|CORAM:||A.K. Sikri J., Ashok Bhushan J|
|SECTION(S):||194C, 200, 40(a)(ia)|
|CATCH WORDS:||paid vs payable, TDS deduction, TDS disallowance|
|COUNSEL:||Raj Kumar Mehta|
|DATE:||May 3, 2017 (Date of pronouncement)|
|DATE:||May 4, 2017 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|S. 40(a)(ia): S. 194C read with s. 200 are mandatory provisions. The disallowance stipulated in s. 40(a)(ia) for failure to deduct TDS u/s 194C is one of the consequences for the default. Accordingly, though there is a difference between “paid” and “payable”, s. 40(a)(ia) covers not only those cases where the amount is payable but also when it is paid. The contrary interpretation that s. 40(a)(ia) applies only to cases where amounts are “payable” will result in defaulters going scot free|
(i) The question is when the word used in Section 40(a)(ia) is ‘payable’, whether this Section would cover only those contingencies where the amount is due and still payable or it would also cover the situations where the amount is already paid but no advance tax was deducted thereupon. This issue has come up for hearing before various High Courts and there are divergent views of the High Courts there upon. In fact, most of the High Courts have taken the view that the aforesaid provision would cover even those cases where the amount stands paid. This is the view of the Madras, Calcutta and Gujarat High Courts. Contrary view is taken by the Allahabad High Court. In a recent judgment, the Punjab & Haryana High Court took note of the judgments of the aforesaid High Courts and concurred with the view taken by the Madras, Calcutta and Gujarat High Courts and showed its reluctance to follow the view taken by the Allahabad High Court.
(ii) In this scenario, we would like to first discuss the reasons given by the High Courts in two sets of judgments, arriving at a contrary conclusion. Before that, we would also like to reproduce relevant portions of Section 194C and 200 of the Act as well as Rule 30(2) of the Income Tax Rules, since they are also relevant to decide the controversy.
(iii) As per Section 194C, it is the statutory obligation of a person, who is making payment to the sub-contractor, to deduct tax at source at the rates specified therein. Plain language of the Section suggests that such a tax at source is to be deducted at the time of credit of such sum to the account of the contract or at the time of payment thereof, whichever is earlier. Thus, tax has to be deducted in both the contingencies, namely, when the amount is credited to the account of the contractor or when the payment is actually made. Section 200 of the Act imposes further obligation on the person deducting tax at source, to deposit the same with the Central Government or as the Board directs, within the prescribed time.
(iv) A conjoint reading of these two Sections would suggest that not only a person, who is paying to the contractor, is supposed to deduct tax at source on the said payment whether credited in the account or actual payment made, but also deposit that amount to the credit of the Central Government within the stipulated time. The time within which the payment is to be deposited with the Central Government is mentioned in Rule 30(2) of the Rules.
(v) The Punjab & Haryana High Court in P.M.S. Diesels & Ors. v. Commissioner of Income Tax – 2, Jalandhar & Ors., (2015) 374 ITR 562, has held these provisions to be mandatory in nature.
(vi) While holding the aforesaid view, the Punjab & Haryana High Court discussed the judgments of the Calcutta and Madras High Courts, which had taken the same view, and concurred with the same, Commissioner of Income Tax v. Crescent Export Syndicate, (2013) 216 Taxman 258 (Calcutta)
(vi) The aforesaid interpretation of Sections 194C conjointly with Section 200 and Rule 30(2) is unblemished and without any iota of doubt. We, thus, give our imprimatur to the view taken. As would be noticed and discussed in little detail hereinafter, the Allahabad High Court, while interpreting Section 40(a)(ia), did not deal with this aspect at all, even when it has a clear bearing while considering the amplitude of the said provision.
(vii) In the aforesaid backdrop, let us now deal with the issue, namely, the word ‘payable’ in Section 40(a)(ia) would mean only when the amount is payable and not when it is actually paid. Grammatically, it may be accepted that the two words, i.e. ‘payable’ and ‘paid’, denote different meanings. The Punjab & Haryana High Court, in P.M.S. Diesels & Ors., referred to above, rightly remarked that the word ‘payable’ is, in fact, an antonym of the word ‘paid’. At the same time, it took the view that it was not significant to the interpretation of Section 40(a)(ia). Discussing this aspect further, the Punjab & Haryana High Court first dealt with the contention of the assessee that Section 40(a)(ia) relates only to those assessees who follow the mercantile system and does not cover the cases where the assessees follow the cash system.
(viii) We approve the aforesaid view as well. As a fortiorari, it follows that Section 40(a)(ia) covers not only those cases where the amount is payable but also when it is paid. In this behalf, one has to keep in mind the purpose with which Section 40 was enacted and that has already been noted above. We have also to keep in mind the provisions of Sections 194C and 200. Once it is found that the aforesaid Sections mandate a person to deduct tax at source not only on the amounts payable but also when the sums are actually paid to the contractor, any person who does not adhere to this statutory obligation has to suffer the consequences which are stipulated in the Act itself. Certain consequences of failure to deduct tax at source from the payments made, where tax was to be deducted at source or failure to pay the same to the credit of the Central Government, are stipulated in Section 201 of the Act. This Section provides that in that contingency, such a person would be deemed to be an assessee in default in respect of such tax. While stipulating this consequence, Section 201 categorically states that the aforesaid Sections would be without prejudice to any other consequences which that defaulter may incur. Other consequences are provided under Section 40(a)(ia) of the Act, namely, payments made by such a person to a contractor shall not be treated as deductible expenditure. When read in this context, it is clear that Section 40(a)(ia) deals with the nature of default and the consequences thereof. Default is relatable to Chapter XVIIB (in the instant case Sections 194C and 200, which provisions are in the aforesaid Chapter). When the entire scheme of obligation to deduct the tax at source and paying it over to the Central Government is read holistically, it cannot be held that the word ‘payable’ occurring in Section 40(a)(ia) refers to only those cases where the amount is yet to be paid and does not cover the cases where the amount is actually paid. If the provision is interpreted in the manner suggested by the appellant herein, then even when it is found that a person, like the appellant, has violated the provisions of Chapter XVIIB (or specifically Sections 194C and 200 in the instant case), he would still go scot free, without suffering the consequences of such monetary default in spite of specific provisions laying down these consequences. The Punjab & Haryana High Court has exhaustively interpreted Section 40(a(ia) keeping in mind different aspects.
(ix) As mentioned above, the Punjab & Haryana High Court found support from the judgments of the Madras and Calcutta High Courts taking identical view and by extensively quoting from the said judgments.
(x) Insofar as judgment of the Allahabad High Court is concerned, reading thereof would reflect that the High Court, after noticing the fact that since the amounts had already been paid, it straightaway concluded, without any discussion, that Section 40(a)(ia) would apply only when the amount is ‘payable’ and dismissed the appeal of the Department stating that the question of law framed did not arise for consideration. No doubt, the Special Leave Petition thereagainst was dismissed by this Court in limine. However, that would not amount to confirming the view of the Allahabad High Court (See V.M. Salgaocar & Bros. (P) Ltd. v. Commissioner of Income Tax, (2000) 243 ITR 383 and Supreme Court Employees Welfare Association v. Union of India, (1989) 4 SCC 187.
(xi) In view of the aforesaid discussion, we hold that the view taken by the High Courts of Punjab & Haryana, Madras and Calcutta is the correct view and the judgment of the Allahabad High Court in CIT v. Vector Shipping Services (P) Ltd., (2013) 357 ITR 642 did not decide the question of law correctly. Thus, insofar as the judgment of the Allahabad High Court is concerned, we overrule the same. Consequences of the aforesaid discussion will be to answer the question against the appellant/assessee thereby approving the view taken by the High Court.