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2017 (5) TMI 242 - SUPREME COURT

2017 (5) TMI 242 - SUPREME COURT - TMI - Interpretation of Section 40(a)(ia) - Disallowance due to non deduction of tax at source (TDS) - Amount payable at the end of FY or any time during the year - 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? - Held that:- When the entire scheme of obligation to deduct the tax at source and paying it over to the Central Government is read holistical .....

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he consequences of such monetary default in spite of specific provisions laying down these consequences. - The Punjab & Haryana High Court [2015 (5) TMI 617 - PUNJAB & HARYANA HIGH COURT] has exhaustively interpreted Section 40(a(ia) keeping in mind different aspects. - Allahabad High Court [2013 (7) TMI 622 - 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 prov .....

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- A. K. Sikri And Ashok Bhushan, JJ. JUDGMENT 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. 2) 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 computin .....

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e, 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 .....

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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 .....

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ation 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?" 5) 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 As .....

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h 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 ₹ 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 uph .....

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low, including the High Court. 7) 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 h .....

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8) 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 (hereafte .....

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… 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 t .....

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and verified in such manner and setting forth such particulars and within such time as may be prescribed. 9) 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 .....

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se, on or before seven days from the end of the month in which- (i) the deduction is made; or (ii) income-tax is due under sub-section(1A) of section 192. 10) 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 t .....

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upposed 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. 11) 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 t .....

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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 & Haryana High Court discussed the ju .....

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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 .....

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the TDS component alone constituted ₹ 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 machiner .....

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sed 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. 14) 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 .....

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ssessees 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 provisi .....

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s 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 augmen .....

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n 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 .....

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cate, (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 t .....

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e 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 .....

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d 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 th .....

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nt, 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, t .....

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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 .....

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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 au .....

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