Shree Choudhary Transport Co vs. ITO (Supreme Court)

REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL No. 7865 OF 2009
SHREE CHOUDHARY TRANSPORT COMPANY …Appellant(s)
Vs
INCOME TAX OFFICER …Respondent(s)
JUDGMENT
Dinesh Maheshwari, J.
Preliminary
1. By way of this appeal, the assessee-appellant has called in question
the order dated 15.05.2009 passed in Income Tax Appeal No. 164 of 2008
whereby, the High Court of Judicature for Rajasthan at Jodhpur has summarily
dismissed the appeal against the order dated 29.08.2008 passed in ITA No.
117/JU/2008 by the Income Tax Appellate Tribunal, Jodhpur Bench at
Jodhpur; and thereby, the High Court has upheld the computation of total
income of the assessee-appellant for the assessment year 2005-2006 with
disallowance of payments to the tune of Rs. 57,11,625/-, essentially in terms
of Section 40(a)(ia) of the Income Tax Act, 19611, for failure of the assesseeappellant
to deduct the requisite tax at source2.
1 Hereinafter referred to as ‘the Act of 1961’ or simply ‘the Act’.
2 ‘Tax deducted at source’ being referred as ‘TDS’
1
2. We may take note of the relevant factual and background aspects of
the case while keeping in view the root point calling for determination in this
appeal, that is, as to whether the payments in question have rightly been
disallowed from deduction in computation of total income of the appellant?
Relevant factual and background aspects; the impugned order of
assessment
3. In a brief outline of the relevant factual aspects, it could be noticed
that the assessee-appellant, a partnership firm, had entered into contract with
M/s Aditya Cement Limited, Shambupura, District Chittorgarh3 for transporting
cement to various places in India. As the appellant was not having the
transport vehicles of its own, it had engaged the services of other transporters
for the purpose. The cement marketing division of M/s Aditya Cement Limited,
namely, M/s Grasim Industries Limited, effected payments towards
transportation charges to the appellant after due deduction of TDS, as shown
in Form No. 16A issued by the company.
4. On 28.10.2005, the assessee-appellant filed its return for the
assessment year 2005-2006, showing total income at Rs. 2,89,633/- in the
financial year 2004-2005 arising out of the business of ‘transport contract’.
5. In the course of assessment proceedings, the Assessing Officer4
examined the dispatch register maintained by the appellant for the period
3 Hereinafter also referred to as “the consignor company” or “the company”.
4 ‘AO’ for short
2
01.04.2004 to 31.03.2005, containing all particulars as regards the trucks
hired, date of hire, bilty and challan numbers, freight and commission charges,
net amount payable, the dates on which the payments were made, and the
destination of each truck etc. The contents of the register also indicated that
each truck was sent only to one destination under one challan/bilty; and if one
truck was hired again, it was sent to the same or other destination/trip as per
separate challan/bilty. The commission charged by the appellant from the
truck operators/owners ranged from Rs. 100/- to Rs. 250/- per trip.
5.1. On verifying the contents of record placed before him, the AO
observed that while making payment to the truck operators/owners, the
appellant had not deducted tax at source even if the net payment exceeded
Rs. 20,000/-. Following this, a notice dated 05.11.2007 was issued to the
appellant, requiring the details of amount paid to the truck operators/owners,
TDS thereupon, and date of depositing the same in the Government account.
In reply, by its letters dated 12.11.2007 and 15.11.2007, the appellant
contended, inter alia, that the trucks hired were belonging to different
operators/owners who were not the sub-contractors or contractors; that they
came from different parts of India and mostly required cash payment for diesel
and other running expenses; that the appellant had no liability to deduct tax at
source because it had not made payments exceeding Rs. 20,000/- in a single
transaction; and that the provisions of Section 40(a)(ia) were not applicable to
the appellant.
3
5.2. While drawing up the assessment order dated 22.11.2007, the AO
observed that the payments to different truck operators/owners were made
directly by the appellant firm and not the consignor company; that the
appellant firm was responsible for transportation of goods of the company as
per the contract for which, the appellant received payment from the company
after tax being deducted at source therefrom. The AO also observed that the
appellant firm paid freight charges to the truck operators/owners from the
income so earned; and the remaining amount was shown as commission.
Looking to the nature of dealings of the parties, the AO observed that there
existed a contract between the appellant and the truck operators/owners in
respect of each challan/bilty for transportation. The AO also referred to the
Circular bearing No. 715 dated 08.08.1995 issued by the Central Board of
Direct Taxes5, to observe that each goods receipt could be considered a
separate contract. While further observing that a contract may be written or
oral, the AO held that when the truck operators/owners in the case at hand
were not to be considered as contractors, they were undoubtedly the subcontractors
of the appellant. The AO also pointed out that despite sufficient
opportunity being given, a copy of the agreement of the appellant firm with the
company for providing transportation services was not furnished.
5.3. Having perused the material placed before him, the AO held on the
appellant’s responsibility for deducting tax at source while making payment to
the truck operators/owners where such payment exceeded Rs. 20,000/- on a
single bilty/challan or goods receipt in the following words:-
5 ‘CBDT’ for short
4
“The dispatch register of the assessee firm as well as the
cash book clearly establish beyond doubt that payment to the
truck operators was made by the assessee firm. In other
words, the assessee firm was the person responsible for
deducting the tax at source therefrom within the meaning of
Section 194C of the Act. Since the goods were transported
by trucks and every truck transported goods under a
separate bilty and challan to a particular destination, there
was a contract or sub-contract between the assessee firm
and the truck operator as per the provisions of Section 194C
of the Act and Board’s circular supra, and the assessee
should have deducted tax at source while making payment to
the truck operators as per the provisions of Section 194C(3)
of the Act where the amount of any sum credited or paid or
likely to be credited or paid to the account of, or to the
contractor or sub-contractor exceeded twenty thousand
rupees.
*** *** ***
From the facts and circumstances of the case discussed
above the final position emerging is that in view of the
provisions of Section 194C of the Act the assessee was liable
to deduct tax at source while making payment to truck
owners/operators where such payment exceeded Rs.
20,000/- on the basis of single bilty/challan or GR.”
5.4. After examining the details contained in the dispatch register, cash
book and payment vouchers, the AO found that tax was not deducted at
source by the appellant while making payment to the truck operator/owner,
even though the payment under a single goods receipt (challan/bilty)
exceeded the sum of Rs. 20,000/-. Thereupon, the assessee-appellant was
called upon to explain as to why deduction claimed on account of such
payment from the income be not disallowed in terms of Section 40(a)(ia) of the
Act. In the order of assessment, the AO took note of and dealt with various
submissions made on behalf of the assessee-appellant in this regard as
follows:-
5
“Since the assessee failed to deduct the tax at source while
making payment to truck owners/ operators exceeding Rs.
20,000/-, the assessee was asked to explain as to why
deduction claimed on account of such payments from the
income be not disallowed within the meaning of Section 40(a)
(ia) of the Act. The learned counsel of the assessee firm
stated that there was no payment exceeding Rs. 20,000/-. In
this regard he furnished photocopy of extract of cash book
and also payment vouchers which indicate that each
payment exceeding Rs. 20,000/- was shown in the cash book
in two parts though paid on the same date and the assessee
made two separate vouchers for such payment just to give an
impression that payment to truck owners/ operators was not
exceeding Rs. 20,000/-. In this regard it is pertinent to
mention that merely by showing payment of one challan/
bilty in two pieces the assessee cannot absolve itself of
the provisions of the Section 40(a)(ia) inasmuch as
Section 194C(3)(i) clearly speaks of – “the amount of any
sum credited or paid or likely to be credited or paid to the
account of, or to, the Contractor or sub-contractor, if such
sum does not exceed twenty thousand rupees”. The learned
counsel further submitted that the receipts of the assessee
firm are full vouched and verifiable and subject to TDS and
the payments to truck owners/ operators are made by the
assessee firm from such receipts and as such there as no
need for further TDS. He further stated that the assessee firm
prepares bills for claiming payments from the company on
the basis of freight charges payable to various truck owners/
operators and when the payment is received on the basis of
such bills, further payment is made to the truck owners/
operators and nominal commission is retained by the
assessee and, therefore, the payment made to the truck
owners/ operators was out of the purview of Section 194C of
the Act. He further stated that it is not practical to deduct tax
at source while making payment to a truck owner/ operator
because no truck owner accepts payment after TDS. This
argument put forth on behalf of the assessee firm is not
acceptable inasmuch as Section 194C(1) clearly says that –
“Any person responsible for paying any sum to any
resident…….” Since the assessee firm was responsible
for making payment to the truck owners operators, it was
mandatory on the part of the assessee to deduct tax at
source while making such payment. Further there is no
direct nexus between the Company and the truck
owners/operators and thus it cannot be said that the
6
assessee firm was a mediator between the company and
the truck owners/ operators……”
(emphasis in bold supplied)
5.5. In view of the above, the AO proceeded to disallow the deduction of
payments made to the truck operators/owners exceeding Rs. 20,000/- without
TDS, which in total amounted to Rs. 57,11,625/-; and added the same back to
the total income of the assessee-appellant. The AO also disallowed a lump
sum of Rs. 20,000/- from various expenses debited to the Profit and Loss
Account and finalised the assessment, accordingly, as under:-
“Therefore, considering the provisions of Section 194C,
Section 40(a)(ia) and Board’s Circular No. 715, dated
08.8.1995, the payment made to the truck owners/operators,
exceeding to Rs. 20,000/- without deducting tax at source is
disallowed and added back to the total income of the
assessee firm which works out to Rs. 57,11,625/-, supra.
The assessee has shown total payments in Truck Freight
Account at Rs. 1,37,71,206/- and total receipts from the
company at Rs. 1,43,90,632/-.
The assessee has shown commission income of Rs.
6,23,300/- on which net profit of Rs. 2,89,694/- has been
shown giving N.P. rate of 46.47% as against N.P. rate of
50.91% declared in the immediate preceding year on
commission income of Rs. 6,00,450/-. The N.P. rate declared
this year is on the lower side. Considering the nature of
various expenses debited to the Profit and Loss Account like
Staff Welfare Expenses, Telephone Expenses, Travelling
expenses, Motor Cycle Repairs etc. where involvement of
personal element cannot be ruled out, a lump sum
disallowance of Rs. 20,000/- is made to the declared
income.”
Before the Commissioner of Income Tax (Appeals), Jodhpur
6. Aggrieved by the order so passed by the Assessing Officer, the
assessee-appellant preferred an appeal before the Commissioner of Income
7
Tax (Appeals)6, being Appeal No. 183 of 2007-08, that was considered and
dismissed on 15.01.2008.
6.1. The CIT(A) re-examined the record and rejected the contentions of
the appellant that it had only received commission income and was not liable
to deduct tax at source on payments made to the truck owners while observing
as under:-
“On careful consideration of the material facts, it is observed
that the appellant entered into a contract for transportation of
goods (cement) with M/s Aditiya Cement Limited in order to
honour the contract, the appellant hired various trucks all
through out the year for the purpose of transportation of
cement. The appellant received freight charges from M/s
Aditiya Cement Limited on which tax was deducted. The
appellant paid freight charges to individual truck owners, after
transportation of goods. There was no nexus between the
truck owners/ operators and M/s Aditiya Cement Limited.
How the appellant transported the goods (cement) was
the exclusive domain of the appellant firm. Under such
circumstances, the gross freight received by the
appellant from M/s Aditiya Cement Limited represents
gross income of the appellant firm. Since the appellant
made payments to various truck owners/ operators.
Such payments represent expenditure. It may be
mentioned here that the payments to the truck owners/
operators were made only after the goods were transported
by them satisfactorily at the given destinations. In other
words, there existed a contract or a sub-contract between the
appellant firm and the transporters. Under such
circumstances, the appellant was required to deduct tax at
source on the payments made to truck drivers/ owners within
the meaning of provisions of Section 40(a)(ia) read with
Section 194C of the Act. Under no circumstances, it can be
said that the appellant only received commission income and
therefore provisions of Section 194C are not applicable.”
(emphasis in bold supplied)
6.2. In regard to the contention that the appellant was not required to
deduct tax at source when no payment exceeded Rs. 20,000/-, the CIT(A)
6 ‘CIT(A)’ for short
8
found that the appellant had, for its convenience and to avoid the rigour of
Section 40A(3) of the Act, chose to split the payments into two parts but the
entries of such split payments were available consecutively in the cash book.
Thus, while not accepting such methodology, the CIT(A) observed that even in
the split payments, it was required of the appellant to deduct tax at the time of
making final payment. The relevant observation of the CIT(A) read as under:-
“The facts have been gone through and it is observed that
the appellant made payments in a manner according to which
individual payment to the truck owner(s) did not exceed Rs.
20,000/-. In other words, the payment was splitted into two
parts. However, the total amount paid to the truck owner(s)
for individual contract exceeded Rs. 20,000/-. For instance,
cashbook dated 31-1-2005 of the appellant shows payments
of Rs. 14,750/- and Rs. 10,510/- to Truck No.RJ14-G-5599
for transport of cement from the premises of the Cement
Company to Bhatinda. The same cashbook page also shows
payments of Rs. 14,750/- and Rs. 9,431/- to Truck No.RJ23-
G-3041 for transport of cement. It is the argument that since
the individual payment did not exceed Rs. 20,000/-, the
provisions of Section 194C are not applicable. On careful
consideration of the material facts, it is observed that both
the entries are consecutive in the cashbook and,
therefore, it is observed that the appellant, for its
convenience and to avoid rigors of the provisions of
Section 40A(3), splitted the payments into two parts. Had
the payments been really made in two parts, both the entries
should not have been consecutive. It is also not understood
as to why the truck owners after completing the contract,
would accept the amount in two parts and why they would
come to the office of the appellant twice for seeking
payments. The theory of making payments in two parts is
merely a story, which is capable neither on facts nor on
practicability. It is also surprising to note that in none of the
case the appellant made fully payment to any truck owner all
through out the year exceeding Rs.20,000/.”
(emphasis in bold supplied)
6.3. The CIT(A) also examined in detail the question as to whether
transport contracts were subject to deduction of tax at source and, with
9
reference to clause (c) of Explanation (iii) of Section 194C of the Act as also to
CBDT Circular Nos. 558 dated 28.03.1990 and 681 dated 08.03.1994, held
that the provisions of Section 194C of the Act were applicable to the contracts
for transportation of goods; and the appellant was required to deduct tax at
source if the gross credited or paid or likely to be credited or paid exceeded
the limit of Rs. 20,000/-. Having found that the appellant’s case was squarely
covered within the provisions of Section 194C of the Act, the CIT(A) held that
in view of the mandatory provisions of Section 40(a)(ia) of the Act, the
payments in question cannot be allowed as deduction while computing total
income. Thus, the CIT(A) proceeded to dismiss the appeal while holding, inter
alia, as under:-
“It is, therefore, clear that the appellant’s case was squarely
covered within the provisions of the Section 194C and,
therefore, it was required to deduct tax at sources while
making payments to the truck owners.
Provisions of Section 40(a)(ia) clearly provide that if any
amount payable to a contractor or subcontractor 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 during the previous year, or in
the subsequent year before the expiry of the time prescribed
under sub-section (1) of Section 200, such sum shall not be
allowed as a deduction while computing the total income. As
can be seen, the provisions are mandatorily to be complied
with in the case a default and the question of existence of
any reasonable cause has got no meaning.
In the light of the entire discussion as above, I hold that the
appellant was required by the provisions of the Act to deduct
tax on freight payments totalling to Rs.57,11,625/-. Since the
appellant failed to deduct tax at source the sum of
Rs.57,11,625/- was rightly disallowed by the Ld. AO. The Ld.
AO rightly invoked the provisions of Section 40(a)(ia) of the
Act. Therefore, on the given facts as also in law, the ground
of appeal fails.”
10
Before the Income Tax Appellate Tribunal, Jodhpur Bench
7. Aggrieved again, the appellant approached the Income Tax Appellate
Tribunal, Jodhpur Bench7 in further appeal, being ITA No. 117/JU/2008. This
appeal was considered and dismissed by ITAT by way of its order dated
29.08.2008.
7.1. The ITAT pointed out that by an application dated 16.07.2008, the
appellant sought permission to produce additional evidence i.e., the
agreement dated 01.04.2003 executed between itself and M/s Grasim
Industries Limited, and as the Department had no-objection, the same was
admitted as additional evidence by the order dated 17.07.2008 but, another
application for admission of evidence in shape of affidavit of partner of the
appellant firm, was objected to by the Department and was rejected.
7.2. The ITAT found that the agreement in question was on principal to
principal basis whereby, the appellant was awarded the work of transporting
cement from Shambupura but, as the appellant did not own any trucks, it had
engaged the services of other truck operators/owners for transporting the
cement; and such a transaction was a separate contract between the appellant
and the truck operator/owner. The ITAT, therefore, endorsed the findings of AO
and CIT(A) in the following words:-
“13. The perusal of agreement on record reveals that the
assessee was awarded a works contract by M/s. Grasim
Industries Limited, a cement marketing division of M/s. Aditya
Cement Ltd. This agreement was on principal to principal
basis whereby the appellant was awarded the cement
transportation work and in terms of agreement the scope of
7 ‘ITAT’ for short
11
work was to include placement of trucks for cement
transportation from their plant at Shambupura on regular
basis in the state of Rajasthan. In case the assessee failed to
provide trucks as per contractual obligation, the company
was free to hire trucks from market at prevailing prices and
the amount of expenses incurred if any was to be debited to
the assessee’s account terming him to be a transporter. The
assessee merely acted as an independent contractor while
carrying on the aforesaid work contract awarded to it by M/s.
Grasim Industries Limited. Admittedly, the appellant did not
own trucks of its own for carrying out such transportation
contract and has engaged the services of other truck
owners/operators for lifting goods from the premises of M/s
Grasim Industries Limited and transporting the same to
various sites in Rajasthan. Goods receipt [GR]/bilty were
prepared and the same was to be taken as a contract
between the appellant and such truck owners/operators. A
clarification to this effect given vide Board Circular No. 715
dated 8.8.1995 has been brought on record by the Revenue
and strongly relied upon by the assessing authority as well so
as to consider the goods carried under particular
goods/receipt/bilty as a separate contract. The assignment of
such contract by the appellant to the truck operators/owners
was rightly taken as a sub contract for carrying out the job
awarded to the assessee by M /s. Grasim Industries Limited.
Provisions of Section 194C were duly attracted to such
payments which have been made/credited or was likely to be
paid on account of obligation under each goods receipt/bilty.
The assessing authority has found that the payments made
and credited with respect to each of such contracts involving
aggregate payment of Rs. 20,000/- on a particular day
amounted to Rs. 57,11,625/-. In the light of clear provisions
contained in Section 194C of the Act and having regard to the
fact that both the amounts actually paid or credited or likely to
be paid on account of each contract exceeded Rs. 20,000/-
on a single day. Section 194C has rightly found applicable.
We, therefore, do not find any wrong committed by the ld.
CIT(A) in holding that the assessee has committed default in
making deduction with respect to payments aggregating to
Rs. 57,11,625/- without deduction of tax at source.”
7.3. The ITAT also negated the argument that by the time of issuance of
Circular No. 5 dated 15.07.2005, the time for payment of tax at source had
expired and that Section 40(a)(ia) would only be applicable from the
12
assessment year 2006-2007 and not from the assessment year 2005-2006.
The ITAT also referred to the proviso to Section 40(a)(ia) of the Act and
pointed out that thereunder, the assessee was eligible to get deduction of such
expenditure in a subsequent year in which TDS was actually paid to the
Government. The ITAT observed in regard to these two aspects concerning
applicability of the provision in question as also the effect of proviso thereto, in
the following passage:-
“15. The assessee’s counsel also raised a plea that Circular
No. 5 was issued only on 15-7-2005 by which date the time
for payment of tax at source has also expired and as such it
was contended that the provisions as contained in Section
40(a)(ia) of the Act would be applicable not from A.Y. 2005-06
but from 2006-07. We, however, do not subscribe to the view
so canvassed by the assessee. The Finance (No.2) Act 2004
has brought an amendment in Section 40 of the Act making it
applicable w.e.f. 01/04/2004 (sic)8. Since this amendment
came before close of the financial year ended on
31/03/2005 in the statute books, the assessee cannot be
held to be ignorant of its liability to deduct tax at source.
The subsequent board circular issued is merely clarificatory.
The amendment in Section 40 of the Act does not take away
the right of the assessee to claim deduction for such
expenses for all times to come. It only mandates that the
deduction shall not be allowed in the relevant year in which
there was liability to deduct and pay tax at source but the
same has not been paid before the expiry of the time
prescribed under sub-section (1) of Section 200 of the act. It
also had proviso clause whereby the assessee was
eligible to get deduction of such expenditure in a
subsequent year in which such tax deducted at source
has actually been paid. The plea raised by the assessee,
therefore, does not support the claim.”
(emphasis in bold supplied)
8 The extraction is from the typed copy of the order of ITAT, placed on record as Annexure P-5 ( at
page 84 of the paper book) but there is obvious typographical error on this date “01.04.2004” because
the amendment of Section 40 of the Act of 1961 by the Finance (No.2) Act, 2004 was made applicable
with effect from “01.04.2005”. The effect and implication of the relevant date is examined in Question
No. 3 infra.
13
7.4. The ITAT further rejected the contention that the amount of
expenditure was not charged to the Profit and Loss Account and only
commission was shown as income. The ITAT observed that mere reflection in
two different account books would not qualify for distinct and different
treatment since both freight paid and freight charged partake the same
character. The ITAT, accordingly, dismissed the appeal.
Before the High Court
8. Aggrieved yet again, the appellant approached the High Court in
D.B. Income Tax Appeal No. 164 of 2008 against the order passed by ITAT.
However, the appeal so filed was dismissed summarily by the High Court, by
its short order dated 15.05.2009 that reads as under:-
“In our view, on the language of Section 194C(2), and the fact
that the good received were sent through truck owners by the
appellant, and there was no privity of direct contract between
the truck owners and the cement factory. According to the
contract between the appellant and the cement factory, it was
the appellant’s responsibility to transport the cement, and for
that the appellant hired the services of the truck owners,
obviously as sub-contractors. In that view of the matter, we
do not find any error in the impugned order of the Tribunal.
The appeal is, therefore, dismissed summarily.”
9. Thus, the net result of the proceedings aforesaid had been that the
consistent views of the AO, CIT(A) and ITAT, that deduction, of the payments
made to the truck operators/owners, cannot be allowed while computing the
total income of the assessee-appellant, came to be affirmed by the High Court.
Rival Submissions
Appellant
14
10. Assailing the order so passed by the High Court in summary
dismissal of the appeal as also the views expressed in the assessment and
appellate orders, learned counsel for the assessee-appellant has urged before
us multiple contentions on the scope and applicability of Section 194C of the
Act as also Section 40(a)(ia) thereof and has argued that these provisions
could not have been applied to the case at hand.
10.1. Learned counsel for the appellant has strenuously argued that the
provisions of Section 194C of the Act of 1961, particularly sub-section (2)
thereof, were not applicable to the present case for there was no oral or written
contract of the appellant with the truck operators/owners, whose vehicles were
engaged to execute the work of transportation of the goods. It has been
contended that the liability under Section 194C(2) would have arisen only if
payments were made to “sub-contractor” and that too “in pursuance of a
contract” for the purpose of “carrying whole or any part of work undertaken by
the contractor”. The learned counsel for the appellant would argue that when
there had not been any specific contract between the appellant and the truck
owners, whose vehicles were hired by the appellant on freelance and need
basis, the ingredients of Section 194C(2) were not satisfied and the obligation
of deducting tax at source could not have been fastened on the appellant.
10.1.1. The learned counsel has supported his contentions against the
applicability of Section 194C of the Act to the present case with reference to
the decision of Delhi High Court in the case of Commissioner of Income-Tax
v. Hardarshan Singh: (2013) 350 ITR 427 wherein it was held that when the
15
assessee merely acted as facilitator or intermediary in the process of
transportation of goods, he had no liability to deduct TDS under Section 194C
of the Act.
10.2. The main plank of the submissions of learned counsel for the
appellant has been that disallowance under Section 40(a)(ia) of the Act is
confined to the expenses that are booked during the year but remain payable
or outstanding and not the expenses that had already been paid. The learned
counsel has referred to the decision of this Court in the case of J.K.
Synthetics Limited v. Commercial Taxes Officer: (1994) 4 SCC 276; and
the definition of the term “paid” in Section 43(2) of the Act to submit that the
two expressions “payable” and “paid” are of entirely different connotations. The
learned counsel has painstakingly referred to the contents of the Bill
introducing the Finance (No.2) Act of 2004 where the expressions “credited or
paid” were used but in the provision as enacted, the expression “payable” has
occurred. According to the learned counsel, if the legislature intended to
disallow the deduction towards the payments made and incurred, it would
have used the expression “paid”, which term has been specifically defined for
the purposes of Sections 28 to 41 of the Act but the use of expression
“payable” makes it clear that the coverage of the provision is restricted and in
any case, it is not applicable over the amount already paid. The learned
counsel has also attempted to draw support to his contentions with reference
to the contents of the proviso to Section 40(a)(ia) of the Act with the
submissions that the meaning and scope of the main provision is accentuated
16
by the scope of proviso wherein, the expression “paid” is used while giving out
the circumstances when a deduction, not allowed under the main provision,
could be claimed in the subsequent year.
10.2.1. Taking this line of argument further, learned counsel would contend
that the scope of Section 40(a)(ia) of the Act cannot be decided on the basis of
the scope of Section 194C of the Act. Learned counsel would submit that
Section 201 of the Act provides for consequence of non-deduction of TDS
either at the time of payment or booking, whichever is earlier; and thus, the
said provision would apply to both the situations where the expenses amount
has been “paid” or is “payable”. However, according to the learned counsel,
the additional consequence of default as provided in Section 40(a)(ia) of the
Act would come into operation only if the alleged default strictly falls within the
language of this provision, which is limited to the amount “payable”. Learned
counsel would submit that the scope of Section 40(a)(ia) of the Act cannot be
expanded beyond its language merely because as per Section 194C, the
liability to deduct tax is at the time of “credit of such amount to the account of a
contractor” or at the time of “payment” whichever is earlier. With reference to
the decision of this Court in the case of Institute of Chartered Accountants
of India v. Price Waterhouse: (1997) 93 Taxman 588, the learned counsel
has argued that when the words are clear and there is no obscurity, the
intention of legislature has to be inferred only from the words used in the
provision.
17
10.2.2. Thus, learned counsel for the appellant has strenuously argued that
Section 40(a)(ia) of the Act remains limited in its scope and does not apply to
the amount already “paid”. However, being aware of the position that the
substratum of such contentions does not stand in conformity with the view
already taken by this Court in the case of Palam Gas Service v.
Commissioner of Income-Tax : (2017) 394 ITR 300, the learned counsel
has made elaborate submissions that the said decision in Palam Gas Service
requires reconsideration. According to the learned counsel, such
reconsideration is necessitated because of the factors that: (a) the taxing
provision for disallowance has to be strictly construed as per the language
used and there is no scope for adopting the so-called purposive construction;
(b) the change of words used in the Bill “credited or paid” to the word “payable”
has been ignored; (c) the effect of proviso making it clear that the intent of the
main provision is only to disallow the outstanding or payable amounts has not
been considered; and (d) the Court has widened the scope of consequences
provided under Section 40(a)(ia) of the Act based on the scope of Sections
194C and 201 of the Act, although such an approach is impermissible while
interpreting a provision in the taxing statute.
10.3. Learned counsel for the appellant has argued in the alternative that
the said sub-clause (ia), having been inserted to clause (a) of Section 40 of the
Act with effect from 01.04.2005 by the Finance (No.2) Act, 2004, would apply
only from the financial year 2005-2006 and hence, cannot apply to the present
case pertaining to the financial year 2004-2005. In support, the learned
18
counsel has referred to and relied upon the decision of Calcutta High Court in
the case of PIU Ghosh v. Deputy Commissioner of Income-Tax & Ors.:
(2016) 386 ITR 322. Supplemental to these contentions, the learned counsel
has also argued that, in any case, the Finance (No.2) Act, 2004 received the
assent of the President of India on 10.09.2004 and hence, the rigour of subclause
(ia) of Section 40(a) of the Act cannot be applied in relation to the
payments already made before 10.09.2004, the date of introduction of this
provision.
10.3.1. In yet another alternative, learned counsel for the appellant has
referred to the amendment made to Section 40(a)(ia) of the Act by the Finance
(No.2) Act, 2014, restricting and limiting the extent of disallowance to 30% of
the expenditure and has submitted that the said amendment, being curative in
nature and having been introduced to ameliorate the hardships faced by the
assessees, deserves to be applied retrospectively and from the date of
introduction of sub-clause (ia) to Section 40(a) of the Act. The learned counsel
has developed this argument by relying on the decision in Commissioner of
Income-Tax v. Calcutta Export Company: (2018) 404 ITR 654, wherein this
Court has held the remedial amendment of Section 40(a)(ia) of the Act by the
Finance Act, 2010 to be retrospective in nature and applicable from the date
of insertion of the said provision.
10.4. Learned counsel for the appellant has lastly submitted that the result
of applying the provisions in question to the entire payment practically leads to
a highly incongruous position that whole of the receipt from company is treated
19
as the income of the appellant and taxed accordingly, but without due
provision towards necessary expenses. According to the learned counsel, in
such contracts, the annual income of the transport contractor like the appellant
cannot be, and is not, to the extent of about Rs. 57 lakhs, as sought to be
taxed in the present matter.
Respondent
11. Per contra, the learned counsel for respondent-revenue has duly
supported the orders impugned, essentially with reference to the reasonings
therein and also with reference to the decision of this Court in Palam Gas
Service (supra).
11.1. Learned counsel for the revenue has, in the first place, contended
with reference to the decided cases that the concurrent findings of fact
recorded by the authorities and ITAT, as affirmed by the High Court call for no
interference for no case of apparent perversity being made out.
11.2. Learned counsel has further submitted that the appellant admittedly
carried out the work of transportation by hiring the trucks and made payments
to the operators/owners while issuing an invoice/bilty/challan for every such
hiring, which constituted a separate contract/sub-contract. According to the
learned counsel, in such dealings, the appellant was required to deduct tax at
source in terms of Section 194C of the Act when making payment to any truck
operator/owner in the sum exceeding Rs. 20,000/-; and the appellant having
failed to do so, the provisions of Section 40(a)(ia) have rightly been invoked.
20
11.3. Learned counsel for the revenue has made elaborate reference to
the decision of this Court in the case of Palam Gas Service (supra) and has
submitted that the principal contention on the part of the appellant, that the
expression “payable”, as occurring in Section 40(a)(ia) of the Act, refers only to
those cases where the amount is yet to be paid and does not cover the cases
where the amount is actually paid, has been duly considered and specifically
rejected by this Court; and the said decision squarely covers the present
matter. The learned counsel has argued that in the case of Palam Gas
Service (supra), this Court having holistically examined the scheme of the
provisions in question, there is no scope for reconsideration of the said
decision; and this appeal deserves to be dismissed for the question sought to
be raised as regard interpretation of Section 40(a)(ia) of the Act being no more
res integra.
11.4. Learned counsel for the revenue has further contended that the
amendment to Section 40(a) of the Act with insertion of sub-clause (ia) by the
Finance (No. 2) Act, 2004 with effect from 01.04.2005 directly applies to the
assessment year 2005-2006; and for the appellant having failed to deduct tax
at source from the payment made to the sub-contractors for the work of
transportation, deduction of such payment has rightly been disallowed.
11.5. The learned counsel has also argued that the proviso to Section
40(a)(ia) of the Act, as inserted by the Finance Act, 2014, does not apply to the
case at hand pertaining to the assessment year 2005-2006 and hence, the
21
argument for curative benefit with reference to the said proviso does not hold
the ground.
Questions for determination
12. Having regard to the submissions made by the learned counsel for
the parties and the observations occurring in the orders impugned, the
principal questions arising for determination in this appeal could be stated as
follows:-
1. As to whether Section 194C of the Act does not apply to the
present case?
2. As to whether disallowance under Section 40(a)(ia) of the Act is
confined/limited to the amount “payable” and not to the amount
“already paid”; and whether the decision of this Court in Palam Gas
Service v. Commissioner of Income-Tax: (2017) 394 ITR 300
requires reconsideration?
3. As to whether sub-clause (ia) of Section 40(a) of the Act, as
inserted by the Finance (No. 2) Act, 2004 with effect from
01.04.2005, is applicable only from the financial year 2005-2006
and, hence, is not applicable to the present case relating to the
financial year 2004-2005; and, at any rate, whole of the rigour of this
provision cannot be applied to the present case?
4. As to whether the payments in question have rightly been
disallowed from deduction while computing the total income of the
assessee-appellant?
22
Relevant Provisions
13. For determination of the questions aforesaid, we need to closely look
at the statutory provisions in the Act of 1961 which have material bearing on
this case.
13.1. It is noticed that elaborate provisions have been made in Chapter
XVII of the Act of 1961 for “Collection and Recovery of Tax” and Part B thereof
carries the provisions concerning “Deduction at Source”. Sections 194C, 200
and 201, which have come in reference in the present matter, are contained in
this part and the same, as existing at the relevant point of time pertaining to
the assessment year 2005-2006, may be usefully noticed.
13.1.1. The liability against the appellant has basically arisen because of its
alleged non-compliance of the requirements of Section 194C of the Act. At the
relevant point of time, this provision read as under:-
“194C. Payments to contractors and sub-contractors.-
(1) Any person responsible for paying any sum to any
resident (hereafter in this section referred to as the
contractor) for carrying out any work (including supply of
labour for carrying out any work) in pursuance of a contract
between the contractor and-
(a) the Central Government or any State Government;
or
(b) any local authority; or
(c) any corporation established by or under a Central,
State or Provincial Act; or
(d) any company; or
(e) any co-operative society; or
(f) any authority, constituted in India by or under any
law, engaged either for the purpose of dealing with
and satisfying the need for housing accommodation
or for the purpose of planning, development or
improvement of cities, towns and villages, or for
both; or
23
(g) any society registered under the Societies
Registration Act, 1860 (21 of 1860) or under any law
corresponding to that Act in force in any part of
India; or
(h) any trust; or
(i) any University established or incorporated by or
under a Central, State or Provincial Act and an
institution declared to be a University under section
3 of the University Grants Commission Act, 1956 (3
of 1956); or
(j) any firm,
shall, at the time of credit of such sum to the account of the
contractor or at the time of payment thereof in cash or by
issue of a cheque or draft or by any other mode, whichever is
earlier, deduct an amount equal to-
(i) one per cent in case of advertising,
(ii)in any other case two per cent,
of such sum as income-tax on income comprised therein.
(2) Any person (being a contractor and not being an
individual or a Hindu undivided family) responsible for paying
any sum to any resident (hereafter in this section referred to
as the sub-contractor) in pursuance of a contract with the
sub-contractor for carrying out, or for the supply of labour for
carrying out, the whole or any part of the work undertaken by
the contractor or for supplying whether wholly or partly any
labour which the contractor has undertaken to supply shall, at
the time of credit of such sum to the account of the subcontractor
or at the time of payment thereof in cash or by
issue of a cheque or draft or by any other mode, whichever is
earlier, deduct an amount equal to one per cent of such sum
as income-tax on income comprised therein:
Provided that an individual or a Hindu undivided family,
whose total sales, gross receipts or turnover from the
business or profession carried on by him exceed the
monetary limits specified under clause (a) or clause (b) of
section 44AB during the financial year immediately preceding
the financial year in which such sum is credited or paid to the
account of the sub-contractor, shall be liable to deduct
income-tax under this sub-section.
Explanation I.- For the purposes of sub-section (2), the
expression “contractor” shall also include a contractor who is
carrying out any work (including supply of labour for carrying
out any work) in pursuance of a contract between the
contractor and the Government of a foreign State or a foreign
enterprise or any association or body established outside
India.
24
Explanation II. -For the purposes of this section, where any
sum referred to in sub-section (1) or sub-section (2) is
credited to any account, whether called “Suspense account”
or by any other name, in the books of account of the person
liable to pay such income, such crediting shall be deemed to
be credit of such income to the account of the payee and the
provisions of this section shall apply accordingly.
Explanation III. – For the purposes of this section, the
expression “Work” shall also include-
(a) advertising;
(b) broadcasting and telecasting including production of
programmes for such broadcasting or telecasting;
(c) carriage of goods and passengers by any mode of
transport other than by railways;
(d) catering.
(3) No deduction shall be made under sub-section (1) or
sub-section (2) from-
(i) the amount of any sum credited or paid or likely to be
credited or paid to the account of, or to, the contractor or subcontractor,
if such sum does not exceed twenty thousand
rupees:
Provided that where the aggregate of the amounts of such
sums credited or paid or likely to be credited or paid during
the financial year exceeds fifty thousand rupees, the person
responsible for paying such sums referred to in sub-section
(1) or, as the case may be, sub-section (2) shall be liable to
deduct income-tax under this section; or
(ii) any sum credited or paid before the 1st day of June, 1972;
or
(iii) any sum credited or paid before the 1st day of June, 1973,
in pursuance of a contract between the contractor and a cooperative
society or in pursuance of a contract between such
contractor and the sub-contractor in relation to any work
(including supply of labour for carrying out any work)
undertaken by the contractor for the co-operative society.”
13.1.2. Sections 200 and 201 of the Act, respectively dealing with the duty of
the person deducting tax and consequences on failure to deduct or pay, as
applicable at the relevant time, could also be reproduced as under:-
“200. Duty of person deducting tax.
25
(1) Any person deducting any sum in accordance with the
foregoing provisions of this Chapter9, shall pay within the
prescribed time, the sum so deducted to the credit of the
Central Government or as the Board directs.
(2) Any person being an employer, referred to in sub-section
(1A) of section 192 shall pay, within the prescribed time, the
tax to the credit of the Central Government or as the Board
directs.10
(3) Any person deducting any sum on or after the 1st day of
April, 2005 in accordance with the foregoing provisions of this
Chapter or, as the case may be, any person being an
employer referred to in sub-section (1A) of section 192 shall,
after paying the tax deducted to the credit of the Central
Government within the prescribed time, prepare quarterly
statements for the period ending on the 30th June, the 30th
September, the 31st December and the 31st March in each
financial year and deliver or cause to be delivered to the
prescribed income-tax authority or the person authorised by
such authority such statement in such form and verified in
such manner and setting forth such particulars and within
such time as may be prescribed.11
201. Consequences of failure to deduct or pay.
(1) If any such person referred to in section 200 and in the
cases referred to in section 194, the principal officer and the
company of which he is the principal officer does not deduct
the whole or any part of the tax or after deducting fails to pay
the tax as required by or under this Act, he or it shall, without
prejudice to any other consequences which he or it may
incur, be deemed to be an assessee in default in respect of
the tax:
Provided that no penalty shall be charged under section 221
from such person, principal officer or company unless the
Assessing Officer is satisfied that such person or principal
officer or company, as the case may be, has without good
and sufficient reasons failed to deduct and pay the tax.
(1A) Without prejudice to the provisions of sub-section (1), if
any such person, principal officer or company as is referred
9 The words “the foregoing provisions of this Chapter” were substituted for the previous expressions
carrying various provisions of the Act, by the Finance (No. 2) Act, 2004, w.e.f. 01.10.2004.
10 Sub-section (2) was inserted by the Finance Act, 2002.
11 Sub-section (3) was inserted by the Finance (No.2) Act, 2004, w.e.f. 01.04.2005.
26
to in that sub-section does not deduct the whole or any part
of the tax or after deducting fails to pay the tax as required by
or under this Act, he or it shall be liable to pay simple interest
at twelve per cent per annum on the amount of such tax from
the date on which such tax was deductible to the date on
which such tax is actually paid.
(2) Where the tax has not been paid as aforesaid after it is
deducted, the amount of the tax together with the amount of
simple interest thereon referred to in sub-section (1A) shall
be a charge upon all the assets of the person, or the
company, as the case may be, referred to in sub-section (1).”
13.2. Chapter IV of the Act of 1961 deals with the subject “Computation of
Total Income” and Section 40 occurs in Part D thereof, carrying the provisions
relating to the “Profits and Gains of Business or Profession”. Even when
Sections 30 to 38 provide for various allowances and deductions in
computation of the income from profits and gains of business or profession,
Section 40 specifically ordains that certain amounts shall not be deducted,
notwithstanding anything to the contrary contained in the said Sections 30 to
38 of the Act. In the present matter, we are concerned with the provisions
contained in sub-clause (ia) of clause (a) of Section 40 of the Act, which was
inserted by the Finance (No. 2) Act, 2004 with effect from 01.04.2005. Hence,
the extraction hereunder is essentially of the provision that could be read as
Section 40(a)(ia) of the Act after insertion by the Finance (No. 2) Act, 2004: –
“40. Amounts not deductible. – 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”,-
(a) in the case of any assessee-
*** *** ***
(ia) any interest, commission or brokerage, fees for
professional services or fees for technical services payable
27
to a resident, or amounts payable to a contractor or subcontractor,
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 during the previous year, or in the subsequent year
before the expiry of the time prescribed under sub-section (1)
of section 200:
Provided that where in respect of any such sum, tax has
been deducted in any subsequent year or, has been
deducted in the previous year but paid in any subsequent
year after the expiry of the time prescribed under sub-section
(1) of section 200, such sum shall be allowed as a deduction
in computing the income of the previous year in which such
tax has been paid.
Explanation.- For the purposes of this sub-clause,-
(i) “commission or brokerage” shall have the same meaning
as in clause (i) of the Explanation to section 194H;
(ii) “fees for technical services” shall have the same meaning
as in Explanation 2 to clause (vii) of sub-section (1) of
section 9;
(iii) “professional services” shall have the same meaning as
in clause (a) of the Explanation to section 194J;
(iv) “work” shall have the same meaning as in Explanation III
to section 194C;
*** *** ***”12
13.3. Section 43 in the very same Part D of Chapter IV of the Act of 1961
defines various terms relevant to the income from profits and gains of business
or profession; and clause (2) thereof, carrying the definition of the expression
“paid”, having been referred in the present matter, could also be usefully
reproduced as under:-
“43. Definitions of certain terms relevant to income from
profits and gains of business or profession. – In sections
12 We may usefully indicate that Section 40(a)(ia) of the Act has undergone several amendments
from time to time and in one segment of arguments, the amendments as made in the years 2010 and
2014, have been referred on behalf of the appellant. We shall refer to the relevant contents of this
provision after such amendments while dealing with that part of arguments at the appropriate juncture
hereafter later.
28
28 to 41 and in this section, unless the context otherwise
requires-
*** *** ***
(2) “paid” means actually paid or incurred according to the
method of accounting upon the basis of which the profits or
gains are computed under the head “Profits and gains of
business or profession”;
*** *** ***”
13.4. For their relevance in relation to another segment of arguments, we
may also take note of the meaning assigned to the expression “assessment
year” in clause (9) of Section 2; and to the expression “previous year” in
Section 3 of the Act of 1961 as follows: –
“2. Definitions.- In this Act, unless the context otherwise
requires,-
*** *** ***
(9) “assessment year” means the period of twelve months
commencing on the 1st day of April every year;
*** *** ***”
“3. “Previous year” defined.- For the purposes of this Act,
“previous year” means the financial year immediately
preceding the assessment year:
*** *** ***”
14. We may now take up the questions involved in this matter ad
seriatim.
Question No.1
15. In order to maintain that the appellant was under no obligation to
make any deduction of tax at source, it has been argued that there was no
oral or written contract of the appellant with the truck operators/owners, whose
vehicles were engaged to execute the work of transportation of the goods only
on freelance and need basis. The submission has been that the question of
TDS under Section 194C(2) would have arisen only if the payment was made
29
to a “sub-contractor” and that too, in pursuance of a contract for the purpose
of “carrying whole or any part of work undertaken by the contractor”. In our
view, the submissions so made remain entirely baseless.
15.1. The nature of contract entered into by the appellant with the
consignor company makes it clear that the appellant was to transport the
goods (cement) of the consignor company; and in order to execute this
contract, the appellant hired the transport vehicles, namely, the trucks from
different operators/owners. The appellant received freight charges from the
consignor company, who indeed deducted tax at source while making such
payment to the appellant. Thereafter, the appellant paid the charges to the
persons whose vehicles were hired for the purpose of the said work of
transportation of goods. Thus, the goods in question were transported through
the trucks employed by the appellant but, there was no privity of contract
between the truck operators/owners and the said consignor company.
Indisputably, it was the responsibility of the appellant to transport the goods
(cement) of the company; and how to accomplish this task of transportation
was a matter exclusively within the domain of the appellant. Hence, hiring the
services of truck operators/owners for this purpose could have only been
under a contract between the appellant and the said truck operators/owners.
Whether such a contract was reduced into writing or not carries hardly any
relevance. In the given scenario and set up, the said truck operators/owners
answered to the description of “sub-contractor” for carrying out the whole or
30
part of the work undertaken by the contractor (i.e., the appellant) for the
purpose of Section 194C(2) of the Act.
15.2. The suggestions on behalf of the appellant that the said truck
operators/owners were not bound to supply the trucks as per the need of the
appellant nor the freight payable to them was pre-determined, in our view,
carry no meaning at all. Needless to observe that if a particular truck was not
engaged, there existed no contract but, when any truck got engaged for the
purpose of execution of the work undertaken by the appellant and freight
charges were payable to its operator/owner upon execution of the work, i.e.,
transportation of the goods, all the essentials of making of a contract existed;
and, as aforesaid, the said truck operator/owner became a sub-contractor for
the purpose of the work in question. The AO, CIT(A) and the ITAT have
concurrently decided this issue against the appellant with reference to the
facts of the case, particularly after appreciating the nature of contract of the
appellant with the consignor company as also the nature of dealing of the
appellant, while holding that the truck operators/owners were engaged by the
appellant as sub-contractors. The same findings have been endorsed by the
High Court in its short order dismissing the appeal of the appellant. We are
unable to find anything of error or infirmity in these findings.
15.3. The decision of Delhi High Court in the case of Hardarshan Singh
(supra), in our view, has no application whatsoever to the facts of the present
case. The assessee therein, who was in the business of transporting goods,
had four trucks of his own and was also acting as a commission agent by
31
arranging for transportation through other transporters. As regards the income
of assessee relatable to transportation through other transporters, it was found
that the assessee had merely acted as a facilitator or as an intermediary
between the two parties (i.e., the consignor company and the transporter) and
had no privity of contract with either of such parties inasmuch as he only
collected freight charges from the clients who intended to transport their goods
through other transporters; and the amount thus collected from the clients was
paid to those transporters by the assessee while deducting his commission.
Looking to the nature of such dealings, the said assessee was held to be “not
the person responsible” for making payments in terms of Section 194C of the
Act and hence, having no obligation to deduct tax at source. In
contradistinction to the said case of Hardarshan Singh, the appellant of the
present case was not acting as a facilitator or intermediary between the
consignor company and the truck operators/owners because those two parties
had no privity of contract between them. The contract of the company, for
transportation of its goods, had only been with the appellant and it was the
appellant who hired the services of the trucks. The payment made by the
appellant to such a truck operator/owner was clearly a payment made to a
sub-contractor.
15.4. Though the decision of this Court in the case of Palam Gas Service
(supra) essentially relates to the interpretation of Section 40(a)(ia) of the Act
and while the relevant aspects concerning the said provision shall be
examined in the next question but, for the present purpose, the facts of that
32
case could be usefully noticed, for being akin to the facts of the present case
and being of apposite illustration. Therein, the assessee was engaged in the
business of purchase and sale of LPG cylinders whose main contract for
carriage of LPG cylinders was with Indian Oil Corporation, Baddi wherefor, the
assessee received freight payments from the principal. The assessee got the
transportation of LPG done through three persons to whom he made the
freight payments. The Assessing Officer held that the assessee had entered
into a sub-contract with the said three persons within the meaning of Section
194C of the Act. Such findings of AO were concurrently upheld up to the High
Court and, after interpretation of Section 40(a)(ia), this Court also approved
the decision of the High Court while dismissing the appeal with costs. Learned
counsel for the appellant has made an attempt to distinguish the nature of
contract in Palam Gas Service by suggesting that therein, the assessee’s
sub-contractors were specific and identified persons with whom the assessee
had entered into contract whereas the present appellant was free to hire the
service of any truck operator/owner and, in fact, the appellant hired the trucks
only on need basis. In our view, such an attempt of differentiation is totally
baseless and futile. Whether the appellant had specific and identified trucks
on its rolls or had been picking them up on freelance basis, the legal effect on
the status of parties had been the same that once a particular truck was
engaged by the appellant on hire charges for carrying out the part of work
undertaken by it (i.e., transportation of the goods of the company), the
33
operator/owner of that truck became the sub-contractor and all the
requirements of Section 194C came into operation.
15.5. Thus, we have no hesitation in affirming the concurrent findings in
regard to the applicability of Section 194C to the present case. Question No.1
is, therefore, answered in the negative; against the assessee-appellant and in
favour of the revenue.
Question No.2.
16. While taking up the question of interpretation of Section 40(a)(ia), it
may be usefully noticed that Section 194C is placed in Chapter XVII of the Act
on the subject “Collection and Recovery of Tax”; and specific provisions are
made in the Act to ensure that the requirements of Section 194C are met and
complied with, while also providing for the consequences of default. As
noticed, Section 200 specifically provides for the duties of the person
deducting tax to deposit and submit the statement to that effect. The
consequences of failure to deduct or pay the tax are then provided in Section
201 of the Act which, as noticed, puts such defaulting person in the category
of “the assessee in default in respect of the tax” apart from other
consequences which he or it may incur. The aspect relevant for the present
purpose is that Section 40 of the Act, and particularly the provision contained
in sub-clause (ia) of clause (a) thereof, indeed provides for one of such
consequences.
16.1. Section 40(a)(ia) provides for the consequences of default in the
case where tax is deductible at source on any interest, commission, brokerage
34
or fees but had not been so deducted, or had not been paid after deduction
(during the previous year or in the subsequent year before expiry of the
prescribed time) in the manner that the amount of such interest, commission,
brokerage or fees shall not be deducted in computing the income chargeable
under “profits and gains of business or profession”. In other words, it shall be
computed as income of the assessee because of his default in not deducting
the tax at source.
16.2. In the overall scheme of the provisions relating to collection and
recovery of tax, it is evident that the object of legislature in introduction of the
provisions like sub-clause (ia) of clause (a) of Section 40 had been to ensure
strict and punctual compliance of the requirement of deducting tax at source.
In other words, the consequences, as provided therein, had the underlying
objective of ensuring compliance of the requirements of TDS. It is also
noteworthy that in the proviso added to clause (ia) of Section 40(a) of the Act,
it was provided that where in respect of the sum referable to TDS requirement,
tax has been deducted in any subsequent year, or has been deducted during
the previous year but paid in any subsequent year after the expiry of the time
prescribed in Section 200(1), such sum shall be allowed as a deduction in
computing the income of the previous year in which such tax has been paid.
16.3. The purpose and coverage of this provision as also protection
therein have been tersely explained by this Court in the case of Calcutta
Export Company (supra), which has been cited by learned counsel for the
appellant in support of another limb of submissions which we shall be dealing
35
with in the next question. For the present purpose, we may notice the relevant
observations of this Court in Calcutta Export Company as regards Section
40(a)(ia) of the Act as follows (at p. 662 of ITR):-
“16. The purpose is very much clear from the above referred
explanation by the Memorandum that it came with a purpose
to ensure tax compliance. The fact that the intention of the
Legislature was not to punish the assessee is further
reflected from a bare reading of the provisions of section
40(a)(ia) of the Income-tax Act. It only results in shifting of the
year in which the expenditure can be claimed as deduction.
In a case where the tax deducted at source was duly
deposited with the Government within the prescribed time,
the said amount can be claimed as a deduction from the
income in the previous year in which the TDS was deducted.
However, when the amount deducted in the form of TDS was
deposited with the Government after the expiry of period
allowed for such deposit then the deductions can be claimed
for such deposited TDS amount only in the previous year in
which such payment was made to the Government.”
16.4. Taking up the question as to whether disallowance under Section
40(a)(ia) of the Act is confined to the amount “payable” and not to the amount
“already paid”, we find that these aspects of interpretation do not require
much dilation in view of the ratio of the decision of this Court in the case of
Palam Gas Service (supra).
16.5. In fact, the decision in Palam Gas Service (supra) is a direct answer
to all the contentions urged on behalf of the appellant in the present case. In
that case, this Court approved the views of Punjab and Haryana High Court in
the case of P.M.S. Diesels and Ors. v. Commissioner of Income-Tax:
(2015) 374 ITR 562 as regards mandatory nature of the provisions relating to
the liability to deduct tax at source in the following words (at pp. 306-308 of
ITR):-
36
“11. The Punjab & Haryana High Court in P.M.S. Diesels v.
CIT [2015] 374 ITR 562 (P&H), has held these provisions to
be mandatory in nature with the following observations:
“The liability to deduct tax at source under the
provisions of Chapter XVII is mandatory. A person
responsible for paying any sum is also liable to
deposit the amount in the Government account. All
the sections in Chapter XVII-B require a person to
deduct the tax at source at the rates specified therein.
The requirement in each of the sections is preceded
by the word ‘shall’. The provisions are, therefore,
mandatory. There is nothing in any of the sections that
would warrant our reading the word ‘shall’ as ‘may’.
The point of time at which the deduction is to be made
also establishes that the provisions are mandatory.
For instance, under section 194C, a person
responsible for paying the sum is required to deduct
the tax “at the time of credit of such sum to the
account of the contractor or at the time of the
payment thereof. ……’”
12. While holding the aforesaid view, the Punjab and
Haryana High Court discussed the judgments of the Calcutta
and Madras High Courts, which had taken the same view,
and concurred with the same, which is clear from the
following discussion contained in the judgment of the Punjab
and Haryana High Court:
“A Division Bench of the Calcutta High Court in CIT v.
Crescent Export Syndicate [2013] 216 Taxman 258
(Cal) held :
‘13. …
‘The term “shall” used in all these sections
make it clear that these are mandatory
provisions and 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
TDS. On the contrary, the intention of the
Legislature is evident from the fact that timing of
deduction of tax is earliest possible opportunity
to recover tax, either at the time of credit in the
account of payee or at the time of payment to
payee, whichever is earlier.’
Ms. Dhugga invited our attention to a judgment of the
Division Bench of the Madras High Court in Tube
Investments of India Ltd. v. Asst. CIT (TDS) [2010]
325 ITR 610 (Mad). The Division Bench referred to
37
the statistics placed before it by the Department which
disclosed that TDS collection had augmented the
revenue. The gross collection of advance tax,
surcharge, etc. was Rs 2,75,857.70 crores in the
financial year 2008-09 of which the TDS component
alone constituted Rs 1,30,470.80 crores. The Division
Bench observed that introduction of section 40(a)(ia)
had achieved the objective of augmenting the TDS to
a substantial extent. The Division Bench also
observed that when the provisions and procedures
relating to TDS are scrupulously applied, it also
ensured the identification of the payees thereby
confirming the network of assessees and that once
the assessees are identified it would enable the tax
collection machinery to bring within its fold all such
persons who are liable to come within the network of
taxpayers. These objects also indicate the legislative
intent that the requirement of deducting tax at source
is mandatory.
The liability to deduct tax at source is, therefore,
mandatory.”
13. 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……”
(emphasis in bold supplied)
16.5.1. Having said that deducting tax at source is obligatory, this Court
proceeded to deal with the issue as to whether the word ‘payable’ in Section
40(a)(ia) would cover only those cases where the amount is payable and not
where it has actually been paid. This Court took note of the exhaustive
interpretation of various aspects related with this issue by the Punjab and
Haryana High Court in the case of P.M.S. Diesels (supra) as also by the
Calcutta High Court in the case of Commissioner of Income-Tax, Kolkata-
XI v. Crescent Export Syndicate: (2013) 216 Taxman 258; and while
approving the same, this Court held, as regards implication and connotation of
the expression “payable” used in this provision, as follows (at p. 310 of ITR):-
38
“15. We approve the aforesaid view as well. As a fortiori, 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 XVII-B (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 XVII-B (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……”
(emphasis in bold supplied)
16.6. We may profitably observe that in the case of P.M.S. Diesels
(supra), the Punjab and Haryana High Court had extensively dealt with myriad
39
features of Section 40(a)(ia) of the Act, including the term “payable” used
therein as also the proviso thereto; and expounded on the entire gamut of this
provision while making reference to Finance (No. 2) Bill of 2004 introducing
the provision and while also drawing support from the views expressed by
Calcutta High Court in the case of Crescent Export Syndicate (supra). As
regards the interpretation of the term “payable”, it was observed in P.M.S.
Diesels as under (at pp. 574-575 of ITR):-
“21. Section 40(a)(ia), therefore, applies not merely to
assessees following the mercantile system but also to
assessees following the cash system.
If this view is correct and indeed we must proceed on the
footing that it is, it goes a long way in indicating the fallacy in
the appellant’s main contention, namely, if the payments have
already been made by the assessee to the payee/contracting
party, the provisions of section 40(a)(ia) would not be
attracted even if the tax is not deducted and/or paid over to
the Government account.
22. Section 40(a)(ia) refers to the nature of the default and
the consequence of the default. The default is a failure to
deduct the tax at source under Chapter XVII-B or after
deduction the failure to pay over the same to the Government
account. The term “payable” only indicates the type or
nature of the payments by the assessees to the
persons/payees referred to in section 40(a)(ia), such as,
contractors. It is not in respect of every payment to a payee
referred to in Chapter XVII-B that an assessee is bound to
deduct tax. There may be payments to persons referred to in
Chapter XVII-B, which do not attract the provisions of
Chapter XVII-B. The consequences under section 40(a)(ia)
would only operate on account of failure to deduct tax where
the tax is liable to be deducted under the provisions of the Act
and in particular Chapter XVII-B thereof. It is in that sense
that the term “payable” has been used. The term
“payable” is descriptive of the payments which attract
the liability to deduct tax at source. It does not
categorize defaults on the basis of when the payments
are made to the payees of such amounts which attract
the liability to deduct tax at source.”
(emphasis in bold supplied)
40
16.7. We find the above-extracted observations and reasonings, which
have already been approved by this Court in Palam Gas Service (supra), to
be precisely in accord with the scheme and purpose of Section 40(a)(ia) of the
Act; and are in complete answer to the contentions urged by the learned
counsel for the appellant. It is ex facie evident that the term “payable” has
been used in Section 40(a)(ia) of the Act only to indicate the type or nature of
the payments by the assessees to the payees referred therein. In other words,
the expression “payable” is descriptive of the payments which attract the
liability for deducting tax at source and it has not been used in the provision in
question to specify any particular class of default on the basis as to whether
payment has been made or not. The semantical suggestion by the learned
counsel for the appellant, that this expression “payable” be read in
contradistinction to the expression “paid”, sans merit and could only be
rejected. In a nutshell, while respectfully following Palam Gas Service
(supra), we could only iterate our approval to the interpretation by the Punjab
and Haryana High Court in P.M.S. Diesels (supra).
16.8. Faced with the position that declaration of law in Palam Gas
Service (supra) practically covers this matter, learned counsel for the
appellant has endeavoured to submit that the decision in Palam Gas Service,
requires reconsideration for the reason that certain aspects of law have not
been considered therein and correct principles of interpretation have not been
applied. We are unable to find substance in any of these contentions. The
decision of Co-ordinate Bench in Palam Gas Service (supra) on the core
41
question of law is equally binding on this Bench and could be doubted only if
the view, as taken, is shown to be not in conformity with any binding decision
of the Larger Bench or any statutory provisions or any other reason of the like
nature. We find none. In fact, a close look at the decision of P.M.S. Diesels
(supra), which has been totally approved by this Court in Palam Gas Service,
makes it clear that therein, every aspect of the matter, from a wide range of
angles, was examined by the Punjab and Haryana High Court while drawing
support from the decisions of other High Courts, particularly that of the
Calcutta High Court in the case of Crescent Export Syndicate (supra).
16.9. We are in respectful agreement with the observations in Palam Gas
Service that the enunciations in P.M.S. Diesels had been of correct
interpretation of the provisions contained in Section 40(a)(ia) of the Act. The
decision in Palam Gas Service covers the entire matter and the said decision,
in our view, does not require any reconsideration. That being the position, the
contention urged on behalf of the appellant that disallowance under Section
40(a)(ia) does not relate to the amount already paid stands rejected.
16.10. Another contention in regard to Section 40(a)(ia) of the Act, that its
scope cannot be decided on the basis of Section 194C, has only been noted
to be rejected. The interplay of these provisions is not far to seek where
Section 40(a)(ia) is not a stand-alone provision but provides one of those
additional consequences as indicated in Section 201 of the Act for default by a
person in compliance of the requirements of the provisions contained in Part B
of Chapter XVII of the Act. The scheme of these provisions makes it clear that
42
the default in compliance of the requirements of the provisions contained in
Part B of Chapter XVII of the Act (that carries Sections 194C, 200 and 201)
leads, inter alia, to the consequence of Section 40(a)(ia) of the Act. Hence, the
contours of Section 40(a)(ia) of the Act could be aptly defined only with
reference to the requirements of the provisions contained in Part B of Chapter
XVII of the Act, including Sections 194C, 200 and 201. Putting it differently,
when the obligation of Section 194C of the Act is the foundation of the
consequence provided by Section 40(a)(ia) of the Act, reference to the former
is inevitable in interpretation of the latter.
16.11. In view of the above, reference to the definition of the term “paid” in
Section 43(2) of the Act is of no assistance to the appellant. Similarly, the
observations in the case of J.K. Synthetics (supra), as regards the difference
in connotation of the expressions “payable” and “paid”, in the context of
liability to pay interest on the tax payable under the Rajasthan Sales Tax Act,
1954, has no co-relation whatsoever to the present case. Further, when it is
found that the process of interpretation of Section 40(a)(ia) of the Act in P.M.S.
Diesels (supra), as approved by this Court in Palam Gas Service (supra),
had been with due application of the relevant principles, reference to the
decision in the case of Institute of Chartered Accountants of India (supra),
on the general principles of interpretation, does not advance the case of the
appellant in any manner.
16.12. In view of the above, Question No.2 is also answered in the
negative; against the assessee-appellant and in favour of the revenue.
43
Question No.3
17. Quite conscious of the position that the decision of this Court in
Palam Gas Service (supra) practically covers the substance of present matter
against the assessee, learned counsel for the assessee-appellant has made a
few alternative attempts to argue against the disallowance in question.
17.1. The learned counsel would submit that the said sub-clause (ia),
having been inserted to clause (a) of Section 40 of the Act with effect from
01.04.2005 by Finance (No.2) Act, 2004, would apply only from the financial
year 2005-2006 and hence, cannot apply to the present case pertaining to the
financial year 2004-2005. The learned counsel, of course, drew support to this
contention from the decision of Calcutta High Court in the case of PIU Ghosh
(supra).
17.1.1. Before proceeding further, it appears apposite to observe, as
indicated in paragraph 7.3 hereinbefore, that in the copy of order passed by
ITAT in this case, there is obvious typographical error on the date of coming
into force of the amendment to Section 40 of the Act of 1961 by the Finance
(No.2) Act, 2004 inasmuch as the said amendment was made applicable with
effect from 01.04.2005 and not 01.04.2004, as appearing the copy of the order
of ITAT. However, this error is not of material bearing because the amendment
in question was applicable from and for the assessment year 2005-2006, for
the reasons occurring infra.
17.2. Reverting to the contentions urged in this case, there is no doubt
that in PIU Ghosh (supra), the Calcutta High Court, indeed, took the view
44
which the learned counsel for the appellant has canvassed before us. The
Calcutta High Court observed that the said Finance (No.2) Act, 2004 got
presidential assent on 10.09.2004 and it was provided that the provision in
question shall stand inserted with effect from 01.04.2005. According to the
Calcutta High Court, the assessee could not have foreseen prior to
10.09.2004 that any amount paid to a contractor without deducting tax at
source was likely to become not deductible in computation of income under
Section 40 and that the legislature, being conscious of the likely predicament,
provided that the provision shall become operative from 01.04.2005. The
High Court further proceeded to observe that any other interpretation would
amount to punishing the assessee for no fault of his. The High Court further
observed that Section 11 of the said Finance Act, inserting sub-clause (ia), did
not provide that the same was to become effective from the assessment year
2005-2006. We may usefully reproduce the opinion of the Calcutta High Court
in the case of PIU Ghosh, as under (at p. 326 of ITR):-
“9. Admittedly, the Finance Act, 2004 got presidential assent
on September 10, 2004. The assessee could not have
foreseen prior to September 10, 2004 that any amount paid
to a contractor without deducting tax at source was likely to
become not deductible under section 40. It is difficult to
assume that the Legislature was not aware or did not foresee
the aforesaid predicament. The Legislature therefore
provided that the Act shall become operative on April 1, 2005.
Any other interpretation shall amount to “punishing the
assessee for no fault of his” following the judgment in the
case of Hindustan Electro Graphites Ltd. (supra).
10. On top of that, section 4 relied upon by Mr. Agarwal
merely provides for an enactment as regards rate of tax to be
charged in any particular assessment year which has no
application to the case before us. Section 11 of the Finance
(No. 2) Act, 2004 by which sub-clause (ia) was added to
45
section 40(a) of the Income-tax Act does not provide that the
same was to become effective from the assessment year
2005-06. It merely says it shall become effective on April 1,
2005 which for reasons already discussed should mean to
refer to the financial year. There is, as such, no scope for any
ambiguity nor is there any scope for confusion……”
17.3. Learned counsel for the appellant has submitted that the revenue
has accepted the said decision and has not filed any appeal against the same.
It appears, however, that the amount of deduction in the said case was only a
sum of Rs. 4,30,386/- and obviously, the net tax effect in that case, decided on
12.07.2016, was on the lower side. In any case, the said decision cannot be
treated as final declaration of law on the subject merely because the same
has not been appealed against. Having examined the law applicable, with
respect, we find it difficult to approve the above-quoted opinion of the Calcutta
High Court, particularly when it does not appear standing in conformity with
the scheme of assessment of income tax under the Act of 1961 and where the
High Court seems to have not noticed the proviso to clause (ia) of Section
40(a) of the Act forming the part of the amendment in question.
17.4. It needs hardly any detailed discussion that in income tax matters,
the law to be applied is that in force in the assessment year in question,
unless stated otherwise by express intendment or by necessary implication.
As per Section 4 of the Act of 1961, the charge of income tax is with reference
to any assessment year, at such rate or rates as provided in any central
enactment for the purpose, in respect of the total income of the previous year
of any person. The expression “previous year” is defined in Section 3 of the
Act to mean ‘the financial year immediately preceding the assessment year’;
46
and the expression “assessment year” is defined in clause (9) of Section 2 of
the Act to mean ‘the period of twelve months commencing on the 1st day of
April every year’.
17.5. In the case of Commissioner of Income-Tax, West Bengal v.
Isthmian Steamship Lines: (1951) 20 ITR 572, a 3-Judge Bench of this
Court exposited on the fundamental principle that ‘in income-tax matters the
law to be applied is the law in force in the assessment year unless otherwise
stated or implied.’ This decision and various other decisions were considered
by the Constitution Bench of this Court in the case of Karimtharuvi Tea
Estate Ltd. v. State of Kerala: (1966) 60 ITR 262 and the principles were laid
down in the following terms (at pp. 264-266 of ITR):-
“Now, it is well-settled that the Income-tax Act, as it
stands amended on the first day of April of any financial
year must apply to the assessments of that year. Any
amendments in the Act which come into force after the
first day of April of a financial year, would not apply to
the assessment for that year, even if the assessment is
actually made after the amendments come into force.
*** *** ***
The High Court has, however relied upon a decision of this
court in Commissioner of Income-tax v. Isthmian Steamship
Lines, where it was held as follows :
“It will be observed that we are here concerned with
two datum lines : (1) the 1st of April, 1940, when the
Act came into force, and (2) the 1st of April, 1939,
which is the date mentioned in the amended proviso.
The first question to be answered is whether these
dates are to apply to the accounting year or the year
of assessment. They must be held to apply to the
assessment year, because in income-tax matters the
law to be applied is the law in force in the
assessment year unless otherwise stated or implied.
The first datum line therefore affected only the
assessment year of 1940-41, because the
amendment did not come into force till the 1st of
47
April 1940. That means that the old law applied to
every assessment year up to and including the
assessment year 1939-40.”
This decision is authority for the proposition that
though the subject of the charge is the income of the
previous year, the law to be applied is that in force in
the assessment year, unless otherwise stated or
implied. The facts of the said decision are different and
distinguishable and the High Court was clearly in error in
applying that decision to the facts of the present case.”
(emphasis in bold supplied)
17.6. We need not multiply on the case law on the subject as the
principles aforesaid remain settled and unquestionable. Applying these
principles to the case at hand, we are clearly of the view that the provision in
question, having come into effect from 01.04.2005, would apply from and for
the assessment year 2005-2006 and would be applicable for the assessment
in question. Putting it differently, the legislature consciously made the said
sub-clause (ia) of Section 40(a) of the Act effective from 01.04.2005, meaning
thereby that the same was to be applicable from and for the assessment year
2005-2006; and neither there had been express intendment nor any
implication that it would apply only from the financial year 2005-2006.
17.7. The observations of Calcutta High Court in the case of PIU Ghosh
(supra) as regards the likely prejudice to an assessee in relation to the
financial year 2004-2005, in our view, do not relate to any legal grievance or
legal prejudice. The requirement of deducting tax at source was already
existing as per Section 194C of the Act and it was the bounden duty of the
appellant to make such deduction of TDS and to make over the same to the
revenue. Section 201 was also in existence which made it clear that default in
48
making deduction in accordance with the provisions of the Act would make the
appellant “an assessee in default”. The appellant cannot suggest that even if
the obligation of TDS on the payments made by him was existing by virtue of
Section 194C(2), he would have honoured such an obligation only if being
aware of the drastic consequence of default that such payment shall not be
deducted for the purpose of drawing up the assessment.
17.7.1. Apart from the above, significant it is to notice that by the
amendment in question, clause (ia) was added to Section 40(a) of the Act with
a proviso to the effect that where, in respect of the sum referable to TDS
requirement, tax has been deducted in any subsequent year, or has been
deducted during the previous year but paid in any subsequent year after
expiry of the time prescribed in Section 200(1), such sum shall be allowed as
a deduction in computing the income of the previous year in which such tax
has been paid. The proviso effectively took care of the case of any bonafide
assessee who would earnestly comply with the requirement of deducting the
tax at source. It is evident that the said proviso has totally escaped the
attention of Calcutta High Court in the case of PIU Ghosh (supra). In fact, the
relaxation by way of the proviso/s to Section 40(a)(ia) of the Act had further
been modulated by way of various subsequent amendments to further
mitigate the hardships of bonafide assessees, as noticed hereafter later.
Suffice it to observe for the present purpose that the said decision in PIU
Ghosh cannot be regarded as correct on law.
49
17.8. In fact, if the contention of learned counsel for the appellant read
with the proposition in PIU Ghosh (supra) is accepted and the said sub-clause
(ia) of Section 40(a) of the Act is held applicable only from the financial year
2005-2006, the result would be that this provision would apply only from the
assessment year 2006-2007. Such a result is neither envisaged nor could be
countenanced. Hence, the contention that sub-clause (ia), of clause (a) of
Section 40 of the Act would apply only from the financial year 2005-2006 and
cannot apply to the present case pertaining to the financial year 2004-2005
stands rejected.
18. The supplemental submission that in any case, disallowance cannot
be applied to the payments already made prior to 10.09.2004, the date on
which the Finance (No.2) Act, 2004 received the assent of the President of
India, remains equally baseless. The said date of assent of the President of
India to Finance (No.2) Act, 2004 is not the date of applicability of the
provision in question, for the specific date having been provided as
01.04.2005. Of course, the said date relates to the assessment year
commencing from 01.04.2005 (i.e., assessment year 2005-2006).
18.1. Even if it be assumed, going by the suggestions of the appellant,
that the requirements of Section 40(a)(ia) became known on 10.09.2004, the
appellant could have taken all the requisite steps to make deductions or, in
any case, to make payment of the TDS amount to the revenue during the
same financial year or even in the subsequent year, as per the relaxation
available in the proviso to Section 40(a)(ia) of the Act but, the appellant simply
50
avoided his obligation and attempted to suggest that it had no liability to
deduct the tax at source at all. Such an approach of the appellant, when
standing at conflict with law, the consequence of disallowance under Section
40(a)(ia) of the Act remains inevitable.
19. In yet another alternative attempt, learned counsel for the appellant
has argued that by way of Finance (No.2) Act, 2014, disallowance under
Section 40(a)(ia) has been limited to 30% of the sum payable and the said
amendment deserves to be held retrospective in operation. This line of
argument has been grafted with reference to the decision in Calcutta Export
Company (supra) wherein, another amendment of Section 40(a)(ia) by the
Finance Act of 2010 was held by this Court to be retrospective in operation.
The submission so made is not only baseless but is bereft of any logic.
Neither the amendment made by the Finance (No.2) Act, 2014 could be
stretched anterior the date of its substitution so as to reach the assessment
year 2005-2006 nor the said decision in Calcutta Export Company has any
correlation with the case at hand or with the amendment made by the Finance
(No.2) Act of 2014.
19.1. By the amendment brought about in the year 2014, the legislature
reduced the extent of disallowance under Section 40(a)(ia) of the Act and
limited it to 30% of the sum payable. On the other hand, by the Finance Act of
2010, which was considered in the case of Calcutta Export Company
(supra), the proviso to Section 40(a)(ia) of the Act was amended so as to
provide relief to a bonafide assessee who could not make deposit of deducted
51
tax within prescribed time. In fact, even before the year 2010, the said proviso
was amended by the Finance Act 2008 and that amendment of the year 2008
was provided retrospective operation by the legislature itself. For ready
reference, we may reproduce in juxtaposition the main part of Section 40(a)
(ia) of the Act as it would read after the amendments of 2008, 2010 and 2014
respectively, as under13:-
(i) After the amendment by Finance Act, 2008
“40. Amounts not deductible. – 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”,-
(a) in the case of any assessee-
*** *** ***
(ia) any interest, commission or brokerage, rent, royalty14,
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,-
(A) in a case where the tax was deductible and was so
deducted during the last month of the previous year, on or
before the due date specified in sub-section (1) of section
139; or
(B) in any other case, on or before the last day of the
previous year:
Provided that where in respect of any such sum, tax has
been deducted in any subsequent year or, has been
deducted –
(A) during the last month of the previous year but paid after
the said due date; or
(B) during any other month of the previous year but paid
after the end of the said previous year,
13 The Explanation part of the provision is omitted, for being not relevant for the present
purpose.
14 The expressions “rent, royalty” were inserted in the year 2006.
52
such sum shall be allowed as a deduction in computing the
income of the previous year in which such tax has been
paid.
*** *** ***”
(ii) After the amendment by Finance Act, 2010
“40. Amounts not deductible. – 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”,-
(a) in the case of any assessee-
*** *** ***
(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 on or before the due date specified in sub-section
(1) of section 139:
Provided that where in respect of any such sum, tax has
been deducted in any subsequent year, or has been
deducted during the previous year but paid after the due date
specified in sub-section (1) of section 139, such sum shall be
allowed as a deduction in computing the income of the
previous year in which such tax has been paid:
*** *** ***”
(iii) After the amendment by Finance (No.2) Act, 2014
“40. Amounts not deductible. – 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”,-
(a) in the case of any assessee-
*** *** ***
(ia) thirty per cent. of any sum payable to a resident, 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:
53
Provided that where in respect of any such sum, tax has
been deducted in any subsequent year, or has been
deducted during the previous year but paid after the due
date specified in sub-section (1) of section 139, thirty per
cent. of such sum shall be allowed as a deduction in
computing the income of the previous year in which such
tax has been paid15:
Provided further that where an assessee fails to deduct the
whole or any part of the tax in accordance with the
provisions of Chapter XVII-B on any such sum but is not
deemed to be an assessee in default under the first proviso
to sub-section (1) of section 201, then, for the purpose of
this sub-clause, it shall be deemed that the assessee has
deducted and paid the tax on such sum on the date of
furnishing of return of income by the resident payee referred
to in the said proviso.16
*** *** ***”
19.2. The aforesaid amendment by the Finance (No.2) Act of 2014 was
specifically made applicable w.e.f. 01.04.2015 and clearly represents the will
of the legislature as to what is to be deducted or what percentage of deduction
is not to be allowed for a particular eventuality, from the assessment year
2015-2016.
19.3. On the other hand, in the case of Calcutta Export Company
(supra), this Court noticed the aforesaid two amendments to Section 40(a)(ia)
of the Act by the Finance Act, 2008 and by the Finance Act, 2010, which were
intended to deal with procedural hardship likely to be faced by the bonafide
tax payer, who had deducted tax at source but could not make deposit within
the prescribed time so as to claim deduction. In paragraph 17 of judgment in
Calcutta Export Company, this Court took note of the case of genuine
hardship, particularly of the assessees who had deducted tax at source in the
15 This proviso was substituted in the year 2008 and again in the year 2010; and then, was amended
by the Finance (No. 2) Act, 2014.
16 This proviso was inserted by Act No. 23 of 2012.
54
last month of previous year; and observed in paragraph 18 that the said
amendment of the year 2008 was brought about with a view to mitigate such
hardship. After reproducing the said amendment of the year 2008 and after
noticing its retrospective operation, this Court delved into the position
obtaining after 2008, where still remained one class of assessees who could
not claim deduction for the TDS amount in the previous year in which the tax
was deducted and who could claim benefit of such deduction in the next year
only; and, after finding that the amendment of the year 2010 was intended to
remedy this position, held that the said amendment, being curative in nature,
is required to be given retrospective operation that is, from the date of
insertion of Section 40(a)(ia).
19.4. Learned counsel for the appellant has only referred to the
concluding part of the decision in Calcutta Export Company but, a look at
the entire synthesis by this Court, of the reasons for the amendments of 2008
and 2010, makes it clear as to why this Court held that the amendment of the
year 2010 would be retrospective in operation. We may usefully reproduce the
relevant discussion and exposition of this Court in Calcutta Export Company
as under:- (at pp. 663-666 of ITR):-
“19. The above amendments made by the Finance Act, 2008
thus provided that no disallowance under section 40(a)(ia) of
the Income-tax Act shall be made in respect of the
expenditure incurred in the month of March if the tax
deducted at source on such expenditure has been paid
before the due date of filing of the return. It is important to
mention here that the amendment was given retrospective
operation from the date of April 1,2005, i.e., from the very
date of substitution of the provision.
55
20. Therefore, the assesses were, after the said amendment
in 2008, classified in two categories namely: one, those who
have deducted that tax during the last month of the previous
year and two, those who have deducted the tax in the
remaining eleven months of the previous year. It was
provided that in the case of assessees falling under the first
category, no disallowance under section 40(a)(ia) of the
Income-tax Act shall be made if the tax deducted by them
during the last month of the previous year has been paid on
or before the last day of filing of return in accordance with the
provisions of section 139(1) of the Income-tax Act for the said
previous year. In case, the assessees are falling under the
second category, no disallowance under section 40(a)(ia) of
Income-tax Act where the tax was deducted before the last
month of the previous year and the same was credited to the
Government before the expiry of the previous year. The net
effect is that the assessee could not claim deduction for the
TDS amount in the previous year in which the tax was
deducted and the benefit of such deductions can be claimed
in the next year only.
21. The amendment though has addressed the concerns of
the assesses falling in the first category but with regard to the
case falling in the second category, it was still resulting into
unintended consequences and causing grave and genuine
hardships to the assesses who had substantially complied
with the relevant TDS provisions by deducting the tax at
source and by paying the same to the credit of the
Government before the due date of filing of their returns
under section 139(1) of the Income-tax Act. The disability to
claim deductions on account of such lately credited sum of
TDS in assessment of the previous year in which it was
deducted, was detrimental to the small traders who may not
be in a position to bear the burden of such disallowance in
the present assessment year.
22. In order to remedy this position and to remove hardships
which were being caused to the assessees belonging to such
second category, amendments have been made in the
provisions of section 40(a) (ia) by the Finance Act, 2010.
*** *** ***
24. Thus, the Finance Act, 2010 further relaxed the rigors of
section 40(a)(ia) of the Income-tax Act to provide that all TDS
made during the previous year can be deposited with the
Government by the due date of filing the return of income.
The idea was to allow additional time to the deductors to
deposit the TDS so made. However, the Memorandum
56
Explaining the Provisions of the Finance Bill, 2010 expressly
mentioned as follows: “This amendment is proposed to take
effect retrospectively from April 1, 2010 and will, accordingly,
apply in relation to the assessment year 2010-11 and
subsequent years.”
25. The controversy surrounding the above amendment was
whether the amendment being curative in nature should be
applied retrospectively, i.e., from the date of insertion of the
provisions of section 40(a)(ia) or to be applicable from the
date of enforcement.
*** *** ***
27. A proviso which is inserted to remedy unintended
consequences and to make the provision workable, a proviso
which supplies an obvious omission in the section, is required
to be read into the section to give the section a reasonable
interpretation and requires to be treated as retrospective in
operation so that a reasonable interpretation can be given to
the section as a whole.
28. The purpose of the amendment made by the Finance Act,
2010 is to solve the anomalies that the insertion of section
40(a)(ia) was causing to the bona fide tax payer. The
amendment, even if not given operation retrospectively, may
not materially be of consequence to the Revenue when the
tax rates are stable and uniform or in cases of big assessees
having substantial turnover and equally huge expenses and
necessary cushion to absorb the effect. However, marginal
and medium taxpayers, who work at low gross product rate
and when expenditure which becomes the subject matter of
an order under section 40(a)(ia) is substantial, can suffer
severe adverse consequences if the amendment made in
2010 is not given retrospective operation, i.e., from the date
of substitution of the provision. Transferring or shifting
expenses to a subsequent year, in such cases, will not wipe
out the adverse effect and the financial stress. Such could
not be the intention of the Legislature. Hence, the
amendment made by the Finance Act, 2010 being curative in
nature is required to be given retrospective operation, i.e.,
from the date of insertion of the said provision.”
19.5. A bare look at the extraction aforesaid makes it clear that what this
Court has held as regards “retrospective operation” is that the amendment of
the year 2010, being curative in nature, would be applicable from the date of
insertion of the provision in question i.e., sub-clause (ia) of Section 40(a) of
57
the Act. This being the position, it is difficult to find any substance in the
argument that the principles adopted by this Court in the case of Calcutta
Export Company (supra) dealing with curative amendment, relating more to
the procedural aspects concerning deposit of the deducted TDS, be applied to
the amendment of the substantive provision by the Finance (No.2) Act, 2014.
19.6. We may in the passing observe that the assessee-appellant was
either labouring under the mistaken impression that he was not required to
deduct TDS or under the mistaken belief that the methodology of splitting a
single payment into parts below Rs. 20,000/- would provide him escape from
the rigour of the provisions of the Act providing for disallowance. In either
event, the appellant had not been a bonafide assessee who had made the
deduction and deposited it subsequently. Obviously, the appellant could not
have derived the benefits that were otherwise available by the curative
amendments of 2008 and 2010. Having defaulted at every stage, the attempt
on the part of assessee-appellant to seek some succor in the amendment of
Section 40(a)(ia) of the Act by the Finance (No.2) Act, 2014 could only be
rejected as entirely baseless, rather preposterous.
19.7. Hence, Question No.3 is also answered in the negative, i.e., against
the assessee-appellant and in favour of the revenue.
Question No. 4
20. Before finally answering the root question in the matter as to whether
the payments in question have rightly been disallowed from deduction, we may
usefully summarise the answers to Question Nos. 1 to 3 that the provisions of
58
Section 194C were indeed applicable and the assessee-appellant was under
obligation to deduct the tax at source in relation to the payments made by it for
hiring the vehicles for the purpose of its business of transportation of goods;
that disallowance under Section 40(a)(ia) of the Act is not limited only to the
amount outstanding and this provision equally applies in relation to the
expenses that had already been incurred and paid by the assessee; that
disallowance under Section 40(a)(ia) of the Act of 961 as introduced by the
Finance (No.2) Act, 2004 with effect from 01.04.2005 is applicable to the case
at hand relating to the assessment year 2005-2006; and that the benefit of
amendment made in the year 2014 to the provision in question is not available
to the appellant in the present case. These answers practically conclude the
matter but we have formulated Question No. 4 essentially to deal with the last
limb of submissions regarding the prejudice likely to be suffered by the
appellant.
21. The suggestion on behalf of the appellant about the likely prejudice
because of disallowance deserves to be rejected for three major reasons. In
the first place, it is clear from the provisions dealing with disallowance of
deductions in part D of Chapter IV of the Act, particularly those contained in
Sections 40(a)(ia) and 40A(3)17 of the Act, that the said provisions are
intended to enforce due compliance of the requirement of other provisions of
the Act and to ensure proper collection of tax as also transparency in dealings
17 Section 40A(3) envisaged at the relevant time that twenty percent of the expenditure exceeding
twenty thousand rupees, of which payment was made otherwise than by a crossed cheque or bank
draft, shall not be allowed as a deduction.
59
of the parties. The necessity of disallowance comes into operation only when
default of the nature specified in the provisions takes place. Looking to the
object of these provisions, the suggestions about prejudice or hardship carry
no meaning at all. Secondly, as noticed, by way of the proviso as originally
inserted and its amendments in the years 2008 and 2010, requisite relief to a
bonafide tax payer who had collected TDS but could not deposit within time
before submission of the return was also provided; and as regards the
amendment of 2010, this Court ruled it to be retrospective in operation. The
proviso so amended, obviously, safeguarded the interest of a bonafide
assessee who had made the deduction as required and had paid the same to
the revenue. The appellant having failed to avail the benefit of such relaxation
too, cannot now raise a grievance of alleged hardship. Thirdly, as noticed, the
appellant had shown total payments in Truck Freight Account at Rs.
1,37,71,206/- and total receipts from the company at Rs. 1,43,90,632/-. What
has been disallowed is that amount of Rs. 57,11,625/- on which the appellant
failed to deduct the tax at source and not the entire amount received from the
company or paid to the truck operators/owners. Viewed from any angle, we do
not find any case of prejudice or legal grievance with the appellant.
21.1. Hence, answer to Question No. 4 is clearly in the affirmative i.e.,
against the appellant and in favour of the revenue that the payments in
question have rightly been disallowed from deduction while computing the
total income of the assessee-appellant.
60
Conclusion
22. For what has been discussed hereinabove, this appeal fails and is,
therefore, dismissed with costs.
………………..………….J.
(A.M. KHANWILKAR)
…………..………….…….J.
(DINESH MAHESHWARI)
New Delhi,
Dated: 29th July, 2020.
61