2025 (7) TMI 768 - HC - Income Tax

Section 40(a)(ia) cannot apply to short deduction of TDS, following S.K. Tekriwal precedent over PVS Memorial Hospital ruling.

Commissioner of Income Tax, International Taxation-3, New Delhi Versus Samsung Heavy Industries Company Limited

The Uttarakhand HC upheld the Tribunal's decision deleting addition under Section 40(a)(ia) for short deduction of TDS. The assessee had deducted TDS ... Addition u/s 40(a)(ia) - short deduction of tax at source - TDS was deducted by the assessee u/s 194C at the rate of 2 percent OR deduction u/s 194J at the rate of 10 percent - Tribunal deleted addition - HELD THAT:- This Court has no hesitation in upholding the finding returned by Tribunal, wherein it has held that Section 40(a)(ia) cannot be made applicable to short deduction of tax at source and the disallowance made was directed to be deleted. This finding of learned Tribunal is based on the judgment rendered in the case of Commissioner of Income Tax Vs. S.K. Tekriwal [2012 (12) TMI 873 - CALCUTTA HIGH COURT] - Appellate Tribunal have negated the submission of the revenue, which relied on the decision of PVS Memorial Hospital Ltd. [2015 (8) TMI 277 - KERLA HIGH COURT] by relying on the judgment passed in the case of Vegetable Products” [1973 (1) TMI 1 - SUPREME COURT] wherein it was held that when there are divergent views of various non-jurisdictional High Courts on an identical issue, the construction that is favorable to the assessee should be considered. We do not find any infirmity in the order of the Income Tax Appellate Tribunal. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court are:(a) Whether the provisions of Section 40(a)(ia) of the Income Tax Act, 1961 are applicable to cases involving short deduction of tax at source (TDS), as opposed to non-deduction of TDS.(b) Whether deduction of tax at source under an incorrect provision of Chapter XVII-B (i.e., deduction under Section 194C instead of Section 194J) triggers disallowance under Section 40(a)(ia).(c) The applicability and interpretation of judicial precedents from various High Courts and the Supreme Court regarding the scope of Section 40(a)(ia) in cases of short deduction of TDS.(d) Whether the present appeal should be deferred pending the decision of the Supreme Court on a related matter involving divergent High Court rulings.2. ISSUE-WISE DETAILED ANALYSISIssue (a): Applicability of Section 40(a)(ia) to Short Deduction of Tax at SourceRelevant Legal Framework and Precedents: Section 40(a)(ia) of the Income Tax Act disallows certain expenses where tax deductible at source under Chapter XVII-B has not been deducted or paid. The provision traditionally applies where TDS is not deducted or not paid, leading to disallowance of the corresponding expense.The Hon'ble Calcutta High Court in Commissioner of Income Tax Vs. S.K. Tekriwal ([2014] 361 ITR 432) held that Section 40(a)(ia) is not applicable to cases of short deduction of TDS. Similarly, the Hon'ble Delhi High Court in PCIT Vs. Future First Info Services Pvt. Ltd (ITA No. 195/2022) endorsed this proposition.Court's Interpretation and Reasoning: The Income Tax Appellate Tribunal (ITAT) relied on these precedents to hold that Section 40(a)(ia) cannot be invoked for short deduction of TDS. The Tribunal reasoned that the language and intent of the provision target non-deduction or non-payment, not short deduction.Key Evidence and Findings: The assessee deducted TDS at 2% under Section 194C on payments for interior and electrification works, whereas the revenue contended that the payments fell under professional services attracting 10% TDS under Section 194J. The Assessing Officer disallowed expenses under Section 40(a)(ia) for short deduction.Application of Law to Facts: The Tribunal applied the Calcutta and Delhi High Court decisions, concluding that since TDS was deducted (albeit at a lower rate), Section 40(a)(ia) disallowance was not warranted.Treatment of Competing Arguments: The revenue relied on the Kerala High Court decision in PVS Memorial Hospital Ltd. (2016) 380 ITR 284, which held that deduction under a wrong provision does not satisfy Section 40(a)(ia) and disallowance is justified. The Tribunal distinguished this as a non-jurisdictional High Court decision and followed the Supreme Court's guidance in Vegetable Products Ltd. (88 ITR 192) to adopt the view favorable to the assessee when divergent High Court rulings exist.Conclusion: Section 40(a)(ia) is not applicable to short deduction of TDS; disallowance under this section in such cases is improper.Issue (b): Deduction under Incorrect Provision of Chapter XVII-B and Its Effect under Section 40(a)(ia)Relevant Legal Framework and Precedents: Section 40(a)(ia) refers to tax deductible at source under the appropriate provision of Chapter XVII-B. The Kerala High Court in PVS Memorial Hospital Ltd. interpreted that deduction under a wrong provision (e.g., Section 194C instead of Section 194J) does not fulfill the requirement and leads to disallowance.Court's Interpretation and Reasoning: The Tribunal and this Court noted the Kerala High Court's view but emphasized that it is a non-jurisdictional High Court decision and that the Supreme Court in Vegetable Products Ltd. mandates following the construction favorable to the assessee in case of conflicting High Court decisions.Key Evidence and Findings: The assessee deducted TDS at 2% under Section 194C instead of 10% under Section 194J. The revenue argued that such incorrect deduction is equivalent to non-deduction under the correct provision.Application of Law to Facts: The Tribunal held that since TDS was deducted (though at a lower rate), Section 40(a)(ia) disallowance is not applicable. This Court upheld that finding, relying on the principle that short deduction does not attract Section 40(a)(ia) disallowance.Treatment of Competing Arguments: The revenue's reliance on the Kerala High Court decision was rejected in light of the Supreme Court's directive to follow the view favorable to the assessee when there is divergence among High Courts.Conclusion: Deduction of TDS under an incorrect provision does not automatically trigger disallowance under Section 40(a)(ia) where TDS has been deducted but short deducted.Issue (c): Treatment of Divergent High Court Decisions and Supreme Court PrecedentRelevant Legal Framework and Precedents: The Supreme Court in Vegetable Products Ltd. held that when divergent views exist among non-jurisdictional High Courts on an identical issue, the construction favorable to the assessee should be adopted.Court's Interpretation and Reasoning: The Tribunal and this Court applied this principle to resolve the conflict between the Kerala High Court decision and the Calcutta and Delhi High Court decisions. Since the Kerala High Court is non-jurisdictional and the Calcutta High Court decision favored the assessee, the latter was followed.Key Evidence and Findings: The Kerala High Court decision was under challenge before the Supreme Court, with a Special Leave Petition converted into a Civil Appeal pending final hearing.Application of Law to Facts: The Court declined to admit the appeal and dismissed it, leaving open the possibility for the revenue to approach the Court again if the Supreme Court upholds the Kerala High Court's decision.Treatment of Competing Arguments: The Court balanced the competing High Court rulings and the pending Supreme Court decision, granting liberty to the revenue to revisit the issue post the Supreme Court's ruling.Conclusion: The Court upheld the favorable view for the assessee in the present case, pending the Supreme Court's final decision on the matter.Issue (d): Whether the Present Appeal Should Be Deferred Pending Supreme Court DecisionRelevant Legal Framework and Precedents: The Kerala High Court decision relied upon by the revenue is under challenge before the Supreme Court, with the appeal ripe for final hearing.Court's Interpretation and Reasoning: The Court considered the pending Supreme Court appeal but found no infirmity in the ITAT order and no substantial question of law arising warranting admission of the appeal.Key Evidence and Findings: The Supreme Court has granted leave and the matter is pending final hearing.Application of Law to Facts: The Court refused to defer the hearing but granted liberty to the revenue to approach again if the Supreme Court rules in its favor.Conclusion: The appeal was dismissed without deferral, with liberty granted to the revenue for future recourse.3. SIGNIFICANT HOLDINGS'Section 40(a)(ia) of the Income Tax Act, 1961 cannot be made applicable for short deduction of tax at source.''When there are divergent views of various non-jurisdictional High Courts on an identical issue, the construction that is favourable to the assessee should be considered.''Deduction under a wrong provision of law will not save an assessee from Section 40(a)(ia) disallowance; however, where tax has been deducted albeit at a lower rate, Section 40(a)(ia) disallowance is not applicable.''The Income Tax Appellate Tribunal's order deleting the disallowance under Section 40(a)(ia) on account of short deduction of TDS is upheld.''No substantial question of law arises for consideration; hence, the Income Tax Appeal is dismissed.''Liberty is granted to the Revenue to approach this Court if the Supreme Court upholds the Kerala High Court's decision in the pending Civil Appeal.'