Per Shri H. S. Ahluwalia, Judicial Member - These three appeals invoke a common issue and are, therefore, disposed of by this single order.
2. The dispute in these appeals relates to the assessees liability to be deemed to be an assessee in default and for payment of interest under section 201 (1) and section 201(1A) of the Income-tax Act, 1961 (the Act). In the first year the ITO noticed that a sum of Rs. 2,71,382 had been paid to the contractors for binding bidis on which tax should have been deducted at source and deposited to the account of the State under section 194C of the Act which the assessee failed to do. He, accordingly, issued a notice to the assessee to show cause as to why interest under section 201(1A) should not be levied. The assessee failed to respond and, accordingly, he treated the assessee to be a defaulter in the payment of tax to the tune of Rs. 5,428, being 2 per cent of the total payment to the contractors, and, accordingly, directed payment of interest on this amount for the period from 1-4-1977 to 30-4-1979 which be calculated at Rs. 2,008. Similarly, for the second year it was noticed that the assessee had paid a sum of Rs. 36,48,056.08 in respect of which it was liable to deduct and deposit Rs. 72,966 as the income-tax under section 194C. A similar interest amounting to Rs. 18,220 was, accordingly, levied. Both these levies have been knocked off by the Commissioner (Appeals) on appeals having been filed by the assessee. The revenue has come up in second appeals before us and in respect of the assessment year 1976-77 the assessee has also filed its own appeal on the ground that although the Commissioner (Appeals) had cancelled the order of the ITO levying interest under section 201(1A) on the ground that there was no deliberate and contumacious conduct on the part of the assessee, he should have held that the assessee did not come within the purview of section 194C altogether.
3. Notice of hearing of these matter was sent to the assessee by registered post and its acknowledgment in token of service is on the record. Nobody turned up to argue these appeals on its behalf. We have, therefore, heard the representative of the department ex parte. The main contention raised on behalf of the department was that the Commissioner (Appeals) had wrongly knocked off the levy of interest by observing that it was necessary to establish mens rea on the part of the assessee for not having complied with the provisions of section 194C. According to the Commissioner (Appeals), the interest livable under section 201(1A) was penal in nature as was the penalty under section 201(1). There was a good deal of genuine doubt and controversy whether the assessee came within the purview of section 194C at all and, therefore, the assessee could not be held liable for interest. We agree with the representative of the department that some of the observations of the Commissioner (Appeals) are not correct in law. If a person is liable for deduction of any amount as income-tax under section 194C and fails to do so, he would ordinarily be liable to be declared as an assessee in default and also to pay penal interest under section 201(1A). Whether the assessee knew of his obligations under the Act would not be very material because the liability is imposed by law but it does not mean that in each case where the ITO chooses to hold an assessee to be responsible for deduction of tax under section 194 of the Act, liability to be declared a defaultor and payment of interest is always there. Each case would have to be examined on its own merits. One of the contentions raised on behalf of the assessee was that the persons to whom the present payments were made were not really contractors. It had been argued before the Commissioner (Appeals) that in bidi trade wages were negotiated and fixed between the manufacturers and the Bidi Shramik Union, very often in the presence of labour directorate officials. In the fixation of rates the alleged contractors better known as munshis did not play any role. A contractor is one who is free to employ his own labour at the rate most profitable to him. In the present case the munshis did not have any such discretion. In fact, they were wrongly called as contractors. Bidi manufacture has its own pattern of operation peculiar to this industry. There is an Act known as Bidi and Cigarette Workers (Conditions of Employment) Act, 1966, and these conditions had been discussed in detail by the Supreme Court in the case of Mangalore Ganesh Beedi Works v. Union of India AIR 1974 SC 1832, decided on 31-1-1974. One of the systems of employment is contract system. Under this system a proprietor gives bidi leaves and tobacco to the middleman who employs labour directly for manufacturing bidis or distributes the materials among the home workers mostly women who manufacture bidis in their own homes with the assistance of other members of the family including children. The Bidi Workers (Conditions of Employment) Act itself recognises a system where the manufacturer is called the principal employer and the munshi or contractor as defined in section 2(a) of the said Act. The labour is really engaged on behalf of the manufacturer, i.e., the principal employer, and it is for the manufacturer who happens to be the trade mark holder. The legislation was intended to achieve welfare, benefits and amenities for the labour. The manufacturer or the trade mark holder becomes principal employer though he engages the labour through the contractor. He cannot escape liability by stating that he had engaged the labour through the contractor. No doubt, technically speaking the provision of section 194C may apply to the assessee but in effect the payment to the munshis is a payment to the labour employed by the manufacturer itself. This aspect of the matter has not been examined by the ITO at all and, prima facie, it appears that the assessee may not be liable to deduct tax under section 194C at all.
4. Faced with this situation the representative of the department was of the opinion that in the present cases we are only concerned with the words of section 194C which, prima facie, do cover the case of the present assessee. Once an assessee falls within the ambit of this provision of law the only remedy for it is to move the ITO under sub-section (4) of section 194C and obtain a certificate that tax may be deducted at a lower rate or may not be deducted at all. Unless and until such a certificate is there the assessee could not escape liability. It is also contended that an order under section 201(1A) is not appealable to the AAC or the Commissioner (Appeals) at all. Now so far as the legal aspect of the matter is concerned, we are of the opinion that the department cannot be allowed to succeed on this ground. Firstly, it was never the case of the department that no appeal lay to the Commissioner (Appeals) in its grounds of appeal filed before us. Secondly, assuming that it is a pure question of law and the department can be permitted to take up this ground before us, we are of the opinion that normally orders under section 201(1) and 201(1A) would be simultaneous because section 201(1) deals with the consequences of the assessee having failed to deduct and deposit tax under section 194 and sub-section (1A) deals with the peculiar aspect of these consequences, namely the liability to pay interest. An order under section 201 is appealable under clause (b) of section 246(1) of the Act. In fact, the ITOs order purports to be also under section 201(1) because therein he has also stated that the assessee was a defaulter in payment of tax which implied the assessees liability under section 201(1) also. He has also directed the assessee to deposit the sums of tax to the credit of the Central Government which would imply some sort of action under section 201(1) as well. The case cited by the departmental representative for the proposition that no appeal lay in the present situation, namely, Mauladin Ayub Firm v. CIT : 35ITR449(Bom) , would not help the department inasmuch as in that case the assessee had failed to move the ITO to get the best judgment assessment set aside under section 27 of the Indian Income-tax Act, 1922 (the 1922 Act) and, therefore, its appeal under section 30 of the 1922 Act to the AAC was not competent. But in the present case the assessee would have no remedy if it was not allowed to file an appeal at all. According to the departmental representative, the assessee could move an application for rectification but the dispute does not relate to a clerical error. It is a dispute of substance, i.e., as to whether the assessee was liable to deduct tax under section 194 at all. This is a matter which can be considered in regular proceedings and not in rectification proceedings. We, therefore, do not propose to interfere with the order of the Commissioner (Appeals) on this ground.
5. Coming to the merits of the case, to our mind the liability to deduct tax under section 194C would be co-extensive with the liability of the munshis or contractors to pay any income-tax. In other words, if the present payments are the real receipts of the contractors or munshis and they had to pay only small portions out of the same to the labourers employed by them, as a result of which they would be themselves liable to assessment, the assessee can be said to be a defaulter and liable to interest. But if the so-called contractors themselves has not been assessed to any income in relation to the present payments, obviously there should be no necessity of deducting any tax at source from the payments made to them. We, therefore, direct that the assessments of the individuals to whom the present payments were made by the assessee be checked up and interest, if any, may be levied upon the assessee only in relation to the period during which the real payees have failed to pay the tax actually assessed from the date on which deduction should have been made under section 194C till they have actually discharged their liabilities under the Act. If these persons are held not liable to pay any tax, no interest can be levied on the assessee as well. For this limited purpose, the matter shall go back to the ITO, who shall pass fresh orders in the light of our aforesaid observations.
6. For statistical purposes, all these three appeals shall be deemed to have been allowed as such.