Whether notices can be issued for TDS default u/s 205 & Sec. 40(a)(i) disallowance if no income arises to the recipient?

Last updated: 30 April 2014

Court :
Delhi High Court

Brief :
Two writ petitions were filed under Art. 226 of the Constitution of India, challenging the jurisdiction of the first respondent to (i) reopen the assessment by issue of a notice under section 148 of the Income Tax Act, 1961 (“the Act”) and (ii) to treat the petitioner as an “assessee in default” under section 201(1) for not deducting tax under section 195(2) and consequently recover interest under section 201(1A) of the Act.The petitioner a wholly owned subsidiary of Samsung Electronics Ltd(SEC) contended that it was not liable to deduct tax from the payments made to the SEC for the goods, the contention being that since the property in the goods was transferred outside the territory of India no income accrued or arose to SEC in India; correspondingly, there was no liability on the petitioner’s part to deduct tax from the payments as required by section 195(2).The key to the decision is that if no income arose to the recipient, then notices to payer for TDS default u/s 201 & s. 40(a)(i) disallowance are bad.

Citation :
Samsung India Electronics Pvt. Ltd - Petitioner - Versus - DY Director of Income Tax, Circle-2(2) International Taxation, DY. Commissioner of Income Tax & Ors. - Respondent