TaxTMI 
TaxTMI 
TaxTMI 
2016 (3) TMI 56
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....ferred by the Assessee against the assessment order dated 25th March, 1994 passed in respect of Assessment Year (AY) 1991-92 . 2. The controversy involved in the present appeal relates to the denial of deduction of expenses - by virtue of provision of Section 40(a)(iii) of the Act -for failure on the part of the Assessee to deduct and deposit Tax Deducted at Source (TDS) within the prescribed time. This appeal was admitted on 28th April, 2005 and two questions of law were framed. At the hearing on 22nd December 2015, the Assessee did not press for one of the questions as it was stated that it had since obtained relief in respect thereof. Consequently only the following question of law arises for consideration: "Whether the Income Tax Appellate Tribunal was right in law in holding that salaries paid to ex-patriate employees overseas on which tax was paid in accordance with CBDT Circular dated 685 dated 17/20 June 94 and Circular 686 dated 12.8.94, is not permissible as a deduction in computation of taxable business income in view of the provisions of Section 40 (a)(iii) of the Income Tax Act, 1961 read with Article 7 of the Indo-UK Double Taxation Avoidance Treaty?" 3. The afore....
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.... payment of salary, allowances and perquisites paid and/or provided to such employees overseas. The said circular also indicated that in order to encourage immediate voluntary compliance, CBDT had decided that penalty proceedings under Section 221 and 271C of the Act and prosecution under Section 276B of the Act would not be initiated in cases where the employers came forward and paid the entire amount of tax due under Section 192 of the Act along with interest before 31st July, 1994. 3.4 Pursuant to the aforesaid Circular (CBDT Circular No.685 dated 17/20th June, 1994), the Assessee deposited a sum of Rs. 9,69,43,214/-, being the amount of TDS pertaining to the payments made abroad to and/or for the benefit of the employees serving in India during the financial years 1984-85 to 1993-94 and the interest due thereon, with the Income Tax Authorities. 3.5 The tax and interest deposited by the Assessee was duly verified and accepted by the income tax authorities and the concerned Commissioner of Income Tax issued a communication on 11th November, 1994 duly informing the Assessee that in view of the payments made, no penalty or prosecution action would be initiated in respect of the p....
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....ssly provided that where tax in relation to any sum mentioned in sub clause (i) of clause (a) of Section 40 of the Act is paid or deducted in any subsequent year, the deduction would be allowed in the previous year in which such tax was paid or deducted. The Tribunal reasoned that since no such similar provision existed in respect of sub clause (iii) of clause (a) of Section 40 of the Act, no deduction would be permissible for payments which are chargeable under the head "Salaries" if tax had not been paid or deducted under Chapter XVII B. 4. The question whether an assessee is liable to deduct tax at source on the aforementioned payments made to and/or for benefit of its employees seconded from its head office situated outside India, is no longer res integra in view of the decision of the Supreme Court in Commissioner of Income Tax v. Eli Lilly & Co. (India) P. Ltd.: (2009) 312 ITR 225 (SC). The same is also not a subject matter of dispute in the present appeal. 5. It cannot be disputed that the Assessee has paid the tax which it was required to withhold under the provisions of Section 192 of the Act. Although before the CIT(A), the Revenue had sought to contend that the amount ....
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....prescribed time. The TDS having been deposited, there is no impediment for Assessee to claim the related expense. 8. In the aforesaid circumstances, the principal issue to be addressed is whether the provisions of Section 40(a)(iii) disentitles an assessee to claim a deduction on account of Salaries paid to its employees if the tax is not paid within the specified time but is paid subsequently. Mr Chaudhari, learned Senior Standing Counsel for the Revenue has contended that there are twin requirements to be fulfilled; the first being that tax should have been deducted under Chapter XVII B of the Act; and second being that tax should have been paid. He argued that even if the tax is paid in subsequent years, deduction on account of expenses could not be allowed because the second condition which is deduction of tax at the time of payment of the amount as required under Section 192 of the Act would not be fulfilled. According to him, if the tax is not deducted and paid within the time prescribed for such deduction or payment under the relevant provisions, an assessee would not be entitled to claim that it had deducted or paid the tax under Chapter XVII B of the Act. He also referred....
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....levant year indicates that no deduction would be allowable in respect of any payments chargeable under the head "Salaries" if (a) the same are payable outside India and (b) if tax has not been paid or deducted thereon under Chapter XVII B of the Act. The said clause (iii) was substituted by virtue of the Finance Act, 2003 with effect from 1st April 2004. By virtue of the aforesaid amendment, the rigor of sub clause (iii) of clause (a) of Section 40 of the Act now also extends to any amount payable as salaries in India. Plainly, the principal object of the aforesaid sub clause (iii) is to provide a further disincentive for non-compliance of provisions of Section 192 of the Act. 12. The provisions of Section 192 fall within Chapter XVII B of the Act which relates to collection and recovery of tax. Provisions for deduction of tax at source are a part of the machinery provided for collection of taxes payable by a payee (recipient of income) by directly imposing upon the payer an obligation to withhold the tax due and deposit the same with the Government. Such tax is deposited to the credit of the payee and not the payer. In case of salaries, any person responsible for paying the incom....
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....iso to sub- clause (i) of clause (a) of Section 40 of the Act cannot be read as to disentitle an Assessee to claim a deduction even though it has complied with the condition under sub-clause (iii) of clause (a) of Section 40 of the Act. A plain reading of proviso to sub-clause (i) of clause (a) of Section 40 of the Act indicates that where an Assessee has not deducted or paid the tax at source in terms of Chapter XVII B in respect of any sum as specified under sub-clause (i) of clause (a) of Section 40 of the Act, the Assessee can, nonetheless, claim a deduction in the year in which the assessee deposits the tax. This benefit is not available to an assessee in respect of payments chargeable under the head "Salaries" which fall within sub-clause (iii) of clause (a) of Section 40 and not sub-clause (i) of clause (a) of Section 40 of the Act. Thus, an assessee would not be entitled to claim deduction on account of salaries if it fails to deduct or pay the amount under Chapter XVII B of the Act. In cases where such assessee deposits the amount in a subsequent year, the Assessee would still not be able to claim the deduction in the year in which such tax is deposited; his claim for dedu....
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....or to a foreign company, on which tax has not been deducted or, after deduction, has not been paid before the expiry of the time prescribed under sub-section (1) of section 200 and in accordance with other provisions of Chapter XVII-B: Provided that where in respect of any such sum, tax has been deducted under Chapter XVII-B or paid in any subsequent year, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid. Explanation.---For the purposes of this sub-clause,--- (A) "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9; (B) "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9;" xxxx xxxx xxxx "(iii) any payment which is chargeable under the head "Salaries", if it is payable- (A) Outside India; or (B) To a non-resident, and if the tax has not been paid thereon nor deducted therefrom under Chapter XVII-B;" (underlining for emphasis) 18. It is at once seen that where the legislature wanted to make payment of tax within a specified time a necessary pre-condition, it had ex....