2015 (8) TMI 277 - HC - Income Tax

Disallowance under Section 40(a)(ia) - professional services to the assessee s hospital - assessee deducted tax at the rate of 2% under Section 194C but assessment was completed on the basis that tax deductible was at 5% as prescribed under Section 194J - assessee in default under Section 201 - whether where tax is deducted by the assessee, even if it is under a wrong provision of law, as in this case, the provisions of Section 40(a)(ia) of the Act cannot be invoked? - Held that - Any fees or professional services or fees for technical services payable to a resident 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 Section 200(1) of the Act, this provision is attracted. If Section 40(a)(ia) is understood in the manner as laid down in Gurusahai Saigal v. Commissioner of Income Tax, Punjab 1962 (8) TMI 66 - SUPREME COURT it can be seen that the expression tax deductible at source under Chapter XVII-B occurring in the Section has to be understood as tax deductible at source under the appropriate provision of Chapter XVII-B. Therefore, as in this case, if tax is deductible under Section 194J but is deducted under Section 194C, such a deduction would not satisfy the requirements of Section 40(a)(ia). The latter part of this Section that such tax has not been deducted, again refers to the tax deducted under the appropriate provision of Chapter XVII-B. Thus, a cumulative reading of this provision, therefore, shows that deduction under a wrong provision of law will not save an assessee from Section 40(a)(ia). - Decided against assessee.

Summary

Issues:
1. Appropriate Section for TDS deduction
2. Applicability of Section 40(a)(ia) of the Act

Issue 1: Appropriate Section for TDS deduction

The case involved a hospital that entered into an agreement with another entity to provide professional services. The hospital deducted tax at 2% under Section 194C, but the assessment was done at 5% under Section 194J. The Tribunal upheld the assessment, stating that tax deductible under Section 194J should have been applied. The agreement clearly outlined the provision of professional services, indicating that tax should have been deducted under Section 194J, not 194C. This discrepancy led to the disallowance of the tax deduction under Section 40(a)(ia) of the Act.

Issue 2: Applicability of Section 40(a)(ia) of the Act

The interpretation of Section 40(a)(ia) was crucial in this case. The provision states that tax should be deducted at the source under Chapter XVII-B for certain payments, and if such tax is not deducted or paid, the provision is attracted. The Court emphasized that this section is not a charging provision but a machinery provision. It was clarified that tax deductible under the appropriate provision of Chapter XVII-B must be adhered to; deducting tax under a wrong provision does not exempt the assessee from Section 40(a)(ia). The judgment of the Calcutta High Court, which suggested that deduction under a wrong provision would not invoke Section 40(a)(ia), was not accepted by the Court in this case.

In conclusion, the Court confirmed the Tribunal's order, dismissing the appeal filed by the assessee concerning the assessment year 2005-2006. Additionally, the Court allowed the appeal filed by the Revenue concerning the assessment year 2006-2007, setting aside the Tribunal's order. The judgment highlighted the importance of correctly applying the provisions for TDS deduction and the implications under Section 40(a)(ia) of the Act.