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2017 (5) TMI 242 - SC - Income TaxInterpretation 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 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 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 provision. - 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. 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., did not decide the question of law correctly. - Decided in favor of revenue.
Issues Involved:
1. Interpretation of Section 40(a)(ia) of the Income Tax Act, 1961. 2. Applicability of Section 40(a)(ia) to amounts already paid versus amounts payable. 3. Compliance obligations under Sections 194C and 200 of the Income Tax Act. 4. Divergent High Court views on the interpretation of Section 40(a)(ia). Detailed Analysis: 1. Interpretation of Section 40(a)(ia) of the Income Tax Act, 1961: The core issue in this appeal is the interpretation of Section 40(a)(ia) of the Income Tax Act, 1961. Section 40(a)(ia) specifies that certain payments, including those to contractors or sub-contractors, will not be allowed as a deduction if tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid within the prescribed time. 2. Applicability of Section 40(a)(ia) to amounts already paid versus amounts payable: The primary question is whether Section 40(a)(ia) applies only to amounts that are 'payable' or also to amounts that have already been 'paid.' The appellant argued that the term 'payable' should be interpreted strictly, meaning the provision should not apply to amounts already paid. However, the court noted that the provision aims to ensure tax compliance and recovery, irrespective of the accounting method followed by the assessee. The court observed that the term 'payable' in Section 40(a)(ia) should be interpreted to include amounts already paid to ensure the legislative intent of tax compliance is met. 3. Compliance obligations under Sections 194C and 200 of the Income Tax Act: Section 194C mandates the deduction of tax at source for payments to contractors and sub-contractors. Section 200 requires that the deducted tax be deposited with the Central Government within the prescribed time. The court emphasized that these provisions are mandatory, and failure to comply results in the disallowance of the expenditure under Section 40(a)(ia). The court highlighted that the liability to deduct tax arises at the time of crediting the amount to the contractor's account or at the time of actual payment, whichever is earlier. 4. Divergent High Court views on the interpretation of Section 40(a)(ia): The court acknowledged the divergent views among various High Courts. The Madras, Calcutta, and Gujarat High Courts held that Section 40(a)(ia) covers both amounts payable and amounts paid. In contrast, the Allahabad High Court held that it applies only to amounts payable. The Punjab & Haryana High Court, in P.M.S. Diesels & Ors. v. Commissioner of Income Tax, supported the broader interpretation, emphasizing the mandatory nature of TDS provisions and the legislative intent to ensure tax recovery. Conclusion: The Supreme Court endorsed the view of the Punjab & Haryana, Madras, and Calcutta High Courts, holding that Section 40(a)(ia) applies to both amounts payable and amounts paid. The court overruled the Allahabad High Court's judgment in CIT v. Vector Shipping Services (P) Ltd., concluding that the section's purpose is to ensure tax compliance and recovery. The appeal was dismissed with costs, affirming the disallowance of the expenditure for failure to deduct and deposit tax at source.
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