IT: Provision of section 40(a)(ia) are applicable not only to amount which is shown as payable on date of balance sheet, but it is also applicable to such expenditure, which become payable at any time during relevant previous year and was actually paid within previous year
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[2013] 38 taxmann.com 62 (Amritsar - Trib.)
IN THE ITAT AMRITSAR BENCH
Manzoor Ahmad Walvir
v.
Deputy Commissioner of Income-tax, Circle-3, Srinagar*
H.S. SIDHU, JUDICIAL MEMBER
AND B.P. Jain, ACCOUNTANT MEMBER
AND B.P. Jain, ACCOUNTANT MEMBER
IT Appeal Nos. 358 & 417 (Asr.) of 2012
[ASSESSMENT YEAR 2009-10]
[ASSESSMENT YEAR 2009-10]
MAY 31, 2013
I. Section 40(a)(ia) of the Income-tax Act, 1961 - Business disallowance - Interest etc. paid to non-resident without deduction of tax at source [Scope of provision] - Assessment year 2009-10 - Whether provision of section 40(a)(ia) are applicable not only to amount which is shown as payable on date of balance sheet, but it is also applicable to such expenditure, which become payable at any time during relevant previous year and was actually paid within previous year - Held, yes [Para 21] [In favour of revenue]
II. Section 32 of the Income-tax Act, 1961 - Depreciation - Allowance/rate of [Car] - Assessment year 2009-10 - Assessing Officer disallowed depreciation on car since no evidence was submitted to substantiate addition of car - First Appellate Authority vacated disallowance finding that since no depreciation was claimed, there could not be any question of disallowance - Assessee raised an additional ground before first appellate authority claiming depreciation of vehicle at rate of 15 per cent as prescribed in rules as against 10 per cent claimed in return - First appellate authority rejected additional ground by stating that ground raised by assessee did not arise from assessment order - Whether additional ground raised by assessee was ground of law which arose from record of assessment and it needed to be admitted and required adjudication - Held, yes - Whether, however, nature of dispute required thorough examination on record at level of Assessing Officer, therefore, issue was to be set aside to Assessing Officer to decide same afresh with direction to allow depreciation on vehicle as per law - Held, yes [Para 26] [Partly in favour of assessee]
FACTS - I
Facts
| ■ | The assessee was a trader/exporter of shawls etc. | |
| ■ | The Assessing Officer found that the assessee had debited the direct expenses of bleaching charges, dyeing charges, embroidery charges, finishing charges and printing charges and the amount exceeded the threshold on which TDS was required to be deducted under section 194C. He held that from the perusal of the bills it was evident that the raw material was supplied by the assessee to the sub-contractors/job workers and the same was processed according to the specifications given by the assessee. The assessee was liable to deduct tax at source thereon as per the provisions of section 194C. The assessee had failed to make deduction at source before crediting the amounts to various parties for performing their works. Accordingly, he made disallowance under section 40(a)(ia). | |
| ■ | The first appellate authority held that payments for such expenses were covered under section 194C, thus, provision of section 40(a)(ia) was clearly applicable. He, however, following the decision of the Special Bench in the case of Merilyn Shipping & Transporters v. Asstt CIT [2010] 39 SOT 13 (HYD.) (URO) held that in view of the language of section 40(a)(ia), only those payments which were payable at the end of the year could be considered for disallowance and the amounts paid were not to be considered. |
Issue involved
| ■ | Whether only those payments which were payable at the end of the year could be considered for disallowance under section 40(a)(ia) and amount paid were not to be considered? |
HELD
| ■ | The High Court of Calcutta in the case of CIT v. Crescent Export Syndicate [2013] 33 taxmann.com 250/216 Taxman 258 has 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 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. |
CASE REVIEW - I
CIT v. Crescent Export Syndicate [2013] 33 taxmann.com 250/216 Taxman 258 (Cal.) (para 21) followed.
CASE REVIEW - II
National Thermal Power Co. Ltd. v. CIT [1998] 229 ITR 383 (SC) (para 26) followed.
CASES REFERRED TO
Teja Construction v. Asstt. CIT [2010] 39 SOT 13 (HYD) (URO) (para 10), Merilyn Shipping & Transporters v. Asstt. CIT [2012] 136 ITD 23/20 taxmann.com 244 (Vishakhapatnam) (para 12), National Thermal Power Co. Ltd. v. CIT [1998] 229 ITR 383 (SC) (para 13), K. Srinivas Naidu v. Asstt. CIT [2010] 131 TTJ 17 (Hyd) (URO) (para 15), Jamkash Vehicleades (P.) Ltd. v. Addl. CIT [IT Appeal No. 136 (ASR) of 2012) (para 15), Dey's Medical (U.P.) (P.) Ltd. v. Union of India [2009] 316 ITR 445 (All.) (para 18), Tube Investments of India Ltd. v. Asstt. CIT [2009] 185 Taxman 438 (Mad.) (para 18), CIT v. Sikandar Khan N. Tunvar [2013] 33 taxmann.com 133 (Guj.) (para 18), CIT v. Crescent Export Syndicate [2013] 33 taxmann.com 250/216 Taxman 258 (Cal.) (para 18), Smt. J. Rama v. CIT [2010] 194 Taxman 37 (Kar.) (para 19), CIT v. Kelvinator of India Ltd. [2010] 187 Taxman 312 (SC) (para 21), Bhuwalka Steel Industries v. Bombay Iron & Steel Labour Board [2010] 2 SCC 273 (para 21), A.S. Krishna v. State of Madras AIR 1957 SC 297 (para 22), Dr. V. N. Shrikhande v. Anita Seva Fernandes [2011] 1 SCC 53 (para 23) and RBI v. Peerless General Finance & Investment Co. Ltd. [1987] 1 SCC 450 (para 23).
R.K. Gupta for the Appellant. Tarsem Lal for the Respondent.
ORDER
1. The assessee as well as the Revenue has filed the present cross-appeals against the impugned order dated 31.08.2012 passed by learned CIT(Appeals), Jammu, for the assessment year 2009-10. The grounds of appeal taken by the assessee in I.T.A. No. 358(Asr)/2012 are as under:
| "i. | That the worthy CIT(A) is not justified in confirming the disallowance to the extent of Rs. 1,87,87,703/- under Section 40(a)(ia) of the Income-tax Act, 1961 by rejecting the plea of the appellant that direct expenses incurred in the shape of bleaching & washing, dyeing, embroidery, finishing & printing charges amounting to Rs. 6,04,40,918/- are incurred as per the specific requirement of the appellant and are in the nature of value addition whereas whole of the amount of Rs. 6,04,40,918/- incurred on these expenses are directly hit by Section 28 of the Income Tax Act, 1961 and therefore do not fall in the purview of Section 40 irrespective of the fact that these payments are attracted by Section 194C. | |
| ii. | The worthy CIT(A) is not justified in dismissing the ground to allow depreciation on vehicle @ 15% as prescribed in the Income Tax Rules as against the claim of 10% on the plea that this ground do not arise from assessment order whereas this ground very much arises from assessment record and should have been allowed by following the Supreme Court Judgment as held in the case of NTPC. | |
| iii. | The appellant craves, leaves to alter and add to substitute any ground of appeal before or at the time of hearing." |
2. The grounds of appeal taken by the Revenue in I.T.A. No. 417(Asr)/2012 are as under:
| "i. | On the facts and circumstances where the learned CIT(A) was right in deleting the addition made on account of disallowance of deduction u/s 40(a)(ia) of the Income Tax Act, 1961 for non-deduction of TDS as per the provisions of Section 194C of the Income Tax Act, 1961. | |
| ii. | On the facts and circumstances whether the learned CIT(A) was right in not appreciation the fact that the object of section 40(a)(ia) is to ensure that the TDS provisions are scrupulously implemented without any default and that if the interpretation is assigned to the term 'payable', then the object with which Section 40(a)(ia) was inserted would be frustrated. | |
| iii. | On the facts and circumstances whether the learned CIT(A) was right in deleting the addition made on account of disallowance of deduction u/s 40(a)(ia) of the Income Tax Act, 1961 for non-deduction of TDS as per the provisions of Section 194C of the Income Tax Act, 1961 when the Hon'ble High Court of Punjab & Haryana in the case of Rakesh Kumar & Co. v. Union of India [2009] 178 Taxman 481 has confirmed the disallowance made u/s 40(a)(ia) of the Income Tax Act, 1961. | |
| iv. | On the facts and circumstances whether the learned CIT(A) was right in deleting the addition made on account of disallowance of deduction u/s 40(a)(ia) of the Income Tax Act, 1961 for non-deduction of TDS as per the provisions of Section 194C of the Income Tax Act, 1961 when the Hon'ble High Court of Allahabad in the case of M/s Dey's Medical (UP) (P) Ltd. Vs. Union of India & Ors. (2009) 316 ITR 445 has confirmed the disallowance made u/s 40(a)(ia) of the Income Tax Act, 1961. | |
| v. | The applicant craves to amend or add any one or more grounds of appeal." |
3. As stated above these are cross-appeals, therefore, for the sake of convenience, we are narrating the facts relating to the issues in dispute on the basis of orders passed by the Revenue Authorities. The assessee being a proprietor-ship firm, filed its return of income of Rs. 1,21,52,406/- on 29.09.2009. The assessee is a trader/exporter of shawls etc. Assessing Officer issued a notice under Section 143(2) of the Income-tax Act, 1961 (in short "the Act"), dated 09.09.2010 by speed-post which was duly served upon the assessee. The Assessing Office requested the assessee to furnish a copy of audit report under Section 44AB of the Act which was furnished by the Assessee on 01.03.2011. Subsequently, a detailed questionnaire dated 22.09.2011 alongwith notice under Section 142(1) of the Act was issued and duly served upon the assessee. In response to these notices, the Authorized Representative of the assessee appeared and filed written submission. Assessee has declared a total turn-over of Rs. 12,33,71,239/- and Gross Profit of Rs. 62,67,561/- giving a G.P. rate @ 5.03.%.
4. The Assessing Officer perused the details submitted by the assessee and found that the assessee has debited the direct expenses of bleaching charges, dyeing charges, embroidery charges, finishing charges and printing charges. Particulars of these charges have been explained in the assessment order in para no. 3.1 at page no. 2 to 4, by the Assessing Officer.
5. After perusing the details of the aforesaid charges, the Assessing Officer found that the amount exceeds the threshold on which TDS is required to be deducted under Section 194C of the Act. In para 3.2 at page no.4 of the assessment order, the Assessing Officer has discussed that the bills in respect of these parties were also obtained on records. One such bill no. 205 dated 27.05.2008 forms Annexure 'A-1' to the assessment order. From the perusal of the bill, it seemed that the raw material has been supplied to the job-worker for instance Ch. Nabi Dhobi, who charged processing charges for Pashmina 1155 yards @ 40/- per unit, for Rafal 136 units @ 75/- per unit, and for Rumal pashmina 887 pcs. @ 25%. The relationship between 'a' and Ch. Nabi is that of a principal who gives a contract for bleaching of certain pcs. As per their specification and the job-worker who processes it at a decided rate per unit. Therefore, the payments made towards bleaching are of the nature of contractual payments and the relationship is that of principal and sub- contractor.
6. The Assessing Officer vide order-sheet entry dated 03.11.2011, called the explanation from the assessee on the subject that 'a' has not made any TDS deduction during the year and payments have been made without deducting the TDS. Therefore, the provisions of Section 194(C) of the Act are applicable as the payments are of the nature of contractual payments to a single party. The assessee has filed its reply vide letter dated 09.11.2011 in which the assessee has stated that dying charges, bleaching/washing, embroidery charges, finishing charges are direct expenses as these are directly related to purchases. We purchase goods in raw material, after that dyeing, bleaching, embroidering, finishing charges are made to these goods, before goods are ready for sale. Therefore, the applicability of Section 194C of the Act on such transactions, does not take place because the assessee outsourced to person trained in this craft certain work relating to manufacturing of article in accordance with the specification given by him. Assessee has also relied upon the Circular No. 681, dt. 08.03.1994 of the C.B.D.T.
7. After considering the reply filed by the assessee as well as the aforesaid Circular, the Assessing Officer held that the provisions of Section 194C are applicable in the case of assessee because it is nothing but a contract for work and not a contract for sale as the raw material is supplied by the assessee on which the job-work is done by various parties. Accordingly, vide order-sheet entry dated 18.11.2011, final show-cause was given to the assessee asking the assessee that the aforesaid Circular no. 681 are not applicable in the case of assessee as the raw material is supplied by assessee's concern to the sub-contractor/job-worker and he processes it and dyes/embroiders it according to the specifications given by the assessee. It is accordingly not a contract for sale. In response to the show-cause notice dated 18.11.2011, assessee filed its reply dated 22.11.2011 and submitted that the case of the assessee is not covered under Section 194C of the Act because the provisions of this Section will not cover contracts for sale of goods as these transactions are directly relating to the cost of production.
8. In a nutshell, the main issue involved in the present appeal is regarding the disallowance of Rs. 6,04,40,918/- under Section 40(a)(ia) of the Act for the default of non-deduction of tax at source on payments made for bleaching charges, dyeing charge, embroidery charges furnishing charges and furnishing charges. Details of expenses are mentioned in the assessment order in the relevant paragraph but finally the Assessing Officer has held that from the perusal of the bills it is evident that the assessee had out-sourced the job-work in respect of the raw material which was being provided by the assessee to them to carry out the job-work as per their requirements. Accordingly, the assessee was liable to deduct TDS thereon as per the provisions of Section 194C of the Act. In the present case, the assessee has failed to make deduction at source before crediting the amounts to various parties for performing their works. Hence, the provision of Section 40(a)(ia) of the Act is attracted and he made the disallowance of 6,04,40,918/- under Section 40(a)(ia) of the Act. The Assessing Officer has also made additions under the fixed assets on account of purchase of two cars at Rs. 8,50,000/- and Rs. 20,35,000/- because the assessee has not furnished the bills/vouchers in support of addition to fixed assets for substantiating the purchase of cars. Assessee claimed depreciation under Section 32 of the Act but the claim for depreciation is allowable only when the asset is purchased and put to use for business purposes. Since no evidence was submitted to substantiate the addition of car, the claim for depreciation on car at 2,55,000/- has been disallowed and added back to the total income of the assessee while completing the assessment under Section 143(3) of the Act on 28.11.2011.
9. Aggrieved by the assessment order dated 28.11.2011, assessee filed an appeal before the learned First Appellate Authority, who vide impugned order dated 31.08.2012, partly allowed the appeal filed by the assessee. In para 4.1 at page-7 of impugned order dated 31.08.2012, learned First Appellate Authority has held that notwithstanding the arguments taken by the assessee's counsel before the Assessing Officer, Sh. R.K. Gupta, C.A. appearing before him has fairly conceded that the expenses were made for contractual payments and were covered under section 194-C of the Act (vide order-sheet note dated 29.08.2012), hence, no discussion is required as to whether Section 194C of the Act was applicable or not.
10. Learned counsel for the assessee contended before the learned First Appellate Authority that the expenses in dispute were in the nature of direct expenses covered under Section 28 of the Act and Section 40(a)(ia) of the Act is not applicable in view of the decision of I.T.A.T., Hyderabad Bench, Hyderabad given in the case of Teja Construction v. Asstt. CIT [2010] 39 SOT 13 (HYD) (URO).
11. Learned First Appellate Authority in para 4.3 has held that the contention of the assessee does not deserve to succeed on this count. The expenses such as bleaching and washing, dyeing, embroidery, finishing and printing charges are such that they are paid as per specific requirements of the assessee given to the artisan. Learned CIT(A) further held that the expenses are in the nature of value-addition varying from case to case and cannot be termed as such as 'direct expenses', the definition of which cannot be stretched too far. He also held that 'the amounts payable to a contractor or sub-contractor for any work' on which tax was deductible at source. It is already admitted by the assessee that such payments were covered under Section 194-C of the Act and in view of this, provision of Section 40(a)(ia) of the Act is clearly applicable in the case of the assessee and these payments are out of the purview of Section 40(a)(ia) of the Act, doesn't hold water.
12. Learned First Appellate Authority in the impugned order has also dealt with the alternate contention of learned counsel for the assessee, In paras 4.4 and 4.5 at page 8, of the impugned order, he held that in view of language of Section 40(a)(ia) of the Act, only those payments which are payable at the end of year can be considered for disallowances and the amounts paid are not to be considered. Learned First Appellate Authority has respectfully followed the decision of I.T.A.T.(SB), Vishakhapatnam, in the case of Merilyn Shipping & Transporters v. Asstt. CIT [2012] 136 ITD 23/20 taxmann.com 244 (Vishakhapatnam) and given partly relief to the assessee. In para 4.5, it is held that out of total disallowance of Rs. 6,04,40,918/-, an amount of Rs. 4,16,53,215/- has been paid during the year and an amount of Rs. 17,800/- in respect of one Sh. Faooq Ahmed Dar, to be excluded as no TDS was to be made on this. Thus, remaining of Rs. 1,87,87,703/- is payable at the end of the year and has to be disallowed. In a concluding paragraph i.e. para no. 5.1 at page-9, learned First Appellate Authority has also vacated the disallowance of Rs. 2,55,000/- on account of depreciation of car purchased for Rs. 8,50,000/- by observing that the Assessing Officer has made this disallowance because the assessee has not submitted any bill in respect of purchase of car but before learned First Appellate Authority, no depreciation on this car was claimed in the return of income, hence, there was no question of any disallowance. The assessee has produced the account of fixed assets and car account before the learned First Appellate Authority which he get it verified from the Assessing Officer during the appellate proceeding and found that the contention of the assessee is correct. Hence, he held that since no depreciation was claimed in the first place, there couldn't be any question of disallowance. Learned First Appellate Authority has vacated the disallowance of Rs. 2, 55,000/-.
13. Another issue raised by the assessee as additional ground before the learned First Appellate Authority seeking direction to the Assessing Officer to allow depreciation @ 15% on Block of vehicles as against the claim of 10% made while computing the income in the return of income filed before the Assessing Officer but the learned First Appellate Authority has dismissed the additional ground raised by the assessee by holding that this ground does not arise from the assessment order at all and whatever depreciation was claimed by the assessee has been allowed to the assessee by the Assessing Officer. This amended ground does not arise from the assessment order and he rejected the same. Assessee has challenged the finding of the learned first Appellate Authority by stating that learned CIT is not justified in dismissing the ground and by holding that this ground does not arise from the assessment order, which is contrary to the judgment of Hon'ble Supreme Court given in the case of National Thermal Power Co. Ltd. v. CIT [1998] 229 ITR 383 (SC). Learned First Appellate Authority vide impugned order dated 31.08.2012, partly allowed the appeal filed by the assessee.
14. Now the assessee as well as the Revenue has challenged the impugned order on the issue involved in the grounds appeal in the cross-objection mentioned in paras 4.1 and 5.1.
15. Sh. R.K. Gupta, CA, learned Authorized Representative of the assessee stated that he has filed his written submission on 13.05.2013 and requested to the Bench that the issue in dispute may be decided after considering his written submission as well as the case laws relied upon by him. He has also filed a small paper book containing pages from 1 to 67, in which has attached case laws of Teja Construction (supra); K. Srinivas Naidu v. Asstt. CIT [2010] 131 TTJ 17 (Hyd) (URO); Merilyn Shipping & Transporters (supra); Jamkash Vehicleades (P.) Ltd. v. Addl. CIT (Order of the Hon'ble I.T.A.T., Amritsar Bench, in I.T.A. No. 136/ASR/2012).
16. In addition to his written submission, he has also drawn our attention towards the case laws relied upon by him, as mentioned in the paper book. He finally stated that the case of the assessee is fully covered by the decision of I.T.A.T., Hyderabad Bench, given in the case of Teja Construction (supra) as well as the decision of the Special Bench given in the case of Merilyn Shipping & Transporters (supra) therefore, the appeal filed by the assessee may be allowed and the appeal filed by the Department may be dismissed.
17. As regards to the issue involved in ground no. 2, regarding raising the additional ground before the learned First Appellate Authority claiming the depreciation on vehicle @ 15% as prescribed in the Income Tax Rules as against the claim of 10%, learned counsel for the assessee stated that learned First Appellate Authority has wrongly held that the additional ground raised by the assessee does not arise from the assessment order whereas this ground of appeal is ground on law which arises from the records of assessment and it needs to be admitted in view of the decision of Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. (supra). He further stated that the assessee's firm is entitled for the depreciation on vehicles @ 15% as prescribed in Income Tax Rules, as against the claim of 10% in the return. He referred CBDT Circular No. 14 (XI-35) of 1995 dated April 11, 1995 and stated that officers of the department must not take advantage of the ignorance of an assessee as to his rights. It is the duty of the officer to assist the taxpayers and grant relief to the assessee due to him, while completing the assessment. Learned counsel for the assessee requested that as against the claim of Rs. 2,38,961/- on account of depreciation on vehicles the actual claim at the rate of 15% as per Income Tax Rules be given which works out to Rs. 4,81,086/-
18. In contradiction to the submissions raised by the ld. counsel for the assessee (supra), the Ld. DR Mr. Tarsem Lal raised point-wise rebuttal on various facts of the controversy which chronologically run as namely the constitutional validity of section 40(a)(ia) upheld while payments made without deducting tax at source in the decision in W.T. 186 of 2008 in Dey's Medical (U.P.) (P.) Ltd. v. Union of India [2009] 316 ITR 445 (All.), Tube Investments of India Ltd. v. Asstt. CIT [2009] 185 Taxman 438 (Mad.), CIT v. Sikandar Khan N. Tunvar [2013] 33 taxmann.com 133 (Guj.), Merilyn Shipping & Transporters (supra) and against the Special Bench decision of the Tribunal finally the decision of Hon'ble Calcutta High Court in the case of CIT v. Crescent Export Syndicate [2013] 33 taxmann.com 250/216 Taxman 258 which notices the decision of Deys' Medical (U.P.) (P.) Ltd. (supra).
19. As regard to appeal filed by the Revenue, he stated that Hon'ble High Court of Karnataka in the case of Smt. J. Rama v. CIT [2010] 194 Taxman 37, has decided the issue in favour of the Revenue and Hon'ble Calcutta High Court in the case of Crescent Export Syndicate (supra), has held that 'the majority views expressed in the case of Merilyn Shipping & Transporters (supra) are not acceptable and decided the issue in favour of the Revenue. He further submitted that in the present case, learned First Appellate Authority has given relief to the assessee by following the decision of the Special Bench given in the case of Merilyn Shipping & Transporters (supra), which has been overruled by Hon'ble Calcutta High Court in the case of Crescent Export Syndicate (supra) and Karnataka High Court in the case of J. Rama (supra). Lastly, he requested that the appeal filed by the Revenue may be allowed and the appeal of the assessee may be dismissed.
20. We have heard both the parties and perused the relevant record available with use along with the citations cited by both the parties. It is pertinent to mention that the assessee has failed to address any rebuttal of whatsoever kind to the judgments of Hon'ble High Court of Allahabad in the case of Deys' Medical (U.P.) (P.) Ltd. (supra), Hon'ble Madras High Court in the case of Tube Investments of India Ltd. (supra), Hon'ble Gujarat High Court in the case of Sikandarkhan N. Tunvar (supra) and Hon'ble Calcutta High Court in the case of Crescent Export Syndicate (supra), which are the decisions on the impugned issues as raised.
21. Secondly, regarding reliance placed on the decision of Coordinate Bench of Hyderabad in the case of Teja Construction (supra), we are of the view that the arguments have not been concluded to the logical end while the said order with greatest respect of the ITAT is dated 23.10.2009 before the constitutional virus were under challenge as revealed through the judgments being by the Hon'ble High Court of Allahabad in the case of Dey's Medical (U.P.) (P.) Ltd. (supra) which is dated 15.02.2008 and judgment of Hon'ble Madras High Court in the case of Tube Investments of India Ltd. (supra) which is dated 29.09.2009 and decision of ITAT, Special Bench in the case of Merilyn Shipping & Transporters (supra) whereby at the time of case disposal before us, we have the benefit of additional judgment of Hon'ble Gujrat high Court in the case of Sikandarkhan N. Tunvar (supra) and Hon'ble Calcutta High Court in the case of Crescent Export Syndicate (supra). Thus, we are bound to follow the law prevalent at the relevant date and time. Even otherwise, controversy raised stands answered against the assessee and therefore the departmental appeal is allowed to that extent whereby the said aspect of the findings by the Hon'ble High Court of Calcutta in the case of Crescent Export Syndicate (supra) are reproduced herein below which are pertinent finding of the Hon'ble High Court in the present case.:
"In the backdrop of these submissions, Hon'ble Madras High Court upheld the constitutional validity of the provisions of section 40(a)(ia) and made various observations:—
| (i) | Hon'ble Madras High Court, inter alia, noted the observations of Hon'ble Supreme Court in the case of A.S. Krishna v. State of Madras AIR 1957 SC 297 which are as under:- | |
| 'It would be quite an erroneous approach to the question to view such a statute not as an organic whole, but as a mere collection of sections then disintegrate it into parts, examine under what heads of legislation those parts would severally fall, and by that process determine what portions thereof are inter vires and what are not. Thus, section 40(a)(ia) could not be viewed independently and had to be considered along with other provisions. | ||
| (ii) | The provisions of section 40(a)(ia) were compared with the provisions of section 201 of the Income Tax Act and, it was, inter alia, observed that as far as section 201 is concerned that would relate to the amount of tax that could be deducted by way of TDS. However, as far as section 40(a)(ia) is concerned, 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. | |
| Thus, Hon'ble Madras High Court has also held in para 61 of its judgment that "whole of the expenditure claimed without making TDS is to be disallowed and not only part of the expenditure". (iii) | ||
| (iii) | The Finance Bill No.2 of 2004 states that the insertion of clause (ia) in clause (a) to section 40 of the Act was with a view to augment compliance of TDS provisions. | |
| (iv) | When the provisions and procedures relating to TDS are scrupulously applied, first and foremost it ensures the identification of the payees and thereby network of assessees gets confirmed. When once such identity of assessees, who are in receipt of the income can be ascertained, it will enable tax collection machinery to bring within its fold all such persons who are liable to come within the network of taxpayers. Thus, if it is held that the provisions of section 40(a)(ia) are not applicable in respect of those payments which have been paid without making TDS and at the end of the year no amount is outstanding then the very object of identification of payees will get frustrated. | |
| (v) | 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 only. | |
| (vi) | The intention of the legislature is not to tax the payer for its failure to deduct the tax at source. The object of introduction of section 40(a)(i) as well as section 40(a)(ia) is to ensure that one of the modes of recovery as provided in Chapter XVII-B is scrupulously implemented without any default, in order to augment the said mode of recovery. |
Hon'ble Madras High Court, inter alia, observed at para 69 of its judgment as under:-
"With the proviso to section 40(a)(ia) the deduction in the subsequent year by rectifying the default committed in the matter of TDS in the previous year, a defaulting assessee cannot be heard to say that irrespective of the deliberate default committed by it in implementing the provision relating to TDS, it should be held that a higher tax liability is mulcted on it".
Hon'ble Madras High Court, inter alia, observed in para 83 of its judgment as under:-
"After all the proviso has been inserted in order to ensure that even a defaulter is not put to serious prejudice, in as much as, by operation of the substantive provision, the expenditure which is otherwise allowable as a deduction is denied on the ground that the obligation of TDS provisions is violated. The law makes while imposing such a stringent restriction wanted to simultaneously provide scope for the defaulter to gain the deduction by complying with the TDS provision at a later pint of time".
Thus, impliedly Hon'ble Madras High Court, has, inter alia, held that the provisions of section 40(a)(ia) will be applicable with respect to entire expenditure. It is true that specific issue regarding 'paid', 'credited' and 'payable' has not been considered but from the judgment it is evident that if assessee's contention is accepted then the very object of incorporation of section 40(a)(ia) would be frustrated.
21. In view of above discussion, we answer the question as under:-
The provisions of section 40(a)(ia) of the Income Tax Act, 1961, are applicable not only to the amount which is shown as payable on the date of balance-sheet, but it is applicable to such expenditure, which become payable at any time during the relevant previous year and was actually paid within the previous year. In the result the question is decided in favour of revenue and against the assessee."
Before dealing with the submissions of the learned Counsel appearing for the assessees in both the appeals we have to examine the correctness of the majority views in the case of Merilyn Shipping.
We already have quoted extensively both the majority and the minority views expressed in the aforesaid case. The main thrust of the majority view is based on the fact "that the Legislature has replaced the expression "amounts credited or paid" with the expression 'payable' in the final enactment.
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 of India Ltd. [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.
The Learned Tribunal fell into an error in not realizing this aspect of the matter.
The Learned Tribunal held "that where language is clear the intention of the legislature is to be gathered from the language used". Having held so, it was not open to seek to interpret the section on the basis of any comparison between the draft and the section actually enacted nor was it open to speculate as to the effect of the so-called representations made by the professional bodies.
The Learned Tribunal held that "Section 40(a)(ia) of the Act creates a legal fiction by virtue of which even the genuine and admissible expenses claimed by an assessee under the head "income from business and profession" if the assessee does not deduct TDS on such expenses are disallowed".
Having held so was it open to the Tribunal to seek to justify that "this fiction cannot be extended any further and, therefore, cannot be invoked by Assessing Officer to disallow the genuine and reasonable expenditure on the amounts of expenditure already paid"? Does this not amount to deliberately reading something in the law which is not there?
We, as such, have no doubt in our mind that the Learned Tribunal realized the meaning and purport of Section 40(a)(ia) correctly when it held that in case of omission to deduct tax even the genuine and admissible expenses are to be disallowed. But they sought to remove the rigour of the law by holding that the disallowance shall be restricted to the money which is yet to be paid. What the Tribunal by majority did was to supply the casus omissus which was not permissible and could only have been done by the Supreme Court in an appropriate case. Reference in this regard may be made to the judgment in the case of Bhuwalka Steel Industries v. Bombay Iron & Steel Labour Board [2010] 2 SCC 273.
'Unprotected worker' was finally defined in Section 2 (II) of the Mathadi Act as follows:-
" 'unprotected worker' means a manual worker who is engaged or to be engaged in any scheduled employment."
The contention raised with reference to what was there in the bill was rejected by the Supreme Court by holding as follows:-
"It must, at this juncture, be noted that in spite of Section 2(11), which included the words "but for the provisions of this Act is not adequately protected by legislation for welfare and benefits of the labour force in the State", these precise words were removed by the legislature and the definition was made limited as it has been finally legislated upon. It is to be noted that when the Bill came to be passed and received the assent of the Vice- President on 05-06-1969 and was first published in the Maharashtra Government Gazette Extraordinary, Part IV on 13-06-1969, the aforementioned words were omitted. Therefore, this would be a clear pointer to the legislative intent that the legislature being conscious of the fact and being armed with all the Committee reports and also being armed with the factual data, deliberately avoided those words. What the appellants are asking was to read in that definition, these precise words, which were consciously and deliberately omitted from the definition. That would amount to supplying the casus omissus and we do not think that it is possible, particularly, in this case. The law of supplying the casus omissus by the courts is extremely clear and settled that though this Court may supply the casus omissus, it would be in the rarest of the rare case and thus supplying of this casus omissus would be extremely necessary due to the inadvertent omission on the part of the legislature. But, that is certainly not the case here".
We shall now endeavour to show that no other interpretation is possible.
The key words used in Section 40(a)(ia), according to us, are "on which tax is deductible at source under Chapter XVII -B". If the question is "which expenses are sought to be disallowed?" The answer is bound to be "those expenses on which tax is deductible at source under Chapter XVII -B. Once this is realized 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.
A few words are now necessary to deal with the submission of Mr. Bagchi and Ms. Roychowdhuri. 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 was not intended by the legislature. This is our answer to the submission of Mr. Bagchi. The submission of Ms. Roychowdhuri that the second proviso sought to become effective from 1st April, 2013 should be held to have already become operative prior to the appointed date cannot also be acceded to for the same reason indicated above. The law was deliberately made harsh to secure compliance of the provisions requiring deductions of tax at source. It is not the case of an inadvertent error.
For the reasons discussed above, we are of the opinion that the majority views expressed in the case of Merilyn Shipping & Transports are not acceptable. The submissions advanced by learned advocates have already been dealt with and rejected.
The appeal is, thus, allowed in favour of the revenue."
22. It would be relevant to deal with the arguments of the ld. counsel of the assessee which were pressed repeatedly that the provisions of section 28 'stand alone', grant the allowance to the assessee and this claim has been made validly thus eligible for allowance nevertheless no deduction of tax made. In this context, we refer that the said arguments by Ld. AR are bereft of merits and substance since the act has to be read as an "integrated code" and not to the choice of the assessee being pick and choose to the provisions of law suiting the requirements of a litigant and the similar argument has been dealt in the aforesaid judgment of Hon'ble Calcutta high Court in the case of Crescent Export Syndicate (supra) and which findings are while noticing the judgment of Hon'ble Supreme Court in A.S. Krishna v. State of Madras AIR 1957 SC 297.
23. That the said argument is hereby rejected and even the Hon'ble Supreme Court in the case of V. N. Shrikhande v. Anita Seva Fernandes [2011] 1 SCC 53 at para 22 while noticing the judgment in the case of RBI v. Peerless General Finance & Investment Co. Ltd. [1987] 1 SCC 450 at para 33 where it has been held as under:
"In RBI vs. Peerless General Finance & Investment Co. Ltd. Chennapa Redyy, J. referred to the rule of contextual interpretation and observed : (SCC p.450 para 33):
33. Interpretation must depend on the text and the context. They are the bases of interpretation. One may well say if the text is the texture, context is what gives the colour. Neither can be ignored. Both are important. That interpretation is best which makes the textual interpretation match the contextual. A statute is best interpreted when we know why it was enacted. With this knowledge, the statute must be read first as a whole and then section by section, clause by clause, phrase by phrase and word by word. If a statute is looked at, in the context of its enactment, with the glasses of the statute maker, provided by such context, its scheme, the sections, clauses, phrases and words may take colour and appear different than when the statute is looked at without the glasses provided by the context. With these glasses, we must look at the Act as a whole and discover what each section, each clause, each phrase and each word is meant and designed to say as to fit into the scheme of the entire Act. No part of a statute and no word of a statute can be construed in isolation."
24. Further, we shall add that provisions of section 28 are confined to charging of incomes under the head 'Profits and Gains of Business or Profession' and it is most pertinent to refer that the provisions of section 29 refers to the methodology of computing the said charge for covering the provision contained in section 30 to 43D, wherein the said provision u/s 40(a)(ia) is inclusive therein. And it is even otherwise relevant to mention that the provisions of section 40 open with word "Notwithstanding anything to the contrary in section 30 to 38" wherein the amounts not deductible are referred to u/s 40(a)(ia). The said provision commence with non-obstante clause and refer the provision u/s 30 to 38 with where into under the general claim of the expenses, the said allowance not to be granted, specifically where a special provision for disallowance has been extracted under the statute.
25. Keeping in view the aforesaid discussions in which we have discussed in detail the issue in dispute with the help of various decisions rendered by the Hon'ble Supreme Court of India as well as Hon'ble High Courts, we are of the view that the appeal filed by the assessee deserves to be dismissed on the issue involved in the ground no. 1.
26. As regard to the issue involved in ground no. 2 in the appeal filed by the assessee i.e. I.T.A. No. 358(Asr)/2012, we are of the view that it is an admitted fact that the assessee has raised additional grounds before learned First Appellate Authority claiming the depreciation of vehicle @ of 15% as prescribed in the Income Tax Rules as against 10% claimed in the return. But the learned First Appellate Authority has wrongly rejected the additional ground by stating that the additional ground raised by the assessee does not arise from the assessment order. We are of the view that keeping in view the decision of Hon'ble Supreme Court of India rendered in the case of National Thermal Power Co. Ltd. (supra), the additional ground raised by the assessee is ground of law which arise from the record of assessment and it needs to be admitted and require adjudication. But keeping in view the nature of dispute which in our view is required thorough examination on record at the level of Assessing Officer. Therefore, the issue involved in ground no. 2 is set aside to the Assessing Officer to decide the same afresh under the law after giving full opportunity to the assessee with the direction to allow the depreciation on vehicle as per law.
27. In the result appeal filed by the assessee i.e. I.T.A. No. 358(Asr)/2012 is partly allowed for statistical purposes.
28. As regard to the appeal filed by the Revenue, we are of the view that as we have discussed in the appeal filed by the assessee i.e. I.T.A. No. 358(Asr)/2012 and held that the Hon'ble Calcutta High Court in the case of Crescent Export Syndicate (supra), decided on 3rd April, 2013, has held that 'the majority views expressed in the case of Merilyn Shipping & Transporters (supra) are not acceptable and decided the issue in favour of the Revenue. Learned First Appellate Authority has respectfully followed the decision of I.T.A.T.(SB), Vishakhapatnam, in the case of Merilyn Shipping & Transporters (supra) and given partly relief to the assessee. In para 4.5, it is held that out of total disallowance of Rs. 6,04,40,918/-, an amount of Rs. 4,16,53,215/- has been paid during the year and an amount of Rs. 17,800/- in respect of one Sh. Faooq Ahmed Dar, to be excluded as no TDS was to be made on this. Thus, remaining amount of Rs. 1,87,87,703/- is payable at the end of the year and has to be disallowed.
29. As discussed above, Hon'ble Calcutta High Court in the case of Crescent Export Syndicate (supra), decided on 3rd April, 2013, has over-ruled the decision of I.T.A.T.(SB), Vishakhapatnam, in the case of Merilyn Shipping & Transporters (supra) and therefore, the impugned order dated 31.08.2012 passed by learned CIT(A), Jammu, deserves to be canceled. Thus, we cancel the impugned order dated 31.08.2012 by accepting the appeal filed by the Revenue and upholding the assessment order dated 28.11.2011 on the issue in dispute as discussed above for the assessment year 2009-10.
30. In the result, the appeal filed by the assessee i.e. I.T.A. No. 358(Asr)/2012 is partly allowed for statistical purposes and the appeal filed by the Revenue i.e. 417(Asr)/2012 is allowed as discussed.
Regards
Prarthana Jalan
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