2008 (2) TMI 424 - HC - Income Tax

Consequences of failure to deduct TDS u/s 194C application of section 40(a)(ia) held that - . Section 4 of the Act provides that for the income of the year concerned, income-tax shall be charged in accordance with the provisions enacted by the legislature. The income is defined under Section 2(24) of the Act. - A sum paid for advertisement towards advancement of the business is liable to be deducted from computation of the total income strictly in accordance with the provisions of the Act and not otherwise - he was liable to deduct tax at source by virtue of Section 194C of the Act failing which Section 40 (a)(ia) provides that such payment shall not be allowed to be deducted from computation of total income and shall be treated to be the income of the assessee. Once a deduction of a particular amount is not allowable under the Act, it is liable to be taxed and merely because some other person may also be liable to tax after receiving the said amount in one or the other manner, it cannot be said that former assessee is entitled for exemption and cannot be taxed.

Summary

Issues:
Challenge to assessment order under Section 143(3) of the Income Tax Act, 1961 for the assessment year 2005-06, liability under Section 40(a)(ia) of the Act.

Analysis:
The petitioner contested the assessment order dated 31.12.2007, challenging the tax liability of Rs. 1,29,10,775 imposed by Joint Commissioner of Income Tax, Range-II, Allahabad under Section 143(3) for the assessment year 2005-06, along with the validity of Section 40(a)(ia) of the Act. The petitioner, engaged in the manufacture and sale of cosmetics and medical products, claimed deductions for payments made towards advertisements without deducting tax at source as required by Section 194C of the Act. The assessing officer disallowed the deduction under Section 40(a)(ia), treating the payment as the petitioner's income, leading to tax liability.

The petitioner argued that the payments should be taxed in the hands of the recipients, and failure to deduct tax at source should not result in double taxation. However, the Court found this argument baseless. It clarified that under Section 4 of the Act, income tax is charged as per legislative provisions, and income, as defined in Section 2(24), must be computed accordingly. While business expenditures are generally deductible under Section 37, Section 40 lists non-deductible amounts. Payments for advertisements are deductible only as per Act provisions. The petitioner's failure to deduct tax at source, as required by Section 194C, led to disallowance under Section 40(a)(ia), making it taxable in the petitioner's hands.

The Court emphasized that if a deduction is not allowable under the Act, the amount becomes taxable, irrespective of potential tax liabilities for the recipients. The petitioner failed to demonstrate how Section 40(a)(ia) was ultra vires or beyond legislative competence. The Court concluded that the provision was within Parliament's legislative competence and did not violate any constitutional provisions, including fundamental rights. Consequently, the writ petition was dismissed, with no costs imposed.