REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 5512 OF 2017
|M/S. PALAM GAS SERVICE |.....APPELLANT(S) |
|VERSUS | |
|COMMISSIONER OF INCOME TAX |.....RESPONDENT(S) |
J U D G M E N T
A.K. SIKRI, J.
The neat question which arises for consideration in this appeal
relates to the interpretation of Section 40(a)(ia) of the Income Tax Act,
1961 (hereinafter referred to as the 'Act'). Section 197C of the Act has
also some bearing on the issue involved.
Section 40 of the Act enumerates certain situations wherein expenditure
incurred by the assessee, in the course of his business, will not be
allowed to be deducted in computing the income chargeable under the head
'Profits and Gains from Business or Profession'. One such contingency is
provided in clause (ia) of sub-section (a) of Section 40. This provision
reads as under:
“S. 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”,—
xxx xxx xxx
(ia) any interest, commission or brokerage, 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 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.
xxx xxx xxx”
As per clause (ia), certain payments made, which includes amounts payable
to a contractor or sub-contractor, would not be allowed as expenditure in
case the tax is deductible at source on the said payment under Chapter
XVIIB of the Act 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 of
the Act. In the instant case, certain payments were made by the appellant
assessee, in the Assessment Year 2006-2007 but the tax at source was not
deducted and deposited. We may point out here itself that as per Section
194C of the Act, payments to contractors and sub-contractors are subject to
tax deduction at source. The Income Tax Department/Revenue has, therefore,
not allowed the amounts paid to the sub-contractors as deduction while
computing the income chargeable to tax at the hands of the assessee in the
said Assessment Year.
It can be seen that Section 40(a)(ia) uses the expression 'payable' and on
that basis the question which is raised for consideration is:
“Whether the provisions of Section 40(a)(ia) shall be attracted when the
amount is not 'payable' to a contractor or sub-contractor but has been
actually paid?"
Some facts which will have bearing on the aforesaid issue need to be
mentioned at this stage:
The appellant-assessee is engaged in the business of purchase and
sale of LPG cylinders under the name and style of M/s. Palam Gas Service at
Palampur. During the course of assessment proceedings, it was noticed by
the Assessing Officer that the main contract of the assessee for carriage
of LPG was with the Indian Oil Corporation, Baddi. The assessee had
received the total freight payments from the IOC Baddi to the tune of
Rs.32,04,140/-. The assessee had, in turn, got the transportation of LPG
done through three persons, namely, Bimla Devi, Sanjay Kumar and Ajay to
whom he made the freight payment amounting to Rs. 20,97,689/-. The
Assessing Officer observed that the assessee had made a sub-contract with
the said three persons within the meaning of Section 194C of the Act and,
therefore, he was liable to deduct tax at source from the payment of Rs.
20,97,689/-. On account of his failure to do so the said freight expenses
were disallowed by the Assessing Officer as per the provisions of Section
40(a)(ia) of the Act. Against the order of the Assessing Officer, the
assessee preferred an appeal before the Commissioner of Income Tax
(Appeals), Shimla who vide its order dated August 17, 2012 upheld the order
dated November 30, 2011. The matter thereafter came up in appeal before
the Income Tax Appellate Tribunal (for short ‘ITAT’) which too met with the
same fate.
In further appeal to the High Court under Section 260A of the Act,
the outcome remained unchanged as the High Court of Himachal Pradesh also
dismissed the appeal affirming the order of the ITAT.
It may be pertinent to observe that the question raised now and formulated
above was specifically raised before the authorities below, including the
High Court.
The question is, as noted above, when the word used in Section 40(a)(ia) is
'payable', whether this Section would cover only those contingencies where
the amount is due and still payable or it would also cover the situations
where the amount is already paid but no advance tax was deducted thereupon.
This issue has come up for hearing before various High Courts and there
are divergent views of the High Courts there upon. In fact, most of the
High Courts have taken the view that the aforesaid provision would cover
even those cases where the amount stands paid. This is the view of the
Madras, Calcutta and Gujarat High Courts. Contrary view is taken by the
Allahabad High Court. In a recent judgment, the Punjab & Haryana High
Court took note of the judgments of the aforesaid High Courts and concurred
with the view taken by the Madras, Calcutta and Gujarat High Courts and
showed its reluctance to follow the view taken by the Allahabad High Court.
In this scenario, we would like to first discuss the reasons given by the
High Courts in two sets of judgments, arriving at a contrary conclusion.
Before that, we would also like to reproduce relevant portions of Section
194C and 200 of the Act as well as Rule 30(2) of the Income Tax Rules,
since they are also relevant to decide the controversy. These provisions
make the following reading:
“194-C. Payments to 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 specified person 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—
.……… ……. …… ………
200. Duty of person deducting tax.—(1) Any person deducting any sum in
accordance with the foregoing provisions of this chapter] 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 subsection (1-A) of
Section 192 shall pay, within the prescribed time, the tax to the credit of
the Central Government or as the Board directs.
(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 (1-A) of
Section 192 shall, after paying the tax deducted to the credit of the
Central Government within the prescribed time, prepare such statements for
such period as may be prescribed] 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.”
Rule 30(2) of the Income Tax Rules which stipulates the time prescribed for
payment of the tax deducted to the credit of the Central Government as
required by Section 200(1) and relevant portion thereof reads as under:
“Time and mode of payment to Government account of tax deducted at source
or tax paid under sub-section (1A) of section 192.
30(1) All sums deducted in accordance with the provisions of Chapter XVII-B
by an office of the Government shall be paid to the credit of the Central
Government-
.….. ………. …….. ……..
(2) All sums deducted in accordance with the provisions of Chapter XVII-B
by deductors other than an office of the Government shall be paid to the
credit of the Central Government-
on or before 30th day of April where the income or amount is credited or
paid in the month of March; and
in any other case, on or before seven days from the end of the month in
which-
the deduction is made; or
income-tax is due under sub-section(1A) of section 192.”
As per Section 194C, it is the statutory obligation of a person, who is
making payment to the sub-contractor, to deduct tax at source at the rates
specified therein. Plain language of the Section suggests that such a tax
at source is to be deducted at the time of credit of such sum to the
account of the contract or at the time of payment thereof, whichever is
earlier. Thus, tax has to be deducted in both the contingencies, namely ,
when the amount is credited to the account of the contractor or when the
payment is actually made. Section 200 of the Act imposes further obligation
on the person deducting tax at source, to deposit the same with the Central
Government or as the Board directs, within the prescribed time.
A conjoint reading of these two Sections would suggest that not only
a person, who is paying to the contractor, is supposed to deduct tax at
source on the said payment whether credited in the account or actual
payment made, but also deposit that amount to the credit of the Central
Government within the stipulated time. The time within which the payment
is to be deposited with the Central Government is mentioned in Rule 30(2)
of the Rules.
The Punjab & Haryana High Court in P.M.S. Diesels & Ors. v. Commissioner of
Income Tax – 2, Jalandhar & Ors., (2015) 374 ITR 562, has held these
provisions to be mandatory in nature with the following observations:
“13. 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. ……”
While holding the aforesaid view, the Punjab & Haryana High Court discussed
the judgments of the Calcutta and Madras High Courts, which had taken the
same view, and concurred with the same, which is clear from the following
discussion contained in the judgment of the Punjab & Haryana High Court:
“14. A Division Bench of the Calcutta High Court in Commissioner of Income
Tax v. Crescent Export Syndicate, (2013) 216 Taxman 258 (Calcutta) 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.”
15. Ms. Dhugga invited our attention to a judgment of the Division Bench
of Madras High Court in Tube Investments of India Ltd. v. Assistant
Commissioner of Income-Tax (TDS), [2010] 325 ITR 610 (Mad). The Division
Bench referred to 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 tax payers. These objects also
indicate the legislative intent that the requirement of deducting tax at
source is mandatory.
16. The liability to deduct tax at source is, therefore, mandatory.”
The aforesaid interpretation of Sections 194C conjointly with Section 200
and Rule 30(2) is unblemished and without any iota of doubt. We, thus,
give our imprimatur to the view taken. As would be noticed and discussed
in little detail hereinafter, the Allahabad High Court, while interpreting
Section 40(a)(ia), did not deal with this aspect at all, even when it has a
clear bearing while considering the amplitude of the said provision.
In the aforesaid backdrop, let us now deal with the issue, namely, the word
'payable' in Section 40(a)(ia) would mean only when the amount is payable
and not when it is actually paid. Grammatically, it may be accepted that
the two words, i.e. 'payable' and 'paid', denote different meanings. The
Punjab & Haryana High Court, in P.M.S. Diesels & Ors., referred to above,
rightly remarked that the word 'payable' is, in fact, an antonym of the
word 'paid'. At the same time, it took the view that it was not
significant to the interpretation of Section 40(a)(ia). Discussing this
aspect further, the Punjab & Haryana High Court first dealt with the
contention of the assessee that Section 40(a)(ia) relates only to those
assessees who follow the mercantile system and does not cover the cases
where the assessees follow the cash system. Those contention was rejected
in the following manner:
“19. There is nothing that persuades us to accept this submission. The
purpose of the section is to ensure the recovery of tax. We see no
indication in the section that this object was confined to the recovery of
tax from a particular type of assessee or assessees following a particular
accounting practice. As far as this provision is concerned, it appears to
make no difference to the Government as to the accounting system followed
by the assessees. The Government is interested in the recovery of taxes. If
for some reason, the Government was interested in ensuring the recovery of
taxes only from assessees following the mercantile system, we would have
expected the provision to so stipulate clearly, if not expressly. It is not
suggested that assessees following the cash system are not liable to deduct
tax at source. It is not suggested that the provisions of Chapter XVII-B do
not apply to assessees following the cash system. There is nothing in
Chapter XVII-B either that suggests otherwise.
20. Our view is fortified by the Explanatory Note to Finance Bill (No. 2)
of 2004. Sub-clause (ia) of clause (a) of Section 40 was introduced by the
Finance Bill (No. 2) of 2004 with effect from 01.04.2005. The Explanatory
Note to Finance Bill-2004 stated:-
“….. ….. ….. ….. ..
With a view to augment compliance of TDS provisions, it is proposed to
extend the provisions of section 40(a)(i) to payments of interest,
commission or brokerage, fees for professional services or fees for
technical services to residents, and payments to a resident contractor or
sub-contractor for carrying out any work (including supply of labour for
carrying out any work), on which tax has not been deducted or after
deduction, has not been paid before the expiry of the time prescribed under
sub-section(1) of section 200 and in accordance with the other provisions
of Chapter XVII-B. ……”
21. The adherence to the provisions ensures not merely the collection of
tax but also enables the authorities to bring within their fold all such
persons who are liable to come within the network of tax payers. The
intention was to ensure the collection of tax irrespective of the system of
accounting followed by the assessees. We do not see how this dual purpose
of augmenting the compliance of Chapter XVII and bringing within the
Department's fold tax payers is served by confining the provisions of
Section 40(a)(ia) to assessees who follow the mercantile system. Nor do we
find anything that indicates that for some reason the legislature intended
achieving these objectives only by confining the operation of Section
40(a)(ia) to assessees who follow the mercantile system.
22. The same view was taken by a Division Bench of the Calcutta High Court
in Commissioner of Income Tax v. Crescent Export Syndicate, (supra). It was
held:-
“12.3. It is noticeable that Section 40(a) is applicable irrespective of
the method of accounting followed by an assessee. Therefore, by using the
term ‘payable’ legislature included the entire accrued liability. If
assessee was following mercantile system of accounting, then the moment
amount was credited to the account of payee on accrual of liability, TDS
was required to be made but if assessee was following cash system of
accounting, then on making payment TDS was to be made as the liability was
discharged by making payment. The TDS provisions are applicable both in the
situation of actual payment as well of the credit of the amount. It becomes
very clear from the fact that the phrase, ‘on which tax is deductible at
source under Chapter XVII-B’, was not there in the Bill but incorporated in
the Act. This was not without any purpose.”
We approve the aforesaid view as well. As a fortiorari, it follows that
Section 40(a)(ia) covers not only those cases where the amount is payable
but also when it is paid. In this behalf, one has to keep in mind the
purpose with which Section 40 was enacted and that has already been noted
above. We have also to keep in mind the provisions of Sections 194C and
200. Once it is found that the aforesaid Sections mandate a person to
deduct tax at source not only on the amounts payable but also when the sums
are actually paid to the contractor, any person who does not adhere to this
statutory obligation has to suffer the consequences which are stipulated in
the Act itself. Certain consequences of failure to deduct tax at source
from the payments made, where tax was to be deducted at source or failure
to pay the same to the credit of the Central Government, are stipulated in
Section 201 of the Act. This Section provides that in that contingency,
such a person would be deemed to be an assessee in default in respect of
such tax. While stipulating this consequence, Section 201 categorically
states that the aforesaid Sections would be without prejudice to any other
consequences which that defaulter may incur. Other consequences are
provided under Section 40(a)(ia) of the Act, namely, payments made by such
a person to a contractor shall not be treated as deductible expenditure.
When read in this context, it is clear that Section 40(a)(ia) deals with
the nature of default and the consequences thereof. Default is relatable
to Chapter XVIIB (in the instant case Sections 194C and 200, which
provisions are in the aforesaid Chapter). When the entire scheme of
obligation to deduct the tax at source and paying it over to the Central
Government is read holistically, it cannot be held that the word 'payable'
occurring in Section 40(a)(ia) refers to only those cases where the amount
is yet to be paid and does not cover the cases where the amount is actually
paid. If the provision is interpreted in the manner suggested by the
appellant herein, then even when it is found that a person, like the
appellant, has violated the provisions of Chapter XVIIB (or specifically
Sections 194C and 200 in the instant case), he would still go scot free,
without suffering the consequences of such monetary default in spite of
specific provisions laying down these consequences. The Punjab & Haryana
High Court has exhaustively interpreted Section 40(a(ia) keeping in mind
different aspects. We would again quote the following paragraphs from the
said judgment, with our complete approval thereto:
“26. Further, the mere incurring of a liability does not require an
assessee to deduct the tax at source even if such payments, if made, would
require an assessee to deduct the tax at source. The liability to deduct
tax at source under Chapter XVII-B arises only upon payments being made or
where so specified under the sections in Chapter XVII, the amount is
credited to the account of the payee. In other words, the liability to
deduct tax at source arises not on account of the assessee being liable to
the payee but only upon the liability being discharged in the case of an
assessee following the cash system and upon credit being given by an
assessee following the mercantile system. This is clear from every section
in Chapter XVII.
27. Take for instance, the case of an assessee, who follows the cash
system of accounting and where the assessee who though liable to pay the
contractor, fails to do so for any reason. The assessee is not then liable
to deduct tax at source. Take also the case of an assessee, who follows the
mercantile system. Such an assessee may have incurred the liability to pay
amounts to a party. Such an assessee is also not bound to deduct tax at
source unless he credits such sums to the account of the party/payee, such
as, a contractor. This is clear from Section 194C set out earlier. The
liability to deduct tax at source, in the case of an assessee following the
cash system, arises only when the payment is made and in the case of an
assessee following the mercantile system, when he credits such sum to the
account of the party entitled to receive the payment.
28. The government has nothing to do with the dispute between the assessee
and the payee such as a contractor. The provisions of the Act including
Section 40 and the provisions of Chapter XVII do not entitle the tax
authorities to adjudicate the liability of an assessee to make payment to
the payee/other contracting party. The appellant's submission, if accepted,
would require an adjudication by the tax authorities as to the liability of
the assessee to make payment. They would then be required to investigate
all the records of an assessee to ascertain its liability to third parties.
This could in many cases be an extremely complicated task especially in the
absence of the third party. The third party may not press the claim. The
parties may settle the dispute, if any. This is an exercise not even
remotely required or even contemplated by the section.”
As mentioned above, the Punjab & Haryana High Court found support from the
judgments of the Madras and Calcutta High Courts taking identical view and
by extensively quoting from the said judgments.
Insofar as judgment of the Allahabad High Court is concerned, reading
thereof would reflect that the High Court, after noticing the fact that
since the amounts had already been paid, it straightaway concluded, without
any discussion, that Section 40(a)(ia) would apply only when the amount is
'payable' and dismissed the appeal of the Department stating that the
question of law framed did not arise for consideration. No doubt, the
Special Leave Petition thereagainst was dismissed by this Court in limine.
However, that would not amount to confirming the view of the Allahabad High
Court (See V.M. Salgaocar & Bros. (P) Ltd. v. Commissioner of Income Tax,
(2000) 243 ITR 383 and Supreme Court Employees Welfare Association v. Union
of India, (1989) 4 SCC 187.
In view of the aforesaid discussion, we hold that the view taken by the
High Courts of Punjab & Haryana, Madras and Calcutta is the correct view
and the judgment of the Allahabad High Court in CIT v. Vector Shipping
Services (P) Ltd., (2013) 357 ITR 642 did not decide the question of law
correctly. Thus, insofar as the judgment of the Allahabad High Court is
concerned, we overrule the same. Consequences of the aforesaid discussion
will be to answer the question against the appellant/assessee thereby
approving the view taken by the High Court.
The appeal is, accordingly, dismissed with costs.
.............................................J.
(A.K. SIKRI)
.............................................J.
(ASHOK BHUSHAN)
NEW DELHI;
MAY 03, 2017.
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 5512 OF 2017
|M/S. PALAM GAS SERVICE |.....APPELLANT(S) |
|VERSUS | |
|COMMISSIONER OF INCOME TAX |.....RESPONDENT(S) |
J U D G M E N T
A.K. SIKRI, J.
The neat question which arises for consideration in this appeal
relates to the interpretation of Section 40(a)(ia) of the Income Tax Act,
1961 (hereinafter referred to as the 'Act'). Section 197C of the Act has
also some bearing on the issue involved.
Section 40 of the Act enumerates certain situations wherein expenditure
incurred by the assessee, in the course of his business, will not be
allowed to be deducted in computing the income chargeable under the head
'Profits and Gains from Business or Profession'. One such contingency is
provided in clause (ia) of sub-section (a) of Section 40. This provision
reads as under:
“S. 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”,—
xxx xxx xxx
(ia) any interest, commission or brokerage, 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 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.
xxx xxx xxx”
As per clause (ia), certain payments made, which includes amounts payable
to a contractor or sub-contractor, would not be allowed as expenditure in
case the tax is deductible at source on the said payment under Chapter
XVIIB of the Act 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 of
the Act. In the instant case, certain payments were made by the appellant
assessee, in the Assessment Year 2006-2007 but the tax at source was not
deducted and deposited. We may point out here itself that as per Section
194C of the Act, payments to contractors and sub-contractors are subject to
tax deduction at source. The Income Tax Department/Revenue has, therefore,
not allowed the amounts paid to the sub-contractors as deduction while
computing the income chargeable to tax at the hands of the assessee in the
said Assessment Year.
It can be seen that Section 40(a)(ia) uses the expression 'payable' and on
that basis the question which is raised for consideration is:
“Whether the provisions of Section 40(a)(ia) shall be attracted when the
amount is not 'payable' to a contractor or sub-contractor but has been
actually paid?"
Some facts which will have bearing on the aforesaid issue need to be
mentioned at this stage:
The appellant-assessee is engaged in the business of purchase and
sale of LPG cylinders under the name and style of M/s. Palam Gas Service at
Palampur. During the course of assessment proceedings, it was noticed by
the Assessing Officer that the main contract of the assessee for carriage
of LPG was with the Indian Oil Corporation, Baddi. The assessee had
received the total freight payments from the IOC Baddi to the tune of
Rs.32,04,140/-. The assessee had, in turn, got the transportation of LPG
done through three persons, namely, Bimla Devi, Sanjay Kumar and Ajay to
whom he made the freight payment amounting to Rs. 20,97,689/-. The
Assessing Officer observed that the assessee had made a sub-contract with
the said three persons within the meaning of Section 194C of the Act and,
therefore, he was liable to deduct tax at source from the payment of Rs.
20,97,689/-. On account of his failure to do so the said freight expenses
were disallowed by the Assessing Officer as per the provisions of Section
40(a)(ia) of the Act. Against the order of the Assessing Officer, the
assessee preferred an appeal before the Commissioner of Income Tax
(Appeals), Shimla who vide its order dated August 17, 2012 upheld the order
dated November 30, 2011. The matter thereafter came up in appeal before
the Income Tax Appellate Tribunal (for short ‘ITAT’) which too met with the
same fate.
In further appeal to the High Court under Section 260A of the Act,
the outcome remained unchanged as the High Court of Himachal Pradesh also
dismissed the appeal affirming the order of the ITAT.
It may be pertinent to observe that the question raised now and formulated
above was specifically raised before the authorities below, including the
High Court.
The question is, as noted above, when the word used in Section 40(a)(ia) is
'payable', whether this Section would cover only those contingencies where
the amount is due and still payable or it would also cover the situations
where the amount is already paid but no advance tax was deducted thereupon.
This issue has come up for hearing before various High Courts and there
are divergent views of the High Courts there upon. In fact, most of the
High Courts have taken the view that the aforesaid provision would cover
even those cases where the amount stands paid. This is the view of the
Madras, Calcutta and Gujarat High Courts. Contrary view is taken by the
Allahabad High Court. In a recent judgment, the Punjab & Haryana High
Court took note of the judgments of the aforesaid High Courts and concurred
with the view taken by the Madras, Calcutta and Gujarat High Courts and
showed its reluctance to follow the view taken by the Allahabad High Court.
In this scenario, we would like to first discuss the reasons given by the
High Courts in two sets of judgments, arriving at a contrary conclusion.
Before that, we would also like to reproduce relevant portions of Section
194C and 200 of the Act as well as Rule 30(2) of the Income Tax Rules,
since they are also relevant to decide the controversy. These provisions
make the following reading:
“194-C. Payments to 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 specified person 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—
.……… ……. …… ………
200. Duty of person deducting tax.—(1) Any person deducting any sum in
accordance with the foregoing provisions of this chapter] 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 subsection (1-A) of
Section 192 shall pay, within the prescribed time, the tax to the credit of
the Central Government or as the Board directs.
(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 (1-A) of
Section 192 shall, after paying the tax deducted to the credit of the
Central Government within the prescribed time, prepare such statements for
such period as may be prescribed] 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.”
Rule 30(2) of the Income Tax Rules which stipulates the time prescribed for
payment of the tax deducted to the credit of the Central Government as
required by Section 200(1) and relevant portion thereof reads as under:
“Time and mode of payment to Government account of tax deducted at source
or tax paid under sub-section (1A) of section 192.
30(1) All sums deducted in accordance with the provisions of Chapter XVII-B
by an office of the Government shall be paid to the credit of the Central
Government-
.….. ………. …….. ……..
(2) All sums deducted in accordance with the provisions of Chapter XVII-B
by deductors other than an office of the Government shall be paid to the
credit of the Central Government-
on or before 30th day of April where the income or amount is credited or
paid in the month of March; and
in any other case, on or before seven days from the end of the month in
which-
the deduction is made; or
income-tax is due under sub-section(1A) of section 192.”
As per Section 194C, it is the statutory obligation of a person, who is
making payment to the sub-contractor, to deduct tax at source at the rates
specified therein. Plain language of the Section suggests that such a tax
at source is to be deducted at the time of credit of such sum to the
account of the contract or at the time of payment thereof, whichever is
earlier. Thus, tax has to be deducted in both the contingencies, namely ,
when the amount is credited to the account of the contractor or when the
payment is actually made. Section 200 of the Act imposes further obligation
on the person deducting tax at source, to deposit the same with the Central
Government or as the Board directs, within the prescribed time.
A conjoint reading of these two Sections would suggest that not only
a person, who is paying to the contractor, is supposed to deduct tax at
source on the said payment whether credited in the account or actual
payment made, but also deposit that amount to the credit of the Central
Government within the stipulated time. The time within which the payment
is to be deposited with the Central Government is mentioned in Rule 30(2)
of the Rules.
The Punjab & Haryana High Court in P.M.S. Diesels & Ors. v. Commissioner of
Income Tax – 2, Jalandhar & Ors., (2015) 374 ITR 562, has held these
provisions to be mandatory in nature with the following observations:
“13. 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. ……”
While holding the aforesaid view, the Punjab & Haryana High Court discussed
the judgments of the Calcutta and Madras High Courts, which had taken the
same view, and concurred with the same, which is clear from the following
discussion contained in the judgment of the Punjab & Haryana High Court:
“14. A Division Bench of the Calcutta High Court in Commissioner of Income
Tax v. Crescent Export Syndicate, (2013) 216 Taxman 258 (Calcutta) 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.”
15. Ms. Dhugga invited our attention to a judgment of the Division Bench
of Madras High Court in Tube Investments of India Ltd. v. Assistant
Commissioner of Income-Tax (TDS), [2010] 325 ITR 610 (Mad). The Division
Bench referred to 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 tax payers. These objects also
indicate the legislative intent that the requirement of deducting tax at
source is mandatory.
16. The liability to deduct tax at source is, therefore, mandatory.”
The aforesaid interpretation of Sections 194C conjointly with Section 200
and Rule 30(2) is unblemished and without any iota of doubt. We, thus,
give our imprimatur to the view taken. As would be noticed and discussed
in little detail hereinafter, the Allahabad High Court, while interpreting
Section 40(a)(ia), did not deal with this aspect at all, even when it has a
clear bearing while considering the amplitude of the said provision.
In the aforesaid backdrop, let us now deal with the issue, namely, the word
'payable' in Section 40(a)(ia) would mean only when the amount is payable
and not when it is actually paid. Grammatically, it may be accepted that
the two words, i.e. 'payable' and 'paid', denote different meanings. The
Punjab & Haryana High Court, in P.M.S. Diesels & Ors., referred to above,
rightly remarked that the word 'payable' is, in fact, an antonym of the
word 'paid'. At the same time, it took the view that it was not
significant to the interpretation of Section 40(a)(ia). Discussing this
aspect further, the Punjab & Haryana High Court first dealt with the
contention of the assessee that Section 40(a)(ia) relates only to those
assessees who follow the mercantile system and does not cover the cases
where the assessees follow the cash system. Those contention was rejected
in the following manner:
“19. There is nothing that persuades us to accept this submission. The
purpose of the section is to ensure the recovery of tax. We see no
indication in the section that this object was confined to the recovery of
tax from a particular type of assessee or assessees following a particular
accounting practice. As far as this provision is concerned, it appears to
make no difference to the Government as to the accounting system followed
by the assessees. The Government is interested in the recovery of taxes. If
for some reason, the Government was interested in ensuring the recovery of
taxes only from assessees following the mercantile system, we would have
expected the provision to so stipulate clearly, if not expressly. It is not
suggested that assessees following the cash system are not liable to deduct
tax at source. It is not suggested that the provisions of Chapter XVII-B do
not apply to assessees following the cash system. There is nothing in
Chapter XVII-B either that suggests otherwise.
20. Our view is fortified by the Explanatory Note to Finance Bill (No. 2)
of 2004. Sub-clause (ia) of clause (a) of Section 40 was introduced by the
Finance Bill (No. 2) of 2004 with effect from 01.04.2005. The Explanatory
Note to Finance Bill-2004 stated:-
“….. ….. ….. ….. ..
With a view to augment compliance of TDS provisions, it is proposed to
extend the provisions of section 40(a)(i) to payments of interest,
commission or brokerage, fees for professional services or fees for
technical services to residents, and payments to a resident contractor or
sub-contractor for carrying out any work (including supply of labour for
carrying out any work), on which tax has not been deducted or after
deduction, has not been paid before the expiry of the time prescribed under
sub-section(1) of section 200 and in accordance with the other provisions
of Chapter XVII-B. ……”
21. The adherence to the provisions ensures not merely the collection of
tax but also enables the authorities to bring within their fold all such
persons who are liable to come within the network of tax payers. The
intention was to ensure the collection of tax irrespective of the system of
accounting followed by the assessees. We do not see how this dual purpose
of augmenting the compliance of Chapter XVII and bringing within the
Department's fold tax payers is served by confining the provisions of
Section 40(a)(ia) to assessees who follow the mercantile system. Nor do we
find anything that indicates that for some reason the legislature intended
achieving these objectives only by confining the operation of Section
40(a)(ia) to assessees who follow the mercantile system.
22. The same view was taken by a Division Bench of the Calcutta High Court
in Commissioner of Income Tax v. Crescent Export Syndicate, (supra). It was
held:-
“12.3. It is noticeable that Section 40(a) is applicable irrespective of
the method of accounting followed by an assessee. Therefore, by using the
term ‘payable’ legislature included the entire accrued liability. If
assessee was following mercantile system of accounting, then the moment
amount was credited to the account of payee on accrual of liability, TDS
was required to be made but if assessee was following cash system of
accounting, then on making payment TDS was to be made as the liability was
discharged by making payment. The TDS provisions are applicable both in the
situation of actual payment as well of the credit of the amount. It becomes
very clear from the fact that the phrase, ‘on which tax is deductible at
source under Chapter XVII-B’, was not there in the Bill but incorporated in
the Act. This was not without any purpose.”
We approve the aforesaid view as well. As a fortiorari, it follows that
Section 40(a)(ia) covers not only those cases where the amount is payable
but also when it is paid. In this behalf, one has to keep in mind the
purpose with which Section 40 was enacted and that has already been noted
above. We have also to keep in mind the provisions of Sections 194C and
200. Once it is found that the aforesaid Sections mandate a person to
deduct tax at source not only on the amounts payable but also when the sums
are actually paid to the contractor, any person who does not adhere to this
statutory obligation has to suffer the consequences which are stipulated in
the Act itself. Certain consequences of failure to deduct tax at source
from the payments made, where tax was to be deducted at source or failure
to pay the same to the credit of the Central Government, are stipulated in
Section 201 of the Act. This Section provides that in that contingency,
such a person would be deemed to be an assessee in default in respect of
such tax. While stipulating this consequence, Section 201 categorically
states that the aforesaid Sections would be without prejudice to any other
consequences which that defaulter may incur. Other consequences are
provided under Section 40(a)(ia) of the Act, namely, payments made by such
a person to a contractor shall not be treated as deductible expenditure.
When read in this context, it is clear that Section 40(a)(ia) deals with
the nature of default and the consequences thereof. Default is relatable
to Chapter XVIIB (in the instant case Sections 194C and 200, which
provisions are in the aforesaid Chapter). When the entire scheme of
obligation to deduct the tax at source and paying it over to the Central
Government is read holistically, it cannot be held that the word 'payable'
occurring in Section 40(a)(ia) refers to only those cases where the amount
is yet to be paid and does not cover the cases where the amount is actually
paid. If the provision is interpreted in the manner suggested by the
appellant herein, then even when it is found that a person, like the
appellant, has violated the provisions of Chapter XVIIB (or specifically
Sections 194C and 200 in the instant case), he would still go scot free,
without suffering the consequences of such monetary default in spite of
specific provisions laying down these consequences. The Punjab & Haryana
High Court has exhaustively interpreted Section 40(a(ia) keeping in mind
different aspects. We would again quote the following paragraphs from the
said judgment, with our complete approval thereto:
“26. Further, the mere incurring of a liability does not require an
assessee to deduct the tax at source even if such payments, if made, would
require an assessee to deduct the tax at source. The liability to deduct
tax at source under Chapter XVII-B arises only upon payments being made or
where so specified under the sections in Chapter XVII, the amount is
credited to the account of the payee. In other words, the liability to
deduct tax at source arises not on account of the assessee being liable to
the payee but only upon the liability being discharged in the case of an
assessee following the cash system and upon credit being given by an
assessee following the mercantile system. This is clear from every section
in Chapter XVII.
27. Take for instance, the case of an assessee, who follows the cash
system of accounting and where the assessee who though liable to pay the
contractor, fails to do so for any reason. The assessee is not then liable
to deduct tax at source. Take also the case of an assessee, who follows the
mercantile system. Such an assessee may have incurred the liability to pay
amounts to a party. Such an assessee is also not bound to deduct tax at
source unless he credits such sums to the account of the party/payee, such
as, a contractor. This is clear from Section 194C set out earlier. The
liability to deduct tax at source, in the case of an assessee following the
cash system, arises only when the payment is made and in the case of an
assessee following the mercantile system, when he credits such sum to the
account of the party entitled to receive the payment.
28. The government has nothing to do with the dispute between the assessee
and the payee such as a contractor. The provisions of the Act including
Section 40 and the provisions of Chapter XVII do not entitle the tax
authorities to adjudicate the liability of an assessee to make payment to
the payee/other contracting party. The appellant's submission, if accepted,
would require an adjudication by the tax authorities as to the liability of
the assessee to make payment. They would then be required to investigate
all the records of an assessee to ascertain its liability to third parties.
This could in many cases be an extremely complicated task especially in the
absence of the third party. The third party may not press the claim. The
parties may settle the dispute, if any. This is an exercise not even
remotely required or even contemplated by the section.”
As mentioned above, the Punjab & Haryana High Court found support from the
judgments of the Madras and Calcutta High Courts taking identical view and
by extensively quoting from the said judgments.
Insofar as judgment of the Allahabad High Court is concerned, reading
thereof would reflect that the High Court, after noticing the fact that
since the amounts had already been paid, it straightaway concluded, without
any discussion, that Section 40(a)(ia) would apply only when the amount is
'payable' and dismissed the appeal of the Department stating that the
question of law framed did not arise for consideration. No doubt, the
Special Leave Petition thereagainst was dismissed by this Court in limine.
However, that would not amount to confirming the view of the Allahabad High
Court (See V.M. Salgaocar & Bros. (P) Ltd. v. Commissioner of Income Tax,
(2000) 243 ITR 383 and Supreme Court Employees Welfare Association v. Union
of India, (1989) 4 SCC 187.
In view of the aforesaid discussion, we hold that the view taken by the
High Courts of Punjab & Haryana, Madras and Calcutta is the correct view
and the judgment of the Allahabad High Court in CIT v. Vector Shipping
Services (P) Ltd., (2013) 357 ITR 642 did not decide the question of law
correctly. Thus, insofar as the judgment of the Allahabad High Court is
concerned, we overrule the same. Consequences of the aforesaid discussion
will be to answer the question against the appellant/assessee thereby
approving the view taken by the High Court.
The appeal is, accordingly, dismissed with costs.
.............................................J.
(A.K. SIKRI)
.............................................J.
(ASHOK BHUSHAN)
NEW DELHI;
MAY 03, 2017.
