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ANZ Grindlays Bank (Now Standard Chartered Grindlays Bank Ltd.) Versus Deputy Commissioner of Income Tax And Others

2016 (3) TMI 56 - DELHI HIGH COURT

Disallowance u/s 40(a)(iii) - failure on the part of the Assessee to deduct and deposit Tax Deducted at Source (TDS) within the prescribed time - whether the provisions of Section 40(a)(iii) disentitles an assessee to claim a deduction on account of Salaries paid to its employees if the tax is not paid within the specified time but is paid subsequently - Held that:- At once seen that where the legislature wanted to make payment of tax within a specified time a necessary pre-condition, it had exp .....

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40 of the Act. The condition to deposit TDS within the prescribed time cannot be read into sub-clause (iii) of clause (a) of Section 40 of the Act as-unlike the language of item (B) of sub-clause (i) of clause (a) of Section 40-the same has not been specifically enacted.

We are also unable to agree with Mr. Chaudhari‟s contention that no deduction can be claimed by the Assessee as the salaries were not reflected in the profit and loss account. The controversy whether an Assessee .....

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the law, a deduction must be allowed by the Income Tax Officer, the assessee will lose the right of claiming or will be debarred from being allowed that deduction. Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter - Decided in favour of assessee - ITA 32/2004 .....

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f the Income Tax Act, 1961 (hereafter the 'Act') impugning an order dated 29th August, 2003 passed by the Income Tax Appellate Tribunal (hereafter the Tribunal‟) in ITA No. 1442/Del of 1997. The said appeal, ITA 1442/Del of 1997, was preferred by the Assessee against an order dated 14th January, 1997 passed by the Commissioner of Income Tax (Appeals) [hereafter 'CIT(A)'] in Appeal No.164/96-97 which in turn was preferred by the Assessee against the assessment order dated 25 .....

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the questions as it was stated that it had since obtained relief in respect thereof. Consequently only the following question of law arises for consideration: Whether the Income Tax Appellate Tribunal was right in law in holding that salaries paid to ex-patriate employees overseas on which tax was paid in accordance with CBDT Circular dated 685 dated 17/20 June 94 and Circular 686 dated 12.8.94, is not permissible as a deduction in computation of taxable business income in view of the provision .....

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elevant period, the Assessee seconded some of its employees from overseas to its branches in India. These expatriate employees were employed for the business carried on in India. They received a part of their remuneration by way of salaries and perquisites in India which were duly reflected in the Profit and Loss Account drawn up by the Assessee in respect of its Indian operations. The Assessee also deducted tax at source on so much of the remuneration that was payable to the aforementioned expa .....

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in India. The Assessee neither claimed such payments as a deduction for the purposes of computing its income chargeable to tax in India nor deducted any tax under Chapter XVII B of the Act. 3.3 During the relevant period, some of the other non-resident assessees, who had employed expatriate employees in India, had also not deducted TDS on payments made to and/or for the benefit of such employees abroad on an erroneous understanding that payments made abroad were not subject to withholding tax i .....

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duct tax at source even in respect of payment of salary, allowances and perquisites paid and/or provided to such employees overseas. The said circular also indicated that in order to encourage immediate voluntary compliance, CBDT had decided that penalty proceedings under Section 221 and 271C of the Act and prosecution under Section 276B of the Act would not be initiated in cases where the employers came forward and paid the entire amount of tax due under Section 192 of the Act along with intere .....

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x authorities and the concerned Commissioner of Income Tax issued a communication on 11th November, 1994 duly informing the Assessee that in view of the payments made, no penalty or prosecution action would be initiated in respect of the payments made overseas to and/or for the benefit of the expatriate employees. 3.6 The assessments for the six assessment years from AY 1985-86 to 1990-91 stood concluded as on 28th July, 1994 and, thus, the Assessee could not claim any deduction on account of th .....

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doubted whether the entire tax due had been paid by the Assessee since the amount of tax paid would also be includable as income of the employees and, therefore, have the effect of increasing their income and consequently, the tax payable thereon. He further observed that it was possible that the salaries paid to the employees overseas were a part of the head "office expenses". 3.7 On appeal, the Tribunal permitted the Assessee to urge the additional ground but rejected the same princi .....

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complied with and TDS is deducted and paid within the prescribed time. It observed that the CBDT Circular only gave immunity to the Assessee from penalty and prosecution but did not remove the disincentive under Section 40 of the Act. 3.8 The Tribunal also referred to Section 40(a)(i) of the Act which expressly provided that no deduction would be allowed in respect of any interest, royalty, fees for technical services or other sum chargeable under the Act which is payable outside India and in re .....

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i) of clause (a) of Section 40 of the Act, no deduction would be permissible for payments which are chargeable under the head Salaries if tax had not been paid or deducted under Chapter XVII B. 4. The question whether an assessee is liable to deduct tax at source on the aforementioned payments made to and/or for benefit of its employees seconded from its head office situated outside India, is no longer res integra in view of the decision of the Supreme Court in Commissioner of Income Tax v. Eli .....

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ithout merit as the communication dated 11th November, 1994 issued by the Commissioner of Income Tax (hereafter also referred to as CIT ) duly indicates that the Assessee had made a disclosure of the payments made outside India for financial years 1984-85 to 1993-94 in respect of its expatriate employees and further had provided "full details". The Commissioner of Income Tax had also obtained a report from the lower authorities and the TDS payments made were duly verified. The AO had a .....

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ior Standing Counsel for the Revenue did not dispute that the Assessee had paid the requisite amount of tax. 7. Concededly, the powers of a CIT (A) are wide and in an Appeal against an Assessment order, it may confirm, reduce, enhance or annul the assessment. Thus, in cases where there is dispute as to the material facts for entertaining a claim, the CIT (A) would be well within his powers to do so. In the present case, the reliance placed by the CIT (A) on the decision of Additional Commissione .....

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S paid on the expenses claimed have been duly verified and the tax on the payments made which are chargeable under the head Salaries‟ have been recovered by the Government. The only reason for denying the claim is non-deposit of TDS within the prescribed time. The TDS having been deposited, there is no impediment for Assessee to claim the related expense. 8. In the aforesaid circumstances, the principal issue to be addressed is whether the provisions of Section 40(a)(iii) disentitles an as .....

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could not be allowed because the second condition which is deduction of tax at the time of payment of the amount as required under Section 192 of the Act would not be fulfilled. According to him, if the tax is not deducted and paid within the time prescribed for such deduction or payment under the relevant provisions, an assessee would not be entitled to claim that it had deducted or paid the tax under Chapter XVII B of the Act. He also referred to the decision of the Supreme Court in Eli Lilly .....

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ion under Section 40(a)(iii) was allowable in case where tax was not deducted or paid within the prescribed time under Chapter XVII B of the Act. 10. In order to address the controversy, it is necessary to refer to the provisions of sub-clauses (i) and (iii) of clause (a) of Section 40 of the Act as in force during the relevant period and the same are reproduced hereunder: "40 Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in compu .....

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pter XVII-B or paid in any subsequent year, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid. ***** (iii) Any payment which is chargeable under the head "Salaries" if it is payable outside India and if the tax has not been paid thereon nor deducted therefrom under Chapter XVII B." 11. Section 40 of the Act begins with the non obstante clause and, thus, expressly disentitles an assessee to claim deductions which m .....

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(a) the same are payable outside India and (b) if tax has not been paid or deducted thereon under Chapter XVII B of the Act. The said clause (iii) was substituted by virtue of the Finance Act, 2003 with effect from 1st April 2004. By virtue of the aforesaid amendment, the rigor of sub clause (iii) of clause (a) of Section 40 of the Act now also extends to any amount payable as salaries in India. Plainly, the principal object of the aforesaid sub clause (iii) is to provide a further disincentive .....

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e payer. In case of salaries, any person responsible for paying the income chargeable under the head Salaries - who would inevitably be the employer - is obliged to deduct the tax chargeable on the income of the employee (payee) under the head Salaries . Thus, in the present case, the tax deposited by the Assessee is clearly in discharge of its obligation under Chapter XVII B of the Act. In this view, the contention advanced by Mr Chaudhari that the condition that the Assessee has not deducted a .....

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ectly with the Government. 13. It is also relevant to mention that Circular No. 685 dated 17/20th June, 1994, in compliance of which the Assessee had deposited the amount of tax, was issued under Chapter XVII B of the Act; the said Circular granted amnesty from penalties and prosecution to the assessees who complied with their obligation to deposit TDS in terms of Section 192 of the Act for the preceding years for which they had not done so, on or before 31st July, 1994. The said circular clarif .....

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ssee had also overcome the rigor of sub-clause (iii) of clause (a) of Section 40 of the Act as the necessary condition for applicability of the said provision, that is, non-deduction and payment of TDS under Chapter XVII B of the Act, no longer held good. Having complied with the said obligation, the Assessee could not be denied the deduction which was otherwise allowable under Section 37 of the Act. 14. In our view, an absence of a provision similar to the proviso to sub- clause (i) of clause ( .....

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an, nonetheless, claim a deduction in the year in which the assessee deposits the tax. This benefit is not available to an assessee in respect of payments chargeable under the head Salaries which fall within sub-clause (iii) of clause (a) of Section 40 and not sub-clause (i) of clause (a) of Section 40 of the Act. Thus, an assessee would not be entitled to claim deduction on account of salaries if it fails to deduct or pay the amount under Chapter XVII B of the Act. In cases where such assessee .....

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ost its right to claim a deduction for a period of six years - AY 1985-86 to AY 1990-91- even though the Assessee has paid the TDS on the expenses pertaining to said period. 15. If a provision similar to the proviso to Section 40(a) (i) was applicable to Section 40(a) (iii) then the Assessee would have been entitled to claim the entire expenses on account of salaries paid overseas pertaining to financial years 1984-85 to 1993-94 in the financial year 1994-95 relevant to AY 1995-96 as the payment .....

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

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(B) In India to a non-resident, not being a company or to a foreign company, 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 other provisions of Chapter XVII-B: Provided that where in respect of any such sum, tax has been deducted under Chapter XVII-B or paid in any subsequent year, such sum shall be allowed as a deduction in computing the income of the previous year in .....

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nor deducted therefrom under Chapter XVII-B; (underlining for emphasis) 18. It is at once seen that where the legislature wanted to make payment of tax within a specified time a necessary pre-condition, it had expressly indicated so. The Parliament has expressly enacted that deduction in respect of payments made under sub-clause (i) of clause (a) of Section 40 of the Act would not be available where such payments were made in India to a non-resident in respect of which tax had not been paid bef .....

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nder Section (i) of Section 200 was retained in sub-clause (i) and (ia). Thereafter, by virtue of Finance Act (No.2), 2014, sub clause (i) was further amended and the principal condition of depositing tax in respect of payments made in India was amended and instead of the pre-condition of depositing the tax within the time prescribed under Section 200 (i) of the Act, it was now stipulated that the tax be deposited on or before the due date specified in sub section (i) of Section 139 . 20. With e .....

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her sum chargeable under this Act, which is payable,- (A) outside India; or (B) in India to a non-resident, not being a company or to a foreign company, 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 b .....

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