2013 (5) TMI 510 - HC - Income Tax

Section 40(a)(ia) applies to all payable amounts during the year, not just year-end outstanding sums

Commissioner of Income-tax, Kolkata - XI Versus Crescent Export Syndicate & Park International

The HC held that section 40(a)(ia) applies to amounts payable at any time during the relevant previous year, not only those shown as payable on the ... Disallowance u/s 40(1)(ia) - whether provisions of section 40(a)(ia) are applicable only to the amount which is shown as payable on the date of balance-sheet or to such expenditure, which become payable at any time during the relevant previous year and was actually paid within the previous year - Whether Merilyn Shipping & Transports case [2012 (4) TMI 290 - ITAT VISAKHAPATNAM] concludes the correct law in stating that section 40(a)(ia) would be applicable only to expenditure which is payable as on March 31 of every year and can not be invoked to disallow amount which have already been paid during the previous year? Held that:- There is no ambiguity in the Section and term 'payable' cannot be ascribed narrow interpretation as contended by assessee. Had the intentions of the legislature were to disallow only items outstanding as on 31st March, then the term 'payable' would have been qualified by the phrase as outstanding on 31st March. However, no such qualification is there in the section and, therefore, the same cannot be read into the section as contended by the assessee. The terms “payable” and “paid” are not synonymous. Word “paid” has been defined in Section 43(2) of the Act to mean actually paid or incurred according to the method of accounting, upon the basis of which profits and gains are computed under the head “Profits and Gains of Business or Profession”. In contrast, term “payable” has not been defined. The word “payable” has been described in Webster’s Third New International Unabridged Dictionary as requiring to be paid: capable of being paid: specifying payment to a particular payee at a specified time or occasion or any specified manner. In the context of section 40(a)(ia), the word “payable” would not include “paid”. The provisions of section 40(a)(ia) are applicable not only to the amount which is shown as payable on the date of balance-sheet, but it is applicable to such expenditure, which become payable at any time during the relevant previous year and was actually paid within the previous year. In the result the question is decided in favour of revenue and against the assessee. On examining the correctness of the majority views in the case of Merilyn Shipping it can be concluded that the main thrust of the majority view is based on the fact 'that the Legislature has replaced the expression 'amounts credited or paid' with the expression 'payable' in the final enactment”. Comparison between the pre-amendment and post amendment law is permissible for the purpose of ascertaining the mischief sought to be remedied or the object sought to be achieved by an amendment. But the same comparison between the draft and the enacted law is not permissible. Nor can the draft or the bill be used for the purpose of regulating the meaning and purport of the enacted law. It is the finally enacted law which is the will of the legislature. Tribunal realized the meaning and purport of Section 40(a)(ia) correctly when it held that in case of omission to deduct tax even the genuine and admissible expenses are to be disallowed. But they sought to remove the rigour of the law by holding that the disallowance shall be restricted to the money which is yet to be paid. What the Tribunal by majority did was to supply the casus omissus which was not permissible and could only have been done by the Supreme Court in an appropriate case. Reference in this regard may be made to the judgment in the case of Bhuwalka Steel Industries vs. Bombay Iron & Steel Labour Board [2009 (12) TMI 697 - SUPREME COURT]. The position prevailing prior to the amendment introduced in Section 40(a) would certainly be a relevant factor. However, the proceedings in the Parliament, its debates and even the speeches made by the proposer of a bill are ordinarily not considered as relevant or safe tools for interpretation of a statute. The language used in the draft was unclear and susceptible to giving more than one meaning. By looking at the draft it could be said that the legislature wanted to treat the payments made or credited in favour of a contractor or sub-contractor differently than the payments on account of interest, commission or brokerage, fees for professional services or fees for technical services because the words 'amounts credited or paid' were used only in relation to a contractor or sub-contractor. This differential treatment was not intended. Therefore, the legislature provided that the amounts, on which tax is deductible at source under Chapter XVII-B payable on account of interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services or to a contractor or sub-contractor shall not be deducted in computing the income of an assessee in case he has not deduced, or after deduction has not paid within the specified time. The language used by the legislature in the finally enacted law is clear and unambiguous whereas the language used in the bill was ambiguous. Thus, the majority views expressed in the case of Merilyn Shipping & Transports [2012 (4) TMI 290 - ITAT VISAKHAPATNAM] are not acceptable. The appeal is, thus, allowed in favour of the revenue. Issues Involved:1. Interpretation of Section 40(a)(ia) of the Income Tax Act, 1961.2. Applicability of disallowance provisions to amounts 'paid' versus 'payable'.3. Legislative intent behind the amendment and final enactment of Section 40(a)(ia).4. Relevance of the Special Bench decision in the case of Merilyn Shipping & Transports.5. The role of judicial interpretation in addressing legislative gaps (casus omissus).Detailed Analysis:1. Interpretation of Section 40(a)(ia) of the Income Tax Act, 1961:The primary issue revolves around the interpretation of Section 40(a)(ia), which disallows certain expenses if tax has not been deducted at source (TDS) as required under Chapter XVII-B. The court examined whether the disallowance applies only to amounts 'payable' at the year-end or also to amounts 'paid' during the year.2. Applicability of Disallowance Provisions to Amounts 'Paid' versus 'Payable':The Tribunal's majority view in Merilyn Shipping & Transports concluded that the term 'payable' should be narrowly interpreted to mean only amounts outstanding at the year-end. The court, however, disagreed, stating that the term 'payable' encompasses both amounts due and amounts already paid. The court emphasized that the legislature's use of 'payable' was deliberate and intended to cover all expenses liable for TDS, regardless of whether they were paid or still outstanding.3. Legislative Intent Behind the Amendment and Final Enactment of Section 40(a)(ia):The court noted that the legislative intent was to ensure compliance with TDS provisions. The change from 'amounts credited or paid' to 'payable' in the final enactment was purposeful, aiming to disallow expenses where TDS was not deducted or paid within the prescribed time. The court rejected the Tribunal's reliance on the draft bill to interpret the enacted law, emphasizing that only the final enacted law reflects the legislature's will.4. Relevance of the Special Bench Decision in the Case of Merilyn Shipping & Transports:The court critically analyzed the Special Bench's decision, which had restricted the disallowance under Section 40(a)(ia) to amounts 'payable' at the year-end. The court found this interpretation flawed, as it introduced a limitation not present in the statute. The court highlighted that the Tribunal's majority view effectively supplied a casus omissus, which is not permissible except by the Supreme Court in rare cases.5. The Role of Judicial Interpretation in Addressing Legislative Gaps (Casus Omissus):The court underscored that judicial bodies should not fill legislative gaps unless absolutely necessary and permissible by law. The Tribunal's attempt to limit the scope of Section 40(a)(ia) to amounts 'payable' at the year-end was seen as an overreach, altering the clear legislative intent to ensure TDS compliance on all relevant expenses.Conclusion:The court concluded that the disallowance under Section 40(a)(ia) applies to all expenses liable for TDS, whether paid or payable. The majority view in Merilyn Shipping & Transports was rejected, and the appeal was allowed in favor of the revenue. The court emphasized the importance of adhering to the clear language of the statute and the legislative intent behind its enactment.