An employer who fails to deduct tax from the salary of an employee who is not resident in India has a right of appeal under Section 30(1) of the Income-tax Act, 1922, as he denies his liability to be assessed under the Act.

Headnote:
INCOME TAX - APPEAL - RIGHT OF APPEAL - EMPLOYER FAILING TO DEDUCT TAX FROM SALARY OF EMPLOYEE NOT RESIDENT IN INDIA - WHETHER ENTITLED TO APPEAL UNDER SECTION 30(1) OF THE INCOME-TAX ACT, 1922 - SECTION 18(3A), 18(6), 18(7), 30(1), 30(1A), 45 OF THE INCOME-TAX ACT, 1922.
Fact of the Case:

The applicant, a producer, failed to deduct tax from the salary of two foreign employees who were not resident in India. The Income-tax Officer directed the applicant to pay income-tax and supertax with appropriate surcharge in the case of both these foreigners. The applicant appealed to the Appellate Assistant Commissioner, who held that the appeals were not competent. The applicant then appealed to the Tribunal, which also held that the appeals were not competent. The applicant contended that his right of appeal arose out of Section 30(1) of the Income-tax Act, 1922.
Finding of the Court:

The court held that the applicant had a right of appeal under Section 30(1) of the Income-tax Act, 1922, as he denied his liability to be assessed under the Act. The court held that the applicant was a deemed assessee in default under Section 18(7) of the Act, and that a deemed assessee in default was undoubtedly a deemed assessee as well and not a wholly different entity from an assessee. The court also held that the applicant was entitled to appeal against an order made under Section 18(7) on the ground that there was no liability initially to deduct tax, because the employee was resident within jurisdiction.
Issues: 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 80(1 A)? 2. Whether for the purpose of disposing of the Producers appeals on the limited question as to their competency, it was obligatory on the Tribunal to go into the question as to whether Judd and/or Haller were resident in the taxable territories in the appropriate accounting year?
Ratio Decidendi: The court held that the applicant had a right of appeal under Section 30(1) of the Income-tax Act, 1922, as he denied his liability to be assessed under the Act. The court held that the applicant was a deemed assessee in default under Section 18(7) of the Act, and that a deemed assessee in default was undoubtedly a deemed assessee as well and not a wholly different entity from an assessee. The court also held that the applicant was entitled to appeal against an order made under Section 18(7) on the ground that there was no liability initially to deduct tax, because the employee was resident within jurisdiction.
Final Decision: The court answered the first issue in the affirmative and the second issue in the negative. The court also directed the Income-tax Commissioner to pay costs.

Judgment

1. The applicant before us is Section 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 em-ployees 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 supertax 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 granted under that section were not fulfilled. Mr. Modi then appealed 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 80(1 A)?"

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)."

2. Now, we will deal with the relevant sections as they stood at the relevant time for the purpose of this reference. Section 18 (3A) enacts:

"Any person responsible for paying to a person not resident in the taxable territories any interest not being interest on securities; or any other sum chargeable under the provisions of this Act, shall, at the time of payment, unless he is himself liable to pay income-tax thereon as an agent, deduct income-tax at the maximum rate."

Then Sub-clause (6) states:

"All sums deducted in accordance with the provisions of this section shall he paid within the prescribed time by the person making the deduction to the credit of the Central Government or as the Central Board of Revenue directs."

Sub-clause (7) provides:

"If any such person does not deduct or after deducting fails to pay the tax as required by or under this section, ho, and in the cases specified in Sub-sections. (3D) and (3E) the company of which he is the principal officer shall, without prejudice to any ofher consequences which he or it may incur, be deemed to be an assessee in default in respect of the tax, provided that the Income-tax Officer shall not make a direction under Sub-section (1) of Section 46 for-the recovery of any penalty from such person unless satisfied that such person has wilfully failed to deduct and pay the tax."

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 p

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