ITO 4(2)(1), MUMBAI V. PRATIBHUTI VINIYOG LTD, MUMBAI

ITA 1689/MUM/2011

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 8340 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 5 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-08-2014
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 12-08-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 01-03-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PARMINDER
• Assessee Lawyers: PRADIP KEDIA
• Keywords: Earning of tax free income; Question of law
• Section: 143(3); 14A

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, MUMBAI . , , , BEFORE SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDI CIAL MEMBER . / ITA NO. 1689 /MUM./ 2011 ( / ASSESSMENT YEAR : 2007 08 ) INCOME TAX OFFICER WARD 4(2)(1), AAYAKAR BHAVAN 101, M.K. ROAD, MUMBAI 400 020 .. / APPELLANT V/S M/S. PRATIBHUTI VIN IYOG LTD. 15 B, 3 RD FLOOR, 28, RAJABAHDUR MANSION BOMBAY SAMACHAR MARG, FORT MUMBAI 400 023 .... / RESPONDENT ./ PERMANENT ACCOUNT NUMBER AAACP7334B / REV E NUE BY : SMT. PARMINDER / ASSESSEE BY : SHRI PRADIP KEDIA / DATE OF HEARING 13 .08.2014 / DATE OF ORDE R 22.08.2014 / ORDER , / PER AMIT SHUKLA , J.M. THE P RESENT APPEAL HAS BEEN PREFERRED BY THE REVENUE CHALLENGING THE IMPUGNED ORDER DATED 30 TH DECEMBER 2010 , PASSED BY THE LEA RNED COMMISSIONER (APPEALS) VIII , MUMBAI, FOR THE QUANTUM OF ASSESS MENT PASSED UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 M/S. PRATIBHUTI VINIYOG LTD. 2 (FOR S HORT 'THE ACT' ) , FOR THE ASSESSMENT YEAR 2007 08 , ON THE FOLLOWING GROUNDS: 1 (I) . ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT(A) ERRED IN DELETING THE DISALLOWANCE OF ` 3,00,009 MADE UNDER SECTION 40(A)(IA) IN RESPECT O F VSAT CHARGES AND TRANSACTION CHARGES PAID TO STOCK EXCHANGE, WITHOUT APPRECIATING THE FACTS THAT THESE WERE COMPOSITE CHARGES FOR PROFESSIONAL AND TECHNICAL SERVICES RENDERED BY THE STOCK EXCHANGE TO ITS MEMBERS AND THE ASSESSEE HAS FAILED TO DEDUCT TDS THEREON. (II). ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT(A) ERRED IN IN IGNORING THE FACT THAT THESE SERVICES ARE ESSENTIAL IN NATURE AS THEY CAN ONLY BE AVAILED BY MEMBERS OF STOCK EXCHANGE. (III) ON THE FACTS AND IN T HE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT(A) ERRED IN IGNORING THE FACTS THAT USE OF TECHNOLOGY AND ALGORITHMIC BASED PROGRAMS HAVE CONVERTED AN ERSTWHILE PHYSICAL MARKET INTO A DIGITALLY OPERATED MARKET. (IV) ON THE FACTS AND IN THE CIRCUMS TANCES OF THE CASE AND IN LAW THE LEARNED CIT(A) ERRED IN IGNORING THE FACT THAT THE SERVICES RENDERED BY THE BROKERS ARE NOT STANDARD SERVICES BUT SERVICES THAT HAS BEEN DEVELOPED TO CATER TO THE NEEDS OF THE BROKER COMMUNITY TO FACILITATE TRADING. (V) O N THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT(A) HAS OVERLOOKED THE FACT THAT THE BROKERS HAVE IN SUBSEQUENT YEARS THEMSELVES STARTED DEDUCTING THE TDS ON SUCH PAYMENTS AND THAT THERE IS NO REASON TO GIVE A DIFFERENT TREATMENT IN THIS YEAR. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT(A) ERRED IN DELETING THE ADDITION OF ` 4,41,221 MADE UNDER SECTION 14A R/W RULE 8D BY THE ASSESSING OFFICER. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE IMPUGNED ORDER OF THE LEARNED CIT(A) IS CONTRARY TO LAW AND CONSEQUENTLY MERITS TO BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED. 2 . FACTS IN BRIEF : T HE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF SHARE BROKING AND APART FROM THAT IT HAS BEEN RECEIVING INCOME FROM M/S. PRATIBHUTI VINIYOG LTD. 3 INTEREST AND DIVIDEND. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAS DEBITED V SAT CHARGES OF ` 1,10,000 AND TRANSACTION CHARGES OF ` 2,90,009, IN THE PROFIT & LOSS ACCOUNT , WHICH HE WAS OF THE OPINION THAT W E RE IN THE NATURE OF TECHNICAL SERVICES, THEREFORE, THE ASSESSEE WAS LIABLE TO DEDUCT TAX ON SUCH PAYMENT. IN RESPONSE TO THE SHOW CAUSE NOTICE, AS TO WHY DISALLOWANCE UNDER SECTION 40(A)(IA) SHOULD NOT BE MADE, THE ASSESSEE SUBMITTED THAT THE TDS HAS NOT BEEN DEDUCTED , BECAUSE THERE IS NO RENDERING OF PROFESSIONAL OR TECHNICAL SERVICES ON SUCH CHARGES . RELIANCE WAS PLACED ON THE DECISION OF THE TRIBUNAL , MUMBAI BENCH, IN KOTAK SECURITIES LTD. T HE ASSESSING OFFICER HELD THAT THE DECISION OF THE TRIBUNAL HAS NOT BEEN ACCEPTED BY THE DEPARTMENT AND THE MATTER IS PENDING BEFORE THE HIGH COURT. THEREFORE, ANALYSING THE NATURE OF SERVICES IN DETAIL, HE HELD THAT SUCH A PAYMENT IS TO BE DISALLOWED UNDER SECTION 40(A)(IA) AS THE ASSESSEE WAS LIABLE TO DEDUCT TAX UN DER SECTION 194J. 3 . BEFORE US, IT HAS BEEN ADMITTED BY BOTH THE PARTIES THAT INSOFAR AS THE DISALLOWANCE OF ` 2,90,009, ON ACCOUNT OF TRANSACTION CHARGES IS CONCERNED, THE SAME HAS BEEN DECIDED AGAINST THE ASSESSEE BY THE HON'BLE JURISDICTIONAL HIGH COURT I N CIT V/S KOTAK SECURITIES LTD. [2012] 340 ITR 333 (BOM.) HOWEVER, THE LEARNED COUNSEL POINTED OUT THAT IN ANOTHER DECISION, THE HON'BLE JURISDICTIONAL HIGH COURT IN CIT V/S THE STOCK AND BOND TRADING COMPANY, VIDE ORDER DATED 14 TH M/S. PRATIBHUTI VINIYOG LTD. 4 OCTOBER 2011, HAS HELD T HAT EVEN THE TRANSACTION CHARGES ARE NOT COVERED UNDER SECTION 194J. HE THOUGH ADMITTED THAT THIS DECISION OF THE HIGH COURT WAS DELIVERED FEW DAYS PRIOR TO THE DECISION OF KOTAK SECURITIES LTD. INSOFAR AS THE V SAT CHARGES ARE CONCERNED, THE LEARNED COUNS EL SUBMITTED THAT THIS ISSUE IS COVERED INFAVOUR OF THE ASSESSEE BY THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN CIT V/S ANG E L CAPITAL AND DEBIT MARKET LTD., ITA NO.475 OF 2011, ORDER DATED 28 TH JULY 2011. THE LEARNED DEPARTMENTAL REPRESENTATIV E ALSO ADMITTED THAT THE ISSUE OF V SAT CHARGES IS COVERED BY THE SAID DECISION OF THE HIGH COURT. 4 . THUS, IN VIEW OF THE ABOVE SUBMISSIONS, WE HOLD THAT INSOFAR AS THE TRANSACTION CHARGES ARE CONCERNED, THE ASSESSEE WAS LIABLE TO DEDUCT TDS UNDER SECTION 1 94J IN VIEW OF THE DECISION OF HON'BLE JURISDICTIONAL HIGH COURT IN KOTAK SECURITIES LTD., WHICH IS A LATER DECISION AND, THEREFORE, THE DISALLOWANCE UNDER SECTION 40(A)(IA) , HAS RIGHTLY BEEN MADE BY THE ASSESSING OFFICER. AS REGARDS V SAT CHARGES ARE CONC ERNED FOR SUM AMOUNTING TO ` 1.10 LAKHS, FOLLOWING THE DECISION OF ANGEL CAPITAL &DEBIT MARKET LTD. (SUPRA), WE HOLD THAT THESE ARE NOT IN THE NATURE OF TECHNICAL SERVICES, THEREFORE, NO TDS WAS REQUIRED AND CONSEQUENTLY, NO DISALLOWANCE UNDER SECTION 40(A )(IA) IS CALLED FOR . M/S. PRATIBHUTI VINIYOG LTD. 5 5 . HOWEVER, REGARDING GROUND NO.1, B EFORE US, THE LEARNED COUNSEL HAS RAISED AN ALTERNATIVE PLEA THAT ALL THE PAYMENTS REMAINED PAID UP TO 31 ST MARCH 2007 AND, THEREFORE, NO DISALLOWANCE UNDER SECTION 40(A)(IA) SHOULD BE MADE EVEN WITH R EGARD TO TRANSACTION CHARGES IN VIEW OF THE DECISION OF ALLAHABAD HIGH COURT IN VECTOR SHIPPING SERVICES PVT. LTD. HE SUBMITTED THAT THOUGH THERE ARE TWO HIGH C O URT DECISION, ONE OF CALCUTTA HIGH COURT AND OTHER OF GUJARAT HIGH COURT AGAINST THE ASSESSEE, HOWEVER, THE HONBLE ALLAHABAD HIGH COURT IN CASE OF CIT V/S VECTOR SHIPPING SERVICE PVT. LTD., ITA NO.122 OF 2013, ORDER DATED 9 TH JULY 2013, HAS HELD THAT THE AMOUNT SHOULD BE DEDUCTED ON THE AMOUNT WHICH IS PAYABLE AND NOT WHICH HAS BEEN PAID BY THE END OF THE YEAR. HE POINTED OUT THAT T HIS DECISION OF THE ALLAHABAD HIGH COURT STANDS APPROVED IN THE SENSE THAT THE SLP AGAINST THE SAID DECISION HAS BEEN DISMISSED BY THE HON'BLE SUPREME COURT , VIDE ORDER DATED 2 ND JULY 2014. THUS, HE SUBMITTED THAT THIS DE CISION BEING FAVOURABLE TO THE ASSESSEE, SHOULD BE FOLLOWED. 6 . THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, SUBMITTED THAT THIS ISSUE WAS NOT RAISED BEFORE THE AUTHORITIES BELOW, THEREFORE, THE SAME SHOULD NOT BE ENTERTAINED AND SECONDLY THE DECISION OF CALCUTTA HIGH COURT AND GUJARA T HIGH COURT SHOULD BE FOLLOWED WHICH ARE MORE ELABORATE AND DETAIL JUDGMENTS. M/S. PRATIBHUTI VINIYOG LTD. 6 7 . WE HAVE HEARD THE RIVAL CONTENTIONS. ON A PERUSAL OF THE ORDER OF THE HONBLE ALLAHABAD HIGH COURT IN VECTOR SHIPPING SERVICES PVT. L TD., ITA NO.122 OF 2013, JUDGMENT DATED 9 TH JULY 2013 , IT IS SEEN THAT ONLY QUESTION OF LAW WHICH WAS FORMULATED BY THE HONBLE HIGH COURT WAS AS UNDER: WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE HON'BLE ITAT HAS RIGHTLY CONFIRMED TH E ORDER OF THE CIT(A) AND THEREBY DELETING THE DISALLOWANCE OF ` 1,17,68,621 MADE BY THE ASSESSING OFFICER UNDER SECTION 40(A)(IA) OF THE I.T. ACT, 1961, BY IGNORING THE FACT THAT THE COMPANY M/S. MERCATOR LINES LTD. HAD PERFORMED SHIP MANAGEMENT WORK ON B EHALF OF THE ASSESSEE. M/S. VECTOR SHIPPING SERVICES PVT. LTD. AND THERE WAS A MEMORANDUM OF UNDERSTANDING SIGNED BETWEEN BOTH THE COMPANIES AS PER THE DEFINITION OF MEMORANDUM OF UNDERSTANDING, IT INCLUDES CONTRACT ALSO. 8 . THUS ISSUE OF PAID AND PAYABLE W AS NOT SUBJECT OF REFERENCE BEFORE THE HONBLE HIGH COURT. FURTHER, F ROM THE FACTS WHICH HAS BEEN INCORPORATED BY THE HONBLE HIGH COURT, WAS THAT M/S. MERCATOR LINES LTD. HAD DEDUCTED TAX AT SOURCE ON THE SALARIES PAID BY IT ON BEHALF OF THE ASSESSEE IN R ESPECT OF WHICH THE DISALLOWANCE WAS MADE BY THE ASSESSING OFFICER UNDER SECTION 40(A)(IA). WHILE ANSWERING THE AFORESAID QUESTION OF LAW, THE HONBLE HIGH COURT HELD IN THE PRESENT CASE , TAX W AS DULY DEDUCTED AS THE TDS HAS BEEN DEDUCTED FROM THE SALARY O F THE EMPLOYEES PAID BY M/S. MERCATOR LINES LTD. ON BEHALF OF VECTOR SHIPPING SERVICE ( THE ASSESSEE ) AND THE CIRCUMSTANCES IN WHICH SUCH SALARIES WERE PAID BY M/S. MERCATOR LINES LTD., FOR M/. VECTOR SHIPPING SERVICES, WHERE SUFFICIENTLY EXPLAINED BY THE A SSESSEE . THUS, M/S. PRATIBHUTI VINIYOG LTD. 7 THE ISSUE WAS DECIDED ON THE GROUND THAT THE TAX HAS ALREADY BEEN DEDUCTED, THEREFORE, NO DISALLOWANCE UNDER SECTION 40(A)(IA) SHOULD BE MADE. AFT ER HAVING ANSWERED THE QUESTION IN THE AFORESAID MANNER, THE HONBLE HIGH COURT FURTHER OBSERVE D AS UNDER: IT IS TO BE NOTED THAT FOR DISALLOWING EXPENSES FROM BUSINESS AND PROFESSION ON THE GROUND THAT TDS HAS NOT BEEN DEDUCTED, THE AMOUNT SHOULD BE PAYABLE AND NOT WHICH HAS BEEN PAID BY THE END OF THE YEAR . 9 . SUCH AN OBSERVATION OF THE HONBLE HIGH COURT SANS THE ISSUE IN QUESTION OF LAW FORMULATED IS IN THE FORM OF OBITER DICTA. THIS OBSERVATION WAS MADE BY THE COURT BECAUSE THE TRIBUNAL WHILE DEALING WITH THE SAID DISALLOWANCE HAS REFERRED TO THE DECISION OF THE SPECIAL BENCH IN M/S. MERILYN S HIPPING AND TRANSPORT LTD., 136 ITD 23 (SB) . IT IS NOT THE CASE WHERE THE HONBLE HIGH COURT HAS CATEGORICALLY AFFIRMED THE REASONING AND INTERPRETATION GIVEN BY THE SPECIAL BENCH. ON THE CONTRARY, WE FIND THAT THE HONBLE CALCUTTA HIGH COURT IN CIT V/S CR ESCENT EXPORTS SYNDICATE , [2013] 262 CTR (CAL.) 525, HAS SPECIFICALLY EXAMINED THE CORRECTNESS OF THE MAJORITY VIEW OF MARILYN SHIPPING AND DISAPPROVED THE VIEW TAKEN BY THE SPECIAL BENCH IN THE FOLLOWING MANNER: - THE HIGH COURT EXAMINED THE CORRECTNESS O F THE MAJORITY VIEWS IN THE CASE OF MERILYN SHIPPING. THE MAIN THRUST OF THE MAJORITY VIEW WAS BASED ON THE FACT 'THAT THE LEGISLATURE HAS REPLACED THE EXPRESSION 'AMOUNTS CREDITED OR PAID' WITH THE EXPRESSION 'PAYABLE' IN THE FINAL ENACTMENT. COMPARISON BETWEEN THE PRE - AMENDMENT AND POST AMENDMENT LAW IS PERMISSIBLE FOR THE PURPOSE OF ASCERTAINING M/S. PRATIBHUTI VINIYOG LTD. 8 THE MISCHIEF SOUGHT TO BE REMEDIED OR THE OBJECT SOUGHT TO BE ACHIEVED BY AN AMENDMENT. BUT THE SAME COMPARISON BETWEEN THE DRAFT AND THE ENACTED LAW IS NOT PER MISSIBLE. NOR CAN THE DRAFT OR THE BILL BE USED FOR THE PURPOSE OF REGULATING THE MEANING AND PURPORT OF THE ENACTED LAW. IT IS THE FINALLY ENACTED LAW WHICH IS THE WILL OF THE LEGISLATURE . CIT V S. KELVINATOR REPORTED IN 2010(2) SCC 723, RELIED ON. THE TR IBUNAL FELL INTO AN ERROR IN NOT REALIZING THIS ASPECT OF THE MATTER . THE TRIBUNAL HELD 'THAT WHERE LANGUAGE IS CLEAR THE INTENTION OF THE LEGISLATURE IS TO BE GATHERED FROM THE LANGUAGE USED' . HAVING HELD SO, IT WAS NOT OPEN TO SEEK TO INTERPRET THE SECTI ON ON THE BASIS OF ANY COMPARISON BETWEEN THE DRAFT AND THE SECTION ACTUALLY ENACTED NOR WAS IT OPEN TO SPECULATE AS TO THE EFFECT OF THE SO - CALLED REPRESENTATIONS MADE BY THE PROFESSIONAL BOD I ES. THE TRIBUNAL HELD THAT 'SECTION 40(A)(IA) OF THE ACT CREATE S A LEGAL FICTION BY VIRTUE OF WHICH EVEN THE GENUINE AND ADMISSIBLE EXPENSES CLAIMED BY AN ASSESSEE UNDER THE HEAD ' INCOME FROM BUS I NESS AND PROFESSION' IF THE ASSESSEE DOES NOT DEDUCT TDS ON SUCH EXPENSES ARE DISALLOWED '. HAVING HELD SO WAS IT OPEN TO T HE TRIBUNAL TO SEEK TO JUSTIFY THAT 'THIS FICTION CANNOT BE EXTENDED ANY FURTHER AND, THEREFORE, CANNOT BE INVOKED BY AO TO DISALLOW THE GENUINE AND REASONABLE EXPENDITURE ON THE AMOUNTS OF EXPENDITURE ALREADY PAID'? DOES TH I S NOT AMOUNT TO DELIBERATELY RE ADING SOMETHING IN THE LAW WHICH IS NOT THERE? THE TRIBUNAL REALIZED THE MEANING AND PURPORT OF SEC . 40(A)(IA) CORRECTLY WHEN IT HELD THAT IN CASE OF OMISSION TO DEDUCT TAX EVEN THE GENUINE AND ADMISSIBLE EXPENSES ARE TO BE DISALLOWED. BUT THEY SOUGHT TO REMOVE THE RIGOUR OF THE LAW BY HOLDING THAT THE DISALLOWANCE SHALL BE RESTRICTED TO THE MONEY WHICH IS YET TO BE PAID. WHAT THE TRIBUNAL BY MAJORITY DID WAS TO SUPPLY THE CASUS OMISSUS WHICH WAS NOT PERMISSIBLE AND COULD ONLY HAVE BEEN DONE BY THE SUPREME COURT IN AN APPROPRIATE CASE. BHUWALKA STEEL INDUSTRIES VS. BOMBAY IRON & STEEL LABOUR BOARD REPORTED IN 2010 (2) SCC 273, RELIED ON. THE KEY WORDS USED IN SEC . 40(A)(IA), ARE 'ON WHICH TAX IS DEDUCTIBLE AT SOURCE UNDER CHAPTER XVII B'. IF THE QUESTION I S 'WHICH EXPENSES ARE SOUGHT TO BE D I SALLOWED?' THE ANSWER IS BOUND TO BE 'THOSE EXPENSES ON WHICH TAX IS DEDUCTIBLE AT SOURCE UNDER CHAPTER XVII - B . ONCE THIS IS REAL I ZED NOTHING TURNS ON THE BASIS OF THE FACT THAT THE LEGISLATURE USED THE WORD 'PAYABLE' AND NOT 'PAID OR CREDITED'. UNLESS ANY AMOUNT IS PAYABLE, IT CAN NEITHER BE PAID NOR CREDITED. IF AN AMOUNT HAS NEITHER BEEN PAID NOR CREDITED, THERE CAN BE NO OCCASION FOR CLAIMING ANY DEDUCTION. THE LANGUAGE USED IN THE DRAFT WAS UNCLEAR AND SUSCEPTIBL E TO GIVING MORE THAN ONE MEANING . BY LOOKING AT THE DRAFT IT COULD BE SAID THAT THE LEGISLATURE WANTED TO TREAT THE PAYMENTS MADE OR CREDITED IN FAVOUR OF A CONTRACTOR OR SUB - CONTRACTOR DIFFERENTLY THAN THE PAYMENTS ON ACCOUNT OF INTEREST, COMMISSION OR B ROKERAGE, FEES FOR PROFESSIONAL SERVICES OR FEES FOR TECHNICAL SERVICES BECAUSE THE WORDS M/S. PRATIBHUTI VINIYOG LTD. 9 'AMOUNTS CREDITED OR PAID' WERE USED ONLY IN RELATION TO ' A CONTRACTOR OR SUB - CONTRACTOR. THIS DIFFERENTIAL TREATMENT WAS NOT INTENDED. THEREFORE, THE LEGISLATURE PRO VIDED THAT THE AMOUNTS, ON WHICH TAX IS DEDUCTIBLE AT SOURCE UNDER CHAPTER XVII - B PAYABLE ON ACCOUNT OF INTEREST, COMMISSION OR BROKERAGE, RENT, ROYALTY, FEES FOR PROFESSIONAL SERVICES OR FEES FOR TECHNICAL SERVICES OR TO A CONTRACTOR OR SUB - CONTRACTOR SHA LL NOT BE DEDUCTED I N COMPUTING THE INCOME OF AN ASSESSEE IN CASE HE HAS NOT DEDUCED, OR AFTER DEDUCTION HAS NOT PAID WITHIN THE SPECIFIED TIME. THE LANGUAGE USED BY THE LEGISLATURE IN THE FINALLY ENACTED LAW IS CLEAR AND UNAMBIGUOUS WHEREAS THE LANGUAGE USED IN THE BILL WAS AMBIGUOUS. THERE CAN BE NO DENIAL THAT THE PROVISION IN QUESTION IS HARSH. BUT THAT WAS NO GROUND TO READ THE SAME IN A MANNER WHICH WAS NOT INTENDED BY THE LEGISLATURE. THE CONTENTION THAT THE SECOND PROVISO SOUGHT TO BECOME EFFECTIV E FROM 1ST APRIL, 2013 SHOULD BE HELD TO HAVE ALREADY BECOME OPERATIVE PRIOR TO THE APPOINTED DATE CANNOT ALSO BE ACCEDED TO. THE LAW WAS DELIBERATELY MADE HARSH TO SECURE COMPLIANCE OF THE PROVISIONS REQUIRING DEDUCTIONS OF TAX AT SOURCE. IT IS NOT THE CA SE OF AN INADVERTENT ERROR . THUS THE MAJORITY VIEWS EXPRESSED IN THE CASE OF MERILYN SHIPPING & TRANSPORTS WAS HELD TO BE NOT ACCEPTABLE. THE APPEAL WAS THUS, ALLOWED IN FAVOUR OF THE REVENUE. MERILYN SHIPPING & TRANSPORTS (ITA 477/V IZ . /2008, DATED MARCH 29, 2012), OVERRULED . 10 . SIMILAR INTERPRETATION HAS BEEN REITERATED AND EXPLAINED IN DETAIL BY THE HONBLE GUJARAT HIGH COURT , IN CIT V/S SIKANDARKHAN N. TUNVAR & ORS.[ 2013] 357 ITR 312 (GUJ.). IN THIS DECISION, AGAIN THE HONBLE GUJARAT HIGH COURT HAS SP ECIFICALLY DEALT THIS ISSUE IN A GREAT LENGTH AND OVERRULED MARILYN SHIPPING IN THE FOLLOWING MANNER: - FOR THE PURPOSE OF THE SAID SECTION, THE TERMS 'PAYABLE' AND 'PAID' ARE NOT SYNONYMOUS . WORD ' PAID ' HAS BEEN DEFINED IN SECTION 43(2) OF THE ACT TO MEA N ACTUALLY PAID OR INCURRED ACCORDING TO THE METHOD OF ACCOUNTING, UPON THE BASIS OF WHICH PROFITS AND GAINS ARE COMPUTED UNDER THE HEAD ' PROFITS AND GAINS OF BUSINESS OR PROFESSION'. SUCH DEFINITION IS APPLICABLE FOR THE PURPOSE OF SECTIONS 28 TO 41 UNLES S THE CONTEXT OTHERWISE REQUIRES . IN CONTRAST, TERM 'PAYABLE' HAS NOT BEEN DEFINED. THE WORD 'PAYABLE' HAS BEEN DESCRIBED IN WEBSTER'S THIRD NEW INTERNATIONAL M/S. PRATIBHUTI VINIYOG LTD. 10 UNABRIDGED DICT I ONARY AS REQU I RING TO BE PAID: CAPABLE OF BEING PAID: SPECIFYING PAYMENT TO A PAR TICULAR PAYEE AT A SPEC I FIED T I ME OR OCCASION OR ANY SPECIFIED MANNER. IN THE CONTEXT OF SECTION 40(A)(IA), THE WORD 'PAYABLE' W OULD NOT INCLUDE 'PAID'. IN OTHER WORDS, THEREFORE, AN AMOUNT WHICH IS ALREADY PAID OVER CEASES TO BE PAYABLE AND CONVERSELY W HAT IS PAYABLE CANNOT BE ONE THAT IS ALREADY PAID. FOR THE PURPOSE OF SECTION 40(A) ( IA) OF THE ACT, TERM 'PAYABLE' CANNOT BE SEEN TO BE INCLUDING THE E XPRESSION 'PAID'. THE TERM 'PAID' AND ' PAYABLE ' IN THE CONTEXT OF SECT I ON 40 ( A)( I A) ARE NOT USED INTERCHA NGABLY. DESPITE THIS NARROW I NTERPRETAT I ON OF SECT I ON 40 ( A )(I A ), THE Q U ES TI ON S T IL L SUR V IVES I F THE T R IBU N A L I N CASE OF M/ S . MER I LYN SHIPP I NG & TRANSPORTS V S . AC I T (SUPR A ) W AS ACCURATE I N ITS OP I NION . I N THIS CONTEX T, COURT E X A MIN E D T W O ASPECTS . F IR S TLY, WHAT WOULD BE T H E CORRECT I NTERPRETAT I ON OF THE SAID PROV I S I ON . SECO NDLY, WH E TH E R OUR S UCH UNDERSTANDING O F T HE LANGUAGE USED BY THE LEG I SLATURE SH OUL D W A V E R ON THE PREM I SE T H AT AS PROPOUNDED BY TH E TR I BUNA L, THIS WAS A CASE O F CONSCIOUS O MISSION ON PART O F THE PAR LI AMENT . IF ONE LOOKS CLOSELY T O TH E PROV I SION , IN QUEST I ON , ADVERSE C O NSEQUENC E S OF NOT BE I NG AB L E TO CLAIM DEDU C TION ON C E RT A IN P AYMENTS I RRESPECT IV E O F THE P R O VISIONS CONT A INED I N SECT I ONS 30 TO 38 OF THE ACT WOULD FLOW IF T HE FO LL O WI NG REQU IR E MENTS ARE SA T I SFIED: - ( A ) THERE IS INTEREST, COMMI S SI O N O R BRO K ERAGE , RENT , ROYALTY, FEES FOR P R OFESS I O N A L SE RVI CE S OR FEES FOR T E CHNIC A L S ER VIC ES PAYAB L E TO RES I DENT OR AMOUNTS PAYABLE TO A C ONTR A C TO R OR SUB - CONTRACTOR BEING RESID E NT F O R C ARRY IN G OU T ANY WORK . (B) THESE AMOUNTS ARE SUCH ON WHICH TAX IS DEDUCTIBL E A T SOURCE UNDER CHAPTE R XVII - B . ( C ) SUC H TAX HAS NOT BEEN DEDUCTED OR AFTER DEDUCTION H AS NOT BEEN PAID ON O R BEFORE DUE DATE SPEC I FIED I N SUB - SECT I ON ( 1 ) OF SECT I ON 39. U/S 40 ( A )(I A ) THE TERM USED IS INTEREST, COMM I SSION , BROKERAGE ETC. I S PAYABLE TO A RESIDENT OR AMOUNTS PAYABLE TO A CONTRACTOR OR SUB - CO N TRACTOR FOR CARRYING OUT ANY WORK . THE LANGUAGE USED I S NOT THA T SUCH AMOUNT MUST CONTINUE TO R EMA I N PAYABLE TILL THE END OF THE ACCOUNT I NG Y EAR . ANY SUCH I NTERPRETAT I ON WOULD REQUIRE READ I NG WORDS WHICH THE LEGISLATURE HAS NOT USED . NO SUCH I NTE R P R ETATION WOULD EVEN OTHERWISE BE JUSTIFIED BECAUSE THE LEGISLATURE COULD NOT HAVE I NTENDED TO BRING ABOUT ANY SUCH D I STINCTION NOR THE LANGUAGE USED IN THE SECT I ON BR I NGS ABO U T ANY SUCH MEAN I NG . IF THE INTE R PRETAT I ON AS ADVANCED BY THE ASSESSEES IS ACCEPTED , I T WOULD LEAD TO A S I TUATIO N WHERE THE ASSESSEE WHO THO U GH W AS REQUIRED TO DEDUCT THE TAX A T SOURCE B U T NO SUCH DEDUC TI ON WAS MADE OR MORE F LAGRA NT L Y DEDUCTION THOUGH M/S. PRATIBHUTI VINIYOG LTD. 11 MADE I S NOT PAID T O TH E GO V ER N MEN T, W OULD ESCAPE THE CONSEQ U E N CE O NLY BECAUSE T HE AMOUN T WAS ALREAD Y PA I D O V E R B E F ORE T H E END OF THE YEAR IN CON T RAST TO . ANOTHER ASSESSEE WHO WOULD OTHERW I SE BE IN SI MIL A R SIT UAT I O N BU T IN W HOSE CASE THE AMOU NT REMA I NED PAYABLE T I LL THE END OF THE YEA R. THIS B R INGS US TO THE SECOND ASPECT OF TH I S D I SCUSS I ON , NAMELY , WHETHER TH I S I S A CASE OF CONSCIOUS OM I SSION AND THEREFORE , THE LEGISLATURE MUST BE SEEN TO HAVE DEL I BE R ATE LY B R OUGH T ABOUT A CERTAIN SIT UATION WHICH DOES NOT REQUIRE ANY FURTHER INTERPRETATION . WH I LE I N T ERP R E TING A STATUTORY P ROV I SION THE COURTS HAVE OFTEN APP LI ED HYDEN ' S RULE OR THE M I SCH I EF RU L E AND ASCERTA I NED WHAT WAS THE POS I T I ON BEFORE THE AMENDMENT, WHAT THE AMENDMENT SOUGHT TO REME DY AND WHAT WAS THE EFFECT OF THE CHANGES . IN SUCH CONTEXT, THE POS I T I ON PREVAILING PR I OR TO THE AMENDMEN T I NTRODUCED I N SECT I ON 40 ( A ) WOULD CERTA I NLY BE A R ELEVANT FACTOR . H OWEVER , THE PROCEED I NGS I N THE PARLIAMENT , ITS DEBATES AND EVEN THE SPEECHES MADE BY THE PROPOSER O F A B ILL AR E O R D I NAR I LY NO T CONS I DERED AS RELEVANT OR SAFE TOOLS FOR I NTERPRETA T ION OF A STATUTE. IT W O ULD A LL TH E MORE BE UNSAFE TO REFER TO O R R E LY UPON THE DRAFTS , AMENDMENTS , DEBA T ES E TC F O R IN TE R PRETAT I ON O F A STATUTORY PRO VI S I ON WHEN THE LANGUAGE USED I S NOT CAPAB L E OF SE V E R A L MEANINGS . IN T HE PRESENT CASE THE TR I BUNA L I N CASE OF M / S . M ERILYN SH I PP I NG & TRA N SPO RT S VS . AC I T FE LL I N A SE RI OUS ERROR I N MERELY CO M PAR I NG THE LA N GUAGE USED IN THE DRAFT BI L L AN D FIN AL ENACTMENT TO ASS I GN A PARTICULAR MEA NIN G TO T H E STATUTORY PROV I SION . THE COU R TS I N INDIA HAVE BEEN APP L Y I NG THE PRINCIP L E OF DEL I BERATE OR CONSCIOUS OM I SSION. S U CH PR I NC I PLE IS APP L IED MAINLY WHEN AN EXIST I NG P R OVISION IS AMENDED AND A CHANGE I S BROUGHT ABOUT . WH I LE I NTERPRET I NG SUCH AN AMENDED PROVIS I ON , THE COURTS WOULD I MMED I ATE L Y I NQUIRE WHAT WAS THE STATUTORY PROVISIO N BE F ORE AND WHAT CHANGES THE LEGISLATURE BROUGHT ABOUT AND COMPARE THE EFFECT OF THE TWO. THE OTHER OCCASION FOR APPLYING THE PRINCIPLE , HAS BEEN WHEN T HE L ANGUAGE OF THE LEG I S L ATURE I S COMPARED W I TH SOME OTHER ANALOGOUS STATUTE OR OTHER PROV I S I ONS OF THE SAME STATUTE OR WITH EXPRESS I ON WH I CH COULD APPARENTLY OR OBV I OUSLY BEEN USED IF THE LEG I SLATURE HAD D I FFERENT I NTENTION IN M I ND, WHI L E FRAM I NG THE PROVISIO N. TR I BUNA L COMM I TTED AN ERROR I N A PPL YI NG THE PR I NCIP L E OF CONSC I OUS OM I SS I ON I N THE PRESENT CASE . F I RS T LY , COURT H A V E SERIOUS DOUBT WHETHER SUCH PR I NC I P L E CAN BE APPL I ED B Y COMPARING THE DRAFT PRESENTED IN PARLIAMENT AND ULTIMATE LEGISLATION WHICH MAY BE PASSED. SECONDLY, THE STATUTORY PROVISION IS AMPLY CLEAR. SECTION 40(A)( I A) WOULD COVER NOT ONLY TO THE AMOUNTS WHICH ARE PAYABLE AS ON 31TH MARCH OF A PARTICULAR YEAR BUT ALSO WHICH M/S. PRATIBHUTI VINIYOG LTD. 12 ARE PAYABLE AT ANY TIME DURING THE YEAR. OF COURSE, AS LONG AS THE OTHER REQUIREMENTS OF THE SAID PROVISION EXIST. M/S. MERILYN SHIPPING & TRANSPORTS V/S ACIT, INCORRECT L AW. BHUWALKA STEEL INDUSTRIES LTD. VS.BOMBAY IRON AND STEEL LABOUR BOARD 2010 (SUPPL . ) 122, AGRICULTURAL PRODUCE MARKET COMMITTEE, NARELA, DELHI VS. COMMISSI ONER OF INCOME TAX AND ANR . AIR 2008 SC (SUPPLEMENT) 566; GREATER BOMBAY C O - OPERATIVE BANK LTD. V/S M/S. UN I TED YARN TEX.PVT.LTD & ORS. AIR 2007 SC 1584; NATIONAL MINERAL DEVELOPMENT CORPORATION LTD. VS. STATE OF M.P AND ANOTHER REPORTED IN AIR 2004 SC 2456 ; GOPAL SARDAR, VS. KARUNA SARDAR AIR 2004 SC 3068, RELIED ON. 11 . THUS, THE DECISION OF THE HONBLE CALCUTTA HIGH COURT AND HONBLE GUJARAT HIGH COURT CONSTITUTES RATIO DECIDENDI ON THIS ISSUE WHICH IN OUR HUMBLE OPINION SHOULD PREVAIL. THUS, WE DO NOT FI ND ANY MERIT IN THE CONTENTION RAISED BY THE LEARNED COUNSEL THAT THE DECISION OF THE ALLAHABAD HIGH COURT IN VECTOR SHIPPING SERVICES PVT. LTD. AGAINST WHICH SPECIAL LEAVE PETITION HAS BEEN DISMISSED BY THE HON'BLE SUPREME COURT , LAYS DOWN A RATIO DECIDEN DI ON THE PHRASE PAID AND PAYABLE BY APPROVING THE DECISION OF SPECIAL BENCH IN MERLYN SHIPPING. THUS, G ROUND NO.1, OF THE REVENUE IS PARTLY ALLOWED. 12 . GROUND NO.2, RELATES TO DISALLOWANCE OF ` 4,41,221, MADE UNDER SECTION 14A, R/W RULE 8D. 13 . THE ASSESSING O FFICER HAS MADE THE DISALLOWANCE UNDER SECTION 14A, AFTER APPLYING RULE 8D OF ` 4,41,221, AS AGAINST THE DIVIDEND INCOME OF ` 4,76,670, AS SHOWN BY THE ASSESSEE. THE LEARNED COMMISSIONER (APPEALS) HAS HELD THAT RULE 8D IS NOT APPLICABLE FOR THE M/S. PRATIBHUTI VINIYOG LTD. 13 ASSESSMENT YEAR 2007 08 A S THE SAME IS APPLICABLE FROM THE ASSESSMENT YEAR 2008 09 , IN VIEW OF THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN GODREJ & BOYCE MFG. CO. LTD. V/S DCIT, (2010), 328 ITR 081 (BOM.) . ACCORDINGLY, HE GAVE A REASONABLE BASIS FOR DETE RMINING THE QUANTUM OF DISALLOWANCE IN THE FOLLOWING MANNER: I FIND THAT IT WILL BE REASONABLE TO DETERMINE THE QUANTUM OF THE AMOUNT OF EXPENDITURE INCURRED FOR EARNING OF EXEMPTED INCOME AT THE RATIO OF THE TOTAL EXPENDITURE DEBITED TO P & L ACCOUNT IN PROPORTION THAT THE VALUE OF TRANSACTION IN SHARES WHICH HAS YIELDED EXEMPT INCOME BEARS TO THE VALUE OF TOTAL TRANSACTIONS IN SHARE AS UNDER: - AMOUNT OF EXPENDITURE ALLOWABLE TO EARNING OF EXEMPT INCOME = TOTAL EXPENDITURE DEBITED TO P&L NC (DIRECT & IN DIRECT) X VALUE OF TRANSACTION I N SHARE Y IELDING EXEMPT INCOME VALUE OF TOTAL TRANSACTIONS IN SHARE THE AMOUNTS SO DETERMINED SHALL BE DISALLOWED AS PER THE PROVISIONS OF SECTION 14A , BEING EXPENDITURE INCURRED FOR EARNING OF EXEMPT INCOME. THE A . O. IS DIR ECTED TO DETERMINE THE QUANTUM OF SUCH EXPENDITURE BY APPLYING THE RATIO AS MENTIONED ABOVE AND DISALLOW THE SAME AS PER THE PROV I SION S OF SECTION 14A . THE APPEAL ON THIS GROUND IS ACCORDINGLY, DISPOSED OFF WITH THESE DIRECTIONS: THE DISALLOWANCE MADE BY T HE A . O . BY APPLYING RULE 80 AT RS . 4 , 41,221 / IS THUS, DELETED IN RESPECTFUL COMPLIANCE OF THE D ECISION OF THE HON ' BLE BOMBAY HIGH COURT IN THE CASE OF M / S . GODREJ & BOYCE MANUFACTURING CO. LT D . (SUPRA) . THE APPEAL ON THIS GROUND IS TREATED AS PARTLY ALLOWED , FOR STATISTICAL PURPOS E . 14 . AFTER HEARING THE PARTIES, WE DO NOT FIND ANY REASON TO DEVIATE FROM SUCH A FINDING OF THE LEARNED COMMISSIONER (APPEALS) , BECAUSE ADMITTEDLY DISALLOWANCE CANNOT BE MADE ON THE BASIS OF FORMULA LAID DOWN BY THE RULE 8D IN THE A SSESSMENT YEAR 2007 08 AND SOME REASONABLE BASIS HAS TO BE ADOPTED. THUS, GROUND NO.2, RAISED BY THE REVENUE IS DISMISSED. M/S. PRATIBHUTI VINIYOG LTD. 14 15 . 1 5 . IN THE RESULT, REVENUES APPEAL IS PARTLY ALLOWED. 22 ND AUGUST 2014 ORDER PRONOUNCED IN THE OPEN COURT O N 22 ND AUGUST 2014 SD/ - . D. KARUNAKARA RAO ACCOUNTANT MEMBER SD/ - AMIT SHUKLA JUDICIAL MEMBER MUMBAI, DATED : 22 ND AUGUST 2014 / COPY OF THE ORDER FORWARDED TO : ( 1 ) / THE ASSESSEE ; ( 2 ) / THE REVENUE; ( 3 ) ( ) / THE CIT(A ) ; ( 4 ) / THE CIT, MUMBAI CITY CONCERNED ; ( 5 ) , , / THE DR, ITAT, MUMBAI ; ( 6 ) / GUARD FILE . / TRUE COPY / BY ORDER . / PRADEEP J. CHOWDHURY / SR. PRIVATE SECRETARY / / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI