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TMI Blog2016 (3) TMI 56X X X X Extracts X X X X X X X X Extracts X X X X ..... ition 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le Taxation Avoidance Treaty? 3. The aforesaid question has to be considered in the following context: 3.1 During the relevant period - financial years 1984-85 to 1993-94 - the Assessee was a non-resident banking company and its principal place of business was situated outside India. The Assessee also carried on banking business in India through its branches situated within the country. During the relevant period, the Assessee seconded some of its employees from overseas to its branches in India. These expatriate employees were employed for the business carried on in India. They received a part of their remuneration by way of salaries and perquisites in India which were duly reflected in the Profit and Loss Account drawn up by the Assessee in respect of its Indian operations. The Assessee also deducted tax at source on so much of the remuneration that was payable to the aforementioned expatriate employees in India. Undisputedly, such TDS was deposited with the Government. 3.2 In addition to the remuneration paid to the aforementioned expatriate employees in India, the Assessee's head office situated overseas also made certain payments to and/or for the benefit of suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or prosecution action would be initiated in respect of the payments made overseas to and/or for the benefit of the expatriate employees. 3.6 The assessments for the six assessment years from AY 1985-86 to 1990-91 stood concluded as on 28th July, 1994 and, thus, the Assessee could not claim any deduction on account of the payments made in respect of the said years. However, the Assessee‟s appeal in respect of AY 1991-92 was pending before CIT(A) and the Assessee sought to claim a deduction of an amount of ₹ 1,32,46,994/- in respect of payments made pertaining to the financial year 1990-91. The CIT(A) rejected the Assessee's claim by holding that such claim could not be made in appellate proceedings. He also observed that no deduction could be claimed in view of Section 40(a)(iii) of the Act. He doubted whether the entire tax due had been paid by the Assessee since the amount of tax paid would also be includable as income of the employees and, therefore, have the effect of increasing their income and consequently, the tax payable thereon. He further observed that it was possible that the salaries paid to the employees overseas were a part of the head office expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hough before the CIT(A), the Revenue had sought to contend that the amount paid to the employees has not been verified as it did not form a part of the Profit and Loss Account submitted by the Assessee, however, the same is without merit as the communication dated 11th November, 1994 issued by the Commissioner of Income Tax (hereafter also referred to as CIT ) duly indicates that the Assessee had made a disclosure of the payments made outside India for financial years 1984-85 to 1993-94 in respect of its expatriate employees and further had provided full details . The Commissioner of Income Tax had also obtained a report from the lower authorities and the TDS payments made were duly verified. The AO had also examined the exchange rates applied by the Assessee while determining the amount of tax to be deposited. It is only after duly verifying the relevant facts that the CIT had issued the communication accepting that no action for penalty or prosecution would be initiated in respect of the payments made to expatriate employees. 6. Undisputedly, the entire tax payable on the salaries along with interest due thereon has been received by the Revenue. Even before us, Mr P. Roy Cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deducted or paid the tax under Chapter XVII B of the Act. He also referred to the decision of the Supreme Court in Eli Lilly Co. (India) P. Ltd. (supra) in support of his contention that Section 40(a)(iii) was an integrated code and Section 40(a)(iii) would have to be read in conjunction with Section 192 of the Act which required an employer (assessee) to deduct and deposit the tax payable in respect of payments chargeable under the head Salaries . 9. Mr Chaudhari further supported the Tribunal‟s view that absence of proviso similar to that as under Section 40(a)(i) also indicated that no deduction under Section 40(a)(iii) was allowable in case where tax was not deducted or paid within the prescribed time under Chapter XVII B of the Act. 10. In order to address the controversy, it is necessary to refer to the provisions of sub-clauses (i) and (iii) of clause (a) of Section 40 of the Act as in force during the relevant period and the same are reproduced hereunder: 40 Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head Profits and gains of business or profess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dit of the payee and not the payer. In case of salaries, any person responsible for paying the income chargeable under the head Salaries - who would inevitably be the employer - is obliged to deduct the tax chargeable on the income of the employee (payee) under the head Salaries . Thus, in the present case, the tax deposited by the Assessee is clearly in discharge of its obligation under Chapter XVII B of the Act. In this view, the contention advanced by Mr Chaudhari that the condition that the Assessee has not deducted and deposited the tax under Chapter XVII B of the Act, cannot be accepted. Indisputably, the Assessee has deposited the requisite amount which it was required to deposit in respect of amounts chargeable under the head Salaries that was payable to and or for the benefit of employees outside India. The said tax is deposited to the credit of such employees. Thus, for all intents and purposes the same is considered as a part of their Salaries which has not been paid to them but has been deposited directly with the Government. 13. It is also relevant to mention that Circular No. 685 dated 17/20th June, 1994, in compliance of which the Assessee had deposited the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... still not be able to claim the deduction in the year in which such tax is deposited; his claim for deduction can be considered only in respect of the year to which such expense relates. Therefore, in cases where the assessments stand concluded, the Assessee would lose the benefit of deduction for the expenses incurred on account of its failure to have deposited the tax at source. Thus, concededly, in the present case the Assessee has lost its right to claim a deduction for a period of six years - AY 1985-86 to AY 1990-91- even though the Assessee has paid the TDS on the expenses pertaining to said period. 15. If a provision similar to the proviso to Section 40(a) (i) was applicable to Section 40(a) (iii) then the Assessee would have been entitled to claim the entire expenses on account of salaries paid overseas pertaining to financial years 1984-85 to 1993-94 in the financial year 1994-95 relevant to AY 1995-96 as the payment for the tax for the aforesaid years was paid on 20th July, 1994. However, absence of a provision similar to that under sub-clause (i) of clause (a) of Section 40 does not mean that the Assessee would also be disentitled to claim deduction on account of sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hasis) 18. It is 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. 19. It is also relevant to note that sub-clause (i) of clause (a) of Section 40 was further substituted by sub-clauses (i), (ia) and (ib) by virtue of Finance Act (No.2) w.e.f. 1st April, 2005. However, the pre-condition for depositing the tax within the time prescribed under Section (i) of Section 200 was retained in sub-clause (i) and (ia). Thereafter, by virtue of Finance Act (No.2), 2014, sub clause (i) was further amended and the principal condition of depositing tax in respect of payments made in India was amended and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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