Section 40(a) view of author find approval in recent judgment of the Supreme Court in case of Palam Gas Service Vs. CIT

[CA DEV KUMAR KOTHARI]

Section 40 (a) (ia) , 145

M/s. Palam Gas Service Versus Commissioner of Income Tax 2017 (5) TMI 242 - SUPREME COURT and judgments referred to therein and also judgments discussed in earlier article.

Earlier article by the same author:

Earlier article tiled “Section 40(a) (ia)- different views of High Court on ‘sum payable’, as per author the section should apply in respect of any sum otherwise allowable for the previous year” webhosted on this website on September 9, 2013  the author has considered S.40 (a) (ia)  and S.145 and expressed  view inter alia that disallowance shall be attracted in respect to all expenses incurred or paid during the year as well as those remain payable and are claimed ,as the case may be to which this provision apply.

The Supreme Court has held that disallowance shall attract in respect of sums paid during the year also and not in respect of sums payable as on closing day of the previous year. The same view was expressed by author for reasoning’s expressed in the article.

From the earlier article of author are reproduced with highlights added:

“ Author would like to express his views about the controversy about ‘sum payable’ as used in S. 40(a) (ia) as follows:

a.   The provisions is related to ascertainment of income chargeable as business or professional  income for the entire previous year. For computing income of the previous year, all transactions during the whole of previous year are to be considered. 

b.    The provision is not such which concerns state of affairs as on closing date of previous year or any particular day, as can be in case of Wealth Tax or Estate Duty.

c.   Liability to deduct and deposit tax at source runs over entire period and not as on close of the previous year only. As and when an event occurs (crediting or paying relevant sums), which required tax to be deducted, the tax has to be deducted and then has to be deposited within prescribed time or in case of delay can be deposited with interest as per law.

d.   The amount which accrued and or paid at any time during the previous year can be claimed as per method of accounting and provisions of law. Therefore, in context of S.40(a)(ia)  the expression ‘sum payable’ must be construed as a sum which is claimed as an allowable expenditure while computing income of the previous year. Therefore, an expenditure which is claimed ( on basis of accrual or payment), and in respect of which tax is deductible but has not been deducted or after deduction tax has not been deposited, then such sum will not be allowable.

e.   If the view is taken that the provision applies only in case of sum payable as on last day, then in case cash system of accounting is followed, there will never be a disallowance.  Because the sum will be debited or claimed only on payment. Once payment is made, sum no longer remain payable so S. 40(a) (ia ) will not apply. This view on playability,  will thus render section redundant in case of assessee following cash basis of accounting (which is permitted vide section 145 of ITA). However, if the  view of author that disallowance is attracted only when a claim is made,  or the sum is allowable, the disallowance will get attracted even in case of cash system of accounting and provision will be fully implementd. Therefore, even in case of cash basis of accounting disallowance will be called for when a payment of allowable expenditure is made but TDS requirements are not complied with.

f.        A sum which represent capital expenditure or which is not allowable for any other reason will not attract s. 40(a)(ia). Therefore, suppose a payment is made to contractor, without TDS. The amount is capitalized, and not claimed while computing business income, on such sum whether payable or already paid  s. 40(a) (ia) will not be applicable because expenditure is not claimed or is not allowable.

From judgment of the Supreme Court from paragraph 15-18 with highlight added by author:

               15) 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.”

16) 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.

17) 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 (4) TMI 2 - SUPREME Court and Supreme Court Employees Welfare Association v. Union of India, 1989 (7) TMI 333 - SUPREME COURT.

18) 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 (7) TMI 622 - ALLAHABAD HIGH COURT 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.

Observations of author:

Disallowance under section 40 (a) (ia) will apply in respect of sums paid in respect of which tax was deductible at source  but it was not deducted or after deduction not paid. The event of deductibility attract consequence of S.40 (a) (ia) also.

However, as per provisions applicable form time to time, assessee will get relief if he deposit the amount of tax deductible, to which S.40(a) (ia) was applied, for making disallowance and the amount disallowed earlier which relates to belated deposit of TDS will be allowed in the year of deposit of  such TDS.

Regarding judgment of Allahabad High Court,

 author had  discussed and expressed views as follows:

The High court has noted as follows:

            “Shri Shambhu Chopra, learned counsel for the department states that the A.O. had recorded findings that on the services for which assessee was claiming allowance of the expenses, tax was not deducted at source and thus the expenses on salaries to the employees could not be claimed. He submits that expenses were clearly disallowable under Section 40 (a) (ia) of the Act.”

From the above submission it is clear that the expenses were claimed as salaries of employees.

It is worth to note that section 40 (a) (ia) is not at all applicable in respect of payment for salary. Therefore, with due respect, author feels that the above submission or argument of learned senior counsel appears to be wrong. If the payment was admittedly for expenses on salaries of the employees of assessee, there cannot be application for disallowance u/s 40(a) (ia)

In view of author, the question framed by revenue, before Allahabad High Court were not properly drafted. In given case questions should have been on following lines covering all issues:

a.   Whether, there was payment to contractor or reimbursement of salary paid on behalf of assessee by Mercator as an agent of assessee?.

b.   Whether persons to whom salary was paid by Mercator were employees of Mercator or Vector (assessee) ?

c.   Whether tax was deductible u/s 194C, on amount paid by assessee to Mercator , when in essence payment was in nature of payment to contractor and not to a disbursement  agent  who disbursed salary to employees of assessee?

d.   Whether section 40(a) (ia) applied to all sums which accrued during the previous year or which were otherwise claimed as allowable or only to sums which remained payable at the close of the previous year?

e.   Whether, disallowance S.40(a) (ia) was not attracted  merely because the sum was paid before close of previous year and was not payable as on close of the previous year?

Revenue lost case in absence of proper question of law:

It appears that revenue lost the case due to lack of proper question. This is clear from the following order of Allahabad High Court:

“ We do not find that the Tribunal has committed any error in recording the finding on the facts, which were not controverter by the department and thus the question of law as framed does not arise for consideration in the appeal.”

Thus the court dismissed appeal because the question of law as framed, did not arise from order of Tribunal.

In view of author, the Allahabad High Court has not held that the provision will not apply if sum was already paid and was not payable. The appeal was dismissed because question did not arise from the order of Tribunal. Therefore, the SLP of revenue against this judgment was also dismissed.

With due respect  author express view that, this real aspect has not been clearly brought to notice of the Supreme Court, and the Supreme Court also has not considered judgment of the Allahabad High Court and made observations  about the judgment of the Allahabad High Court, as if it was held that provision of s. 40(a) (ia)  attracted to only ‘sum payable’, whereas there was no such question before High Court.

Furthermore, when SLP of revenue against judgment of the Allahabad High Court was earlier dismissed, by another bench of equal strength, with due respect author feels that it was not necessary for the Supreme Court, while considering cases before it, to hold that

           “the judgment of the Allahabad High Court in CIT v. Vector Shipping Services (P) Ltd., 2013 (7) TMI 622 - ALLAHABAD HIGH COURT did not decide the question of law correctly. Thus, insofar as the judgment of the Allahabad High Court is concerned, we overrule the same.”

With limited knowledge and experience  and with great respect to the honorable Supreme Court, author feels that the above ruling was not at all called for and it appears to be superfluous because,  when SLP against the judgment of Allahabad High Court was already dismissed  by the Supreme Court (definitely for some other reasons)  , there was no need for the Supreme Court, while considering other appeal before it, to make above statements and judgment. Particularly so, when we find that Allahabad High Court has not considered question on aspect of payable vis a vis paid- that was not question before the High Court.

 Author feels that this gives a wrong signal at level of the Supreme Court that in a way earlier judgment of the Supreme Court is overruled, without being looking into what exact facts and circumstances and rulings were in that case.

 The way in which even judgments of the Supreme Court are reconsidered, or reviewed and earlier judgments are differed or over ruled,  it is  desirable that the orders  allowing or dismissing appeals  by the  Supreme Court  should also be speaking orders so that  they can be properly understood and there is no further litigation.

For example in case of Commissioner Of Income Tax, Muzaffar Ngr Versus Vector Shipping Services (P) Ltd. If in case of 2015 (12) TMI 1131 - SUPREME COURT OF INDIA, if there was some discussion on facts and question considered, the position would be different.