MODI S M Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE applicant before us is S. M. Modi who produced the picture 'Jhansi -ki -Rani'. For the purpose of this production he had employed two foreigners, Ernest Haller and Forrest Judd. They arrived in India in September and November, : 1951, respectively. Mr. Modi had paid remuneration to these employees in the sums of Rs. 1,31,520 and Rs. 33,478 respectively in the two accounting years 1951 -52 and 1952 -53. If these foreigners were not resident in India during the accounting years, Mr. Modi was under a liability to deduct income -tax at the maximum rate from the salary paid to these employees at the time of payment by reason of section 18, sub -section (3A). Mr. Modi failed to do so. The Income -tax Officer was of opinion that these two employees were not 'resident' in the taxable territories and directed Mr. Modi to pay income -tax and super -tax with appropriate surcharge in the case of both these foreigners. The demand was not paid; and Mr. Modi filed two appeals one in each case to the Appellate Assistant Commissioner. These two appeals were held to be not competent on the ground that the only right of appeal that Mr. Modi could have was under section 30(1A), and the conditions precedent to the right of appeal to the Tribunal against both the orders of the Appellate Assistant Commissioner; and the Tribunal also held that the appeals were not competent, applying the provisions of section 30(1A). It was contended on behalf of Mr. Modi before the Tribunal that his right of appeal arose out of section 30, sub -section (1). The Tribunal negatived this argument; and the question that has been referred to us by the Tribunal is : '(1) Whether the producer who did not deduct and pay tax, was entitled to file an appeal to the Appellate Assistant Commissioner in either case as provided by section 30(1A) ?'

(2.) OBVIOUSLY the question as framed does not bring out the real dispute between the parties. There is no doubt whatever that there is no right of appeal which Mr. Modi can have under section 30(1A) to which we will presently draw attention; and the only right of appeal, which he claimed, was under section 30(1). We will, therefore, reframe the question by deleting the words 'as provided by section 30(1A)'.

(3.) NOW , sub -section (3A) makes it obligatory on an employer to deduct tax from the salary payable to his employee if such employee is not resident in the taxable territory. Therefore, an essential condition of the applicability of this sub -section is that the employee is not resident in the taxable territory. The concept of 'resident' for the purpose of the Income -tax Act has been defined in section 4A of the Income -tax Act. It is not only actual residence in India but it includes within its scope other cases such as for example under sub -clause (a)(ii) of section 4A : '(Where a person) maintains or has maintained for him a dwelling place in the taxable territories for a period or periods amounting in all to one hundred and eighty -two days or more in that year, and is in the taxable territories for any time in that year.' It is in the context of section 4A that it is to be determined whether an employee is or is not a resident and it is only when is not a resident that the liability to deduct under section 18 arises. If that liability is discharged and the deduction is made, sub -section (6) provides that the person who deducts shall pay over the deduction to the Central Government, and sub -section (5) of that section provides that this payment shall be treated as a payment of income -tax or super -tax on behalf of the person from whose income the deduction was made. Then, when we come to sub -section (7), it deals with two cases : (1) where an employer fails to deduct and (2) where after deducting he fails to pay the tax to the Central Government; and in either case the sub -section provides that he will be deemed to be an assessee in default in respect of the tax. Now, before a person can fall in the first category and it can be said of him that he has failed to deduct, it must necessarily be established that he was liable to deduct. In other words, it must be determined whether the employee from whose salary he did not make the deduction was not resident in India because if he was resident, there is no liability to deduct the tax. The other case, where the employer after deducting does not pay, is a much simpler case, where the liability to pay over what has been deducted arises by reason of sub -section (6). But we are here dealing with a case falling under the former category where the employer did not deduct. Before such employer can be called upon to pay tax and can in terms of sub -section (7) be deemed to be an assessee in default obviously there must of necessity be an adjudication as to whether the particular employee from whose salary he should have made the deduction was or was not resident in British India; and it appears to us that sub -section (7) has implicit in it the requirement that the Income -tax Officer, who proposes to give effect to this sub -section and to deem an employer to be an assessee in default will first determine whether the employer in respect of whose income the deduction should have been made was a resident in India. In the present case, on the record before us it does not appear that any such adjudication was made by the Income -tax Officer.