of the State Government depends and it is obvious that by wrongly deciding the question as to the character of the land the State Government cannot give itself jurisdiction to give a direction to the Collector to take possession of the land under s. 17(1) of the Act. It is well-established that where the jurisdiction of an administrative authority depends upon a preliminary finding of fact the High Court is entitled, in a proceeding of writ of certiorari to determine, upon its independent judgment, whether or not that finding of fact is correct". (emphasis supplied)

82. A question under the Income Tax Act, 1922 arose in Raza Textiles Ltd. v. Income Tax Officer, Rampur, (1973) 1 SCC 633 : AIR 1973 SC 1362. In that case, the ITO directed X to pay certain amount of tax rejecting the contention of X that he was not a non-resident firm. The Tribunal confirmed the order. A single Judge of the High Court of Allahabad held X as non-resident firm and not liable to deduct tax at source. The Division Bench, however, set aside the order observing that:

"..... ITO had jurisdiction to decide the question either way. It cannot be said that the Officer assumed jurisdiction by a wrong decision on this question of residence". X approached this Court.

83. Allowing the appeal and setting aside the order of the Division Bench, this Court stated;


28

"The Appellate Bench appears to have been under the impression that the Income-tax Officer was the sole judge of the fact whether the firm in question was resident or non- resident. This conclusion, in our opinion, is wholly wrong. No authority, much less a quasi-judicial authority, can confer jurisdiction on itself by deciding a jurisdictional fact wrongly The question whether the jurisdictional fact has been rightly decided or not is a question that is open for examination by the High Court in an application for a writ of certiorari. If the High Court comes to the conclusion, as the learned single Judge has done in this case, that the Income-tax Officer had clutched at the jurisdiction by deciding a jurisdictional fact erroneously, then the assesses was entitled for the writ of certiorari prayed for by him. It is incomprehensible to think that a quasi- judicial authority like the Income-tax Officer can erroneously decide a jurisdictional fact and thereafter proceed to impose a levy on a citizen." (emphasis supplied)

84. From the above decisions, it is clear that existence of 'jurisdictional fact' is sine qua non for the exercise of power. If the jurisdictional fact exists, the authority can proceed with the case and take an appropriate decision in accordance with law. Once the authority has jurisdiction in the matter on existence of 'jurisdictional fact', it can decide the 'fact in issue' or 'adjudicatory fact'. A wrong decision on 'fact in issue' or on 'adjudicatory fact' would not make the decision of the authority without jurisdiction or vulnerable provided essential or fundamental fact as to existence of jurisdiction is present.

85. In our opinion, the submission of Mr. Salve is well founded and deserves to be accepted that "concession" under clause (ii) of sub-section (2) of Section 17 of the Act is a 'jurisdictional fact'. It is only when there is a 'concession' in the matter of rent respecting any accommodation provided by an employer to his employee that the mode, method or manner as to how such concession can be computed arises. In other words, concession is a 'jurisdictional fact'; method of fixation of amount is 'fact in issue' or 'adjudicatory fact'. If the assessee contends that there is no 'concession', the authority has to decide the said


29

question and record a finding as to whether there is 'concession' and the case is covered by Section 17 (2) (ii) of the Act. Only thereafter the authority may proceed to calculate the liability of the assessee under the Rules. In our considered opinion, therefore, in spite of the legal position that Rule 3 is intra vires, valid and is not inconsistent with the provisions of the parent Act under Section 17 (2) (ii) of the Act, it is still open to the assessee to contend that there is no 'concession' in the matter of accommodation provided by the employer to the employee and hence the case did not fall within the mischief of Section 17 (2) (ii) of the Act.”

The proposition of law deducible from the aforesaid

pronouncement is that unless pre-conditions for exercise of

jurisdiction exists in an authority assumption of jurisdiction on

assuming wrong fact can always be questioned in a writ Court and

the mere fact that income tax authorities have assumed jurisdiction

and proceeded to pass an order does not preclude the scrutiny that

whether jurisdictional facts to assume jurisdiction were present or

not.

Now we again revert to the facts of the present case to find

out as to whether preconditions to proceed under Section

201/201(1A) of the Act were present or not.

As noted above, two conditions, which are required to be

fulfilled before holding a person liable for deduction at source, are

the payment is received by a person as agent of principal and

secondly payment is for services rendered (not being professional

services). The petitioner’s contention is that relationship between

the petitioner i.e. newspaper agency and the advertising agency is

not on the basis of principal and agent, rather is on the basis of

principal to principal. It has been submitted that there is no

agreement between the petitioner and the advertising agency from

which any assumption can be inferred nor at any point of time the


30

petitioner has employed the advertising agency as its agent

whereas the contention of the department is that advertising

agencies are agent of the petitioner since they are bringing

advertising business which are services rendered by them to the

petitioner and payment of trade discount to the advertising agency

is nothing but commission in lieu of services rendered. We now

proceed to examine as to what are the tests for finding out

relationship of principal and agent.

Section 182 of the Indian Contract Act, 1872, which defines

“Agent” and “Principal”, is quoted below:-

“182."Agent" and "principal" defined.-An "agent" is a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done, or who is so represented, is called the "principal".

The rule as to agency is expressed in maxim “qui facit per

alium, facit per se”. It is founded on a contract, express or implied,

by which one of the parties confides to the other, the management

of some business to be transacted in his name or on his account

and by which the other assumes to do the business and renders an

account of it. A Division Bench of this Court had occasion to

consider Section 182 of the Indian Contract Act in the case of Loon

Karan Sohan Lal vs. Firm John and Co. and others reported in

A.I.R. 1967 Alld. 308. Following was laid down in paragraphs 5 and

6:-

“6. ..... The court must examine the true nature of the agreement and the subsequent dealings between the parties, and then decide whether it established a relationship of agency under the law. It is common experience that the word 'agent' is frequently used to describe a relationship which is not an agency in law. In several cases, a person described as an agent in


31

the agreement or his letter of appointment was held to be not an agent according to law. Some of these cases are cited in Halsbury's Laws of England, 3rd edition, Vol. 1 p. 146, in a foot-note to the following observation:

"351. Agency Depends on True Nature of Relationship In order to ascertain whether the relation of agency exists, the true nature of the agreement or the exact circumstances of the relationship between the alleged principal and agent will be regarded and if it is found that such agreement in substance contemplates the alleged agent acting on his own behalf, and not as an agent in the agreement, the relation of agency will not have arisen."

The cases cited in the foot-note are: Re Nevill, Ex parte White, (1871) 6 Ch. App. 397; Towle (John) and Co v. White, (1873) 29 LT 78; Livingstone v. Ross. 1901 AC 327; Micheline Tyre Co. v. Macfarlane (Glasgow) Ltd., (1917) 55 Sc L. R. 35; Kitson v. King (P. S.) and Son, Ltd. (1919) 36 T. L. R. 162, Lamb (W T.) & Sons v. Goring Brick Co. (1932) K. B. 710.

6. I have examined these cases except the one reported in 55 Sc. L. R. 35 which is not available. They establish the principle that in determining legal nature of relationship between the alleged principal and agent the use or omission of the word "agent" is not conclusive. American Law is similar:

"the manner in which the parties designate the relationship is not controlling, and if an act done by person on behalf of another is in its essential nature one of agency, the one is the agent of such other notwithstanding he is not so called. Conversely the mere use of the word by agent in the contract cannot have to be held the effect of making one agent, who, in fact is not such."

American Jurisprudence, IInd edition Vol. 3 page 431. The foot-note on this page refers to a case in which it was held that the use of the words "agency agreement" and "agent" by the parties in a contract does not necessarily establish a relationship of agency in the legal sense. McCarty v. King County Medical Service Corp. 26


32

Wash 2d 660, 175 P2d 658. The law in India is the same. It has been held in several decisions that the fact that the parties have called their relationship an agency is not conclusive, if the incidence of this relationship, as disclosed by evidence does not justify a finding of agency, and that the court must examine the true nature of the relationship and the functions and responsibilities of the alleged agent: Banaras Bank v. Ram Prasad, AIR 1930 All 573, Phool Chand v. Agarwal B. M. Co., AIR 1938 Lah 814; Suryaprakasaraya v. Matheson's Coffee Works, (1913) 14 Mad L. T. 249. What is the real nature of the relationship created between the plaintiff and the Government of Assam under the so-called agreement of agency Ex. C-1. Before analysing this agreement, it is necessary to state the essential characteristic of an agency in law. Section 182 of the Contract Act defines an agent as "a person employed to do any act for another or to represent another in dealings with third person." The section defines a principal as "the person for whom such act is done or who is so represented." According to this definition, an agent never acts on his own behalf but always on behalf of another. He either represents his principal in any transaction or dealing with a third person, or performs any act for the principal. In either case, the act of the agent will be deemed in law to be not own but of the principal. The crucial test of the status of an agent is that his acts bind the plaintiff.

A Division Bench of Madras High Court in the case of P.

Krishna Bhatta and others vs. Mundila Ganapathi Bhatta and

others, AIR 1955 Madras 648 laid down following in paragraph 36:-

“36. ..... Looked at from this point of view, an agency is a contract of employment for the purpose of bringing another-in legal relation with a third party or in other words, the contract between the principal and agent is primarily a contract of employment to bring him into legal relation with a third party Or to contract such business as may be going on between him and the third party. An agent is thus a person either actually or by law held to be authorised and


33

employed by any person to bring hint into contractual or other legal relations with a third party. He is a representative vested with authority, real or ostensible, to create voluntary primary obligations for his principal by making promises or representations to third persons calculated induce them to change their legal relations. Representative character and derivative authority may briefly be said to be the distinguishing features of an agent.”

The Apex Court in the case of Chiarman, Life Insurance

Corporation vs. Rajiv Kumar Bhasker reported in (2005)6 SCC

188 had occasion to consider various sections of Indian Contract

Act including Sections 182, 186 and 187. The Apex Court in the

said case held that an agency can be created expressly or by

necessary implications. Followings were laid down in paragraphs

26, 27 and 28:-

“26. The definition of 'agent' and 'principal' is clear. An agent would be a person employed to do any act for another, or to represent other in dealings with third parties and the person for whom such act is done or who is so represented is called the principal. It may not be obligatory on the part of the Corporation to engage an agent in terms of the provisions of the Act and the rules and regulations framed thereunder, but indisputably an agent can be appointed for other purposes. Once an agent is appointed, his authority may be express or implied in terms of Section 186 of the Contract Act.

27. For creating a contract of agency, in view of Section 185 of the Indian Contract Act, even passing of the consideration is not necessary. The consideration, however, so far as the employers are concerned as evidenced by the Scheme, was to project their better image before the employees.

28. It is well-settled that for the purpose of determining the legal nature of the relationship between the alleged principal and agent, the use of or omission of the word "agent" is not


34

conclusive. If the employee had reason to believe that his employer was acting on behalf of the Corporation, a contract of agency may be inferred.”

Now after having taken note of the propositions as laid down

in the aforesaid judgments regarding tests to be applied for finding

out as to whether particular relationship is of a principal and agent

or not, we proceed to look into the relevant facts and materials

which have been brought on the record to examine the above

question.

As noted above, the assessment order has already been

passed by the assessing authority holding that relationship between

the petitioner and advertising agency is that of principal and agent

and the relevant materials and facts, which have been relied for

coming to the said conclusion, have been expressly referred to in

the assessment order and have been reiterated in the counter

affidavit filed by the department. The entire case of the department

having come on the record, it is useful to refer to and rely on the

said materials for determining the above jurisdictional question.

The assessment order itself noticed the three conditions,

which were required to be satisfied for principal and agent

relationship, and finding has been returned that all the said three

conditions are fulfilled. The relevant findings and observation are

contained in paragraphs 21, 27, 30 and 31, which are to the

following effect:-

“21. The gist of the above para is that it is a principal agency relationship because the advertising agents canvass advertisement for the media house at tariff prescribed by the media house. In this connection, it would be relevant to quote para 4 of the Standard of Practice for Advertising Agencies (As approved by the Advertising Agencies Association of India, Bombay) as under:


35

“No member shall pay or undertake or allow to an advertiser or his agent or representative, the whole or any portion of the standard rate of commission resulting or to result to such member from any advertising medium nor promise or procure or undertake to procure advertising or at a reduced rate nor supply free or partly free to any advertiser, any advertising material, including finished drawings, or other art work, photographs, blocks, stereos, matrices or the like, typesetting or printing nor defray in whole or in part the salary of any employee of an advertiser, nor grant any allowances, discount or the like nor render any service having the effect of rebating the commission allowed by an advertising medium. The sharing of commission with member or overseas agency or with agent by this Association shall, however, be permitted.”

27. It can be said that an agent can conduct the business of his principal according to the custom which prevails in doing business. Therefore, the assessee’s argument that since it has no codified agreement with the advertising agency, the advertising agency cannot be treated as its agent, does not hold good. The principal-agent relationship can also exist without any written or codified agreement. The assessee has himself admitted that the INS as an apex trade body for governing newspaper publishers also govern newspaper relations with advertising agencies. Since, assessee is a part of INS it is implied that it also has a contract/agreement with the advertising agent though it may not be codified agreement between the assessee and the advertising agency.

30. In order to satisfy the requirements of principal-agent relationship, certain condition laid down in explanation (I) to section 194H are required to be fulfilled:

1. There should be payment received or receivable directly or indirectly.

2. It should be received or receivable by a person acting on or behalf of another person.

3. The payment should be received or


36

receivable for:

(a) Services rendered (not being professional services) or

(b) For any services in the course of buying or selling of goods or

(c) In relation to any transaction relating to any asset, valuable articles or thing not being securities.

All these three conditions are fulfilled in the instant case:-

1. In the Jagran Prakashan Ltd. case the advertising agent is receiving payment indirectly under the name of “discount”. This discount is nothing but an amount deducted from the gross amount receivable by the principal i.e. Jagran Prakashan Ltd. If the advertising agent would have not rendered services to the Jagran Prakashan Ltd. it would have not received any discount or payment.

2. This discount or payment was received by the advertising agent for procuring/providing advertisements to Jagran Prakashan Ltd. The advertisements were given as per the space available in the Jagran Newspaper. Therefore, the publication of the advertisement is strictly subject to the availability of space in the newspaper. The advertising agency is providing advertisements on the basis of requirement of the newspaper. The newspaper also decides what type of advertisements it will publish. For example, newspapers don’t publish the advertisement for alcoholic drinks. Thus, it is the newspaper which decides that what type of advertisement it will publish and in how much space. Thus, the advertising agency is acting on behalf of the Jagran Prakashan Ltd. and receiving payment in the name of discount from the gross amount accruing to the Jagran Prakashan Ltd.

3. The advertisement agency is rendering a service to Jagran Prakashan Ltd. by procuring and supplying the advertisement to the later and for this service it is receiving its payment from the


37

Jagran Prakashan Ltd. under the name ‘discount’.

31. From the above discussion, it can be appreciated that the advertising agency is acting on behalf of Jagran Prakashan Ltd. and receiving payments for the services it has rendered to the Jagran Prakashan Ltd. Thus, the existence of principal-agent relationship vis-a-vis assessee and advertising agencies is established. The provisions of section 194 H of the I.T. Act, 1961 are applicable in such cases. Accordingly, the commission paid by the assessee to various accredited advertising agencies in the guise of “trade discount” is liable to TDS.”

It is the case of the department, as apparent from the

impugned assessment order as well as from the counter affidavit,

that there is no inter se contract between the petitioner and any

advertising agency, rather the case of the department is that

principal-agent relationship can exist even if there is implicit

agreement. The conclusions have been recorded in the

assessment order in paragraph 34, which is to the following effect:-

“34. In conclusion, the whole discussion of this order is summarised as under:-

A. There is a implicit agreement between the Jagran Prakashan Ltd. and the advertising agencies via Indian Newspaper Society (INS) or otherwise.

B. There is a principal-agent relationship between the Jagran Prakashan Ltd. and the advertising agencies and the advertising agencies act on behalf and as per the requirement of the Jagran Prakashan Ltd.

C. There is payment from the Jagran Prakashan Ltd. to advertising agencies in the name of so called ‘discount’. The source of this discount is nothing but the ad revenue generated by the Jagran Prakash Ltd.

D. This payment from Jagran Prakashan Ltd. to the advertising agencies is


38

entirely for the services of advertisement procurement by the advertising agencies.

E. That the Jagran Prakashan Ltd. vis-a-vis INS and AAAI have devised a cosmetic and artificial methodology to circumvent the clear provisions of section 194H.”

The petitioner is member of Indian Newspapers Society (INS)

by whom the advertising agencies are granted accreditation.

According to the Rules of INS the advertising agencies while being

granted accreditation are required to enter into an agreement. The

department submits that since the petitioner is bound by Rules of

INS by whom the accreditation was granted to advertising agencies

after entering into an agreement, there is implicit contract between

the petitioner and the advertising agencies and the relationship of

principal-agent exists between them.

The petitioner has brought on the record Rules governing

accreditation of advertising agencies and the proforma of the

agreement which is entered between the advertising agencies and

the INS. The aforesaid rules have also been referred to in the

assessment order. On the basis of Rules of INS of which petitioner

is also a member and with whom the advertising agency enters into

an agreement, the department has concluded that there is implicit

contract between the petitioner and the advertising agencies from

which relationship of principal-agent can be found out. The

assessment order also refers to Standard of Practice for Advertising

Agencies as approved by the Advertising Agencies Association of

India, Bombay. Apart from abovesaid two materials, no other

material has been referred to in the order impugned. The

proposition is well settled that relationship of principal and agent

can be founded either expressly or by implication. Even if there is

no agreement between the principal and agent, the relationship can

exist. To find out the real relationship between the petitioner and the

advertising agency, the Rules of INS and the agreement entered


39

between the advertising agencies and the INS has to be carefully

looked into. The petitioner has brought on record as Annexure RA-

2, copy of the Rules governing accreditation (INS Press Handbook

2010-11). The aforesaid rules delineate the clear picture of

relationship between the newspaper agencies and advertising

agencies. It is useful to refer to certain rules of INS which clearly

negate the relationship of principal and agent between the

newspaper agency and the advertising agency. Under the heading

“Rules and Regulations Governing Accreditation of Advertising

Agencies”, Rule 10 clearly indicates that there is no control of

newspapers agency on the advertising agency whereas in a

relationship of principal and agent principal retains full control over

the activities of agent. Rule 10(1), 10(b) and 10(c) are quoted

below:-

“10(a). It is free from control or interference of any business or person who owns or controls any newspaper or other advertising medium or media.

(b) Its principal or principals are not the proprietor/partners/salaried employees of any advertiser or publisher of a newspaper or an advertising medium.

(c) Any of its Directors, Proprietor, Partners or Chief Executives do not hold any share or equity in any publication or any other form of advertising media and have no connection financially or otherwise, with any publication or with any firm of advertising media such as outdoor, hoardings, cinemas, radio, etc. or with any advertiser except as an advertising agent. Such persons can hold a small number of shares in public limited client companies.”

When Rule 10, as quoted above, clearly provides that

advertising agency is free from control or interference from

any business or person who owns or controls newspaper, the

newspaper agency cannot be treated to be principal and advertising


40

agency as agent.

Rule 32, which provides for payment of trade discount has

been referred by the department, is to the followign effect:-

“32. Payment of Trade Discount. As and from the date of accreditation as above, the accredited advertising agency shall be entitled to receive from the members of the Society the maximum and minimum Trade Discount of 15% in respect of advertisement business placed by it with such members. In the case of the provisionally accredited advertising agency, the maximum and minimum Trade Discount shall be 10% of the advertisement business.”

Rule 45 prohibits the members of the society from appointing

advertising agency as their representatives. Rule 45 is quoted

below:-

“45. Member’s Representation by Advertising Agency. Members of the Society are free to appoint whomsoever they like as their representative provided the said representatives are not classified as “advertising agents” and do not function as advertising agencies.”

A agency is a contract of employment for the purpose of

bringing another in legal relation with a third party or in other words,

the contract between the principal and agent is primarily a contract

of employment to bring him into legal relation with a third party or to

contract such business as may be going on between him and the

third party. In publication of advertisement submitted by advertising

agency, the responsibility to make payment of bills of the

newspaper is on the advertising agency and there is no

responsibility of advertiser to make payment to the newspaper

agency and no privity of contract took place between the

newspaper agency and the advertiser and had the advertising

agency being agent of newspaper agency, the advertiser was to be


41

liable for payment to the newspaper agency. Rule 56(a) of the

Rules clearly contemplates that it is the advertising agency which is

responsible for payment even if the advertiser has not paid to the

advertising agency. Rule 56(a) of the Rules is quoted below:-

“56. Defaulting Clients. (a) where an advertiser fails to pay and in consequence the agency is unable to pay publications, INS upon being authentically informed by the agency and being so satisfied will advise its member publications to suspend the advertisements of the concerned advertiser until payment is realised. This is without prejudice to the agency’s clear liability to pay its dues even if its client has not paid.”

In the form of application, which is provided in Appendix-II to

the Rules, advertising agency is required to attach a list of the

names and addresses of clients whose advertisement is handled by

the advertising agency, which clearly indicates that in fact the

advertising agency is working for the advertisers/clients. Column 26

of the form of application is as follows:-

“Attach a list of the names and addresses of clients whose advertisement is handled by you and products/services as advertised along with letters of appointment issued by the clients as also with other documentary evidence.”

The most important material is format of contract between the

advertising agency and the INS, which is in Appendix-III to the

Rules. The contents of first paragraph of the contract clearly

indicates that object is to secure the best advertising service for

the advertiser. Thus the accreditation of advertising agency is for

the object of providing better service to the advertiser and it is not

engaged as agent of the newspaper agency and advertising

agency, in fact, is running its advertising business and while

conducting the said business it acts on behalf of their client i.e.

advertiser. The first paragraph of the agreement is as follows:-


42

“(1) BY THE SOCIETY: ‘That the Society accredits the Agency and includes its name in the list of accredited agents published from time to time.”

Clause 2 of the agreement clearly indicates that advertising

agency works in the interest of consumer and advertisers. Clause

2(a), (b), (c) and (d) are quoted below:-

“(2) BY THE AGENCY: In consideration of the accreditation herein afforded and of the trade discount to which the Agency is entitled by reasons of such accreditation.

(a) The Advertising Agency shall maintain a properly equipped office and shall fully abide by the Standards of Service by Advertising Agencies in the interest of consumers and Advertisers set out in the Society’s Rules and Regulations on Accreditation of Advertising Agencies.

(b) The Advertising Agency shall ensure that all advertisements placed by it are legal, clean, honest and truthful and it shall render the best possible advertising service to the advertiser and encourage the development of new advertisement accounts and it shall fully adhere in this respect to the advertisement ethics and the Code of Ethics and Standards set out in the Society’s Rules and Regulations on Accreditation of Advertising Agencies.

(c) The Advertising Agency shall be paid trade discount in accordance with the Society’s Rules and Regulations on Accreditation of the Advertising Agencies.

(d) That it will retain full trade discount earned as an advertising agency from Member Publications and that it will at no time pay or otherwise allow any part of such trade discount to any advertiser or representative of any advertiser for whom it may be acting, or has acted as an advertising agency.”

In the agreement Clause 2(q) mentions about 15% trade


43

discount which advertising agency is entitled from newspaper

agency. Clause 2(q) is quoted below:-

“2(q). As and from the date of accreditation, the Advertising Agency shall be entitled to receive from the Members of the Society the maximum and minimum trade discount of 15% in respect of advertisement business placed by it with such Members. In the case of provisional accreditation the Advertising Agency shall be entitled to receive maximum and minimum trade discount of 10% only.”

According to Clause (3) of the agreement the advertising

agencies whose accreditation application is accepted by the society

are bound by the contract to be entered in Appendix-III.

The second precondition, which is required to be fulfilled for

applicability of Section 194H of the Act is that the person receiving

payment has rendered service to the deductor. A perusal of the INS

Rules clearly indicates that advertising agencies are rendering

service to the advertisers/customers and they are accredited by the

society not as an agent of newspaper agency but to provide service

to the advertisers/its clients. The aforesaid is clear from the

following part of the Rules.

A bare reading of Rule 20 indicates that advertising agencies

are rendering service to the advertisers i.e. their clients. Rule 20 of

the Rules is quoted below:-

“20. No Rebating. The Trade Discount allowed to the agency by the members shall be retained in full by the agency and shall not be shared or rebated to any other person, firm or company, directly or indirectly except:

When an agency rebates full Trade Discount to its clients and is paid a service fee for its services provided that the amount of the service fee so


44

received shall not be less than 15%, such service fee being levied on the gross and not on the net amount.”

Column 26 of the application form, as quoted above, which

require the advertising agencies to submit the list of names and

addresses of clients whose advertisement is handled by them with

the letters of appointment issued by the clients (advertisers) clearly

mean that advertising agencies act for the advertisers who are their

client and they cannot be treated to be an agent of the newspaper

agency. The format of agreement in Appendix-III Clause (2) sub-

clause (d), as quoted above, which provides that advertising

agency shall retain full trade discount earned as an advertising

agency from member publications and it will at no time pay or

otherwise allow any part of such trade discount to any

advertiser or representative of any advertiser for whom it may

be acting, or has acted as an advertising agency. Thus the said

clause clearly indicates that advertising agencies act for the

advertisers who are their client and they are not the agent of the

News Agency.

In paragraph 21 of the assessment order, paragraph 4 of the

Standard of Practice for Advertising Agencies as approved by the

Advertising Agencies Association of India, has been relied and

referred to. Paragraph 4 of the Standard of Practice for Advertising

Agencies, provides a rule that no advertising agency shall pay or

undertake to pay any part of its commission received from

newspaper agency or promise or procure or undertake to procure

advertising at a reduce rate or to provide free or partly free any

advertising material to the advertiser. The said clause is with

different object and has no relevance in finding out the relationship

of newspaper and advertising agency as principal and agent. The

observation in the assessment order that advertising agency is

providing advertisements on the basis of requirement of newspaper,


45

for example, the newspaper do not publish advertisement for

alcoholic drinks and thus it is the newspaper which decides that

what type of advertisement it will publish and hence the advertising

agency is acting on behalf of the Jagran Prakashan Ltd. and

receiving payment in the name of discount from the gross amount

accruing to the Jagran Prakashan Ltd. The fact that advertisement

for alcoholic drinks is prohibited is in view of the prohibition

contained in the executive orders and statutory provisions to which

every newspaper is bound to follow and on the aforesaid factor

inference of agency which has been drawn by the respondents is

wholly misplaced. The observation that advertisement agency is

rendering service to Jagran Prakashan Ltd. is also without any

basis and foundation.

From the aforesaid , it is clear that no foundational fact exists

on the basis of which any inference can be drawn that advertising

agencies are agent of the petitioners and further advertising

agencies render any service to the newspaper. The above two

foundational facts being non existent, the proceedings under

Section 201/201(1A) of the Act were clearly not permissible.

Now comes another factor (first factor) which is required to

be established for applicability of Section 194H of the Act i.e. as to

whether any payment was made to the advertising agency as

commission. The case of the petitioner throughout has been that

petitioner has been paying a trade discount at the rate of 15% as

per Rule 32 of the Rules. The sample bills, which were collected by

the department at the time of survey and are part of the

assessment order, mention the total amount paid to advertising

agency and the discount provided for and the net bill amount. The

petitioner’s case is that trade discount has been provided by the

petitioner throughout as a part of trade practice. The trade discount

is claimed to be given in normal business practice which has been


46

recognised in several cases. Reliance has been placed on the

judgment of the Apex Court in the case of Moped India Ltd. vs.

Assistant Collector of Central Excise, Nellore and others

reported in (1986)1 SCC 125. In the said case the appellant,

manufacturer of moped, allowed commission to its dealer. The

central excise duty was paid on the price list after deducting the so

called commission to the dealer. The Central Excise Department

took the view that they were not entitled for deduction of the

aforesaid amount and demand of central excise was issued. The

Apex Court held in the said judgment that the said amount was

trade discount. Following was laid down in paragraph 7 of the said

judgment:-

“7. That takes us to the second question, namely, whether the Division Bench was right in taking the view that the Commission of Rs. 110, 145 and 165 per moped in respect of different varieties of mopeds sold to the dealers could not be said to be trade discount. Mr. Nariman, Learned Counsel appearing on behalf of the appellants contended that this Commission allowed to the dealers was clearly trade discount and was, therefore, liable to be deducted in determining the exciseable value of the mopeds by reasons of sub section (b) (ii) of Section 4 of the Act. Now it is true that this amount allowed to the dealers has been referred to in the agreement as commission but the level given by the parties cannot be determinative because it is for the court to decide whether the amount is trade discount or not, whatever be the name given to it. If we look at the terms of the agreement, it is clear that the agreement was between the appellants and the dealers on principal to principal basis. The clauses of the agreement which we have set out above clearly show beyond doubt that under the agreement, the mopeds were sold by the appellants to the dealers and the dealers did not act as agents of the appellants for the purpose of effecting sales on behalf of the appellants. It is clear from clause 5 (a) of the agreement that the bills in respect of the mopeds delivered to the dealers were to be


47

sent by the appellants through their bankers and it was the responsibility of the dealers to retire the bills for the purpose of taking delivery of the mopeds. Clause 5 (b) of the agreement laid an obligation on the dealers to insure the mopeds against all risks, pilferage, non-delivery and SRCC including breakage from the time the mopeds left the factory or stockyard of the appellants until they arrived at the premises of the dealer and this again would show that the dealers acted as principal to principal in purchasing the mopeds from the appellants. The dealers were also liable under Clause 6 of the agreement to maintain adequate organisation for sale and service of the mopeds including service stations, repair shops, spare parts. salesmen etc. and the mechanics were also to be trained at the cost of the dealers. The relationship between the appellants and the dealers was clearly on principal to principal basis and in the circumstances it is difficult to see how the amount of Rs. 11 , 145 and 165 allowed to the dealers. in respect of different varieties of mopeds could be regarded as anything other than trade discount. The appellants charged to the dealer the price of the mopeds sold to them less the amount of Rs. 110, Rs. 145 and Rs. 165 in respect of different varieties of mopeds. These amounts allowed to the dealers were clearly trade discount liable to be deducted from the price charged to the dealers for the mopeds. purpose of arriving at the exciseable value of the moped.”

Another judgment relied by the petitioner is in the case of

Commissioner of Central Excise, New Delhi vs. DCM Textiles

reported in (2006)9 SCC 349 where the amount paid to dealer was

treated to be trade discount. In the aforesaid case under the

agreement with the dealer a payment of commission was

contemplated. The Apex Court rejected the argument that dealer

was agent of the appellant and further the amount to be paid to the

dealer was trade discount. Followings were laid down in paragraphs

8 to 12:-

“8. Respondent has entered into different


48

but similar agreements with its dealers in connection with the sale of cotton yarn manufactured by it and one of the agreement was produced during the course of proceedings before the original authority for the purposes of ascertaining the terms and conditions at which the goods were supplied by the respondent to its dealers. The agreement purports to be a dealership agreement. The relevant clauses of the agreement are reproduced hereunder:

"2. That the Cotton Yarn will be delivered to the dealer on his requisitions placed in company's office at Delhi, Ex-company's Delhi Godown subject to availability of the stock with company in their said godown.

3. That the dealer shall be wholly and solely responsible for making full payment to the company of all stocks of Cotton Yarn received from the company.

xx xx xx xx xx xx

8. That the company shall pay the dealer commission of 1.5% including brokerage, if any, on the net value of the sale. The commission payable shall be worked out at the end of every quarter and remitted to the dealer.....

9. The dealer shall be paid ½% cash discount if cheque/pay order/draft is issued and handed over to company's staff by the dealer within one day of date of the sale invoice. The cash discount will be 0.25% if the payment is made by the dealer by cheque/pay order/draft within four days of the date of sale invoice.

10. No interest shall be levied if the payment is made by the dealer by cheque/pay order/draft within seven days of the date of the sale invoice for payment delayed beyond seven days of the date of sale invoice interest will be recoverable from 8th day of the sale invoice till the date of issue of cheque/draft/pay order and handed over to the company's staff. The interest shall be recovered at the end of every month.


49

11. That the dealer shall arrange to lift the stocks of cotton yarn purchased by the dealer as per the agreed schedule failing which the company may issue the sale invoice in dealer's favour. In such event, terms of cash discount/interest free period and interest recoverable shall start from the date of sale invoice itself.

xx xx xx

13. That the dealer shall keep with the company a security deposit of Rs.50,000/- as security which shall carry on interest of 15% per annum which will be payable yearly.

xx xx xx xx xx xx

16. If at any time this agreement is terminated in accordance with the conditions of this agreement, the accounts shall be finalised and settled within one week from the date of its termination.

9. A bare perusal of the above-noted clauses clearly shows that the agreement entered into between the respondent and dealers was on 'principal to principal basis' and it was an absolute sale made by the respondent in favour of the dealers. The dealer is required to make full payment of the cotton yarn purchased by him forthwith and he is given half percent cash discount if the payment is made within one day, 0.25 per cent if the payment is made within four days and if the payment is not made within seven days then from 8th day onwards the dealer becomes liable to pay interest on the delayed payment. This indicates that there was an absolute sale made by the respondent to its dealers and the sale was on 'principal to principal basis'.

10. This Court in Union of India & Others v. Bombay Tyres International Pvt. Ltd. reported in 1984 (17) ELT 329 (SC) on further arguments held trade discount to mean:

“1. Trade Discounts - Discounts allowed in the Trade (by whatever name such discount is


50

described) should be allowed to be deducted from the sale price having regard to the nature of the goods, if established under agreements or under terms of sale or by established practice, the allowance and the nature of the discount being known at or prior to the removal of the goods. Such Trade Discounts shall not be disallowed only because they are not payable at the time of each invoice or deducted from the invoice price."

11. It was held that discount allowed in the trade, if established under agreements or under terms of sale or by established practice, the allowance and the nature of the discount being known at or prior to the removal of the goods, then the same shall amount to a trade discount provided the sale is from 'principal to principal basis'. It was further observed that such trade discount shall not be disallowed only because they are not payable at the time of each invoice or deducted from the invoice value.

12. Original authority as well as Commissioner (Appeals) had stressed upon the point that since the trade discount was not paid to the dealer at the time of the preparation of the invoice and was to be paid later based on the net sale value of the sale effected (½ per cent of the net sale value); that the agreement between the parties amounting to be an agency agreement and not the dealership agreement and the sale was not from principal to principal basis. We agree with the Tribunal that this view is not sustainable on the facts of this case.”

Heavy reliance was placed by the learned counsel for the

petitioner on the judgment of the Delhi High Court in I.T.A. No.1264

of 2007 (The Commissioner of Income Tax XVII Mvs. Living

Media India Ltd.), dated 6th May, 2008. The facts of the aforesaid

case need to be noted in detail. The petitioner has already brought

on the record copy of the judgment of the Income Tax Appellate

Tribunal in Assistant Commissioner of Income Tax vs. Living

Media India Limited as well as the judgment of the High Court

along with the letter dated 14th August, 2008 of the Indian


51

Newspaper Society as Annexure-1 to the writ petition. The Indian

Newspaper Society has issued the letter dated 14th August, 2008 on

the reference “TDS on advertising agency trade discounts under

Section 194H of the Income Tax Act”. Following was circulated to all

the members of the Indian Newspaper Society:-

“Re: TDS on advertising agency trade discounts under Section 194H of the Income Tax Act.

Several of our member publications have reported having received a demand for depositing TDS against the trade discounts permitted by them to advertising agencies from whom member publications received advertising releases.

In this connection, we are enclosing copies of the following Court orders in the case of Living Media Ltd vs Asstt. Commissioner of Income Tax Circle 50(1), New Delhi.

1. Order No.I.T.A.No.3807/Del/2005 by the Appellate Tribunal Delhi Bench H, New Delhi, which held that the advertising agency was not an agent of the assessee and the amount deducted out of the gross payment received by the agency from the advertiser cannot be treated as payment of commission by the assessee to agency. Thus it was held that the assessee was not liable to deduct TDS on payment received by the agency.

2. Order No. ITA No. 1264 of 2007 by the High Court of Delhi, New Delhi upholding the judgment passed by the Appellate Tribunal Delhi Bench H, New Delhi.

These orders may be of use in dealing with such notices.”

M/s Living Media Limited is a publisher, which is publishing

various magazines like India Today, Business Today, Cosmopolitan

etc. The company had been generating income through space

selling (advertisement) in its magazines which was done through

advertising agency or directly through advertiser. The Company


52

used to pay 15% discount as per Rule 32 of the INS Rules. Similar

notices were issued to Living Media Ltd. asking for similar details

and alleging non deduction of tax at source under Section 194H.

Copy of the order of Tribunal has been enclosed at Page 26 of the

writ petition which notes these facts in paragraph 4. The Tribunal

dismissed the appeal of the department against which a writ petition

was filed by the department. The Delhi High Court dismissed the

writ petition of the department. The Delhi High Court held that there

is no liability of deduction of tax at source under Section 194H with

regard to trade discount of 15% given to the advertising agency.

Following was laid down in paragraph 6 to 10 of the judgment of

Delhi High Court:-

“6. It is contended by learned counsel for the Revenue that the CIT (A) had determined the payment of 15% to the advertising agency by the Assessee as commission and this was not challenged by the Assessee. Consequently, the provisions of Section 194H of the Act would come into play. While this is factually so, we are of the opinion that the conclusion arrived at by the CIT (A) really turns the argument upside down.

7. What is first required to be seen is the nature of the contract between the parties and after that determination, it is necessary to find out what is the nature of the payment. What the CIT(A) has done is to determine the nature of the payment and then to determine the nature of the contract. This, we think, is incorrect.

8. On a reading of the contract as well as the order passed by the CIT (A) and the Tribunal, we find that the two authorities below have held it to be a principal to principal contract. That being so, by its very definition, the payment made by the Assessee to the advertising agency cannot be classified as commission. The payment may be called a trade discount or may be described as a concession but since Rule 32 of the INS Rules described it as a trade discount, we have to proceed on that basis and by merely describing


53

the trade discount as commission, the Revenue cannot seek to invoke the provisions of Section 194H of the Act.

9. There is a concurrent finding of the CIT (A) as well as the Tribunal that the contract was a principal to principal contract and in terms of that contract what was given by the Assessee to the advertising agency was trade discount as per Rule 32 of the INS Rules.

10. Under the circumstances, we are of the view that the Tribunal was not in error in coming to the conclusion that commission was not paid by the Assessee to the advertising agency and therefore, the provisions of Section 194H of the Act could not be invoked by the Revenue.”

It is relevant to note that the Income Tax Department filed

Special Leave to Appeal (Civil) No.3433 of 2009 against the

judgment of the Delhi High Court dated 6th May, 2008 which special

leave to appeal was dismissed by the Apex Court vide its order

dated 11th December, 2009. The petitioner has relied on the

aforesaid judgment extensively and the assessing authority has

distinguished the judgment of the Delhi High Court stating that

Kerala High Court has delivered a judgment in the case of CIT

Thiruvanathapuram vs. Director, Prasar Bharati reported in 325

ITR 205, which is more recent judgment, hence the recent

judgment is to be preferred. The aforesaid reasoning by assessing

authority is wholly erroneous. The judgment of the Delhi High Court

was fully applicable on the facts of the present case and the

department was obliged to take into consideration the said

judgment specially when the special leave to appeal filed by the

department was dismissed by the Supreme Court.

Now we come to the judgment of the Kerala High Court

(supra) on which much reliance has been placed by the assessing

authority. The Prasar Bharati is fully owned Government of India

undertaking engaged in telecast of news, various sports,


54

entertainments, cinemas and other programmes. The

advertisements were canvassed through agents under the

agreement with them. The advertising agencies and the Director,

Prasar Bharati were principal and agent as per the agreement and

the Doordarshan provided 15% discount on the basis of which it

was contended that no deduction at source was required. The

Tribunal held that there was no liability for deduction of tax at

source under Section 194H which judgment was reversed by the

Kerala High Court. From the facts of the aforesaid case, it is clear

that Doordarshan had appointed agents i.e. advertising agencies

and there was agreement entered between them. In the aforesaid

circumstances 15% advertisement charges collected and remitted

was held to be in the form of commission payable to the agent by

Doordarshan. There was explicit agreement between the agency

and the Doordarshan where both understood that payment made to

the agency was liable to tax deduction. It is useful to quote following

observations of the judgment of Kerala High Court:-

“Respondent is a fully owned Government of India undertaking engaged in telecast of news, various sports, entertainments, cinemas and other programmes. Advertisement income is a major source of revenue for all telecasting companies including the respondent. Advertisements are canvassed through agents appointed by the respondent under agreement with them. Advertising agencies recognised by the respondent are of two types, the unregistered agencies which are not entitled to any credit facility and the other type are registered agencies which are given accredition and credit facility with Doordarshan. In other words, while the first category will be able to telecast advertisment programmes canvassed from customers only on advance payment, the other category can have telecast done before making payments. Advertisement charges are based on air-time used for telecasting advertisement material. Rates are also varying depending upon the time of advertisment. However, these matters have no relevance for the purpose of deciding this case


55

because the issue involved is whether the commission paid at the rate of 15% by the respondent on advertisement charges remitted by the advertising agencies is subject to tax deduction at source as commission under Section 194H of the Act.

From the above it is very clear that parties have understood their relationship as Principal and Agent and what is paid to the agent by Doordarshan is 15% of advertisement charges collected and remitted to it by the agent which is in the form of commission payable to the Agent by Doordarshan. Counsel for the respondent referred to one of the agreements where the commission is referred to as standard discount and contended that the arrangement between respondent and advertising agency is not agency but is a Principal to Principal arrangement of sharing advertisement charges. We are unable to accept this contention because advertisement contract entered into between the customer and the agency is for telecasting advertisement in Doordarshan channels. The agent canvasses advertisement on behalf of Doordarshan under agreement between them and the advertisement charges recovered from the customers are also in accordance with tariff prescribed by Doordarshan which is incorporated in the agreement. Further it is specifically stated in the agreement that advertisement material should also conform to the discipline introduced by Doordarshan which is nothing but a Government agency which cannot telecast all what is desired to be telecast by advertising agencies. In fact, Doordarshan is bound by advertisement contract canvassed by advertising agencies and it is their duty under the agreement between them and the advertising agencies to telecast advertisement material in terms of the contract which the agency signs with the customer. In our view, the transaction is a pure agency arrangement between the respondent and the advertising agencies because one acts for the other and the act of the agent binds the respondent in their capacity as Principal of the agent. It is pertinent to note that commission or brokerage defined under explanation (i) to Section 194H has a wide meaning and it covers any payment received or receivable directly or indirectly by a person acting


56

on behalf of another person for services rendered. In this case, no one can doubt that 15% commission paid to advertising agencies by the Doordarshan is for canvassing advertisements on behalf of the respondent. So much so, the payment of 15%, by whatever name called, whether discount or commission, falls within the definition of "commission" as defined under Explanation (i) to Section 194H of the Act.

The next question to be considered is whether the provision in the agreement permitting advertising agencies to retain 15% of the advertising charges payable by them to the respondent towards commission from out of the charges received for advertising services from customers will exonerate the respondent from their liability to deduct tax at source under Section 194H of the Act. In this context, it is pertinent to refer to clause 2(e) of Annexure A agreement which is extracted hereunder:

(e) The Agency shall retain in full all discount earned as an advertising agency and that it will at no time pay or otherwise allow directly or indirectly any part of such discount or remuneration to any person, advertiser or representative of any advertiser for whom it may be acting or has acted as an advertising agency.

Agency agrees to pay the TDS/Income Tax liability as applicable under the Income Tax Law on the discount retained by him. For this purpose agency agrees to make payment to Doordarshan Commercial Service by means of cheque/demand draft for the TDS on 15% discount retained by them. This cheque/demand draft will be drawn separately and should not be included in the telecast fee/advertisement charges.

It is very clear from the above provision that the advertising agency clearly understood the agreement as an agency arrangement and the commission payable by the respondent to such agency is subject to tax deduction at source under the Income Tax Act and so much so the


57

provision in the agreement was for the agent after retaining 15% to give cheque or demand draft for TDS amount which was originally 5% until it was enhanced to 10% by Finance Act 2007 with effect from 1.6.2007...”

In the aforesaid case, the relationship of principal and agent

was fully established since the advertising agency was appointed

as agent by written agreement and there was specific clause that

tax shall be deductible at source on payment of trade discount. In

the said circumstances the Kerala High Court held that Section

194H of the Income Tax Act was applicable. In the present case,

there is no agreement between the petitioner and the advertising

agency and the advertising agency has never been appointed as

agent of the petitioner. Thus the above case of Kerala High Court is

clearly inapplicable and the reliance on the said judgment for

fastening the liability of tax and interest on the petitioner is wholly

untenable. The judgment of the Kerala High Court thus does not

help the respondents in the present case.

Issues No. 7,8 and 9 are interrelated hence, they are being

taken together. The ground of challenge of the petitioner is that

under section 201 of the Act, the Income Tax authorities cannot

direct for payment of tax from the person, who was obliged to

deduct the tax at source and at best only interest and penalty can

be recovered on failure of deductor to deduct the tax at source.

Elaborating the submission, it is submitted that the orders of the

assessing authority directing for payment to the extent of amount

which was deductible under section 194H from the petitioner is

without jurisdiction and beyond the scope of provisions of section

201. The order being without jurisdiction, the petitioner can very

well invoke the jurisdiction of this court praying for quashing of such

an order which is void and in excess of the jurisdiction of the

authorities. Before answering the aforesaid issues, the scheme of

the Act including the scheme of collection and recovery of tax have


58

to be looked into.

Section 4 of the Act is charging section which provides that

income tax is chargeable in respect of the total income of the

previous year of every person. The charge of the income tax is thus

on the income of a person. Person has been defined in Section 2

(31). Section 4 of the Act is quoted as below:

“ 4 (1) Where any Central Act enacts that income-

tax shall be charged for any assessment year at

any rate or rates, income-tax at that rate or those

rates shall be charged for that year in accordance

with, and subject to the provisions (including

provisions for the levy of additional income-tax) of,

this Act in respect of the total income of the

previous year of every person :

Provided that where by virtue of any provision of

this Act income-tax is to be charged in respect of

the income of a period other than the previous

year, income-tax shall be charged accordingly.

(2) In respect of income chargeable under sub-

section (1), income-tax shall be deducted at the

source or paid in advance, where it is so

deductible or payable under any provision of this

Act.”

Interpreting the similar provisions of the Income Tax Act,

1922, the Federal Court in 15 ITR 302 Chatturam Vs.

Commissioner of Income Tax held that section imposes income

tax upon a person in respect of his income. While interpreting


59

Sections 3,4 and 22 of Income Tax Act, 1922 following was laid

down by the Federal Court:

“ The liability to pay tax is founded on Sections 3

and 4 of the Income Tax Act, which are the

charging sections. Section 22 etc. are the

machinery sections to determine the amount of

tax. Lord Dunedin in Whitney Vs. Commissioners

of Inland Revenue stated as follows:- “ Now, there

are three stages in the imposition of a tax. There

is the declaration of liability, that is the part of the

statute which determines what persons in respect

of what property are liable. Next, there is the

assessment. Liability does not depend on

assessment, that ex hypothesi has already been

fixed. But assessment particularizes the exact sum

which a person liable has to pay. Lastly, come the

methods of recovery if the person taxed does not

voluntarily pay.” In W.H. Cockerline & Co. V.

Commissioners of Inland Revenue, Lord

Hanworth, M.R., after accepting the passage from

Lord Dunedin's judgment quoted above, observed

as follows:- “Lord Dunedin, speaking, of course,

with accuracy as to these taxes, was not unmindful

of the fact that it is the duty of the subject to whom

a notice is given to render a return in order to

enable the Crown to make an assessment upon

him; but the charge is made in consequence of the

Act, upon the subject; the assessment is only for

the purpose of quantifying it.” He quoted with

approval the following passage from the judgment

of Sargant, L.J., in the case of Williams:- “ I cannot

see that the non-assessment prevents the


60

incidence of the liability, through the amount of the

deduction is not ascertained until assessment. The

liability is imposed by charging section, namely,

Section 38 (of the English Act) the words of which

are clear. The subsequent provisions as to

assessment and so on are machinery only. They

enable the liability to be quantified, and when

quantified to be enforced against the subject, but

the liability is definitely and finally created by the

charging section and all the materials for

ascertaining it are available immediately.” In

Attorney-General V. Aramayo and others, it was

held by the whole Court that there may be a waiver

as to the machinery of taxation which inures

against the subject. In India these well-considered

pronouncements are accepted without reservation

as laying down the true principles of taxation under

the Income-tax Act.”

The apex Court had occasion to consider section 4 of the

Income Tax Act in (1993) 201 ITR 88 Universal Radiators Vs.

Commissioner of Income Tax. Following was laid down by the

apex Court:

“But liability to pay tax under the Act arises on the

income accruing to an assessee in a year. The

word 'income', ordinarily in normal sense, connotes

any earning or profit or gain periodically, regularly

or even daily in whatever manner and from

whatever source. Thus it is a word of very wide

import. Clause (24) of Section 2 of the Act is

legislative recognition of its elasticity. Its scope has


61

been widened from time to time by extending it to

varied nature of income. Even before it was

defined as including profits, gains, dividends and

contributions received by a trust it was held to be a

word, 'of broadest connotation' which could not be

'understood in restricted or technical sense'. The

wide meaning of the word was explained by this

Court in Raghuvanshi Mills Ltd., Bombay v.

Commissioner of Income Tax, Bombay City MANU/

SC/0043/1952 : [1952]22ITR484(SC) and it was

emphasised that the expression, 'from whatever

source derived' widened the net. But exigibility to

tax is not the same as liability to pay tax. The

former depends on charge created by the Act and

latter on computation in accordance with the

provisions in the Act and the rules.”

Chapter XVII of the Act deals with collection and recovery of

tax. Section 190 provides for deduction at source and advance

payment. Section 190 is quoted below:

“190 (1) Notwithstanding that the regular

assessment in respect of any income is to be

made in later assessment year, the tax on such

income shall be payable by deduction or collection

at source or by advance payment or by payment

under sub-section (1A) of Section 192, as the case

may be, in accordance with the provisions of this

Chapter.

(2) Nothing in this section shall prejudice the

charge of tax on such income under the provisions

of sub-section (1) of section 4.”


62

Section 190 thus, provides mode of collection and recovery

of tax and under sub-section (1) of Section 190, the tax is payable

by deduction or collection at source.

Section 191 provides that in the case of income in respect of

which either provision is not made for deduction at source or where

income tax has not been deducted in accordance with the

provisions of this Chapter, income-tax shall be payable by the

assessee direct. Section 191 is quoted below:

“ 191. In the case of income in respect of which

provision is not made under this Chapter for

deducting income-tax at the time of payment, and

in any case where income-tax has not been

deducted in accordance with the provisions of this

Chapter, income-tax shall be payable by the

assessee direct.

Explanation.—For the removal of doubts, it is

hereby declared that if any person including the

principal officer of a company,—

(a) who is required to deduct any sum in

accordance with the provisions of this Act; or

(b) referred to in sub-section (1A) of section 192,

being an employer, does not deduct, or after so

deducting fails to pay, or does not pay, the whole

or any part of the tax, as required by or under this

Act, and where the assessee has also failed to pay

such tax directly, then, such person shall, without

prejudice to any other consequences which he

may incur, be deemed to be an assessee in default

within the meaning of sub-section (1) of section


63

201, in respect of such tax.”

Section 194H provides for payment of commission or

brokerage where income tax is to be deducted at source by the

person responsible for paying such commission or brokerage.

Section 201 provides for consequence of failure to deduct or pay.

Section 201 is quoted as below:

“201. (1) Where any person, including the principal

officer of a company,—

(a) who is required to deduct any sum in

accordance with the provisions of this Act; or

(b) referred to in sub-section (1A) of section 192,

being an employer, does not deduct, or does not

pay, or after so deducting fails to pay, the whole or

any part of the tax, as required by or under this

Act, then, such person, shall, without prejudice to

any other consequences which he may incur, be

deemed to be an assessee in default in respect of

such tax:

Provided that no penalty shall be charged under

section 221 from such person, unless the

Assessing Officer is satisfied that such person,

without good and sufficient reasons, has failed to

deduct and pay such tax.

(1A) Without prejudice to the provisions of sub-

section (1), if any such person, principal officer or

company as is referred to in that sub-section does

not deduct the whole or any part of the tax or after

deducting fails to pay the tax as required by or

under this Act, he or it shall be liable to pay simple


64

interest,—

(i) at one per cent for every month or part of a

month on the amount of such tax from the date on

which such tax was deductible to the date on

which such tax is deducted; and

(ii) at one and one-half per cent for every month

or part of a month on the amount of such tax from

the date on which such tax was deducted to the

date on which such tax is actually paid,

and such interest shall be paid before furnishing

the statement in accordance with the provisions of

sub-section (3) of section 200.

(2) Where the tax has not been paid as aforesaid

after it is deducted, the amount of the tax together

with the amount of simple interest thereon referred

to in sub-section (1A) shall be a charge upon all

the assets of the person, or the company, as the

case may be, referred to in sub-section (1).

(3) No order shall be made under sub-section (1)

deeming a person to be an assessee in default for

failure to deduct the whole or any part of the tax

from a person resident in India, at any time after

the expiry of—

(i) two years from the end of the financial year in

which the statement is filed in a case where the

statement referred to in section 200 has been filed;

(ii) four years from the end of the financial year in

which payment is made or credit is given, in any

other case :

Provided that such order for a financial year

commencing on or before the 1st day of April, 2007


65

may be passed at any time on or before the 31st

day of March, 2011.

(4) The provisions of sub-clause (ii) of sub-

section (3) of section 153 and of Explanation 1 to

section 153 shall, so far as may, apply to the time

limit prescribed in sub-section (3).”

The main issue to be answered is as to whether in event, the

person who is responsible to deduct tax at source fails to deduct

the tax at source, what are the consequences? Whether the tax

which was required to be deducted at source by such deductor, can

also be recovered from the deductor or recovery can confine only to

interest and penalty. The Income Tax Act is an integrated Act

delineating a scheme for payment of income tax. For interpreting

provisions of Section 201 of the Act, other related provisions have

to be looked into to find out the scheme of section 201.

Sections 190 and 191 of Chapter XVII under which chapter

Section 201 also falls need a closure scrutiny. Section 190(1)

provides that tax on income shall be payable by deduction or

collection at source or by advance payment. Sub-section (2) of

section 190 starts with a negative injunction i.e. “nothing in this

section shall prejudice the charge of tax on such income under the

provisions of sub-section (1) of Section 4.” Sub-section (1) of

section 4 as noted above, provides that charge of the income tax

shall be on the income of a person. Sub-section (2) of Section 190

clearly mandates that despite of mode and manner of collection

and recovery of tax i.e. by deduction or collection at source as

envisaged under section 190 (1), the charge of payment of income

tax is on a person, whose income is to be taxed.

Section 191 provides that in the case of income in respect of

which provision is not made under this Chapter for deducting


66

income tax at source and where income tax has not been deducted

in accordance with the provision of this chapter, income tax shall be

payable by the assessee direct. Thus, both the conditions i.e. (i) in

the case of income in respect of which provision is not made under

chapter XVII for deducting income tax at the time of payment and

(ii) in case where income tax has not been deducted in accordance

with the provisions of Chapter XVII, the Income tax is payable by

the assessee direct. Section 191 thus re-enforces that primarily the

liability of payment of income tax is on the person, whose income is

to be taxed as delineated under sub-section (1) of section 4 and

sub-section (2) of section 190. The explanation to Section 191

provides that where a deductor who was required to deduct income

tax at source does not deduct or after deduction does not pay and

where the assessee has also failed to pay such tax directly then

such person shall without prejudice to any other consequence be

deemed to be an assessee in default within the meaning of sub-

section (1) of Section 201 in respect of such tax. The explanation

to section 191 thus has to be read into section 201 (1).

Sub-section (1) of Section 201 provides that where deductor

does not deduct or does not pay after deduction such person shall

without prejudice to any other consequences which he may incur,

be deemed to be an assessee in default in respect of such tax.

The language of the explanation to Section 191 and sub-section (1)

of Section 201 is almost similar except with one difference. In

Explanation to Section 201, the deductor shall be deemed to be an

assessee in default where the assessee has also failed to pay such

tax directly, whereas in sub-section (1) of Section 201, the above

condition is not mentioned. While interpreting the provisions of

sections 191 and sub-section (1) of Section 201, a harmonious

construction has to be adopted and such interpretation is to be put

which gives meaning and purpose to both the provisions.

Explanation to section 191 specifically mentions “....be deemed to


67

be an assessee in default within the meaning of sub-section (1) of

section 201 in respect of such tax.” The above meaning thus has to

be read in sub-section (1) of section 201, which has been

specifically provided for. Not repeating the said condition again in

section 201 (1) is inconsequential. Thus, deductor who fails to

deduct income tax at source shall be deemed to be an assessee in

default only when the assessee has also failed to pay such tax

directly. Thus, it flows that there is no occasion to treat the deductor

as an assessee in default unless the assessee has not paid the tax

directly.

The apex Court in (2010) 10 SCC 29 GE India Technology

Centre Private Limited Vs. Commissioner of Income Tax, had

occasion to consider Section 195 of the Act, which also provides for

deduction of income tax. In the aforesaid case, words “chargeable

under the provisions of the Act” contained in Section 195 came for

interpretation. In the above context, the apex Court had held that

charging provisions of the Act form one single integral inseparable

code. It is useful to quote paragraphs 16,17 and 18:

“ 16. The fact that the Revenue has not obtained

any information per se cannot be a ground to

construe Section 195 widely so as to require

deduction of TAS even in a case where an amount

paid is not chargeable to tax in India at all. We

cannot read Section 195, as suggested by the

Department, namely, that the moment there is

remittance the obligation to deduct TAS arises. If

we were to accept such a contention it would mean

that on mere payment income would be said to

arise or accrue in India. Therefore, as stated

earlier, if the contention of the Department was


68

accepted it would mean obliteration of the

expression “sum chargeable under the provisions

of the Act” from Section 195(1). While interpreting

a Section one has to give weightage to every word

used in that section. While interpreting the

provisions of the Income Tax Act one cannot read

the charging Sections of that Act dehors the

machinery Sections. The Act is to be read as an

integrated code.

17. Section 195 appears in Chapter XVII which

deals with collection and recovery. As held in the

case of C.I.T. Vs. Eli Lilly &Co. (India) (P.) Ltd. [312

ITR 225] the provisions for deduction of TAS which

is in Chapter XVII dealing with collection of taxes

and the charging provisions of the I.T. Act form one

single integral, inseparable Code and, therefore,

the provisions relating to TDS applies only to those

sums which are “chargeable to tax” under the I.T.

Act. It is true that the judgment in Eli Lilly (supra)

was confined to Section 192 of the I.T. Act.

However, there is some similarity between the two.

If one looks at Section 192 one finds that it

imposes statutory obligation on the payer to deduct

TAS when he pays any income “chargeable under

the head salaries”. Similarly, Section 195 imposes

a statutory obligation on any person responsible

for paying to a non- resident any sum “chargeable

under the provisions of the Act”, which expression,

as stated above, do not find place in other

Sections of Chapter XVII. It is in this sense that we

hold that the I.T. Act constitutes one single integral

inseparable Code. Hence, the provisions relating


69

to TDS applies only to those sums which are

chargeable to tax under the I.T. Act.

18. If the contention of the Department that any

person making payment to a non-resident is

necessarily required to deduct TAS then the

consequence would be that the Department would

be entitled to appropriate the moneys deposited by

the payer even if the sum paid is not chargeable to

tax because there is no provision in the I.T. Act by

which a payer can obtain refund. Section 237 read

with Section 199 implies that only the recipient of

the sum, i.e., the payee could seek a refund. It

must therefore follow, if the Department is right,

that the law requires tax to be deducted on all

payments. The payer, therefore, has to deduct and

pay tax, even if the so-called deduction comes out

of his own pocket and he has no remedy

whatsoever, even where the sum paid by him is

not a sum chargeable under the Act. The

interpretation of the Department, therefore, not

only requires the words “chargeable under the

provisions of the Act” to be omitted, it also leads to

an absurd consequence. The interpretation placed

by the Department would result in a situation

where even when the income has no territorial

nexus with India or is not chargeable in India, the

Government would nonetheless collect tax. In our

view, Section 195(2) provides a remedy by which a

person may seek a determination of the

“appropriate proportion of such sum so

chargeable” where a proportion of the sum so

chargeable is liable to tax.”


70

Sri Govind Krishna, learned counsel for the Department

relied on judgment of the apex Court on statutory interpretation

namely; AIR 1972 S.C. 2319 Azam Jha Bahadur Vs. Expenditure

Tax Officer for the proposition that logic or reason cannot be of

much avail in interpreting a tax statute. There cannot be any

dispute to the proposition as laid down by the apex Court in the

aforesaid case.

While interpreting the provisions of charging section of the

Income Tax Act and the machinery part both have to be treated as

integrated code as held by the apex Court in GE India

Technology Centre Private Limited Vs. Commissioner of

Income Tax (supra). Sri Govind Krishna further relied on the

judgment of the apex Court in Civil Appeal No. 1507 of 2007 of

2007 M/s Sharma Transports Vs. The State of Maharashtra

decided on 2.8.2011 for the proposition that if a particular method

is prescribed for doing a certain thing by the Statute, it rules out any

other method. For the same proposition reliance has been placed

on the judgment of the apex Court in Dr. Ram Deen Maurya Vs.

State of U.P. & others Civil Appeal No. of 2009 (arising out of

Special Leave Petition (C) No. 22330 of 2007), decided on

17.4.2009, wherein same proposition was laid down i.e. when rules

prescribed a particular procedure to be followed, the same requires

to be followed and any deviation would disentitle the applicant to

claim relief. There cannot be any dispute to the proposition laid

down by the apex Court in the aforesaid two cases. However, the

present is not a case of non compliance of any procedural

requirement.

The apex Court had occasion to consider provisions of

Section 201 in (2007) 8 SCC 463 Hindustan Coca Cola Beverage

(P) Ltd. Vs. Commissioner of Income Tax. In the aforesaid case,


71

the appellant entered into an agreement with M/s Pradeep Oil

Corporation for use of their premises for receipt, storage and

dispatch of goods belonging to the appellant-company. Tax was

deducted under Section 194C @ 2% in respect of ware housing

charges. The Assessing Officer took the view that warehousing

charges were in the nature of rent and tax was to be deducted at

the rate of 20% under section 194-I. The Assessing Officer

accordingly determined the amount of short deduction of tax and

also levied interest payable thereon under Section 201 (1A) of the

Act. The Tribunal held that there can be no recovery of tax alleged

to be in default from the appellant considering the fact that Pradeep

Oil Corporation had already paid taxes on the amount received

from the appellant. High Court however, interfered with the order of

the Tribunal. The view of the Tribunal was affirmed by the apex

Court reversing the order of the High Court. It is useful to quote

paragraphs 6,7,8,9 and 10:

“6. The Tribunal upon rehearing the appeal held

that though the appellant-assessee was rightly

held to be an 'assessee in default', there could be

no recovery of the tax alleged to be in default once

again from the appellant considering that Pradeep

Oil Corporation had already paid taxes on the

amount received from the appellant. It is required

to note that the department conceded before the

Tribunal that the recovery could not once again be

made from the tax deductor where the payee

included the income on which tax was alleged to

have been short deducted in its taxable income

and paid taxes thereon. There is no dispute

whatsoever that Pradeep Oil Corporation had

already paid the taxes due on its income received

from the appellant and had received refund from

the tax department. The Tribunal came to the right


72

conclusion that the tax once again could not be

recovered from the appellant (deductor- assessee)

since the tax has already been paid by the

recipient of income.

7. The High Court interfered with the order passed

by the Tribunal on the ground that the order dated

12.7.2002 of the Income-Tax Appellate Tribunal

has attained its finality since the appeal filed

against the same by the appellant was dismissed

by the High Court on 21.5.2004; the point based

on Ground No. 7 was not taken up in the appeal

preferred by the appellant in the High Court. The

High Court further held that the Income-tax

Appellate Tribunal's order dated 12.7.2002 got

itself merged into the order passed by it on

21.5.2004 dismissing the appeal of the appellant

herein. The High Court came to the conclusion

that the Tribunal could not have reopened the

matter for any further hearing.

8. We have already noticed that the order passed

by the Tribunal to reopen the matter for further

hearing as regards ground No. 7 has attained its

finality. In the circumstances, the High Court could

not have interfered with the final order passed by

the Income-tax Appellate Tribunal.

9. Be that as it may, the circular No. 275/201/95-

IT(B) dated 29.1.1997 issued by the Central Board

of Direct Taxes, in our considered opinion, should

put an end to the controversy. The circular


73

declares "no demand visualized under Section 201

(1) of the Income- tax Act should be enforced after

the tax deductor has satisfied the officer-in-charge

of TDS, that taxes due have been paid by the

deductee-assessee. However, this will not alter the

liability to charge interest under Section 201 (1A)

of the Act till the date of payment of taxes by the

deductee-assessee or the liability for penalty

under Section 271C of the Income-tax Act."

10. In the instant case, the appellant had paid

the interest under Section 201 (1A) of the Act and

there is no dispute that the tax due had been paid

by deductee- assessee (M/s Pradeep Oil

Corporation). It is not disputed before us that the

circular is applicable to the facts situation on

hand.”

From the above, it is clear that deductor cannot be treated an

assessee in default till it is found that assessee has also failed to

pay such tax directly. In the present case, the Income tax

authorities had not adverted to the Explanation to Section 191 nor

had applied their mind as to whether the assessee has also failed

to pay such tax directly. Thus, to declare a deductor, who failed to

deduct the tax at source as an assessee in default, condition

precedent is that assessee has also failed to pay tax directly. The

fact that assessee has failed to pay tax directly is thus, foundational

and jurisdictional fact and only after finding that assessee has failed

to pay tax directly, deductor can be deemed to be an assessee in

default in respect of such tax. It is relevant to notice here that

Explanation to Section 191 is confined only to the amount of tax

which was required to be deducted.


74

The point next to be considered is as to whether under

Section 201, the Income Tax Authorities could have fastened the

liability of tax which was not deducted at source by the petitioner

and the said tax can be recovered from the petitioner. From the

assessment orders which have been brought on the record, it is

clear that with regard to assessment year 2009-10, the amount of

tax which was required to be deducted at source under section

194H has been determined as Rs. 10,49,60,865 and adding the

interest on the said short deductions total amount directed to be

recovered has been arrived at Rs. 13,57,31,472 similarly with

regard to the financial year 2008-09 total amount on which tax was

required to be deducted at source under section 194H has been

determined as Rs. 2,40,31,583 and after adding interest recovery

has been issued for Rs. 3,26,82,953. The challenge is that there is

no liability of deductor to pay the tax not deducted from assessee

and it is the assessee, who is liable to pay the said tax on the

aforesaid income and liability, if any, of the deductor is of interest

and penalty.

Section 201 (1) provides that where any person who is

required to deduct tax at source does not deduct, or does not pay,

or after so deducting fails to pay, the whole or any part of the tax,

then such person, shall without prejudice to any other

consequences which he may incur, be deemed to be an assessee

in default in respect of such tax.

Section 201 (1A) contains a specific provision for payment of

simple interest by any such person who does not deduct whole or

any part of the tax or after deducting fails to pay the tax. Sub-

section (2) of Section 201 provides that where tax has not been

paid after it is deducted the amount of tax together with simple

interest shall be a charge upon all the assets of the person or the


75

company as may be, referred to under sub-section (1). Sub-section

(2) thus, although enact a provision that in case where tax after

deduction has not been paid by the deductor, the amount of the tax

together with the amount of simple interest thereon shall be a

charge upon all the assets of the deductor, whereas nothing has

been said in sub-section (2) with regard to such charge on a

deductor, who fails to deduct the tax. The reason is obvious, in a

case where deductor fails to deduct the tax, the consequences are

different as compared to in a case where deductor deducts the tax

and does not pay to the Government. It is relevant to notice that

Section 201 (1A) specifically provides for payment of only simple

interest when tax has not been deducted or not paid. Sub-section

(2) provides for creating a charge on the assets of the deductor, if

the tax deducted is not paid. But nothing under section 201 can be

read as to mean that when the tax has not been deducted by the

deductor, the tax not deducted can be realised from the deductor.

No such provision is made under section 201 obviously because

the liability to pay income tax is on the assessee direct in whose

case, the tax has not been deducted. In the present case, the

income tax authorities in proceeding under section 201 apart from

directing recovery of interest from the petitioner has also directed

for recovery of tax which is alleged to be short deducted, which is

beyond the scope of section 201 and is an action of the authorities

without jurisdiction.

A Full Bench of Uttarakhand High Court had considered the

provisions of Section 190,191,201 and other provisions of the Act in

(2011) 334 ITR 79 Director of Income Tax Vs. MAERSK Co. Ltd.

The question arose for consideration was as to when no deduction

for payment of advance tax has been made by the employer,

whether the assessee is liable to pay interest under section 234B

of the Act. The Full Bench considering the provisions of the Act had

held that under the scheme of the Act provisions relating to


76

payment of tax and payment of interest operate in two different

areas. It is useful to quote following relevant extract from the

judgment:

“Part A of Chapter XVII of the Act deals with the

general provision for the collection and recovery of

tax. Section 190(1) of the Act provides that

notwithstanding the fact that the regular

assessment in respect of any income is to be

made in a later assessment year, the tax on such

income shall be payable by deduction at source or

by advance payment in accordance with the

provisions of this Chapter. Section 191 of the Act

provides that in the case of income in respect of

which a provision is not made under this Chapter

for deducting income tax at the time of payment

and, in any case, where income tax has not been

deducted in accordance with the provisions of this

Chapter, income tax shall be payable by the

Assessee directly.

xxxxx

Section 201 of the Act provides the consequences

of failure to deduct the tax at source or failure to

pay the tax deducted to the Government. If the

person responsible to deduct the tax at source

fails to deduct the whole or any part of the tax or

after deducting fails to pay the tax as required

under the Act, the person responsible would be

treated as an Assessee in default in respect of the

tax. Section 201(1A) of the Act provides that

without prejudice to the provision of Sub-section

(1), if such person does not deduct the tax or


77

having deducted, failed to pay the tax, he or it shall

be liable to pay simple interest @ 15 % per annum

on the amount of such tax from the date on which

it was deductible to the date on which it was

actually paid. Under Section 204 of the Act, the

expression "the person responsible for paying" in

the case of payment of income chargeable under

the head "Salaries" means, the employer.

xxxxxxxxx

Thus, from a combined reading of Section 190,

191, 192, 198, 200, 201, 203 and 204 of the Act, it

is clear that as soon as tax is deducted at source

by the person responsible to make the payment,

the liability of the Assessee to pay the tax gets

discharged. If the tax is not deducted, it remains

payable by the Assessee direct as provided under

Section 191 of the Act. Further, the liability to pay

interest under Section 201(1A) is on the person

who fails to deduct the tax at source is absolute

and is upon the person responsible for deducting

tax at source till the date it was actually paid.

xxxxxx

When the tax is not deducted, the Assessee is

required to pay the tax directly which would be at

the stage of self assessment and not by way of

advance tax. The liability to pay the interest will

however remain upon the person responsible to

deduct the tax at source. The statute has taken

care of the liability for the Assessee under Section

191 of the Act to pay the tax deductible at source

directly if it has not been deducted by the person

responsible for making such deduction. The loss of


78

interest on the amount of tax suffered by the

revenue would be compensated by the person

responsible for making such deduction, namely, in

the present case, by the employer as provided

under Section 201(1A) of the Act.

xxxxxxxx

The statute has taken care of the liability to pay tax

by the Assessee under Section 191 of the Act

directly if the tax has not been deducted at source.

xxxxxxxxxx

Looking into the scheme of Chapter XVII of the

Act, it is clear that the provisions relating to

payment of tax and payment of interest operate in

two different areas. If the tax has not been

deducted at source, the liability is upon the

Assessee to pay directly as per Section 191 of the

Act and upon failure to deduct the tax at source,

the liability is upon the employer to pay interest

under Section 201(1A) of the Act. An Assessee

whose income is liable to be deducted at source is

not liable to pay advance tax under Section 208 of

the Act and consequently is not liable to pay

interest under Section 234B of the Act. The

contention of the Appellant that it is open to the

department to proceed against the employer or

against the employee for the recovery of interest is

patently misconceived and, in any case, would not

make the Assessee jointly and severally liable to

pay interest on the amount of tax which was not

deducted at source on the income by the

employer.”


79

The Full Bench of Uttarakhand High Court had clearly laid

down that in event the tax at source is not deducted, the liability of

the deductor is to pay interest.

The similar view was been taken by the Gujrat High Court in

(1999) 235 ITR 433 Commissioner of Income Tax Vs. Ranoli

Investment P. Ltd. And others, while considering the provisions of

Sections 201, 190,191 and other provisions of the Act. Following

was laid down in the aforesaid judgment:

“The consequences of failure to deduct the tax at

source or failure to pay the tax deducted to the

Government, are provided for in s. 201 of the Act

as per which, if no deduction is made or if the

deducted amount is not paid as required by the

Act, the person whose duty it was to deduct the tax

at source and to pay, is to be treated as an

assessee-in-default in respect of the tax, but no

penalty is to be charged under s. 221 from such

person, if the ITO is satisfied that the failure to

deduct and pay the tax had occurred due to good

and sufficient reasons. As provided by sub-s. (1)A

of s. 201, without prejudice to the provisions of

sub-s. (1), if such person did not deduct the tax or

having deducted, fails to pay the tax, he or it shall

be liable to pay simple interest at 12 per cent. per

annum on the amount of such tax from the date on

which it was deductible to the date on which it was

actually paid. The liability to pay interest under

sub-s. (1A) of s. 201 imposed on the person who

fails to deduct the tax at source or does not pay the

tax deducted, is absolute and runs throughout the


80

period from the date when the tax was deductible

till the date it was actually paid. When the tax is not

deducted at source, it is required to be paid by the

assessee directly but in such a case the liability to

pay interest consequent upon failure to deduct tax

at source will nonetheless remain with such person

who was duty-bound to deduct, till the date when

the tax is actually paid by the assessee or on his

behalf. It is only when the tax has not been paid

after it is deducted, that the amount of the tax

together with the amount of simple interest thereon

referred to in sub-s. (1A) of s. 201 shall be a

charge upon all the assets of the person who has

failed in his duty to pay the tax deducted, as

provided by sub-s. (2) of s. 201. The power to levy

tax by deduction at source is without prejudice to

any other mode of recovery, as stated in s. 202 of

the Act. It will thus, be seen that where the tax is

not deducted, the liability to pay the tax directly will

be on the assessee, but so far as the interest is

concerned, the liability has been fastened on the

person who had failed to deduct the tax while

crediting the interest income to the assessee.”

It is relevant to note that Chapter XVII Part BB, which deals

with collection at source contains a provision under section 206C

(6) which provide that any person responsible for collecting the tax

who fails to collect the tax shall be liable to pay the tax to the credit

of the Central Government. Section 206C deals with “profits and

gains from the business of trading in alcoholic liquor, forest

produce, scrap, etc.” Section 206C (6) is as follows:


81

“206C (6) Any person responsible for collecting the

tax who fails to collect the tax in accordance with

the provisions of this section, shall, notwithstanding

such failure, be liable to pay the tax to the credit of

the Central Government in accordance with the

provisions of sub-section (3).”

From the above provision, it is thus, clear that wherever the

liability to pay tax was fastened on the person who failed to deduct

the tax at source a are specific provision was made for that

purpose.

In view of the foregoing discussions, we are of the

considered opinion that in a case where tax has not been deducted

at source, the short deducted tax cannot be realised from the

deductor and the liability to pay such tax shall continue to be with

the assessee direct, whose income is to be charged and a person

who fails to deduct the tax at source, at best is liable for interest

and penalty only. The above issues thus, are decided in favour of

the petitioner.

Now comes issue no. 10 which is in two parts; (i) whether

the assessing authority has taken into consideration all relevant

materials, while passing the assessment order ? (ii) whether the

assessing authority has taken into consideration any irrelevant

material, while passing the assessment order. The petitioner in the

writ petition has specifically referred to and relied on the Circular

issued by the Central Board of Direct Taxes being Circular No. 715

dated 8.8.1995. The said circular was clarified vide letter dated

12.9.1995 of Central Board of Direct Taxes. Copy of the said

Circulars along with letter dated 12.9.1995 have been filed as

Annexure-10 to the writ petition. The clarification was issued on the


82

subject “ Circular No. 715 dated 8-8-1995 regarding applicability of

TDS provisions.”. Paragraph 4 of the letter dated 12.9.1995 has

been specifically relied and pleaded in paragraph 32-O of the writ

petition, which is quoted below:

“32-O. That TDS is already deducted on the

amount paid by the advertiser to the advertising

agency under section 194C of the Act and as duly

clarified by the Central Board of Direct Taxes in its

Circular No. 715 dated 8.8.1995. The CBDT has

further clarified the aforesaid circular dated

8.8.1995 in its letter F. No. 133/19/95-tPl-111 dated

12.9.1995 that:

'4. In a situation where the media raises only a bill for

an advertising contract including therein inter-alia

commission at the specified percentage to be retained

by the advertising agency out of the gross payment

received/collected from the advertiser, the media is not

required to deduct tax at source @ 1% under section

194C since such payment is subject to TDS by the

advertiser at the time of payment as clarified in reply to

Question No. 17. Of course, where the media makes a

direct payment to the advertising agency in respect of

professional or technical services, it shall deduct tax at

source @ 5% under section 194J of the Act as clarified

in reply to Question No. 27'. True copies of the

Circular No. 715 dated 8.8.1995 and of the letter dated

12.9.1995 is being filed herewith and marked

collectively as Annexure-10 to this writ petition.

As such the amount of trade discount allowed by the

petitioner to the advertising agencies has already been

subjected to TDS on the payment of the gross amount


83

by the advertisers to the advertising agencies. The

same amount cannot be subjected to TDS again and

again by any strained and illegal interpretation of any

other provision of the Act by assuming/deeming the

existence of the jurisdictional facts necessary for the

applicability of the provision.”

Paragraph 32-O has been replied in counter affidavit in

paragraph 40, which is quoted below”

“40. That with regard to the contents of para 32 O

of the affidavit filed in the amendment application it

is submitted that it refers to the CBDT circular

dated 08.08.1995. The order dated 28.03.2012

and 29.03.2012 has made reference to the recent

stand of the CBDT on page no. 15&16. The

remaining allegation has been suitably replied in

the above preceding paragraph need not to be

repeated here again.”

Paragraph 40 of the counter affidavit does not deny the

issuance of the Circular dated 8.8.1995 and the clarification issued

by the Central Board of Direct Taxes on 12.9.1995 but nothing has

been said as to why the said clarification be not be applicable. The

assessing authority in its assessment order has not adverted to the

aforesaid circular dated 8.8.1995 and its clarification dated

12.9.1995, which was the most relevant material while deciding the

issues. Thus, the assessing authority has not applied its mind to a

relevant material i.e. the clarification issued by the CBDT dated

12.9.1995, which clinches the issues.


84

While considering issues No. 2 to 6, we have already

observed that the assessing authority has not adverted to the

relevant Rules of INS, which were required to be adverted for

finding out the relationship of principal and agent. We thus,

conclude that assessing authority has not considered the relevant

materials while passing the assessment order which clearly vitiates

the assessment order.

Learned Counsel for the petitioner has submitted that

assessing authority has placed reliance on a wholly irrelevant

material i.e. an article published in newspaper 'Business Standard'

on 31.10.2006. In Paragraph 32 of the order of assessment, the

article has been reproduced. The said article refers to some

correspondences of CBDT with INS. It is useful to quote paragraph

32 of the assessment order which contains the article as follows:

“ It would not be out of context at this juncture to

mention an article published in “Business

Standard” on 31st October 2006. The title of the

article is “Newspaper' ad payments liable to be

taxed”. The article is reproduced as under:

'The Central Board of Direct Taxes has informed

the Indian Newspaper Society that Tax Deducted

at Source (TDS) is liable to be deducted by

newspapers on payments made by them to

advertising agencies.

The CBDT has written to the INS following a

clarification sought by the latter on whether TDS

was deductible on payments made by them to

advertising agents.

The contention of INS was that such payments are

not in the nature of a commission but a discount.

Since the payment was actually a discount, no


85

TDS was liable on such payments, it had said.

However, revenue department officials said the

CBDT was of the view that such payments were

covered by the definition of the term ‘commission

or brokerage’ given in Section 194H of the Income

Tax Act and hence liable to TDS.

Section 194H defines ‘commission or brokerage’

as any payment received or receivable, directly or

indirectly, by a person acting on behalf of another

person for services rendered or for any services in

the course of buying or selling of goods or in

relation to any transaction relating to any asset,

valuable article or thing, not being securities.

“The board examined the contention of the INS

that such payment is in the nature of a discount. A

discount is given on sale or purchase of an article

in which there is no agreement between the seller

and the buyer. The board found that the INS

granted accreditation to the advertising agencies

and usually the newspapers would enter into an

agreement with the agencies. Hence, the

newspapers and the agencies were not acting

independently and the agency was in fact an agent

of the newspaper and was being paid a

commission for the services rendered,” an official

said.

It was also observed by the board that the agency

did not book ad space from the newspapers and

sell the space, in turn, to the advertisers, the

officials said.

“The model used by the newspapers is that the

agency informs the newspapers about the


86

advertisement and then the paper slots the

advertisement. Hence, once again, the agency is

merely being paid for the services it renders, which

is why such payment is liable to TDS,” the official

added.”

Learned Counsel for the petitioner is right in his submission

that reliance on the said article published in a newspaper was an

irrelevant material. The assessing authority from the aforesaid

article has relied on the opinion of CBDT as disclosed in the said

article to the effect that members of the society are liable to deduct

tax at source on payments made by them to advertising agency. In

paragraph 40 of the counter affidavit as quoted above, the said

stand of the CBDT has also been relied. We are of the view that the

said article was an irrelevant material, which was not required to be

relied by the assessing authority, while passing the assessment

order.

After having considered and answered the issues No. 2 to

10, now we revert on the first submission of learned counsel for the

Department that the writ petition be not entertained and the

petitioner be asked to avail the statutory remedy of appeal provided

under the Act. Learned Counsel for the respondent in support of his

submission that the petitioner be relegated to avail the alternative

remedy, have placed reliance on several judgements which need to

be referred to. Learned Counsel for the respondent has relied on

judgment of the apex court reported in AIR 2001 S.C. 3208 Punjab

National Bank Vs. O.C. Krishnan and others. In the aforesaid

case, a suit was filed by the bank for recovery of money from the

principal debtor as well as the guarantors, which was transferred to

the Debts Recovery Tribunal and was decreed against the principal

debtor and guarantors. The Recovery Officer was directed to


87

proceed to realise the amount. The guarantor filed a petition under

Article 227 before the High Court. In said circumstances, the apex

Court laid down following in paragraphs 5 and 6:

“5. In our opinion, the order which was passed by

the Tribunal directing sale of mortgaged property

was appealable under Section 20 of the Recovery

of Debts Due to Banks and Financial Institutions

Act, 1993 (for short "the Act"). The High Court

ought not to have exercised its jurisdiction under

Article 227 in view of the provision for alternative

remedy contained in the Act. We do not propose to

go into the correctness of the decision of the High

Court and whether the order passed by the

Tribunal was correct or not has to be decided

before an appropriate forum.

6. The Act has been enacted with a view to provide

a special procedure for recovery of debts due to

the banks and the financial institutions. There is

hierarchy of appeal provided in the Act, namely,

filing of an appeal under Section 20 and this fast

track procedure cannot be allowed to be derailed

either by taking recourse to proceedings under

Articles 226 and 227 of the Constitution or by filing

a civil suit, which is expressly barred. Even though

a provision under an Act cannot expressly oust the

jurisdiction of the court under Articles 226 and 227

of the Constitution, nevertheless when there is an

alternative remedy available judicial prudence

demands that the court refrains from exercising its

jurisdiction under the said constitutional provisions.


88

This was a case where the High Court should not

have entertained the petition under Article 227 of

the Constitution and should have directed the

respondent to take recourse to the appeal

mechanism provided by the Act.”

There cannot be any dispute to the proposition as laid down

by the apex Court in the aforesaid case. In the aforesaid case, the

rights were already adjudicated in the suit which was decreed. In

the said circumstances, the apex court observed that petition under

article 227 ought not to have been entertained and the guarantor

should have been relegated to take recourse to the appeal. The

present is a case where the proceedings have been challenged on

the ground that there was no jurisdictional facts on the basis of

which the income tax authorities could have assumed jurisdiction

under section 201 and further there was no jurisdiction to direct for

recovery of tax which according to the respondent was short

deducted by the deductor. Thus, the present case is clearly

distinguishable. It is further relevant to note that in the present

case, the assessing authority has relied on an article published in

the newspaper namely; 'Business Standard' which article quoted

the opinion of CBDT that the news agency is liable to deduct tax at

source while making payment to advertising agency for

advertisement. Although there are no material brought on the

record by the Department to indicate as to when and in what

circumstances, the CBDT has expressed the said opinion. As noted

above, Delhi High Court in its judgment in the case of M/s Living

Media (supra) has already turned down the stand of the

Department that Section 194H is applicable with regard to payment

to advertising agency by the news agency and the special leave

petition filed by the Department against the Division Bench

judgment of Delhi High Court has been dismissed on 11.2.2009. No

distinguishing feature could be pointed out by the Department as to


89

why the said view of the Delhi High Court should not be followed by

the Department. We are of the view that it is not a fit case in which

the petitioner be relegated to remedy of appeal.

Further more, as submitted by learned counsel for the

petitioner, huge liability running in several crores have been

fastened on the petitioner and on the basis of the assessment

order, reassessment notice dated 30.3.2012 has been issued by

the Department for reopening the assessment for the years 2005-

06, 2006-07, 2007-08, 2008-09 and 2009-10, which will again

expose the petitioner, which proceedings would be nothing but

multiplicity of proceedings to be faced by the petitioner which may

prolong years increasing the sufferings of the petitioner, whereas

under law section 194 H of the Act is not applicable in the facts of

the present case. Taking into consideration over all facts and

circumstances of the present case, and the answers given by us,

while deciding the issues No. 2 to 10, we are of the view that the

petitioner has rightly invoked the jurisdiction of this Court under

Article 226 and the petition cannot be thrown out on the ground of

alternative remedy.

The issue next to be considered is as to whether there has

been violation of principles of natural justice in the proceedings

undertaken by the respondents. Learned Counsel for the petitioner

submits that the respondent did not provide adequate opportunity to

the petitioner to place relevant materials and have denied

reasonable time to bring the details, which were asked for from the

petitioner. It is submitted that notice was issued on 19.3.2012 and

within ten days opportunity, hearing and proceedings were

concluded and completed. Whereas, the petitioner was required to

give details pertaining to each and every payments made to

advertising agencies during the relevant period which were in


90

numbers more than 1,80,000. The petitioner submits that there are

various centres spread throughout the country which have separate

offices and the petitioner having not maintained any detail of the

TDS discount account, which is being given to the advertising

agencies, the informations were required to be compiled and it was

a herculean task requiring atleast one month's time. In 2004 (266)

ITR 283 V.K. Packaging Industries Vs. Tax Recovery Officer

and others, a Division Bench has made following observation:

“Before parting with the case we would like to state

that we cannot appreciate this practice of the

Income-tax Department of hurriedly passing

assessment orders shortly before the limitation

period is about to expire and justifying this practice

by saying that there was shortage of time and

hence it was impossible to verify the facts properly,

and hence the additions were being made. It is

common knowledge that when the limitation for

making an assessment is about to expire (usually

on 31st March) there is a sudden rush and

scramble to complete the assessments. If this

practice is countenanced the citizens of the

country will be put to great harassment as

exorbitant demands can be made against them

merely by saying that there was shortage of time

and hence additions were being made for this

reason without verifying the facts correctly. It is the

duty of the Department to make a correct

assessment and not to make an excessive

assessment merely on the ground of shortage of

time.

No doubt the Department has to assess and


91

collect the correct tax, but for this purpose it

should devise and set up a rational scheme in

accordance with law. It should certainly not make

assessments hurriedly merely by saying that there

is shortage of time (as often happens), thus putting

the citizens to great harassment.”

The caution given by the Division Bench in the aforesaid

case is fully applicable in the facts of the present case. Suddenly in

second quarter of March, the proceedings are started and

concluded within ten days. The Department has rushed through the

proceedings to complete it before 31.3.2012, which evidences

infraction of rules of natural justice. We thus, conclude that the

adequate opportunity to which the petitioner was entitled was not

provided for by the Department and the Department rushed through

the proceedings.

In the result of foregoing discussions, the petitioner is entitled

for the reliefs as claimed in the writ petition. The proceedings

initiated vide notices dated 193.2012 and 21.3.2012 culminated into

assessment orders dated 28.3.2012 and 29.3.2012 are set aside.

The writ petition is allowed.

The parties shall bear their own costs.

Order Date :- 23.5.2012

LA/Rakesh


(delivered by hon'ble ashok bhushan, j.) · 2018-03-25 · 1 reserved on 04.5.2012 delivered...

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