TaxTMI 
TaxTMI 
TaxTMI 
2015 (5) TMI 617
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.... Section 40(a)(ia) can be applied when payments in respect of which tax is deductible at source has already been made by the assessee to the payee at the time of computing the income chargeable under the head "profits and gains of business or profession" i.e. at the close of the year. The other two appeals are also admitted on this question of law. This judgment is, therefore, restricted to this question alone. 3. We have answered the question against the assessee/respondent. In doing so, we have also held that the requirement to deduct tax at source is mandatory and that the provisions of section 40(a)(ia) apply to assessees who follow the cash system as well as assessees who follow the mercantile system. 4. We will, however, for the record, refer to the questions of law raised in ITA No.716 of 2009 and ITA No.130 of 2012. ITA No.716 of 2009 was admitted by an order of a Division Bench dated 27.05.2010 on the following substantial questions of law:- "1. Whether the Tribunal had erred in law by failing to appreciate that the CIT (Appeal) by resorting to the cardinal rule of strict literal interpretation rightly interpreted the scope of applicability of Section 40(a)(ia) of the I....
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....s attributable only to the Dera Bassi Unit?" 6. The interpretation of Section 40(a)(ia) is what really falls for consideration. Mr. Sood, the learned counsel appearing on behalf of the appellant contended that the disallowance contemplated by Section 40(a)(ia) cannot be applied when payment has already been made by the assessee to the payee (in this case, a contractor) at the time of computing the income chargeable under the head "profits and gains of business or profession" i.e. at the close of the year. 7. The appellant filed its income-tax return declaring a net income of Rs. 15,93,200/- as on 11.10.2005. The case was picked up for scrutiny assessment under Section 143(2) of the Act. The appellant produced the bills, vouchers and other records indicating expenses such as freight, wages, advertisement and publicity. The Assessing Officer, however, found that the TDS return for the Financial Year 2004-05 corresponding to the assessment year in question along with proof of payment of TDS was not submitted. The Assessing Officer noted that the assessee's books of accounts, however, recorded that the TDS had been deposited in the government account. The appellant's accounta....
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....he assessee fails to do so, the payments in respect of which the TDS was to be deducted and paid over are to be disallowed in view of Section 40(a)(ia). 10. While construing Section 40(a)(ia), it will be necessary to also refer to the provisions of Chapter XVII, Part-B (hereafter for convenience referred to as "Chapter XVII-B"). The relevant provisions are as follows:- "40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession":- (a) in the case of any assessee- (i) ........................................................................................................................................ (ia) Any interest, commission or brokerage, rent royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or subcontractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid during the p....
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.... of the Central Government as required by Section 200(1). Rule 30(2), in so far as it is relevant, reads as under:- "Time and mode of payment to Government account of tax deducted at source or tax paid under sub-section (1A) of section 192. 30(1) All sums deducted in accordance with the provisions of Chapter XVII-B by an office of the Government shall be paid to the credit of the Central Government- ........ .......... ........ ........ (2) All sums deducted in accordance with the provisions of Chapter XVII-B by deductors other than an office of the Government shall be paid to the credit of the Central Government- (a) on or before 30th day of April where the income or amount is credited or paid in the month of March; and (b) in any other case, on or before seven days from the end of the month in which- (i) the deduction is made; or (ii) income-tax is due under sub-section(1A) of section 192." 11. The liability to deduct tax at source under the provisions of Chapter XVII is mandatory. A person responsible for paying any sum is also liable to deposit the amount in the Government account. All the sections in Chapter XVII-B require a person to deduct the tax at source at the r....
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.... the provisions and procedures relating to TDS are scrupulously applied, it also ensured the identification of the payees thereby confirming the network of assessees and that once the assessees are identified it would enable the tax collection machinery to bring within its fold all such persons who are liable to come within the network of tax payers. These objects also indicate the legislative intent that the requirement of deducting tax at source is mandatory. 14. The liability to deduct tax at source is, therefore, mandatory. 15. This brings us to a consideration of the ambit of Section 40(a)(ia). The words "payable" and "paid" have different connotations. The word "paid" is, in fact, an antonym of the word "payable". This, however, is not significant to the interpretation of Section 40(a)(ia). 16. It is necessary to first deal with the contention on behalf of the appellant that section 40(a)(ia) relates only to assessees who follow the mercantile system and does not pertain to the assessees who follow the cash system. 17. There is nothing that persuades us to accept this submission. The purpose of the section is to ensure the recovery of tax. We see no indication in the sect....
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....hese objectives only by confining the operation of Section 40(a)(ia) to assessees who follow the mercantile system. 20. The same view was taken by a Division Bench of the Calcutta High Court in Commissioner of Income Tax vs. Crescent Export Syndicate, (supra). It was held:- "12.3. It is noticeable that Section 40(a) is applicable irrespective of the method of accounting followed by an assessee. Therefore, by using the term 'payable' legislature included the entire accrued liability. If assessee was following mercantile system of accounting, then the moment amount was credited to the account of payee on accrual of liability, TDS was required to be made but if assessee was following cash system of accounting, then on making payment TDS was to be made as the liability was discharged by making payment. The TDS provisions are applicable both in the situation of actual payment as well of the credit of the amount. It becomes very clear from the fact that the phrase, 'on which tax is deductible at source under Chapter XVII-B', was not there in the Bill but incorporated in the Act. This was not without any purpose." 21. Section 40(a)(ia), therefore, applies not merely to ....
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....VII. 24. Take for instance, the case of an assessee, who follows the cash system of accounting and where the assessee who though liable to pay the contractor, fails to do so for any reason. The assessee is not then liable to deduct tax at source. Take also the case of an assessee, who follows the mercantile system. Such an assessee may have incurred the liability to pay amounts to a party. Such an assessee is also not bound to deduct tax at source unless he credits such sums to the account of the party/payee, such as, a contractor. This is clear from Section 194C set out earlier. The liability to deduct tax at source, in the case of an assessee following the cash system, arises only when the payment is made and in the case of an assessee following the mercantile system, when he credits such sum to the account of the party entitled to receive the payment. 25. The government has nothing to do with the dispute between the assessee and the payee such as a contractor. The provisions of the Act including Section 40 and the provisions of Chapter XVII do not entitle the tax authorities to adjudicate the liability of an assessee to make payment to the payee/other contracting party. The ap....
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....ion for this case relates to the assessment year 2005-06. Prior to its substitution, the proviso substituted by the Finance Act, 2008 with retrospective effect from 1st April, 2005, read as under:- "Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted - (A) During the last month of the previous year but paid after the said due date; or (B) During any other month of the previous year but paid after the end of the said previous year, Such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid." According to Mr. Sood, the first proviso can be meaningfully applied only where the amounts are outstanding/payable by the assessee to the payee, as the assessee, who is in possession of the funds of the payee, would be in a position to deduct the amount at source while making the payment to the payee. However, in case the assessee had already made payment to the payee and nothing is outstanding/payable to the payee, it would be impossible for the assessee, who is no more in possession of the funds, to effect the deduction at source with respect to such amounts which had....
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.... accorded on the amount being payable and not only upon the amount being paid. In Section 40, the term "payable" is used to denote the nature of the default and the consequence thereof. 31. Our view is supported by the judgments of the Calcutta and Gujarat High Courts. The Division Bench of the Calcutta High Court in Commissioner of Income Tax vs. Crescent Export Syndicate, (supra) held:- "12.4. In our considered opinion, 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. 13. Section 40(a)(ia) is to be interpreted harmoniously with the TDS provision as its operation solely depends on the provisions contained under Chapter XVII-B. It contemplates one of the consequences of non-deduction of tax and, therefore, has to be interpreted in the light of mandatory provisions....
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....al had relied on the definition of Section 43(2) but the import of phrase 'incurred in accordance with the method of accounting followed' was not considered. Therefore, the finding that by implication the word 'payable' does not include 'paid' cannot be accepted. ..... ...... ...... ..... 21. In view of above discussion, we answer the question as under:- The provisions of section 40(a)(ia) of the Income Tax Act, 1961, 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. ..... ...... ...... ..... We shall now endeavour to show that no other interpretation is possible. The key words used in Section 40(a)(ia), according to us, are "on which tax is deductible at source under Chapter XVII-B". If the question is "which expenses are sought to be disallowed?" The answer is bound to be "those expenses on which tax is deductible at source under Chapter XVII-B. Once this is realized no....
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....een deducted or if deducted not paid before the due date. This provision no-where requires that the amount which is payable must remain so payable throughout during the year. To reiterate the provision has certain strict and stringent requirements before the unpleasant consequences envisaged therein can be applied. We are prepared to and we are duty bound to interpret such requirements strictly. Such requirements, however, cannot be enlarged by any addition or subtraction of words not used by the legislature. The term used is interest, commission, brokerage etc. is payable to a resident or amounts payable to a contractor or sub-contractor for carrying out any work. The language used is not that such amount must continue to remain payable till the end of the accounting year. Any such interpretation would require reading words which the legislature has not used. No such interpretation would even otherwise be justified because in our opinion, the legislature could not have intended to bring about any such distinction nor the language used in the section brings about any such meaning. If the interpretation as advanced by the assessees is accepted, it would lead to a situation where the....
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....r requirements of the said provision exist. In that context, in our opinion the decision of the Special Bench of the Tribunal in the case of M/s Merilyn Shipping & Transports Vs. ACIT (supra), does not lay down correct law." We are in respectful agreement with the conclusion and the reasoning of this judgment as well. 33. On behalf of the appellant, reliance was placed on a judgment of a Division Bench of the Allahabad High Court in Commissioner of Income Tax vs. M/s Vector Shipping Services (P) Ltd., (2013)262 CTR(All)545. The Division Bench noted the finding of the CIT (Appeals) to the effect that since it had not been disputed that no amount remained payable at the year end, addition could not be made in view of the Special Bench decision of the Tribunal in the case of Merilyn Shipping & Transports, 136 ITD 23 (SB) (Vishakhapatnam). The Division Bench also noted the finding of the CIT (Appeals) that when expenses incurred by the appellant were totally paid and did not remain payable at the end of the relevant accounting period, the provisions of Section 40(a)(ia) are not applicable. In paragraph-9, the Division Bench held as follows:- "9. It is to be noted that for disallowin....
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.... not dealing here with the question of penalty. We have been called upon to interpret the provisions of Section 40(a)(ia). 37. Mr. Sood also relied upon the judgment of a Division Bench of this Court dated 20.11.2014 in the case of The Commissioner of Income-tax, Hisar vs. M/s Rajinder Parshad Jain, ITA No.228 of 2014. The revenue sought to raise the following question of law:- "ii) Whether on the facts and in the circumstances of the case, the Hon'ble ITAT was right in law in accepting the interpretation adopted by Vishakhapatnam Special Bench of ITAT in case of ACIT Vs Merilyn Shipping & Transporters {136 ITD 23 (SB) (Vishakhapatnam)} that the disallowance u/s 40(a)(ia) is to be made only in respect of payments which are outstanding at the end of financial year and payment of which is without deduction of tax (after end of Financial Year)." The Division Bench held as under:- "As regards the question relating to deduction of tax at source, suffice it to state that the Tribunal has merely restored the matter to the assessing officer by asking him to verify the transactions and if found to be correct, pass orders accordingly by holding as follows: - "8. On perusal of the re....