In large organisations employing thousands of persons, a full-fledged department has to be set-up which virtually has to do the work of the Income Tax Department. Since employees are eligible to claim deduction and rebates permitted under various sections of the law, the question which generally arises is whether the employer can base the tax calculation for each employee on a claim or declaration made by an employee in respect of the rebates which he is entitled to claim under the law.

It is well-nigh impossible for an employer to scrutinise the documents, receipts and other pieces of evidence. Most companies and employers take a written statementor declaration signed by each employee who claims that he has made certain investments, for example, in the Public Provident Fund, National Savings Certificate, or has paid premium to Life Insurance Corporation or any other expenditure which qualifies for the rebate under Section 88 of the Income Tax Act, 1961.

The interesting question which arises for consideration is whether employers would be justified in accepting the declarations made by employees and basing the calculation of tax to be deducted at source on such declarations. The Income Tax Department is in constant conflict with employers who have been slapped with penalties under Section 221 of the Act for short deduction of tax at source. Further, interest is payable at the rate of 15 per cent per annum and the employer is treated as an assessee in default under Section 201.

Under this provision, where a person defaults in the fulfilment of his obligation to deduct tax at source and to pay it to the credit of the Union government within theprescribed time, he will be treated as an assessee in default in respect of the tax. Such a defaulter is liable to penalty under Section 221 in an amount not exceeding the amount of tax in arrears, unless the income tax officer is satisfied that such person has failed to do so for good and sufficient reasons.

The point whether an employer could relay on a declaration of his employees for calculating the amount to be deducted at source had been considered in State Bank of Patiala vs CIT (236 ITR 281).

The facts in this case were that the bank filed the return on April 30, 1993, in Form No. 24 under Section 206 of the Act, showing the amount of salary paid to each employee and the amount of rebate claimed under Section 88 by each employee during the financial year ended on March 31, 1993.

The assessing officer asked the assessee to prove the source of investment in the savings by two employees. Rebate of tax on the investment of Rs 20,000 claimed by K, an employee, was refused on the ground that K had notwithdrawn any money from his bank account on the dates of investments. Withdrawal of money was made by K from his bank account a few days before making investments.

In the cases of both the employees, not only had the investments been proved, but the source of money invested had also been explained to the assessing officer. The petitioner-bank had as an employer, no reason, much less the authority in law, to enquire into the employee's source of investment or to disbelieve its genuineness or to decide its admissibility.

It was not within the powers of the bank, as employer, to examine as to whether investments had been made by the employees out of the taxable income of the current year. There was nothing before the employer to raise a suspicion that investments were not made by the employees from their past or current savings. Even if there was a reason to raise a suspicion, the employer could not go any further to enquire into the source of investment. Section 192 of the Act did not vest any such powerin the employer.

The expression "on the estimated income of the assessee" occurring in Section 192(1) enabled the employer to work out the estimate of income under the head "salaries" in the case of its employees. Final determination of income had to be made by the concerned assessing officer in the case of an employee during the course of his assessment as an individual.

Once the investments made by an employee were found to be correct after verification, the employer had no further authority in law to examine the source and record its satisfaction. In the present case, the investments had not been found to be incorrect; it was the source of funds invested which had been doubted.

From the facts, it could not be concluded that the assessee had failed in its duty to deduct tax from the two employees in question. There was nothing to enable the assessing officer to hold that the bank had, without good and sufficient reasons, failed to deduct and pay tax. When the deposits stood verified, the assesseecould not be held responsible for not looking into the source of funds invested by the employee in the savings.

Summary assessments in the cases of the two employees under Section 143(1)(a) of the Act were also made and a sum of Rs 1,490 was refunded to K and Rs 70 to Mrs G.

It was pleaded on behalf of the department that an employer had to satisfy himself about the actual deposit of money in the investment made by an employee. Genuineness of the claim for rebate had to be seen. The bank had not verified the genuineness of the investments made by the employees. Hence, according to the department, excess allowance of rebate was given under Section 88 and thereby short deduction of tax at source took place.

The court found that the order passed by the assessing officer was wholly unjustified, arbitrary and untenable in law. When the bank had explained the investments made by employees, there was no reason to hold the bank responsible for not verifying the source of investment. Even the source had beenexplained, but that too was not accepted. In the case of K, withdrawal of money had been made from the bank account a few days earlier to the investments.

In the case of Mrs G, withdrawal had been made from the bank account in which her salary was also deposited. In the face of the source having been explained, there was no reason for the employer to raise a further suspicion and to reject the rebate claimed by the two employees, could decline to accept the source as genuine, but that power rested with the assessing officer.

The employer was required to deduct tax at source from the "estimated income" of the employee. The assessee's application seeking interference by the commissioner also did not help it, though not only the investments made had been duly explained, but also the source of money so invested. The commissioner also did not feel inclined to accept the assessee's plea that, as an employer, the obligation cast on it had been discharged. Even a second attempt made by the assessee by moving anapplication under Section 154 of the Act proved futile. In view of the above, the court held that the exercise of power was wholly arbitrary, unwarranted and in excess of jurisdiction.

Thus, the Punjab and Haryana High Court quashed the orders of the assessing officer under Section 201 and the orders of the commissioner under sections 264 and 164. The tax department was directed to refund the amount paid by the bank under Section 201, with interest. Further, the bank was awarded costs of Rs 5,000.

The important principle which emerges from the aforesaid decision is that the employer has no authority in law to inquire into the source of income of employees or to disbelieve its genuineness. The employer is not required to examine, while deducting tax at source, as to whether the investment is out of the taxable income of the employee of the current year or not. Even if there is reason for suspicion, the employer cannot inquire into the source of investments because Section 192 does not give any power to theemployer to do so.

The author is a Supreme Court advocate