ANZ Grindlays Bank vs. DCIT (Delhi High Court)

The High Court had to consider whether salaries paid to expatriate employees overseas on which tax was paid in accordance with CBDT Circular dated 685 dated 17/20 June 94 and Circular 686 dated 12.8.94, is not permissible as a deduction in computation of taxable business income in view of the provisions of Section 40 (a)(iii) of the Income Tax Act, 1961 read with Article 7 of the Indo-UK Double Taxation Avoidance Treaty? HELD by the High Court:

(i) The principal issue to be addressed is whether the provisions of Section 40(a)(iii) disentitles an assessee to claim a deduction on account of Salaries paid to its employees if the tax is not paid within the specified time but is paid subsequently. The Revenue contended that there are twin requirements to be fulfilled; the first being that tax should have been deducted under Chapter XVII B of the Act; and second being that tax should have been paid. It was argued that even if the tax is paid in subsequent years, deduction on account of expenses could not be allowed because the second condition which is deduction of tax at the time of payment of the amount as required under Section 192 of the Act would not be fulfilled.

(ii) An absence of a provision similar to the proviso to sub-clause (i) of clause (a) of Section 40 of the Act cannot be read as to disentitle an Assessee to claim a deduction even though it has complied with the condition under sub-clause (iii) of clause (a) of Section 40 of the Act. A plain reading of proviso to sub-clause (i) of clause (a) of Section 40 of the Act indicates that where an Assessee has not deducted or paid the tax at source in terms of Chapter XVII B in respect of any sum as specified under sub-clause (i) of clause (a) of Section 40 of the Act, the Assessee can, nonetheless, claim a deduction in the year in which the assessee deposits the tax. This benefit is not available to an assessee in respect of payments chargeable under the head “Salaries” which fall within sub-clause (iii) of clause (a) of Section 40 and not sub-clause (i) of clause (a) of Section 40 of the Act. Thus, an assessee would not be entitled to claim deduction on account of salaries if it fails to deduct or pay the amount under Chapter XVII B of the Act. In cases where such assessee deposits the amount in a subsequent year, the Assessee would still not be able to claim the deduction in the year in which such tax is deposited; his claim for deduction can be considered only in respect of the year to which such expense relates. Therefore, in cases where the assessments stand concluded, the Assessee would lose the benefit of deduction for the expenses incurred on account of its failure to have deposited the tax at source. Thus, concededly, in the present case the Assessee has lost its right to claim a deduction for a period of six years – AY 1985-86 to AY 1990-91- even though the Assessee has paid the TDS on the expenses pertaining to said period.

(iii) If a provision similar to the proviso to Section 40(a) (i) was applicable to Section 40(a) (iii) then the Assessee would have been entitled to claim the entire expenses on account of salaries paid overseas pertaining to financial years 1984-85 to 1993-94 in the financial year 1994-95 relevant to AY 1995-96 as the payment for the tax for the aforesaid years was paid on 20th July, 1994. However, absence of a provision similar to that under sub-clause (i) of clause (a) of Section 40 does not mean that the Assessee would also be disentitled to claim deduction on account of salaries in the year to which such expenses pertained even though the Assessee has subsequently discharged its obligation to deposit the tax and has thus overcome the rigor of sub-clause (iii) of clause (a) of Section 40 of the Act.

(iv) The Tribunal has proceeded on the basis that if the tax due on salaries paid overseas is not deposited strictly within the time prescribed under Chapter XVII B of the Act, Section 40(a) (iii) would be applicable. In our view, this added condition that the tax must be deducted and paid within time, cannot be read in Section 40(a) (iii) of the Act. The plain language of the Section 40(a) (iii) does not permit such interpretation. If the parliament so desired, it would have specifically enacted so. This becomes apparent when one reads the legislative amendments made to Section 40 of the Act.

(v) Sub-clause (i) and sub-clause (iii) of clause (a) of Section 40 were substituted by Finance Act, 2003 w.e.f. 1st April, 2004. It is seen that where the legislature wanted to make payment of tax within a specified time a necessary pre-condition, it had expressly indicated so. The Parliament has expressly enacted that deduction in respect of payments made under sub-clause (i) of clause (a) of Section 40 of the Act would not be available where such payments were made in India to a non-resident in respect of which tax had not been paid “before the expiry of time prescribed under sub Section (i) of Section 200”. However, no such condition for depositing the tax paid within a prescribed time was introduced in sub clause (iii) of clause (a) of Section 40 of the Act.

(vi) It is also relevant to note that sub-clause (i) of clause (a) of Section 40 was further substituted by sub-clauses (i), (ia) and (ib) by virtue of Finance Act (No.2) w.e.f. 1st April, 2005. However, the pre-condition for depositing the tax within the time prescribed under Section (i) of Section 200 was retained in sub-clause (i) and (ia). Thereafter, by virtue of Finance Act (No.2), 2014, sub clause (i) was further amended and the principal condition of depositing tax in respect of payments made in India was amended and instead of the pre-condition of depositing the tax within the time prescribed under Section 200 (i) of the Act, it was now stipulated that the tax be deposited “on or before the due date specified in sub section (i) of Section 139”.

(vii) It is apparent from sub-clause (i) of clause (a) of Section 40 as amended with effect from 1st April, 2015 that the condition to deposit TDS within the prescribed time cannot be read into sub-clause (iii) of clause (a) of Section 40 of the Act as-unlike the language of item (B) of sub-clause (i) of clause (a) of Section 40-the same has not been specifically enacted.

(viii) We are also unable to agree with the contention that no deduction can be claimed by the Assessee as the salaries were not reflected in the profit and loss account. The controversy whether an Assessee can claim deduction on an expense which is not reflected in its profit and loss account for the relevant period has been authoritatively settled by the Supreme Court in its decision in The Kedarnath Jute Mfg. Co. Ltd. v. The Commissioner of Income Tax, (Central), Calcutta: [1971] 82 ITR 363 (SC)