Tribunal and Revenue in battle over interpretation of term 'payable' in section 40(a)(ia)
An analysis of CIT v. Sikandarkhan N Tunvar [2013] 33 taxmann.com 133 (Guj.)& CIT v. Md. Jakir Hossain Mondal [2013] 33 taxmann.com 123 (Cal.)
D.C. AGRAWAL
Advocate (Former CIT & Accountant Member of ITAT )
Introduction
1. Section 40(a)(ia) of the Income-tax Act provides, while computing income under the head "business or profession", for disallowance of an expenditure of the nature of "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 sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), (Let us call it specified expenditure in short) 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 on or before the due date specified in sub-section (1) of section 139"... A controversyhas arisen on the interpretation of the expression "payable" used in section 40(a)(ia). Special Bench of the ITAT inMerilyn Shipping & Transports v. Asstt. CIT [2012] 20 taxmann.com 244/136 ITD 23 (Visakhapatnam) by majority had taken a view that the word "payable" used in section 40(a)(ia) of the Act would make the provision applicable only to expenditure payable on 31st March of a particular year and that such provision cannot be invoked to disallow the amounts which had already been paid during such year, even though tax may not have been deducted at source. The Hon'ble Accountant Member in that case expressing a dissenting view held that "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." Thus, the majority view was in favour of the taxpayers resulting into allowance of specified expenditure paid during the financial year without deduction of tax, which tax was otherwise deductible under Chapter VII-B. Such allowance of specified expenditure was also held permissible, if after deduction such tax is not paid to the Govt. The revenue took up the matter before the High Courts in other cases where such disallowance of expenditure paid without deduction of tax was deleted by the Tribunal following the decision of the Special Bench in Merilyn Shipping & Transports (supra). The Hon'ble Calcutta High Court in CIT v. Md. Jakir Hossain Mondal [2013] 33 taxmann.com 123 and in CIT v. Crescent Export Syndicate [2013] 33 taxmann.com 250 (Kol.) and the Hon'ble Gujarat High Court in CIT v. Sikandarkhan N Tunvar [2013] 33 taxmann.com 133 disapproved of the majority view in Merilyn Shipping & Transports (supra) and held that expression "payable" used in the section does not mean that only the amount of expenditure pending for payment at the end of the Financial year alone is subject to disallowance and that which is already paid during the Financial Year without deduction of tax can be allowed. The two High Courts took the common view that section 40(a)(ia) would cover not only the amounts which are payable as on 31st March of a particular year, but also which are payable at any time during the year. In essence they approved of the view of the Hon'ble Accountant Member in Merilyn Shipping & Transports (supra). In this article all the four judgments have been analysed and salient points and reasoning have been highlighted.
2. Comments
2.1 As per ruling in Merilyn Shipping & Transports v. Asstt. CIT - Any amount of expenditure under section 40(a)(ia) cannot be disallowed if it is not found payable at the end of the F.Y.
In Merilyn Shipping & Transports (supra) the Special Bench of the tribunal by majority had taken the view that disallowance of an expenditure of the nature of interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services as envisaged in section 40(a)(ia) can be done only when such expenditure is payable at the end of the accounting period and on which tax is not deducted or where the tax is deducted but the same is not paid within the time allowed. As a consequence to this view any amount of expenditure of the nature as described in section 40(a)(ia) cannot be disallowed for non-deduction of tax, or after deduction, for non-payment thereof to the Govt. within the time allowed, if such specified amount is actually paid during the F.Y., i.e., if it is not found payable at the end of the F.Y. While taking this view the special bench gave following reasonings:
| (a) | A comparison of the draft of the provision as introduced in the Parliament and the Act which was finally passed showed that the expression earlier proposed was "amount credited or paid" which was replaced in the final enactment by the word "payable". The Legislature knew that if the amount is already paid TDS cannot be deducted. Therefore, only outstanding amount or the provision for expenses liable for TDS is sought to be disallowed in the event when there is a default of TDS. | |
| (b) | It was only after receiving the representation from professional bodies that the Legislature replaced the words from "credited or paid" to "payable". | |
| (c) | When the language of the Statute is clear the intention of the Legislature is to be gathered from the language used. | |
| (d) | As per dictionary meaning "Paid" means actually paid or incurred according to the method of accounting, whereas "Payable" means which is required to be paid. It means a debt to be discharged, legally due, collectable. Thus, where amount is already paid the provisions of this section will not apply. | |
| (e) | While interpreting the word "Payable" in section 40(a)(ia) the words of the Statute must be understood in its natural, ordinary or popular sense and construed according to its grammatical meaning and such construction should not lead to absurdity. As per literal interpretation of the statute the word used should be read as it is without doing any violence to the language. | |
| (f) | Section 40(a)(ia) creates a legal fiction by virtue of which even the genuine and admissible expenses are disallowed from the computation of income under the head "Business and Profession", if TDS is not made or after deduction such tax is not paid to the Govt. The legal fiction cannot be extended any further for taxing the amount already paid and has to be limited to the area for which it is created, i.e., for the amounts outstanding or remaining payable at the end of every year as on 31st March. |
2.2 Dissenting view by Accountant Member – The intention of the Legislature must be seen from the Statute passed by the Parliament - On the other hand the Hon'ble Accountant Member expressing dissenting view gave following reasoning for his conclusion:
| (a) | The intention of the Legislature must be seen not from the draft of the proposed bill but from the Statute which is passed by the Parliament. Therefore, the comparison of the draft with the final enactment cannot help to find out intention of the Legislature. | |
| (b) | The difference between the terms "credited" or "paid" or "payable" is relevant for the purposes of TDS provisions under Chapter XVII-B but has no relevance for making disallowance under section 40(a)(ia) and, therefore, the Legislature has dropped the word "credited" or "paid" from the final enactment. | |
| (c) | Section 40(a)(ia) was inserted in order to ensure a scrupulous adherence to the TDS provisions. If narrow interpretation was assigned to the word "payable" as suggested by the assessee then the very object of incorporation of section 40(a)(ia) would be defeated. | |
| (d) | Therefore, the contention that amount contemplated for tax deduction under Chapter XVII-B has been segregated in two parts - one part which has been paid within the F.Y. without making TDS and the other part which is payable at the end of the year would only be covered for disallowance was never intended by the Legislature. | |
| (e) | Section 40(a)(ia) is applicable irrespective of method of accounting followed by an assessee, therefore, the word "payable" includes within its ambit entire accrued liability. In mercantile system of accounting the TDS is required to be made the moment amount is credited to the account of the payee on accrual of liability. In cash system of accounting TDS is required to be made the moment amount is paid to the payee. | |
| (f) | The insertion of expression "on which tax is deductible at source under Chapter XVII-B" in the final enactment clearly shows the intention of the Legislature that deductibility is to be seen from the point view of Chapter XVII-B. | |
| (g) | Had the intention of the Legislature been to disallow only items outstanding as on 31st March, then the term "payable" would have been qualified by the phrase as outstanding as on 31st March. In the absence of such qualification the same cannot be read in the section. | |
| (h) | When one goes through the provisions of TDS as contained in Chapter XVII-B, there is use of the term "shall". It makes it clear that these are mandatory provisions and are applicable to the entire sum contemplated under the respective sections. These sections do not give any leverage to the assessee to make the payment without making the TDS. | |
| (i) | As per principle of ejusdem generis the term "payable" in section 40(a)(ia) has to be interpreted in the light of the sums referred to in various sections contained in Chapter XVII-B. Therefore, emphasis is on liability to pay on which tax is deductible and not on actual payment. | |
| (j) | If the contention of the assessee was accepted then section 40(a)(ia) would become otiose in respect sums paid during the F.Y. | |
| (k) | Rule 30 merely contemplates the procedure for deposit of the TDS amount and merely because different time-limits are prescribed, it would not follow that different considerations would apply while considering the term "payable" under section 40(a)(ia). Further, it is only a procedural provision which cannot override the substantive provisions of the Act. |
2.3 Rationale of the decision of the Calcutta High Court against the majority view in case of Merilyn Shipping & Transports v. Asstt. CIT - In the case of Crescent Export Syndicate (supra)theHon'ble Calcutta High Court held against the majority view of the Special Bench of the ITAT in Merilyn Shipping & Transports (supra). The rationale of the decision was as under:
| (a) | Comparison between the pre-amendment and post-amendment law is permissible for the purpose of ascertaining the mischief sought to be remedied or the object sought to be achieved by an amendment. This is precisely what was done by the Apex Court in the case of CIT v. Kelvinator [2010] 187 Taxman 312. But the same 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. | |
| (b) | What the Tribunal by majority (in Merilyn Shipping & Transports (supra)) did was to supply the casus omissus (by way of reading into the section 40(a)(ia) that it cannot be invoked by Assessing Officer to disallow the genuine and reasonable expenditure on the amounts of expenditure already paid) which was not permissible and could only have been done by the Supreme Court in an appropriate case. | |
| (c) | Only Hon'ble Supreme Court may supply the casus omissus, but it would be in the rarest of the rare case when such supplying ofcasus omissus would be extremely necessary due to the inadvertent omission on the part of the Legislature. | |
| (d) | The key words used in section 40(a)(ia), are "on which tax is deductible at source under Chapter XVII–B". What is to be disallowed is 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. | |
| (e) | There can be no denial that the provision in question is harsh, but that is no ground to read the same in a manner which is not intended by the Legislature. The law is deliberately made harsh to secure compliance of the provisions requiring deductions of tax at source. It is not the case of an inadvertent error. |
2.4 Another decision of the Calcutta High Court in CIT v. Md. Jakir Hossain Mondal reaffirming non-acceptance of ITAT's decision in Merilyn Shipping Transport (supra) - Decision in case of Crescent Export Syndicate was followed by Hon'ble Calcutta High Court in Md. Jakir Hossain Mondal (supra) while holding that the decision of the SB of ITAT in Merilyn Shipping & Transports(supra) was not acceptable.
2.5 Gujarat High Court in CIT v. Sikandarkhan N Tunvar also holds decision in Merilyn Shipping & Transports v. ACIT as erroneous - Hon'ble Gujarat High Court in Sikandarkhan N Tunvar (supra) considered the issue in further details while holding that the view in Merilyn Shipping & Transports (supra) was erroneous. Their Lordships gave following reasons:
| (a) | As section 40(a)(ia) of the Act creates an artificial charge on an amount which is otherwise not an income of the assessee, it cannot be construed liberally. The provision makes disallowance of an expenditure which has otherwise been incurred and is eligible for deduction, on the ground that, though tax was required to be deducted at source it was not deducted or if deducted, had not been deposited before the due date. | |
| (b) | The terms "payable" and "paid" are not synonymous. In the context of section 40(a)(ia) they are not used interchangeably. Word "paid" as defined in section 43(2) of the Act means actually paid or incurred according to the method of accounting. The word "payable" has been described in Webster's Third New International Unabridged Dictionary as requiring to be paid: capable of being paid. | |
| (c) | In the context of section 40(a)(ia), the word "payable" would not include "paid". In other words, an amount which is already paid ceases to be payable and conversely, what is payable cannot be one that is already paid. Term "payable" cannot be seen to be including the expression "paid". | |
| (d) | The provisions contained in Chapter VII-B nowhere require that the amount which is payable must remain so payable throughout the year. | |
| (e) | The language used in section 40(a)(ia) 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. | |
| (f) | The Legislature could not have intended to bring about any such distinction nor does the language used in the section bring about any such meaning. If the interpretation as advanced by the assessees is accepted, it would lead to a situation where the assessee who thought he was required to deduct the tax at source but no such deduction was made or more flagrantly deduction, though made was not paid to the Government, would escape the consequence only because the amount was already paid before the end of the year in contrast to another assessee who would otherwise be in similar situation but in whose case the amount remained payable till the end of the year. The Legislature would not have desired to bring about incongruous and seemingly irreconcilable consequences. | |
| (g) | Merely because accounts are closed on the last date of the accounting year and the computation of profit and loss is to be judged with reference to such date, it does not mean whether an amount is payable or not in the context of section 40(a)(ia) must be ascertained on the strength of the position emerging on 31st March. | |
| (h) | The proceedings in the Parliament, its debates and even the speeches made by the proposer of a bill are ordinarily not considered as relevant or safe tools for interpretation of a Statute. The debates in the Parliament at best indicate the opinion of the individual members and are ordinarily not relied upon for interpreting the provisions, particularly when the provisions are plain. | |
| (i) | The reason why a certain language was used in a draft bill and why the provision ultimately enacted carried a different expression cannot be gathered from mere comparison of the two sets of provisions. There may be variety of reasons why the ultimate provision may vary from the original draft. | |
| (j) | The principle of casus omissus 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 the statutory provision was before and what changes the Legislature brought about and compare the effect of the two. | |
| (k) | The other occasion when this principle of casus omissus is applied is 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 be used if the Legislature had different intention in mind, while framing the provision. | |
| (l) | The Tribunal in Merilyn Shipping & Transports (supra) committed an error in applying the principle of casus omissus . Firstly, there is serious doubt whether such principle can be applied by comparing the draft presented in the Parliament and ultimate legislation which may be passed. Secondly, the statutory provision is amply clear. |
Analysis of the language used in section 40(a)(ia)
3. For appreciating the views expressed by the Hon'ble Calcutta and the Gujarat High Court let us analyse the language used in section 40(a)(ia). The relevant part for the purposes of present controversy is as under:
"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' ... Section 40(a)(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 sub-contractor, 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 ......... "
3.1 The basic ingredients of section 40(a)(ia)-
| (i) | It applies to interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services. | |
| (ii) | The aforementioned amounts are payable to a resident. | |
| (iii) | The amounts are payable to a contractor or sub-contractor being resident. | |
| (iv) | Tax is deductible at source under Chapter XVII-B in respect of amounts payable in respect of aforementioned items. | |
| (v) | Tax has not been deducted as per requirement of Chapter XVII-B. | |
| (vi) | After deduction of tax, amount has not been paid. |
3.2 Crucial words used in section 40(a)(ia) - The crucial words used in the section 40(a)(ia) are "................payable to a resident, or amounts payable to a contractor ..... on which tax is deductible at source under Chapter XVII-B......." One should not read the word "payable" in isolation or on standalone basis. The amount "payable" is qualified by the expression "on which tax is deductible at source under Chapter XVII-B". In fact, this expression qualifies the word "amount", or the sums of the specified nature claimed as deduction from the business profits, that is, if the specified sum is the one on which tax is deductible under Chapter VII-B then it will be subject to disallowance, if tax is not deducted or after deduction is not paid to the Central Govt. Conversely, if no tax is required to be deducted under Chapter VII-B on an amount of expenditure claimed, no disallowance need be made. Before relying on the interpretation given by majority in Merilyn Shipping & Transports (supra) one has to examine whether tax was deductible: (i) only on the amount paid, or (ii) only on the amount payable at the end of the financial year, or (iii) on both. If tax was deductible on both the amounts "paid" and "payable", then the distinction made by the Special Bench to the effect that section 40(a)(ia) is applicable for disallowance only on the amount "payable" as on the last day of the F.Yr. and not what is already paid during the financial year without deduction of tax is only artificial and has been rightly held as erroneous. Further, the meaning of the term "payable" as construed in Merilyn Shipping & Transports (supra) is not sustainable for another reason. Though the dictionary meaning of the term "payable" has been rightly explained by the Tribunal as what is required to be paid; a debt to be discharged, legally due, or collectable, but further presumption that it means "payable" at the end of the Financial Year is not warranted. It actually means "a liability or debt created or an amount has legally become due to someone else". When a transaction is completed, the other party has completed his part of the performance in the contract, an amount legally becomes due to him and an enforceable claim of the other party crops up and then the amount becomes "payable" to him. The specified sum becomes "payable" at any time during the financial year, depending upon the accrual of the enforceable claim.
3.2.1 The term 'payable' – It clearly indicates an amount that has crystallized - The term 'payable' is not defined in the Act. The ordinary meaning of the word 'payable' is a sum/money to be paid. The term can also be understood as liability to be discharged because of the statute or by virtue of contract, though the liability to pay may have accrued at any time [Shanmugam Narayanaswami v. ITO [2005] 97 ITR 1(Hyd.)(SMC)]. This word is used with reference to the payer. It expresses an existing obligation or simply indebtedness. It also indicates a certain and fixed sum, though payable in future [CIT v. Upnishad (P.) Ltd.[2003] 131 Taxman 20 (Guj.)]. Thus, the word 'payable' used in section 40(a)(ia) can be seen to mean some amount which has become due to be paid by virtue of contract for services rendered but it still to be paid. It certainly indicates execution of work/services for which assessee is required to make the payment to the other party. It clearly indicates an amount that has crystallized.
3.3 The term 'payable' is transaction-specific - The interest accrues and is payable at the end of the specified period of the deposit. Commission or brokerage is payable when the underlying contract or transaction is completed on behalf of the assessee by the claimant of commission or brokerage. Rent or royalty becomes payable at the end of the specified period in the contract. Fee for professional or technical services becomes payable on rendering of requisite services in the contract. An amount becomes payable to a contractor when he completes the work assigned to him. Thus, the ambit of the term "payable" is not circumscribed by any particular date. It is transaction-specific. Its creation or cropping up is simultaneous to the accrual of liability. For appreciating the scope of the term "payable", one may also refer to Chapter VII-B. The tax under the provisions of Chapter VII-B is deductible in both the situations when such amount as specified in that Chapter is paid or is credited. Thus, first step is to know whether the specified amount as per section 40(a)(ia) is "payable". Second step is whether tax is deductible thereon under relevant provision of Chapter VII-B. Third step is to know as to when that amount is paid or credited to the payee. It is only at the time of third step when the specified amount which is payable and on which tax is deductible is paid or credited to the account of the payee that tax has to be simultaneously deducted from the payment or credit and the last step is to make the payment of the tax so deducted to the Central Govt. If tax is not deducted from the specified amount "paid" or "credited", or after deduction of such tax it is not paid to the Central Govt., then section 40(a)(ia) is invoked to disallow the amount paid or credited to the payee. Thus, the scope of expression "payable" is anterior in effect to the application of the terms "paid" or "credited". It is incorrect to compare "paid" with "payable", as "payable" precedes the "paid" or "credited". "Payable' here really means "accrual of liability". It is for this reason that the Legislature substituted "paid" or "credited" by the term "payable" in the final enactment.
3.4 More reasons to hold interpretation in Merilyn Shipping & Transports v. ACIT as erroneous - There is yet another reason to hold the interpretation given by the Special Bench of ITAT in Merilyn Shipping & Transports (supra) as erroneous. If we exempt those taxpayers who have paid the specified amount during the financial year from the rigours of section 40(a)(ia), then in addition to it becoming discriminatory between two class of taxpayers for similar default, it further keeps the protected class of those taxpayers who have paid the specified sum without deduction of tax, (by the decision of Merilyn Shipping & Transports (supra)) to additional advantage. They can retain the govt. money, being the tax deducted by them at the time of payment of the specified sum during the financial year without subjecting the concerned amount to disallowance under section 40(a)(ia). No interpretation which dilutes or makes the collection or recovery provisions otiose can be acceptable. It is not relevant that interest or penalty can be charged for this default. But mere thought of protecting a taxpayer for retaining the govt. money will not be acceptable.
There is another reason to disagree with the interpretation given by the Special Bench of the ITAT in Merilyn Shipping & Transports(supra). Merely because a sum is payable at the end of the year, it cannot be disallowed from the computation of income. It has to be further shown that it has been claimed as an expenditure in the profit and loss account while computing business income at the end of the year. This means that such amount is either credited to the account of the payee or actually paid to him, creating a simultaneous entry by debiting the P/L account. If no claim in the P/L account is made, no disallowance of such amount can be made under section 40(a)(ia). Therefore, crucial event for deciding the disallowability of specified sum is claim in the P/L account with simultaneous payment or credit thereof to the payee. It is not sufficient to know whether an amount is payable to decide invoking of section 40(a)(ia). One has to further decide about claim thereof in the P/L account. However, the impact of provisions of section 201/201(1A) and penalty provisions under section 271C are independent of section 40(a)(ia). They can be simultaneously invoked with section 40(a)(ia) or independent of it (if conditions laid down in section 40(a)(ia), like not making any claim in the P/L account are not satisfied). If tax is not deducted, though otherwise deductible under Chapter VII-B then section 201/201(1A) and penalty provisions under section 271C can be invoked, but if claim is not made in the P/L account then section 40(a)(ia) cannot be invoked.
Conclusion
4. The decision of the Special Bench of the ITAT in Merilyn Shipping & Transports (supra) centres around the interpretation of the term "payable" used in section 40(a)(ia). It is held therein that if specified amount is paid during the F.Yr., then it is not payable and, therefore, it cannot be disallowed even if tax has not been deducted or after deduction it has not been paid to the Govt. However, the Calcutta High Court and the Gujarat High Court did not approve of this view. In brief, their view was: (i) Section 40(a)(ia) creates a fiction by which the genuine payment of a specified sum claimed in the P/L account is disallowed for either not deducting the tax or after deduction for not paying to the Govt., therefore, the provision should be interpreted strictly; (ii) the debate in the Parliament does not reflect the intention of the Legislature, but it is only the final enactment which reflects the intention behind the legislation; (iii) 'Payable' means amount which has accrued in favour of payee; (iv) the assumption that it should be shown at the end of the Financial Year is like putting another condition in the provision which is not intended by the Legislature; (v) paid comes after an amount becomes payable. A sum cannot be paid unless it first becomes payable. The moment agreed work is completed, agreed services are rendered and the other party has performed its part of contract the sum would become payable. It is anterior in time as compared to term paid. Whatever is paid prior to completion of agreed work/services would only be in the nature of advance to be adjusted against final payment on completion of work/service. Therefore, it is not fair to compare "paid" and "payable" by keeping them at par and then hold that only time of payment differentiates them.
The view of the ITAT, that by not putting the expression after the word "payable" to the effect that the sum is pending/payable at the end of the accounting year is only a casus omissus is not acceptable because the casus omissus is generally supplied by the Hon'ble Apex Court and only in rare cases when the language of the Legislature is compared with some other analogous statute or if the Legislature had different intention in mind, while framing the provision.
Thus, for the above reasons the decision of the Special Bench in MerilynShipping & Transports (supra) does not lay down a correct law and it was rightly disapproved by the Hon'ble High Courts in Md. Jakir Hossain Mondal (supra); Crescent Export Syndicate (supra) &Sikandarkhan N Tunvar (supra).
Regards
Prarthana Jalan
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