2016 (3) TMI 56 - HC - Income Tax

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 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 before the expiry of time prescribed under sub Section (i) of Section 200 . However, no such condition for depositing the tax paid within a prescribed time was introduced in sub clause (iii) of clause (a) of Section 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 can claim deduction on an expense which is not reflected in its profit and loss account for the relevant period has been authoritatively settled by the Supreme Court in its decision in The Kedarnath Jute Mfg. Co. Ltd. v. The Commissioner of Income Tax, (Central), Calcutta 1971 (8) TMI 10 - SUPREME Court wherein held that it is wholly unable to appreciate the suggestion that if an assessee under some misapprehension or mistake fails to make an entry in the books of account and although under 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

Summary

Issues Involved:
1. Denial of deduction of expenses under Section 40(a)(iii) of the Income Tax Act, 1961 due to failure to deduct and deposit Tax Deducted at Source (TDS) within the prescribed time.
2. Applicability of CBDT Circulars and compliance with Chapter XVII B of the Act.
3. Interpretation of Section 40(a)(iii) and its comparison with Section 40(a)(i).

Detailed Analysis:

1. Denial of Deduction of Expenses under Section 40(a)(iii):
The primary issue in this appeal is whether the Income Tax Appellate Tribunal was correct in law in holding that salaries paid to expatriate employees overseas, on which tax was paid according to CBDT Circulars, are not permissible as a deduction in computing taxable business income due to the provisions of Section 40(a)(iii) of the Income Tax Act, 1961. The Assessee, a non-resident banking company, paid salaries and perquisites to expatriate employees both in India and overseas. While TDS was deducted and deposited for salaries paid in India, the same was not done for payments made overseas until the issuance of CBDT Circular No. 685.

2. Applicability of CBDT Circulars and Compliance with Chapter XVII B:
The CBDT Circular No. 685 clarified that all payments made and perquisites provided to employees overseas for services rendered in India are taxable in India. Consequently, the Assessee deposited the TDS amounting to Rs. 9,69,43,214/- for payments made abroad for the financial years 1984-85 to 1993-94. The Commissioner of Income Tax verified and accepted the tax and interest deposited, and no penalty or prosecution was initiated against the Assessee. Despite this, the CIT(A) and the Tribunal denied the deduction under Section 40(a)(iii) on the grounds that the tax was not deducted and deposited within the prescribed time.

3. Interpretation of Section 40(a)(iii) and Comparison with Section 40(a)(i):
Section 40(a)(iii) disallows deductions for salaries paid outside India if tax has not been paid or deducted under Chapter XVII B. The Tribunal held that since no tax was deducted at source within the prescribed time, the deduction was not permissible. However, the Court noted that the Assessee had complied with its obligations under Chapter XVII B by depositing the tax, albeit belatedly, in response to the CBDT Circular. The Court emphasized that the absence of a proviso similar to Section 40(a)(i) in Section 40(a)(iii) does not mean that an Assessee is disentitled to claim a deduction if the tax is paid subsequently. The Court also referenced the legislative amendments and concluded that the condition to deposit TDS within the prescribed time cannot be read into Section 40(a)(iii) as it was not specifically enacted.

Conclusion:
The Court held that the Assessee had complied with its obligation under Chapter XVII B by depositing the tax as required, and thus, the rigor of Section 40(a)(iii) no longer applied. The Assessee was entitled to claim the deduction for the expenses incurred on account of salaries paid overseas. The question of law was answered in favor of the Assessee, and the appeal was allowed. The parties were left to bear their own costs.