[2013] 33 taxmann.com 303 (Article)
Fuss over proposition laid by SB in Merilyn Shipping's case
SRINIVASAN ANAND G.
CA
Disallowance of amounts payable to a resident for non-deduction of TDS/Non-Deposit of TDS Deducted - Section 40(a)(ia)
1. Section 40(a)(ia) of the Income-tax Act, 1961 ("the Act") disallows deduction of following amounts payable to a resident on which tax is deductible at source (TDS) under Chapter XVII-B of the Act:
| • | Interest | |
| • | Commission or Brokerage | |
| • | Rent | |
| • | Royalty | |
| • | Fees for professional services | |
| • | Fees for technical services | |
| • | Amounts payable to a contractor or sub-contractor for carrying out any work |
Disallowance under section 40(a)(ia) as aforesaid is attracted if TDS deductible has not been deducted or TDS deducted has not been deposited with the Government on or before the due date for filing return of income in terms of section 139(1).
Interpretation of section 40(a)(ia) by ITAT (SB) in Merilyn Shipping
A Special Bench of ITAT had interpreted the provisions of section 40(a)(ia) in Merilyn Shipping & Transports v Addl. CIT [2012] 136 ITD 23/20 taxmann.com 244(Vishakha). The Special Bench held that section 40(a)(ia) would apply only to amounts outstanding as on 31st March of every year on which TDS has not been deducted. Section 40(a)(ia) would have no application to amounts paid during the previous year on which TDS has not been deducted. The Tribunal based its above interpretation on the fact that sub-clause (ia) of clause(a) of section 40 was first inserted in the Act by Finance(No. 2) Act, 2004 and that the words 'credited or paid' in sub-clause (ia) in Finance (No. 2) Bill, 2004 were changed to 'payable' in the Finance (No. 2) Act, 2004 as finally enacted.
The above interpretation of Tribunal was challenged by Revenue before High Courts . Three recent High Court decisions have rejected the interpretation placed upon section 40(a)(ia) by the Special Bench of ITAT- Gujarat High Court in CIT v. Sikandarkhan N Tunvar [2013] 33 taxmann.com 133 and Calcutta High Court in CIT v Crescent Export Syndicate [2013] 33 taxmann.com 250 and in CIT v. Md. Jakir Hossain Mondal [2013] 33 taxmann.com 123
Decision of the Gujarat High Court in Sikandarkhan N Tunvar case (supra)
2. The Gujarat HC in CIT v. Sikandarkhan N Tunvar (supra) held that section 40(a)(ia) would apply not only to the amounts which are payable as on 31st March of a particular year but also to the amounts which are payable at any time during the year. 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 and is not acceptable. Further, the Court did not agree with the approach to interpretation of section 40(a)(ia) adopted by the Special Bench in Merilyn Shipping & Transports (supra). The Special Bench's approach of comparing the language of the draft presented in Parliament and ultimate legislation passed was held by the High Court to be an incorrect application of the 'principle of conscious omission' . The Court explained this as under:
| • | The Courts in India have been applying the principle of deliberate or conscious omission. Such principle is applied mainly when an existing provision is amended and a change is brought about. | |
| • | While interpreting such an amended provision, the Courts would immediately inquire what was the statutory provision before and what changes the Legislature brought about and compare the effect of the two. | |
| • | The other occasion for applying the principle, noticeable from various decisions of the Supreme Court, has been when the language of the Legislature is compared with some other analogous statute or other provisions of the same statute or with expression which could apparently or obviously been used if the Legislature had different intention in mind, while framing the provision. | |
| • | The Tribunal committed an error in applying the principle of conscious omission in the present case. Firstly, there is serious doubt whether such principle can be applied by comparing the draft presented in Parliament and ultimate legislation which may be passed. Secondly, the statutory provision is amply clear. |
Decisions of the Kolkata High Court
3. In Crescent Export Syndicate (supra) (date of judgment 3 April, 2013), the Calcutta HC held that 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 also to such expenditure which become payable at any time during the relevant previous year and was actually paid within the previous year. The Court held as under:
| • | Comparison between the pre-amendment and post-amendment law is permissible for ascertaining the mischief sought to be remedied or the object sought to be achieved by an amendment. | |
| • | 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. | |
| • | The Learned Tribunal fell into an error in comparing the wordings of the provisions of Finance Bill and Finance Act for interpretation purposes. | |
| • | The key words used in section 40(a)(ia) 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 nothing turns on the basis of the fact that the Legislature used the word 'payable' and not 'paid or credited'. | |
| • | Unless any amount is payable, it can neither be paid nor credited. | |
| • | If an amount has neither been paid nor credited, there can be no occasion for claiming any deduction. | |
| • | 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. | |
| • | Majority views expressed in the case of Merilyn Shipping & Transports (supra) are not acceptable. |
The above decision was applied by the Calcutta HC in Md. Jakir Hossain Mondal (supra)
Critique of the above decisions
4. One fails to understand the logical reason why the words in Bill and Act(finally enacted) should not be compared as part of the process of statutory interpretation. Even the legal merits of this broad proposition laid down by the two Hon'ble High Courts is not clear. It is pertinent to note that the Supreme Court in Sassoon J David & Co. (P.) Ltd v. CIT [1979] 1 Taxman 485 referred to the fact that the word 'necessarily' which was there in section 37 of the Income-tax Bill, 1961 was omitted from the text of section 37(1) of the Income-tax Act, 1961 as finally enacted. The Court observed as under:
"…………. An attempt was made in the Income-tax Bill of 1961 to lay down the 'necessity' of the expenditure as a condition for claiming deduction under section 37. Section 37(1) in the Bill read 'any expenditure....laid out or expended wholly, necessarily and exclusively for the purposes of the business or profession shall be allowed' The introduction of the word 'necessarily' in the above section resulted in public protest. Consequently when section 37 was finally enacted into law, the word 'necessarily' came to be dropped…….."
In Vodafone International Holdings B.V. v Union of India [2012] 204 Taxman 408 /17 taxmann.com 202, the Supreme Court compared the provisions of the Income-tax Act,1961 with those of proposed a legislation the Direct Taxes Code Bill for determining whether section 9(1)(i) [prior to retro amendment by FA, 2012] covered 'indirect transfers' of capital assets. The Court while holding that section 9(1)(i) does not cover indirect transfers observed as under at para 71:
"…..Thus, the words directly or indirectly in section 9(1)(i) go with the income and not with the transfer of a capital asset (property). Lastly, it may be mentioned that the Direct Tax Code (DTC) Bill, 2010 proposes to tax income from transfer of shares of a foreign company by a non-resident, where at any time during 12 months preceding the transfer, the fair market value of the assets in India, owned directly or indirectly, by the company, represents at least 50% of the fair market value of all assets owned by the company. Thus, the DTC Bill, 2010 proposes taxation of offshore share transactions. This proposal indicates in a way that indirect transfers are not covered by the existing section 9(1)(i) of the Act. In fact, the DTC Bill, 2009 expressly stated that income accruing even from indirect transfer of a capital asset situate in India would be deemed to accrue in India. These proposals, therefore, show that in the existing section 9(1)(i) the word indirect cannot be read on the basis of purposive construction……."
Thus, there appears to be nothing wrong with the Special Bench's approach of comparing the wordings in the Finance (No. 2) Bill, 2004 with the wordings of the Finance (No. 2) Act, 2004 to ascertain the real scope of section 40(a)(ia). The Special Bench could not be faulted for making such comparison. Where the Special Bench could be said to have erred was that, based on such a comparison, it placed a very strained meaning on the word 'payable' used in section 40(a)(ia) as rightly observed by the High Courts.
• DT - Secs. 9, 37 & 40
Regards
Prarthana Jalan
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