TaxTMI 
TaxTMI 
2009 (9) TMI 37
X X X X Extracts X X X X
X X X X Extracts X X X X
....eek for the issuance of a Writ of Declaration to declare Section 40(a)(ia) of the Act as beyond the legislative competence of the Union of India under Serial No.82 of List-I of the Seventh Schedule of the Constitution of India besides being void as infringing Articles 14, 19(1)(g), 265 and 300A of the Constitution and consequently unenforceable in law. 3. In all these writ petitions, the common challenge is to Section 40(a)(ia) of the Act to declare as ultra vires of the Constitution on the grounds stated therein. All the writ petitions are therefore disposes of by this common order. 4. Arguments were heard in common, learned senior counsels M/s. C. Natarajan and V. Ramachandran as well as other learned counsel viz., M/s. Joseph Prabhakar, N. Devanathan, N. Viswanathan and V.S. Jayakumar appeared on behalf of the petitioners. Mrs. Pushya Sitaraman, Mr. K. Subramanian and Mr.J. Naresh Kumar learned standing counsel for the Income Tax Department appeared on behalf of the Revenue. 5. Mr. C. Natarajan, learned senior counsel appearing for the petitioners in W.P.Nos.10750 & 10751 of 2009 contended that while contractors business has no nexus to the determination of profits and gains ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e tax recovered in the year of assessment can hardly be secured back, even if business is carried on for so long with profit to absorb the losses of the subsequent year. 10. It was lastly contended that every assessee has got a right to terminate his business and if the business is terminated in the subsequent year or thereafter, the tax recovered by virtue of Section 40(a)(ia) in the previous year can never be off set. 11. Mr. V. Ramachandran, learned senior counsel appearing for the petitioners in W.P.Nos.1106, 1107, 1690, 1691, 2478, 2479, 3330, 3331, 1056, 1057, 1717, 1718, 2013 and 2014 of 2008, contended that the object of introduction of Section 40(a)(ia) by the Parliament was to augment the TDS recovery provided under Chapter XVII-B, for which there are various provisions contained in Chapter XVII C,D,E and F in as much as the entire Chapter XVII deals with recovery of tax in different situations by different modes. 12. According to the learned senior counsel, while Chapter XVII-B deals with the recovery of tax to be deducted at source, the other sub-chapters C, D, E and F provides for other recovery procedures and that the TDS procedure alone cannot be treated different....
X X X X Extracts X X X X
X X X X Extracts X X X X
....a)(ia) was invoked can be reopened to withdraw the additions made. In support of his submissions, the learned senior counsel relied upon the decisions reported in : (i) AIR 2002 (SC) 2004 (Rakesh Wadhawan Vs. M/s. Jagadamba Industrial Corporation), (ii) 194 ITR 539 (Commissioner of Wealth Tax Vs. S.Jindal) (iii) 156 ITR 323 (Commissioner of Income Tax, Bangalore Vs. J.H.Gotla) (iv) (1994) 208 ITR 649 (C.W.S. (India) Ltd., Vs. Commissioner of Income Tax) (v) (2002) 254 ITR 337 (Omkars S.Kanwar Vs. Union of India and others) (vi) AIR 1941 (Federal Court) 72 (Hindu Women's Right to Property Act) (vii) AIR 1980 SC 1042 (All Saints High School Vs. Govt. of A.P.) (viii) (2000) 120 STC 302 (B.R. Enterprises Vs. State of U.P.) (ix) AIR 1996 S.C. 1023 (Panalal Bansilal & Others Vs. State of Andhra Pradesh) (x) (1989) 178 ITR 31 (Sanyasi Rao Vs. Government of A.P.) (xi) 236 ITR 380 (Geetha Hariharan Vs. Reserve Bank of India) 17. Mr. N. Viswanathan, learned counsel appearing for the petitioners in W.P.No.5109 and 5110 of 2008 in his submissions contended that Section 40(a)(ia) is arbitrary, unreasonable and colourable legislation, in as much as, the expenditure which ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the total income available and since the available income itself was Rs.42,00,000/- as per book profits provided under the Companies Act, it would take five other financial years to adjust the whole of the additional tax paid which would result in a loss mounting in each of the subsequent years to the disadvantage of the petitioner. 23. Mr. V. S. Jayakumar, learned counsel appearing for the petitioners in W.P.Nos.9142 and 28097 of 2008 contended that the impugned provision violates Article 265, 14 and 19(1)(g) of the Constitution. As far as the violation alleged against Article 265 is concerned, the learned counsel submitted that simply because the assessee committed default in implementing the TDS under Chapter XVII-B, the liability to tax cannot be granted as provided under Section 40(a)(ia) of the Act, which is not permissible under Article 265 of the Constitution. In other words, while Chapter XVII-B provides for mode of recovery, under the guise of recovery tax cannot be levied. 24. According to the learned counsel a comparative reading of Section 40(a)(ia) and Section 198 would show that while under Section 198, the non deduction of TDS would result in deemed income in the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the taking by the Government of the retained income of the citizen would be confiscatory in nature and thereby violative of Article 19(1)(g) of the Constitution. The learned counsel relied upon (i) 27 STC 1 (SC) (K.P.Abdullah Vs. State of Tamil Nadu) (ii) 22 STC 552 (MAD) 29. Lastly, it was contended by the learned counsel that even if the Section is held to be valid, the assessee should be directed to pay tax under the provisions which is lighter in burden. Reliance was placed on 8 ITR 41 (MAD) (CIT Vs. Bosotto). 30. Mr. N. Devanathan, learned counsel appearing for the petitioner in W.P.No.4782 of 2008, in his submissions contended that applying the maxim "NEMO DEBET BIS VEXARI EADEM CAUSA" i.e. no one should be twice harassed for the same cause this Court should hold that severe hardship and violation of the Constitutional provisions of Article 14, 19(1)(g) and 265 has resulted by virtue of invocation of Section 40(a)(ia) and therefore the provision should be held as ultra vires. 31. According to the learned counsel, the disallowance provided under Section 40(a)(ia) would result in treating the expenses as income which will not fit in the description under Entry 82 in List I....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... income tax and to make it easier and systematic is enacted, such legislation would certainly be within the competence of Parliament. She also relied upon the decision reported in 215 ITR 371 (K.M.Vijayan Vs. Union of India). 38. To meet the contention of the petitioners that Section 40(a)(ia) seeks to tax the income of the payee in the hands of the payer, the learned standing counsel contended that what is provided under Section 40(a)(ia) is the disallowance as is provided in various other provisions contained in Sections 30 to 43D of the Act. By referring to Sections 37 (2 to 4), 40A and 43B, the learned standing counsel contended that even in those cases when the expenses are disallowed, such disallowance results in treating the same as income of the payer and it cannot be held that payee's income is taxed in the hands of the payer. The learned standing counsel contended that in the present situation when the assessee failed to fulfil the responsibility caused on it, the disallowance is made and as and when the responsibility is fulfilled, it is reversed. 39. According to the learned standing counsel, by virtue of Section 5 of the Act, income would include deemed receipts and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....non-resident when the provision can be scrupulously followed, there is no reason why in the case of a resident, the assessee should make a hue and cry. 43. The learned standing counsel contended that after the introduction of Section 40(a)(ia) the TDS provision have been augmented which was not the position inspite of Sections 201, 271C and other provisions falling under Chapter XVII. The learned standing counsel also pointed out that among other things, PAN number of the payee is to be filled up in the TDS return, the augmentation of the TDS provision was working well since more persons will come within the preview of the income tax. 44. On reading down a provision, the learned standing counsel by relying upon (2007) 288 ITR 400 (CIT Vs. Valli Cotton Traders P. Ltd.), 286 ITR 89 (Arun Kumar Vs. Union of India) and 229 ITR 682 (Sukra Diamond Tools Ltd. case) contended that the necessity of reading down a section will arise only if the Court is faced with a situation of striking down the provision of law. Since the provision of Section 40(a)(ia) is not unconstitutional, the question of reading down the said provision does not arise. 45. Mr. Naresh Kumar, learned standing counsel ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply or 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 previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of section 200: Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of section 200, 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,- (i) "commissioner or brokerage" shall have the same meaning as in clause (i) of the Explanation to section 194H; (ii) "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9; (....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ioned two grounds." 51. In the decision reported in (1996) 3 SCC 709 (State of A.P. Vs. Mcdowell & Co) at page 737 in paragraph 43 & 44 the Hon'ble Supreme Court has held as under: "43....In India, the position is similar to the United States of America. The power of Parliament or for that matter, the State Legislatures is restricted in two ways. A law made by Parliament or the legislature can be struck down by courts on two grounds and two grounds alone, viz., (1) lack of legislative competence and (2) violation of any of the fundamental rights guaranteed in Part III of the Constitution or of any other constitutional provision. There is no third ground.........In other words, say, if an enactment is challenged as violative of Article 14, it can be struck down only if it is found that it is violative of the equality clause/equal protection clause enshrined therein. Similarly, if an enactment is challenged as violative of any of the fundamental rights guaranteed by clauses (a) to (g) of Article 19(1), it can be struck down only if it is found not saved by any of the clauses (2) to (6) of Article 19 and so on. No enactment can be struck down by just saying that it is arbitrary or u....
X X X X Extracts X X X X
X X X X Extracts X X X X
....suffrage it comes into existence." x x x x x 57. In our opinion, the court should, therefore, ordinarily defer to the wisdom of the legislature unless it enacts a law about which there can be no manner of doubt about its unconstitutionality." 55. In (1982) 133 ITR 239 (R.K.Garg Vs. Union of India and others) the Hon'ble Supreme Court laid down the basic principle while examining the constitutionality of a Statute has held as under in page 254: "6.....It is clear that Article 14 does not forbid reasonable classification of persons, objects and transactions by the legislature for the purpose of attaining specific ends. What is necessary in order to pass the test of permissible classification under Article 14 is that the classification must not be arbitrary, artificial or evasive but must be based on some real and substantial distinction bearing a just and reasonable relation to the object sought to be achieved by the legislature. The question to which we must therefore address ourselves is whether the classification made by the Act in the present case satisfies the aforesaid test or it is arbitrary and irrational and hence violative of the equal protection clause in Article 14. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lexity of economic regulation, the uncertainty, the liability to error, the bewildering conflict of the experts, and the number of times the judges have been overruled by events self-limitation can be seen to be the path to judicial wisdom and institutional prestige and stability. The Court must always remember that legislation is directed to practical problems, that the economic mechanism is highly sensitive and complex, that many problems are singular and contingent, that laws are not abstract propositions and do not relate to abstract units and are not to be measured by abstract symmetry; that exact wisdom and nice adaption of remedy are not always possible and that judgment is largely a prophecy based on meagre and uninterpreted experience. Every legislation particularly in economic matters is essentially empiric and it is based on experimentation or what one may call trial and error method and therefore it cannot provide for all possible situations or anticipate all possible abuses. There may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid. The courts cannot, as pointed out by the Unite....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ution; it imposes unreasonable restrictions in violation of Article 19(1)(g) of the Constitution and it lacks legislative competence and is in violation of Articles 265 and 300A of the Constitution. 58. According to the learned counsel for the petitioners, it is arbitrary, in as much as, it seeks to tax the petitioners at far higher rate then the rate at which the defaulted TDS tax is fixed. The other limb of the argument is that by providing for disallowance of the entire expenditure for the simple default of non-deduction at source, the very basis of the tax liability is shifted. Yet another contention on that aspect is that while for any default in making the TDS, there are other liabilities created such as penalty, interest etc., by providing the disallowance to the entirety of the expenses, gross unreasonableness is created apart from the vice of the Legislative competence. 59. When we test the above submissions in the anvil of the provisions contained in Chapter XVII-B, vis-a-vis Section 40(a)(ia), we notice that under Section 194C the provision which is relating to TDS in regard to payment to contractors and sub-contractors, it is stipulated that at the time of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n at best would only relate to the amount of tax that could be deducted by way of TDS as compared to Section 40(a)(ia) which would result in the disallowance of whole of the expenditure and thereby the entire sum expended would attract the levy of tax at a prescribed rate with all other conditions such as surcharge etc., 62. In this context when we examine the object for the introduction of the impugned provision, the Finance Bill No.2 of 2004 states that the insertion of such clause (ia) in clause (a) to Section 40 of the Act was with a view to augment compliance of TDS provisions. While we are on that, it will be also useful to refer to the statistics placed before us by the learned standing counsel for the Department which discloses that the TDS collection had really augmented the revenue. Amongst various components such as Advance Tax, Surcharge etc., which constituted total gross collection of Rs.2,75,857.7 crores in the financial year 2008-09, the TDS component alone constituted a sum of Rs.1,30,470.8/- crores. Apparently, it only shows that the introduction of Section 40(a)(ia) had its own consequential effect and it only proves that the objective was achieved to substantia....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ners was that going by the specific provision contained under Section 194C, where it stipulate that the deduction is to be made at the point of either credit or payment, in the event of any default in compliance with the said provision, Section 40(a)(ia) would immediately come into play. Such a submission of the learned counsel appearing for the petitioners, in our opinion is taken care of by virtue of the stipulations contained under Section 200 read along with Rule 30 of the Income Tax Rules. It is rightly pointed out by the learned standing counsel appearing for the Revenue that sufficient time is provided for depositing the deducted amount into the coffers of the State. When such procedures in the matter of making the TDS and in depositing such deducted amount is provided under Chapter XVII-B, it is difficult to hold that implication of Section 40(a)(ia) works out harshly or can be held to be arbitrary or unreasonable. Therefore on the one hand in respect of non-resident when an identical provision has been successfully working without any challenge for more than two decades, there is no reason why a similar provision in respect of a resident shoul....
X X X X Extracts X X X X
X X X X Extracts X X X X
....collected. As compared to those provisions, the legislative intent of the introduction of Section 40(a)(ia) is in the larger perspective of augmenting the very TDS provisions themselves. It is not merely related to the collection of TDS alone. In this context, it will be appropriate to refer to one of the submission of the learned standing counsel for the Revenue that only about 3% of the Returns filed are taken up for scrutiny, in view of the fact that the Act and administration have been moving towards self-assessment. In other words, reposing higher amount of confidence in the law abiding citizens that they would voluntarily come forward to pay the tax as a Honourable Citizen, scrutiny is stated to have been limited to 3% of the Returns. Having regard to such a notable advancement in the revenue administration, it cannot be said that the objective sought to be achieved viz., augmentation of TDS provisions by bringing out a stringent provision in the form of Section 40(a)(i) or 40(a)(ia) can be said to be draconic or highly excessive in its approach. Here again, the resultant position in the TDS recoveries for the year 2008-09 discloses that the objective sought to be achieved ha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....VII-B, the TDS is only to the prescribed percentage of the payment to be made to the payee by the payer, the consequence of default in compliance of TDS would result in entirety of the payment to the payee subjected to tax. It is therefore contended that while on the one hand the payer parts with the entire amount of the payee while at the same time for the said payment already made a further sum at 30% of that amount plus 5% surcharge and other liabilities are imposed which is highly excessive and it will have to be held to be unauthorized as stipulated under Article 265 of the Constitution. When we consider the said submission, as rightly pointed out by the learned standing counsel for the revenue, proviso to Section 40(a)(ia) will have to be read along with the main provision. Under the proviso to Section 40(a)(ia), the assessee is entitled for claiming the deduction in the event of a defaulted payment is made good in any subsequent year. The provision however makes it clear that such deduction are allowed in computing the income of the previous year in which such tax has been paid. If the proviso is read along with Section 40(a)(ia) there can be no dispute that the assessee who....
X X X X Extracts X X X X
X X X X Extracts X X X X
....herefore hold that Section 40(a)(ia) cannot be read in isolation but must be read along with its proviso and when it is read in that manner, there would be no scope to hold that there will be any harsh treatment meted out to any assessee in the matter of disallowance of any expenditure validly made by them. 72. Yet another argument made on behalf of the petitioners was that the impugned Section seeks to deduct the income of the payee in the hands of the payer. The argument is on the footing that by virtue of the disallowance provided under Section 40(a)(ia) the entirety of the expense incurred by way of payment to a third party is disallowed on which the assessees failed to deduct TDS but even the income which has been received by a third party is treated as the income of the assessee. To counter such an argument on the side of the Revenue, reference was made to similar such disallowance provided under Section 37, 40, 40A and 43B. It would be sufficient if we make reference to Section 40A(4) and 43B. Section 40A provides for certain expenses not deductible under certain circumstances. One such circumstance is provided under Section 40A(4). Under the said provision, in respect of p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing these taxes and duties. Thus, on the one hand, the businessmen had free use of the funds collected from the public by way of taxes for the ostensible purpose of making them over to the public exchequer and at the same time secured tax reliefs without paying the same. The provisions of law, as they stood at the relevant time, could not remedy the situation and the result was that "taxes and duties" aggregating to thousands of crores of rupees lay in the hands of the tax payers while the Government was reeling under the pressure of finding moneys to discharge commitments. That was the alarming situation when the Legislature felt concerned to find a remedy to the problem. The result was that section 43B was inserted in the Act which has the effect of compelling the assessees to pay the disputed taxes which they had otherwise collected from the consuming public, if they wanted such amounts to be deducted by way of expenses. The Legislature did not act unreasonably in making a wholesome change that all expenses incurred by an assessee maintaining accounts under the mercantile system would not be deducted unless the expenditure was actually paid out. In choosing only the statutory li....
X X X X Extracts X X X X
X X X X Extracts X X X X
....High Court also. The Division Bench of the Karnataka High Court in the decision reported in (1986) 160 ITR 50 (Mysore Kirloskar Ltd. And Others Vs. Union of India and Others) upheld the constitutional validity of the said provision. While so holding, the Division Bench held as under at page 66 : "Section 43B does not disallow the payments made towards taxes and contributions made to superannuation fund or gratuity fund or any other fund for the welfare of the employees but allows them as deductions only when actually made or for the very accounting year in which they are so paid and not otherwise. That the provision to some extent interferes with the mercantile system of accounting normally adopted by business organisations can hardly be doubted. But, that practice can hardly be treated as a constitutional or legal right to hold that Parliament was bound to accept the claims made in the accounts but not actually paid as deductions under the Act. When the section recognises the payments actually made, we fail to see as to how the same contravenes article 14 of the Constitution. When Government and Parliament found that the system had led to large scale abuse by many tax payers, w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ners on the above grounds. 78. One other argument made on behalf of the petitioners is that it is a hostile scheme of taxation, in which on the ground of default of tax recovery from a contractor's income, the whole of the contractors income is taxed at the hands of the petitioners while such tax on the said sum is paid by the contractor himself in his returns even in the absence of the TDS effected by the petitioners. In the first blush though the said submission looks attractive, when a detailed consideration of the said submission is made, it can be noticed that the disallowance provided under Section 40(a)(ia) is for the failure of the petitioners in making the TDS as provided under Chapter XVII-B of the Act, which varies from 2% to 10%. If the TDS has been effected, such deduction would be credited to the tax liability of the contractor when his liability is assessed. Only in the event of non-deduction or non-payment of the deducted amount, there would be scope for the contractor being mulcted with the entire liability inclusive of TDS which could have been otherwise made under Chapter XVII-B. 79. As far as the disallowance of the entire expenses as provided under Section 40....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lf of the petitioner that the proviso is illusory cannot be accepted, in as much as, it proceeds on the footing that unless the TDS deducted from the payment made to the contractor in the previous year or in the subsequent year, it has no operation. As stated by us earlier, on a reading of the Section 201, where the expression "it is not deducted, or does not pay or after so deducted fails to pay" makes it clear that the proviso would be applicable even in respect of rectification of the TDS provision by the assessee itself/himself making the payment on its/his own without there being any scope for deduction from the payment made to the contractor. 82. The contention of the petitioners that Section 194C(1) authorises deduction only at the time of credit or at the time of payment without there being any other provision to deduct the said payment in a subsequent year to the year of credit or payment, in our considered view is an interpretation which completely omitted to note the other provisions in the same Chapter which enables an assessee to make the payment by way of TDS on its own. On the other hand it can be said that there is no prohibition in the said Chapter XVII-B as again....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e tested. We are therefore rejecting such a contention at the very outset. 84. One other argument of the learned counsel appearing for the petitioners is that Section 2(24) having defined the term 'income' have included only profits or gains of business or profession and the disallowance provided under Section 40(a)(ia) is indisputably an expenditure in the hands of the assessee and in the absence of deeming such expenditure as income of the assessee falling under Section 2(24) of the Act, no tax liability can be imposed on the assessee. The said submission failed to take note of one important factor viz., the proviso which would enable the assessee to claim the deduction as and when in any subsequent year compliance of the TDS provisions are duly made. It can also be stated that the disallowance committed under Section 40(a)(ia) is not a disallowance in toto but a temporary phenomenon, the ratification of which is in the hands of the assessee themselves. Therefore, it is a misnomer to call it an income while as a matter of fact it is an expenditure not properly claimed. The provision under Section 40(a)(ia) while treating the same as an expenditure only disables the assessee to c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he tax revenue. Viewed in that respect, such economic support to the State will enable the State to concentrate on other welfare activities catering to the needs of the downtrodden by virtue of the improved financial status comfortable and thereby fulfil the socio economic obligation enshrined under the Preamble of our Constitution. Therefore, we do not find any substance in the said submission. 87. The contention comparing Section 40(a)(ia) with the proviso to Section 40A(3)(b) of the Act as introduced through Finance Act, 2007, can have no relevance, in as much as in the first place, the two substantive provisions are not comparable at all. While the purport of Section 40A(3)(b) is to have effective control over cash expenditure over and above a sum of Rs.20,000/- and thereby restrict the generation of any unaccounted money, the provision contained in Section 40(a)(ia) is for augmenting the TDS. The proviso to Section 40A(3)(b) is mainly intended to cover certain extraordinary situations such as non-availability of banking facilities and business expediency. On the otherhand, the proviso to Section 40(a)(ia) would act as a remedial measure to rectify any ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... The argument based on Section 10A/10B and those availing deduction under Section 80(ia) cannot be accepted for the reason that in the first place it is not the case of the petitioners that total exemption has been granted from the applicability of Section 10A(1A). Secondly, by applying Section 40(a)(ia) if an assessee is governed by Sections 10A/10B or 80(IA) 80(IE) and is able to get any benefit by virtue of the applicability of those other provisions, it cannot be stated that they were on par with the assessees not governed by those provisions in order to state that any discriminatory treatment is meted out. Certainly such grievances based on incomparable situation cannot be a ground for striking down a provision. Equally, the contention as between the profit making assessee and loss making assessee are all highly hypothetical grounds and do not merit any consideration. 92. Similarly, the contentions by making a comparison with an assessee in the preoperative stage or defaulting assessee, cannot be considered as a ground which can be urged while challenging a provision as violative of Articles 14 or 19(1)(g) of the Constitution. The said submission therefore does not merit any ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sion impugned therein did not suffer from any Constitutional vires, yet, the absence of a machinery for an assessee to agitate the justifiability of a disputed right needed rectification. In the case on hand having regard to the existing availability of a right in an assessee to question any erroneous disallowance made under Section 40(a)(ia) in the assessment proceedings, there is no scope to compare the ratio of the said decision to the facts of this case. 94. One other contention raised on behalf of the petitioners was that Section 40(a)(ia) is the only provision where it provides for Double Taxation. The said submission was made by referring to Sections 64 and 205 of the Act, wherein the provision itself specifically provided that the income on being included in the total income of one individual, it should be excluded from the total income of others or where the tax is deductible at source under Chapter XVII of the Act, the assessee shall not be called upon to pay the tax himself to the extent to which the TDS has been effected. Here again, it is relevant to note that the distinctive feature as between those provisions and Section 40(a)(ia) is the recovery provision contained....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e and upheld the ultimate order of the Tribunal. In the first place the question of invocation of Section 40(a)(ia) did not arise in that case. Secondly in the special facts of that case, the Hon'ble Supreme Court while upholding the order of the Tribunal held that the decision that the assessee is only to pay interest under Section 201(1A) was valid. Moreover, the Hon'ble Supreme Court has referred to Circular No.275/201/95-IT(B) dated 29.01.1997 issued by the CBDT, which specifically declares "no demand visualized under Section 201(1) of the Income Tax Act should be enforced after the tax deductor has satisfied the officer-in-charge of TDS, that taxes due have been paid by the deductee-assessee. However, this will not alter the liability to charge interest under Section 201(1A) of the Act till the date of payment of taxes by the deductee-assessee or the liability for penalty under Section 271C of the Income Tax Act." It was in the above stated legal position that decision came to be rendered by the Hon'ble Supreme Court. The said decision rendered in the light of Sections 201(1) and 201(1A) cannot be applied to a situation where Section 40(a)(ia) gets attracted which stands entir....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es of the State from the persons carrying on particular trade in view of the peculiar difficulties expressed in the past and the measure was so enacted to check evasion of substantial revenue due to the State. Nevertheless, when the Hon'ble Supreme Court noticed that while enacting the said provisions it denied the relief provided by Sections 28 to 43C applicable to all other assessees, the Hon'ble Supreme Court held the non-obstinate clause under Section 44AC to the extent of such denial of particular business or trade was discriminatory. When we consider the ratio of the said decision to the case on hand, we find that there is no scope for comparison of any particular assessee with any other set of assessee to whom there was anything provided in the impugned Section 40(a)(ia) providing for different treatment. In other words, the applicability of Section 40(a)(ia) being common to all assessees whomsoever, who were to comply with the TDS provisions contained under Chapter XVII-B, there is no question of discriminatory treatment being meted out to any particular set of assessees as against those for whom the said provision is made inapplicable. The said decision therefore does not ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sition of law applicable to all situations in order to apply the said principle to a case falling under Section 40(a)(ia) of the Act. 99. As far as the reliance placed upon the decision reported in (2009) 5 SCC 342 (Grand Kakatiya Sheraton Hotel & Towers Employees & Workers Union Vs. Srinivasa Resorts Ltd.) is concerned, the said case has absolutely no comparison to the case on hand. That was a case arising under the provisions of the Andhra Pradesh Shops and Establishments Act, 1966. Section 47(3) of the said Act provided for payment of gratuity even if an employe has put in one year of service, the said provision virtually confronted with the provisions contained in the Payment of Gratuity Act, 1972 which prescribes a minimum period of 5 years of continuous service for an employee to claim gratuity. The Hon'ble Supreme Court upheld the decision of the Andhra Pradesh High Court which struck down the provision under the Shops Act as unreasonable and violative of the Constitution. In fact similar such provision contained in the Andhra Pradesh Shops and Establishment Act of 1966 was also held to be unconstitutional in the decision reported in (1972) 2 AnLT 163 (Suryapet Coop. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ustice. Might would be right. An aggrieved partner is left without any remedy whatsoever. He can neither file a suit to compel the mischievous partner to cooperate for registration, as such a suit is not maintainable, nor can he resort to arbitration if any, because the arbitration proceedings would be hit by Section 69(1) of the Act (Jagdish Chandra Gupta Vs. Kajaria Traders (India) Ltd.) 26. In our opinion the restrictions placed by sub-section (2-A) of Section 69 introduced by the Maharashtra Amendment Act, for the reasons given above, are arbitrary and of excessive nature and go beyond what is in the public interest. Hence the restrictions cannot be regarded as reasonable." The reasoning set out in the above paragraphs itself are sufficient to show how the said decision can have no application to the provision impugned in these writ petitions viz., Section 40(a)(ia) of the Act, which as stated by us earlier has got an inbuilt safeguard providing for a defaulting assessee to set right the disallowance by correcting its default in any subsequent year. 101. As far as decision reported in (2000) 118 STC 297 (Steel Authority of India Ltd. Vs. State of Orissa and Others) the chall....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n the said decision viz., the subject of the tax, the person who is liable to pay the tax and the rate at which the tax is to be paid are all clear while applying Section 40(a)(ia) and therefore the said decision does not help the petitioners. 103. In the decision reported in (1993) 4 SCC 380 (State of Haryana Vs. Santlal) the challenge was to Section 38 of Haryana General Sales Tax Act, 1973 and Rule 53 of the Haryana General Sales Tax Rules, 1975. The Punjab and Haryana High Court struck down the said provision as unconstitutional. Section 38(3) provided for exemption of the penalty on the clearing or forwarding agent, dalal or any other person transporting the goods within the state if it contravenes the provisions of Section 38(1) & (2) of the said Act at the rate of 20% of the value of goods. While upholding the decision of the High Court, the Hon'ble Supreme Court held as under in paragraph 16 : "16. It is difficult to hold that a clearing or forwarding agent, 'dalal' or person transporting goods can be made liable to a penalty equivalent to 20 per cent of the value of the goods in respect of which no particulars and information have been furnished. Given the obligation to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on the decisions reported in (2008) 175 Taxman 77 (SC) (Vijay Ship Breaking Corporation Vs. Commissioner of Income Tax, Ahmedabad) is concerned, the ratio decided therein is in relation to the merits of the claim in respect of an allowable deduction. In so far as such a controversy is concerned, that can always be worked out by the assessee by taking the stand that the TDS was not made and the same would not be covered by the provisions of Chapter XVII-B. Such a stand if taken, it will be for the appropriate Assessing Authority to decide the claim on its own merits, which decision will always be open to challange before the higher authorities. When we consider with the vires of Section 40(a)(ia), in our considered opinion the decision rendered in the said judgment can have no application. In fact, the question framed in the said decision themselves show as to the nature of the controversy involved which was on the merits of the claim and not on the validity of any provisions of law. The said decision therefore does not help the petitioners. 106. Similar is the position in regard to the decision reported in (2009) 312 ITR 225 (SC) (Commissioner of Income Tax Vs. Eli Lilly and Co (I....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the vice of being rendered unconstitutional." (ii) In the decision reported (1992) 194 ITR 539 (Commissioner of Wealth Tax Vs. S.Jindal) the principle has been set down as under at page 544: "Several decisions were cited enunciating the principle of interpretation of the word "shall" as either mandatory or directory. It is unnecessary to repeat them. One of the principles is to find out the consequence of reading the provision as mandatory and if the consequence is to render the statutory provision harsh, onerous or arbitrary, such a reading should be avoided. Another principle is to "read down" a statutory provision so as to make it a valid provision and prevent its nullification as unconstitutional; the third principle applicable is to read the provision so as to be in consonance with the object and scheme of the statute and thus limit the operation of the particular provision to effectuate the said statutory object." (iii) In the decision reported in (1985) 156 ITR 323 (Commissioner of Income Tax Vs. J.H.Gotla) the Hon'ble Supreme Court has held as under at page 339: "In the case of Varghese Vs. ITO (1981) 131 ITR 597, this court emphasised that a statutory provision must b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of reading down as a permissible means of the process of interpretation of statutes can be restored to to give the statute reasonable meaning and to make it constitutionally valid but not for adding or supplementing any alleged unconscious omissions sought to be perceived in it." (vi) In the decision reported in AIR 1980 SC 1042 (All Saints High School Vs. Government of Andhra Pradesh) the Hon'ble Supreme Court has held as under in para 111: "111......This Court has in several cases adopted the principle of reading down the provisions of the Statute. The reading down of a provision of a statute puts into operation the principle that so far as it is reasonably possible to do so, the legislation should be construed as being within its power. It has the principal effect that where an Act is expressed in language of a generality which makes it capable, if read literally of applying to matters beyond the relevant legislative power, the Court will construe it in a more limited sense so as to keep it within power." 109. For the very same proposition the learned senior counsel appearing for the petitioners also relied upon the decisions reported in (2000) 120 STC 302 (B.R.Enterprises Vs....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n and prevents its nullification as unconstitutional. 112. Keeping the above principles in mind when we consider the submissions of the learned counsel appearing for the petitioners, at the outset, it will have to be stated that having considered the various submissions on the grounds of arbitrariness, unreasonableness as well as discrimination, we have found that such grounds are not available for the petitioners when challenging the impugned Section 40(a)(ia). Therefore when we have held that there is no ambiguity to be cleared, the question of applying the doctrine of Reading Down to Section 40(a)(ia) does not arise. Equally, there is no doubt in our minds that the provision is constitutionally valid, having regard to the various inbuilt safeguards in the substantive Section read along with its proviso. In such circumstances, the very question of applying the doctrine of Reading Down does not arise. When that be so, if it where to be held that in the event of a reasonable doubt about the applicability of Chapter XVII-B, Section 40(a)(ia) cannot be invoked, would be stretching our jurisdiction beyond the permissible limit which cannot be done. In as much as we have reached a con....