Dy.Commissioner of Income Tax, Lucknow V. Anil Kumar Singh, Lucknow

ITA 808/LKW/2013

• Counselvise Citation: 80823714 RSA 2013
• Duration Of Justice: 6 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-07-2014
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 19-06-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 27-12-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: ROHIT BHALLA
• Keywords: Salary income; Question of law
• Section: 194C; 139

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW BENCH A, LUCKNOW BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI A.K. GARODIA, ACCOUNTANT MEMBER ITA NO.808/LKW/2013 ASSESSMENT YEAR:2009 - 10 DY. C.I.T., RANGE - 1, LUCKNOW VS. SHRI ANIL KUMAR SINGH, 6/194, VIPIN KHAND, GOMTI NAGAR, LUCKNOW. PAN:APRPS9706B (APPELLANT) (RESPONDENT) APPELLANT BY SHRI MANOJ KUMAR, CIT, D.R. RESPONDENT BY SHRI ROHIT BHALLA, C.A. DATE OF HEARING 19/06/2014 DATE OF PRONOUNCEMENT 0 4 /07/2014 O R D E R PER A. K. GARODIA, A.M. THIS IS REVENUES APPEAL DIRECTED AGAINST THE ORDER PASSED BY LEARNED CIT (A) - I, LUCKNOW DATED 21/10/2013 FOR ASSESSMENT YEAR 2009 - 2010. 2. THE GROUNDS RAISED BY THE REVENUE ARE AS UNDER: 1. THE CIT(A) HAS ERRED IN LAW AND ON FACTS OF THE CASE IN DELETING THE ADDITION OF RS.7,98,797/ - OUT OF PAYMENTS OF COMMISSION TO PETTY PERSONS WITHOUT CONSIDERING THE FACTS THAT THE ADDITION WAS MADE IN LIEU OF PAYMENTS OF COMMISSION WHICH REMAINED UNVERIFIED. 2. THE LD. CIT (A) HAS ERRED IN LAW AND ON FACTS OF THE CASE IN GIVING RELIEF OF RS.3,76,000/ - OUT OF COMMISSION ON SALES AND RS.21,35,000/ - ON ACCOUNT OF REMUNERATION WITHOUT CONSIDERING THE FACT THAT ABOVE PAYMENTS WERE MADE WITHOUT DEDUCTING TDS U/S 40(A)(IA) OF THE I.T. ACT 1961. 2 3. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS OF THE CASE IN DELETING THE ADDITION OF RS.12,29,404/ - WITHOUT APPRECIATING THE FACT THAT THE ADDITION WAS MADE ON ACCOUNT OF NON CONFIRMATION OF CREDITORS. 4. APPELLANT CRAVES LEAVE TO ADD OR AME ND THE GROUND OF APPEAL, AS STATED ABOVE AS AND WHEN NEED OF DOING SO ARISES WITH THE PRIOR PERMISSION OF THE HON'BLE BENCH. 3. LEARNED D.R. OF THE REVENUE SUPPORTED THE ASSESSMENT ORDER WHEREAS LEARNED A.R. OF THE ASSESSEE SUPPORTED THE ORDER OF LEARNE D CIT(A). 4. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. REGARDING THE FIRST GROUND, WE FIND THAT THIS ISSUE WAS DECIDED BY THE CIT(A) AS PER PARA 4.4 OF HIS ORDER, WHICH IS REPRODUCED BELOW FOR THE SAKE OF READY REFERENCE: 4.4 I HAVE CONSIDERED THE MATTER. IT IS SEEN THAT THE COMMISSION OF RS.19,96,700/ - HAS ALSO BEEN DISALLOWED BY THE AO DUE TO NON - DEDUCTION OF TDS U/S 40(A)(IA). I AGREE WITH THE SUBMISSION OF THE APPELLANT THAT THE COMMISSION PAYABLE TO THE PERSONS CANNOT BE DISALLOWED ON ACCOUNT O F NON - VERIFIABILITY AS WELL AS SECTION 40(A)(IA) OF THE ACT AS IT WOULD AMOUNT TO TAXING THE SAME INCOME TWICE WHICH IS NOT PERMISSIBLE. I FIND TH AT THE APPELLANT HAS FURNISHED CONFIRMATIONS AND AFFIDAVITS OF TWELVE PERSONS ALONG WITH THE PROOF OF THEIR I DENTITIES AND ADDRESSES SUCH AS COPY OF PAN, RATION CARD, DRIVING LICENSE, COPY OF RETURN ETC. THE APPELLANT HAS ALSO FURNISHED THE DETAILS OF PAYMENT OF COMMISSION GIVING THE DETAILS OF PARTICULARS OF BILL, DATE OF BILL, ORDER/INDENT NO., AMOUNT, COMMISSI ON, MODE OF PAYMENT, PAYEE NAME AND THEIR ADDRESSES TO THE AO DURING THE ASSESSMENT PROCEEDINGS. THE COMMISSION HAS BEEN PAID @ 8.5% OF THE VALUE OF ORDER/INDENT INCLUSIVE OF ALL EXPENSES INCURRED IN PROCUREMENT OF SUCH ORDERS WHICH WAS INCLUSIVE OF EXPENS ES LIKE TRAVELLING AND CONVEYANCE, TELEPHONE, PRINTING AND STATIONARY, CLEARING OF BUILTY AND SUPPLYING THE GOODS AT THE STORES ETC. INCURRED BY THE AGENTS. THE SERVICES RENDERED BY SUCH COMMISSION AGENTS INCLUDED PROCUREMENT OF ORDER/INDENT FROM VARIOUS C MOS OF DISTT. HOSPITALS SPREAD ALL OVER THE STATE OF UTTAR PRADESH, SUPPLY OF GOODS TO SUCH DISTRICT HOSPITALS, COLLECTION OF PAYMENTS AGAINST SUPPLIES AND CARRYING ON SUCH FOLLOW UP WORKS WHICH WERE ESSENTIAL SUBSEQUENT TO SUCH SUPPLIES. IT IS ALSO NOTED THAT THE AO 3 HAS ACCEPTED SIMILAR CONFIRMATIONS/ EVIDENCES FROM SEVENTEEN COMMISSION AGENTS AND HAS TREATED THE COMMISSION PAID TO THEM AS GENUINE WHEREAS IN THE CASE OF REMAINING TWELVE PERSONS THE SAME HAVE BEEN REJECTED WITHOUT CONDUCTING ANY ENQUIRY DUR ING THE REMAND PROCEEDINGS. IN VIEW OF THE ABOVE, I HOLD THAT THE ASSESSING OFFICER WAS NOT JUSTIFIED IN MAKING ADDITION OF RS.7,98,787/ - TO THE INCOME OF THE ASSESSEE AND THE SAME IS DELETED. 5. WE FIND THAT AS PER ABOVE PARA OF CIT(A), THE ADDITION WAS DELETED BY THE CIT(A) ON THE BASIS THAT FOR THE SAME EXPENDITURE, DISALLOWANCE CANNOT BE MADE TWICE, ONCE U/S 40(A)(IA) OF THE ACT AND AGAIN ON THE BASIS THAT COMMISSION PAYMENT IS NON VERIFIABLE. AS PER PARA 5.4.2, THE CIT(A) HAS UPHELD THE DISALLOWANCE OF RS.16,20,700/ - BY APPLYING THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT. MOREOVER, IT IS ALSO NOTED BY CIT(A) IN THE ABOVE PARA THAT THE SERVICES RENDERED BY COMMISSION AGENT INCLUDED PROCUREMENT OF ORDER/INDENT FROM VARIOUS CMOS OF DISTT. HOSPITALS SPREAD ALL OVER THE STATE OF UTTAR PRADESH, SUPPLY OF GOODS TO SUCH DISTRICT HOSPITALS, COLLECTION OF PAYMENTS AGAINST SUPPLIES AND CARRYING ON SUCH FOLLOW UP WORKS WHICH WERE ESSENTIAL SUBSEQUENT TO SUCH SUPPLIES. HE HAS ALSO NOTED THAT THE ASSESSING OFFICER H AS ACCEPTED SIMILAR CONFIRMATIONS/ EVIDENCES FROM SEVENTEEN COMMISSION AGENTS AND HAS TREATED THE COMMISSION PAID TO THEM AS GENUINE WHEREAS IN THE CASE OF REMAINING TWELVE PERSONS , THE SAME HAVE BEEN REJECTED WITHOUT CONDUCTING ANY ENQUIRY DURING THE REMAND PROCEEDINGS. WE ALSO FIND THAT THE ASSESSING OFFICER HAS NOTED IN THE ASSESSMENT ORDER THAT COMMISSION PAYMENT WAS MADE TO 29 PERSONS OF RS.19,96,700/ - AND OUT OF THAT , NO REPLY WAS RECEIVED FROM 12 PERSONS AND TH E ASSESSING OFFICER DISALLOWED THE COMMISSION PAYMENT TO THOSE 12 PERSONS BY ALLEGING THAT THE SAME IS NOT VERIFIABLE BUT IT IS NOTED BY CIT(A) IN THE ABOVE PARA THAT THE ASSESSEE HAS FURNISHED THE CONFIRMATIONS AND AFFIDAVITS OF THESE 12 PERSONS ALSO ALON G WITH THE PROOF OF IDENTITY SUCH AS ADDRESSES , COPY OF PAN, RATION CARD, DRIVING LICENSE, COPY OF RETURN ETC. HE HAS FURTHER NOTED THAT THE 4 ASSESSEE HAS ALSO FURNISHED THE DETAILS OF PAYMENT OF COMMISSION GIVING THE DETAILS OF PARTICULARS OF BILL, DATE O F BILL, ORDER/INDENT NO., AMOUNT, OF COMMISSION, MODE OF PAYMENT, PAYEE NAME AND THEIR ADDRESSES TO THE AO DURING THE ASSESSMENT PROCEEDINGS. THE CIT(A) HAS ALSO OBTAINED REMAND REPORT FROM THE ASSESSING OFFICER IN RESPECT OF THESE 12 PERSONS FROM WHOM TH E CONFIRMATIONS AND AFFIDAVITS ETC. WERE NOT FURNISHED BEFORE THE ASSESSING OFFICER. CONSIDERING ALL THESE FACTS, IN OUR CONSIDERED OPINION, THERE IS NO INFIRMITY IN THE ORDER OF CIT(A) ON THIS ISSUE. ACCORDINGLY, GROUND NO. 1 IS REJECTED. 6. IN GROUND NO. 2 OF THE APPEAL, TWO ISSUES ARE RAISED BY THE REVENUE. THE FIRST ISSUE IS REGARDING RELIEF ALLOWED BY THE CIT(A) OF RS.3.76 LAC OUT OF COMMISSION ON SALES AND THE SECOND ISSUE IS REGARDING RELIEF ALLOWED BY CIT(A) OF RS.21.35 LAC ON ACCOUNT OF REMUNER ATION. BOTH THESE ISSUES ARE RAISED BY THE ASSESSING OFFICER IN THE SAME GROUND BECAUSE BOTH THE DISALLOWANCE WERE MADE BY HIM U/S 40(A)(IA) OF THE ACT. 7. REGARDING THE FIRST ISSUE, WE FIND THAT THE RELIEF WAS ALLOWED BY CIT(A) ON THE BASIS THAT THE AMOUNT OF COMMISSION WAS NOT UNPAID/PAYABLE AS ON 31/03/2009. HE HAS FOLLOWED THE DECISION OF SPECIAL BENCH OF THE TRIBUNAL RENDERED IN THE CASE OF MERILYN SHIP PPING & TRANSPORTS VS. ADDL. CIT 70 DTR 81 AND THE JUDGMENT OF HONBLE ALLAHABAD HIGH COURT RENDERED IN THE CASE OF CIT VS. VECTOR SHIPPING SERVICES PVT. LTD. IN I.T.A. NO.122/2013 DATED 09/07/2013. IN THIS REGARD IT WAS POINTED OUT BY THE BENCH IN THE C OURSE OF HEARING ITSELF THAT THE TRIBUNAL HAS DULY CONSIDERED BOTH THESE JUDGMENTS AND OTHER JUDGMENTS OF VARIOUS HIGH COURT S . THE RELEVANT PARA OF THIS TRIBUNAL DECISION IS PARA NO . 7 , WHICH IS REPRODUCED BELOW FOR THE SAKE OF READY REFERENCE: 7. HAVING GIVEN A THOUGHTFUL CONSIDERATION TO THE RIVAL SUBMISSIONS IN THE LIGHT OF THE ORDERS OF THE AUTHORITIES BELOW 5 AND THE JUDGMENTS REFERRED TO BY THE PARTIES, WE FIND THAT THE CIT(A) HAS ADJUDICATED THE ISSUE IN THE LIGHT OF ORDER OF SPECIAL BENCH OF T HE TRIBUNAL IN THE CASE OF MERILYN SHIPPING & TRANSPORTS (SUPRA) AND DELETED THE ADDITION. THE ORDER OF THE SPECIAL BENCH WAS CHALLENGED BEFORE HON'BLE ANDHRA PRADESH HIGH COURT IN THE CASE OF CIT VS. MERILYN SHIPPING & TRANSPORTS IN I.T.A. NO. 384 OF 20 12 AND VIDE ORDER DATED 8 TH OCTOBER, 2012, THE HON'BLE HIGH COURT HAS SUSPENDED THE OPERATION OF THE ORDER OF THE TRIBUNAL. DESPITE THE SUSPENSION OF THE ORDER OF THE TRIBUNAL BY THE CONCERNED HON'BLE JURISDICTIONAL HIGH COURT, THE CIT(A) HAS FOLLOWED THE ORDER OF THE SPECIAL BENCH OF THE TRIBUNAL AND DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE AS THE CIT(A) HAS PASSED AN ORDER ON 03/12/2012. 7.1 DURING THE COURSE OF HEARING, IT WAS EMPHATICALLY ARGUED ON BEHALF OF THE ASSESSEE THAT WHEN THE HON'BLE ALLAH ABAD HIGH COURT HAS APPROVED THE VIEW TAKEN BY THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF MERILYN SHIPPING & TRANSPORTS , THIS BENCH OF THE TRIBUNAL BEING SUBORDINATE TO THE HIGH COURT OF ALLAHABAD IS BOUND TO FOLLOW THE SAME AND DECIDE THE ISSUE ACC ORDINGLY EVEN WITHOUT TAKING COGNIZANCE OF THE JUDGMENT OF OTHER HIGH COURTS IN THIS REGARD. THE SUBORDINATE AUTHORITY HAS NO JURISDICTION TO QUESTION THE WISDOM OF THE HIGHER AUTHORITY AND THEY ARE REQUIRED TO FOLLOWS THE VERDICT IN ITS LETTER AND SPIRIT GIVEN BY HIGHER AUTHORITY. 7.2 SINCE THE SOLE CONTROVERSY IS RAISED WITH REGARD TO THE JUDGMENT OF HON'BLE JURISDICTIONAL HIGH COURT, WE HAVE TO EXAMINE THE JUDGMENT OF HON'BLE JURISDICTIONAL HIGH COURT WHETHER THERE HAVE LAID DOWN ANY LAW ON THE IMPUGNE D ISSUE OR A PASSING REFERENCE WAS MADE WITH REGARD TO THE AFORESAID ORDER IN THE CASE OF MERILYN SHIPPING & TRANSPORTS . 7.3 HAVING CAREFULLY EXAMINED THE JUDGMENT OF HON'BLE ALLAHABAD HIGH COURT IN THE CASE OF VECTOR SHIPPING SERVICES P. LTD. (SUPRA), W E FIND THAT THOUGH THERE WAS DISPUTE WITH REGARD TO THE DISALLOWANCE OF PAYMENT OF SALARIES ON ACCOUNT OF NON DEDUCTION OF TDS AS REQUIRED U/S 40(A)(IA) OF THE ACT BUT NO QUESTION OF LAW WITH REGARD TO THE RATIO LAID DOWN BY THE TRIBUNAL IN THE CASE OF MER ILYN SHIPPING & TRANSPORTS WAS RAISED BEFORE THE HON'BLE HIGH COURT. THE QUESTION OF LAW BEFORE THE HON'BLE HIGH COURT IS AS UNDER: 6 '(A) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE HON'BLE ITAT HAS RIGHTLY CONFIRMED THE ORDER OF THE C IT(A) AND THEREBY DELETING THE DISALLOWANCE OF RS.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 BEHALF OF THE AS SESSEE M/S. VECTOR SHIPPING SERVICES (P) LTD. AND THERE WAS A MEMORANDUM OF UNDERSTANDING SIGNED BETWEEN BOTH THE COMPANIES AND AS PER THE DEFINITION OF MEMORANDUM OF UNDERSTANDING, IT INCLUDED CONTRACT ALSO. 7.4 THE MAIN THRUST OF THE ARGUMENT BEFORE THE HON'BLE HIGH COURT WAS THAT M/S MERCATOR LINES LTD. HAD DEDUCTED TDS ON SALARIES PAID BY IT ON BEHALF OF THE ASSESSEE. UNDER SUCH CIRCUMSTANCES, THE ASSESSEE WAS NOT REQUIRED TO DEDUCT TDS ON REIMBURSEMENT BEING MADE BY IT TO M/S MERCATOR LINES LTD. BESIDES REFERENCE WAS ALSO MADE ABOUT THE ORDER OF THE SPECIAL BENCH IN THE CASE OF MERILYN SHIPPING & TRANSPORTS WHEREIN IT HAS BEEN HELD THAT IF NO AMOUNT REMAINED PAYABLE AT THE YEAR END, THERE WOULD NOT BE ANY DI SALLOWANCE AS THE PROVISION OF SECTION 40(A)(IA) ARE NOT APPLICABLE. AFTER RECORDING THE FINDING OF THE TRIBUNAL AND THE CIT(A), THE HON'BLE HIGH COURT HAS OBSERVED IN LAST TWO PARAS THAT THE PROVISION OF 40(A)(IA) WAS BROUGHT ON STATUTE TO DISALLOW THE C LAIM OF EVEN GENUINE AND ADMISSIBLE EXPENSES OF THE ASSESSEE UNDER THE HEAD 'INCOME FROM BUSINESS AND PROFESSION' IN CASE THE ASSESSEE DOES NOT DEDUCT TDS ON SUCH EXPENSES AND THE DEFAULT IN DEDUCTION OF TDS WOULD RESULT IN DISALLOWANCE OF EXPENDITURE ON W HICH SUCH TDS WAS DEDUCTIBLE. THEIR LIRDSHIPS HAVE FURTHER OBSERVED THAT IN THE PRESENT CASE TAX WAS DEDUCTED AS TDS FROM THE SALARIES OF THE EMPLOYEES PAID BY M/S. MERCATOR LINES LTD. AND THE CIRCUMSTANCES UNDER WHICH SUCH SALARIES WERE PAID BY M/S. MERCA TOR LINES LTD., FOR M/S. VECTOR SHIPPING SERVICES, THE ASSESSEE WERE SUFFICIENTLY EXPLAINED. IN LAST FEW LINES, THE HON'BLE HIGH COURT HAS MADE A REFERENCE TO THE RATIO LAID DOWN BY THE SPECIAL BENCH OF THE TRIBUNAL AND OBSERVED THAT IT IS 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. EXCEPT THESE OBSERVATIONS, THE HON'BLE HIGH COURT HAS NOT ADVERTED TO THE LEGA L PROPOSITION LAID DOWN BY THE SPECIAL BENCH OF THE TRIBUNAL. FOR THE SAKE OF REFERENCE, WE 7 EXTRACT THE FINDING OF THE JUDGMENT OF HON'BLE JURISDICTIONAL HIGH COURT IN THIS REGARD AS UNDER: WE DO NOT FIND THAT THE REVENUE CAN TAKE ANY BENEFIT FROM THE O BSERVATIONS MADE BY THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF MERILYN SHIPPING AND TRANSPORT LTD. (136 ITD. 23) (SB) QUOTED AS ABOVE TO THE EFFECT SECTION 40(A)(IA) WAS INTRODUCED IN THE ACT BY THE FINANCE ACT, 2004 WITH EFFECT FROM 1.4.2005 WITH A VIEW TO AUGMENT THE REVENUE THROUGH THE MECHANISM OF TAX DEDUCTED AT SOURCE. THIS PROVISION WAS BROUGHT ON STATUTE TO DISALLOW THE CLAIM OF EVEN GENUINE AND ADMISSIBLE EXPENSES OF THE ASSESSEE UNDER THE HEAD 'INCOME FROM BUSINESS AND PROFESSION' IN CASE TH E ASSESSEE DOES NOT DEDUCT TDS ON SUCH EXPENSES. THE DEFAULT IN DEDUCTION OF TDS WOULD RESULT IN DISALLOWANCE OF EXPENDITURE OR WHICH SUCH TDS WAS DEDUCTIBLE. IN THE PRESENT CASE TAX WAS DEDUCTED AS TDS FROM THE SALARIES OF THE EMPLOYEES PAID BY M/S. MERCA TOR LINES LTD. AND THE CIRCUMSTANCES UNDER WHICH SUCH SALARIES WERE PAID BY M/S. MERCATOR LINES LTD., FOR M/S. VECTOR SHIPPING SERVICES, THE ASSESSEE WERE SUFFICIENTLY EXPLAINED. 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. WE DO NOT FIND THAT THE TRIBUNAL HAS COMMITTED AN Y ERROR IN RECORDING THE FINDING ON THE FACTS, WHICH WERE NOT CONTROVERTED BY THE DEPARTMENT AND THUS THE QUESTION OF LAW AS FRAMED DOES NOT ARISE FOR CONSIDERATION IN THE APPEAL. 7.5 THE IMPACT OF THE JUDGMENT OF HON'BLE ALLAHABAD HIGH COURT AND OTHER H IGH COURTS WAS ALSO EXAMINED BY THE DIFFERENT BENCHES OF THE TRIBUNAL AND THEY HAVE CATEGORICALLY HELD THAT THE HON'BLE ALLAHABAD HIGH COURT HAS DECIDED THE ISSUE REFERRED TO IT ON DIFFERENT FOOTING AND HAS MADE A PASSING REFERENCE ABOUT THE DECISION RENDE RED BY THE SPECIAL BENCH. THEREFORE, WE ARE OF THE VIEW THAT THE HON'BLE JURISDICTIONAL HIGH COURT HAS NOT EXAMINED THE IMPUGNED ISSUE I.E. WHETHER DISALLOWANCE U/S 40(A)(IA) OF THE ACT COULD BE MADE ONLY IN RESPECT OF SUCH 8 AMOUNT WHICH ARE PAYABLE AS ON 31 ST MARCH OF EVERY YEAR UNDER CONSIDERATION WHEREAS THE HON'BLE GUJARAT HIGH COURT AND HON'BLE CALCUTTA HIGH COURT HAVE DEALT WITH THE ISSUE IN DETAIL IN THE LIGHT OF VARIOUS JUDICIAL PRONOUNCEMENT AND HAVE CATEGORICALLY HELD THAT SECTION 40(A)(IA) WOULD COVER NOT ONLY TO THE AMOUNT WHICH ARE PAYABLE AS ON 31 ST MARCH OF A PARTICULAR YEAR BUT ALSO WHICH ARE PAYABLE AT ANY TIME DURING THE YEAR. 7.6 BEFORE THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. SIKANDARKHAN N. TUNVAR (SUPRA), THE FOLLOWING QUE STION OF LAW WAS RAISED: (I) WHETHER THE DISALLOWANCE U/S 40(A)(IA) OF THE ACT WOULD BE MADE ONLY IN RESPECT OF SUCH AMOUNTS WHICH ARE PAYABLE ON 31 ST OF MARCH? (II) WHETHER THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF MERILYN SHIPPING & TRANSPORTS LAYS DOWN CORRECT LAW? 7.7 THE HON'BLE HIGH COURT HAVE ADJUDICATED THE ISSUE IN THE DETAIL IN THE LIGHT OF VARIOUS JUDICIAL PRONOUNCEMENTS AND HAVE CONCLUDED THAT THE SECTION 40(A)(IA) WOULD COVER NOT ONLY THE AMOUNTS WHICH ARE PAYABLE ON 3 1 ST MARCH OF A PARTICULAR YEAR BUT ALSO WHICH ARE PAYABLE AT ANY TIME DURING THE YEAR. THE RELEVANT OBSERVATIONS OF HON'BLE HIGH COURT ARE EXTRACTED AS UNDER: IN ADDITION TO SUCH PROVISIONS ALREADY EXISTING, THE LEGISLATURE INTRODUCED YET ANOTHER PROVISION FOR ENSURING COMPLIANCE WITH THE REQUIREMENT OF DEDUCING TAX AT SOURCE AND DEPOSITING IT WITH THE CENTRAL GOVERNMENT. SECTION 40(A)(IA), RELEVANT FOR OUR PURPOSE, READS AS UNDER : '(IA) ANY INTEREST, COMMISSION OR BROKERAGE, RENT, ROYALTY, FEES FOR PROFESSIONAL SERVICES OR FEES FOR TECHNICAL SERVICES PAYABLE TO A RESIDENT, OR AMOUNTS PAYABLE TO A CONTRACTOR OR SUB - CONTRACTOR, BEING RESIDENT, FOR CARRYING OUT ANY WORK (INCLUDING SUPPLY OF LABOUR FOR CARRYING OUT ANY WORK), 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 ON OR BEFORE THE DUE DATE SPECIFIED IN SUB - SECTION (1) OF SECTION 139 : 9 PROVIDED THAT WHERE IN RESPECT OF ANY SUCH SUM, TAX HAS BEEN DEDU CTED IN ANY SUBSEQUENT YEAR, OR HAS BEEN DEDUCTED DURING THE PREVIOUS YEAR BUT PAID AFTER THE DUE DATE SPECIFIED IN SUB - SECTION (1) OF SECTION 139, SUCH SUM SHALL BE ALLOWED AS A DEDUCTION IN COMPUTING THE INCOME OF THE PREVIOUS YEAR IN WHICH SUCH TAX HA S BEEN PAID.' IN SUCH CONTEXT, THEREFORE, THE QUESTION ARISES WHETHER UNDER SECTION 40(A)(IA) OF THE ACT DISALLOWANCE OF THE EXPENDITURE PAYMENT OF WHICH, THOUGH REQUIRED DEDUCTION OF TAX AT SOURCE HAS NOT BEEN MADE WOULD BE CONFINED ONLY TO THOSE CASES WHERE THE AMOUNT REMAINS PAYABLE TILL THE END OF THE PREVIOUS YEAR OR WOULD INCLUDE ALL AMOUNTS WHICH BECAME PAYABLE DURING THE ENTIRE PREVIOUS YEAR. THE DECISION IN THE CASE OF MERILYN SHI PPING AND TRANSPORTS V. ADDL. CIT WAS RENDERED BY THE SPECIAL BENCH BY A SPLIT OPINION. LEARNED ACCOUNTANT MEMBER WHO WAS IN MINORITY, PLACED HEAVY RELIANCE ON A DECISION OF THE MADRAS HIGH COURT IN THE CASE OF TUBE INVESTMENTS OF INDIA LTD. V. ASST. CI T (TDS) REPORTED IN [2010] 325 ITR 610 (MAD). THE LEARNED JUDGE DID NOTICE THAT THE HIGH COURT IN SUCH CASE WAS CONCERNED WITH THE VIRES OF THE STATUTORY PROVISION BUT FOUND SOME OF THE OBSERVATIONS MADE BY THE COURT IN THE PROCESS USEFUL AND APPLICABL E. THE LEARNED JUDGE REJECTED THE THEORY OF NARROW INTERPRETATION OF THE TERM 'PAYABLE' AND OBSERVED AS UNDER (PAGE 21 OF 16 ITR (TRIB)) : '12.4 IN OUR CONSIDERED OPINION, THERE IS NO AMBIGUITY IN THE SECTION AND THE TERM 'PAYABLE' CANNOT BE ASCRIBED A NARROW INTERPRETATION AS CONTENDED BY THE ASSESSEE. HAD THE INTENTIONS OF THE LEGISLATURE WERE TO DISALLOW ONLY ITEMS OUTSTANDING AS ON MARCH 31, THEN THE TERM 'PAYABLE' WOULD HAVE BEEN QUALIFIED BY THE PHRASE AS OUTSTANDING ON MARCH 31. HOWEVER, NO SUCH QUALIFICATION IS THERE IN THE SECTION AND, THEREFORE, 10 THE SAME CANNOT BE READ INTO THE SECTION AS CONTENDED BY THE ASSESSEE.' ON THE OTHER HAND, THE LEARNED JUDICIAL MEMBER, SPEAKING FOR MAJORITY, ADOPTED A STRICTER INTERPRETATION. HEAVY RELIANCE WAS PLACED ON THE FINANCE BILL OF 2004, WHICH INCLUDED THE DRAFT OF THE AMENDMENT IN SECTION 40 AND THE ULTIMATE AMENDMENT WHICH ACTUALLY WAS PASSED BY PARLIAMENT. IT WAS OBSERVED THAT FROM THE COMPARISON BETWEEN THE PROPOSED AND THE ENACTED PROVISION IT CA N BE SEEN THAT THE LEGISLATURE HAS REPLACED THE WORDS 'AMOUNTS CREDITED OR PAID' WITH THE WORD 'PAYABLE' IN THE ENACTMENT. ON SUCH BASIS, IT WAS HELD THAT THIS IS A CASE OF CONSCIOUS OMISSION AND WHEN THE LANGUAGE WAS CLEAR THE INTENTION OF THE LEGISLAT URE HAD TO BE GATHERED FROM LANGUAGE USED. IN THEIR OPINION, THE PROVISION WOULD APPLY ONLY TO AMOUNTS WHICH ARE PAYABLE AT THE END OF THE YEAR. HAVING SAID SO, CURIOUSLY, IT WAS OBSERVED THAT THE PROVISO TO SECTION 40(A)(IA) OF THE ACT LAYS DOWN THAT E ARLIER YEARS PROVISION CAN BE ALLOWED IN SUBSEQUENT YEARS ONLY IF TAX AT SOURCE IS DEDUCTED AND DEPOSITED AND, THEREFORE, THE REVENUE'S FEAR IS UNFOUNDED AS THE PROVISION OF SECTION 40(A)(IA) OF THE ACT COVERS THE SITUATION. WHAT THIS SUB - SECTION, THEREFORE, REQUIRES IS THAT THERE SHOULD BE AN AMOUNT PAYABLE IN THE NATURE DESCRIBED ABOVE, WHICH IS SUCH ON WHICH TAX IS DEDUCTIBLE AT SOURCE UNDER CHAPTER XVII - B BUT SUCH TAX HAS NOT BEEN DEDUCTED OR IF DEDUCTED NOT PAID BEFORE THE DUE DATE. THIS PROVISION NOWHERE REQUIRES THAT THE AMOUNT WHICH IS PAYABLE MUST REMAIN SO PAYABLE THROUGHOUT DURING THE YEAR. TO REITERATE THE PROVISION HAS CERTAIN STRICT AND STRINGENT REQUIREMENTS BEFORE THE UNPLEASANT CONSEQUENCES ENVISAGED THER EIN CAN BE APPLIED. WE ARE PREPARED TO AND WE ARE DUTY BOUND TO INTERPRET SUCH REQUIREMENTS STRICTLY. SUCH REQUIREMENTS, HOWEVER, CANNOT BE ENLARGED BY ANY ADDITION OR SUBTRACTION OF WORDS NOT USED BY THE LEGISLATURE. THE TERM USED IS INTEREST, COMMISSION , BROKERAGE, ETC., IS PAYABLE TO A RESIDENT OR 11 AMOUNTS PAYABLE TO A CONTRACTOR OR A SUB - CONTRACTOR FOR CARRYING OUT ANY WORK. THE LANGUAGE USED IS NOT THAT SUCH AMOUNT MUST CONTINUE TO REMAIN PAYABLE TILL THE END OF THE ACCOUNTING YEAR. ANY SUCH INTERP RETATION WOULD REQUIRE READING WORDS WHICH THE LEGISLATURE HAS NOT USED. NO SUCH INTERPRETATION WOULD EVEN OTHERWISE BE JUSTIFIED BECAUSE, IN OUR OPINION, THE LEGISLATURE COULD NOT HAVE INTENDED TO BRING ABOUT ANY SUCH DISTINCTION NOR THE LANGUAGE USED IN THE SECTION BRINGS ABOUT ANY SUCH MEANING. IF THE INTERPRETATION, AS ADVANCED BY THE ASSESSEES IS ACCEPTED, IT WOULD LEAD TO A SITUATION WHERE THE ASSESSEE WHO THOUGH WAS REQUIRED TO DEDUCT THE TAX AT SOURCE BUT NO SUCH DEDUCTION WAS MADE OR MORE FLA GRANTLY DEDUCTION THOUGH MADE IS NOT PAID TO THE GOVERNMENT, WOULD ESCAPE THE CONSEQUENCE ONLY BECAUSE THE AMOUNT WAS ALREADY PAID OVER BEFORE THE END OF THE YEAR IN CONTRAST TO ANOTHER ASSESSEE WHO WOULD OTHERWISE BE IN SIMILAR SITUATION BUT IN WHOSE C ASE THE AMOUNT REMAINED PAYABLE TILL THE END OF THE YEAR. WE SIMPLY DO NOT SEE ANY LOGIC WHY THE LEGISLATURE WOULD HAVE DESIRED TO BRING ABOUT SUCH IRRECONCILABLE AND DIVERSE CONSEQUENCES. WE HASTEN TO ADD THAT THIS IS NOT THE PRIME BASIS ON WHICH WE H AVE ADOPTED THE INTERPRETATION WHICH WE HAVE GIVEN. IF THE LANGUAGE USED BY PARLIAMENT CONVEYED SUCH A MEANING, WE WOULD NOT HAVE HESITATED IN ADOPTING SUCH AN INTERPRETATION. WE ONLY HIGHLIGHT THAT WE WOULD NOT READILY ACCEPT THAT THE LEGISLATURE DESIRE D TO BRING ABOUT AN INCONGRUOUS AND SEEMINGLY IRRECONCILABLE CONSEQUENCES. THE DECISION OF THE SUPREME COURT IN THE CASE OF CIT V. ASHOKBHAI CHIMANBHAI (SUPRA), WOULD NOT ALTER THIS SITUATION. THE SAID DECISION, OF COURSE, RECOGNIZES THE CONCEPT OF ASC ERTAINING THE PROFIT AND LOSS FROM THE BUSINESS OR PROFESSION WITH REFERENCE TO A CERTAIN PERIOD, I.E., THE ACCOUNTING YEAR. IN THIS CONTEXT, THE LAST DATE OF SUCH ACCOUNTING PERIOD WOULD ASSUME CONSIDERABLE SIGNIFICANCE. HOWEVER, THIS DECISION NOWHERE I NDICATES THAT THE EVENTS WHICH TAKE PLACE DURING THE ACCOUNTING PERIOD SHOULD BE IGNORED AND THE ASCERTAINMENT OF FULFILLING A CERTAIN CONDITION PROVIDED UNDER THE STATUTE MUST BE JUDGED WITH REFERENCE TO THE LAST DATE OF THE ACCOUNTING PERIOD. PARTICULA RLY, IN THE CONTEXT OF REQUIREMENTS OF SECTION 40(A)(IA) OF THE ACT, WE SEE NO 12 WARRANT IN THE SAID DECISION OF THE SUPREME COURT TO APPLY THE TEST OF PAYABILITY ONLY AS ON MARCH 31, OF THE YEAR UNDER CONSIDERATION. MERELY BECAUSE, ACCOUNTS ARE CLOSED ON THAT DATE AND THE COMPUTATION OF PROFIT AND LOSS IS TO BE JUDGED WITH REFERENCE TO SUCH DATE, DOES NOT MEAN THAT WHETHER AN AMOUNT IS PAYABLE OR NOT MUST BE ASCERTAINED ON THE STRENGTH OF THE POSITION EMERGING ON MARCH 31. 7.8 BEFORE HON'BLE CALCUTTA HIGH COURT IN THE CASE OF CRESCENT EXPORT SYNDICATE (SUPRA), THE FOLLOWING QUESTION OF LAW WAS RAISED: IF ALL THE AMOUNTS HAVE BEEN PAID, THEN OBVIOUSLY FOLLOWING THE PRINCIPLES LAID DOWN BY THE HONBLE SPECIAL BENCH OF THIS TRIBUNAL IN THE CASE OF MERIL YN SHIPPING & TRANSPORTS, NO ADDITION SHALL BE MADE. IF ANY AMOUNT IS FOUND TO BE PAYABLE AS ON THE YEAR END, THEN THE ASSESSING OFFICER SHALL GIVE THE ASSESSEE ADEQUATE OPPORTUNITY TO SUBSTANTIATE HIS CASE AS TO WHY THE DISALLOWANCE, IF ANY, SHOULD NOT B E MADE BY INVOKING THE PROVISIONS OF SECTION 40(1)(IA) OF THE ACT. 7.9 THE HON'BLE HIGH COURT HAS EXAMINED THE ISSUE IN THE LIGHT OF THE FINANCE BILL 2004, RELEVANT PROVISIONS OF THE ACT AND VARIOUS JUDICIAL PRONOUNCEMENTS AND THE DETAILED ORDER OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF MERILYN SHIPPING & TRANSPORTS AND HAVE FINALLY CONCLUDED THAT MAJORITY VIEW EXPRESSED IN THE MERILYN SHIPPING & TRANSPORTS ARE NOT ACCEPTABLE. 7.10 THE RELEVANT OBSERVATIONS OF THEIR LORDSHIPS ARE AS UNDER: WE ALREADY HAVE QUOTED EXTENSIVELY BOTH THE MAJORITY AND THE MINORITY VIEWS EXPRESSED IN THE AFORESAID CASE. THE MAIN THRUST OF THE MAJORITY VIEW IS BASED ON THE FACT THAT THE LEGISLATURE HAS REPLACED THE EXPRESSION AMOUNTS CREDITED OR PAID WITH THE EXP RESSION PAYABLE IN THE FINAL ENACTMENT. COMPARISON BETWEEN THE PRE - AMENDMENT AND POST AMENDMENT LAW IS PERMISSIBLE FOR THE PURPOSE OF ASCERTAINING THE MISCHIEF SOUGHT TO BE REMEDIED OR THE OBJECT SOUGHT TO BE ACHIEVED BY AN AMENDMENT. THIS IS 13 PRECISEL Y WHAT WAS DONE BY THE APEX COURT IN THE CASE OF CIT VS. KELVINATOR REPORTED IN 2010(2) SCC 723. BUT THE SAME COMPARISON BETWEEN THE DRAFT AND THE ENACTED LAW IS NOT PERMISSIBLE. NOR CAN THE DRAFT OR THE BILL BE USED FOR THE PURPOSE OF REGULATING THE MEA NING AND PURPORT OF THE ENACTED LAW. IT IS THE FINALLY ENACTED LAW WHICH IS THE WILL OF THE LEGISLATURE. THE LEARNED TRIBUNAL FELL INTO AN ERROR IN NOT REALIZING THIS ASPECT OF THE MATTER. THE LEARNED 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 SECTION 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 BODIES. THE LEARNED TRIBUNAL HELD THAT SECTION 40(A)(IA) OF THE ACT CREATES A LEGAL FICTION BY VIRTUE OF WHICH EVEN THE G ENUINE AND ADMISSIBLE EXPENSES CLAIMED BY AN ASSESSEE UNDER THE HEAD INCOME FROM BUSINESS AND PROFESSION IF THE ASSESSEE DOES NOT DEDUCT TDS ON SUCH EXPENSES ARE DISALLOWED. HAVING HELD SO WAS IT OPEN TO THE TRIBUNAL TO SEEK TO JUSTIFY THAT THIS FIC TION CANNOT BE EXTENDED ANY FURTHER AND, THEREFORE, CANNOT BE INVOKED BY ASSESSING OFFICER TO DISALLOW THE GENUINE AND REASONABLE EXPENDITURE ON THE AMOUNTS OF EXPENDITURE ALREADY PAID? DOES THIS NOT AMOUNT TO DELIBERATELY READING SOMETHING IN THE LAW WH ICH IS NOT THERE? WE, AS SUCH, HAVE NO DOUBT IN OUR MIND THAT THE LEARNED TRIBUNAL REALIZED THE MEANING AND PURPORT OF SECTION 40(A)(IA) CORRECTLY WHEN IT HELD THAT IN CASE OF OMISSION TO DEDUCT TAX EVEN THE GENUINE AND ADMISSIBLE EXPENSES ARE TO BE D ISALLOWED. 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 14 OMISSUS WHICH WAS NOT PERMISSIBLE AND COULD ONLY HAVE BEEN DONE BY THE SUPREME COURT IN AN APPROPRIATE CASE. REFERENCE IN THIS REGARD MAY BE MADE TO THE JUDGMENT IN THE CASE OF BHUWALKA STEEL INDUSTRIES VS. BOMBAY IRON & STEEL LABOUR BOARD REPORTED IN 2010 (2) SCC 273. THE KEY WORDS USED IN SECTION 40(A)(IA), ACCORDING TO US, ARE ON WHICH TAX IS DEDUCTIBLE AT SOURCE UNDER CHAPTER XVII B. IF THE QUESTION IS WHICH EXPENSES ARE SOUGHT TO BE DISALLOWED? THE ANSWER IS BOUND TO BE THOSE EXPENSES ON WHICH TAX IS DEDUCTIBLE AT SOURCE UNDER CHAPTER XVII B. ONCE THIS IS REALIZED 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 SUSCEPTIBLE 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 BROKERAGE, FEES FOR PROFESSIONAL SERVICES OR FEES FOR TECHNICAL SERVICES BECAUSE T HE WORDS AMOUNTS CREDITED OR PAID WERE USED ONLY IN RELATION TO A CONTRACTOR OR SUB - CONTRACTOR. THIS DIFFERENTIAL TREATMENT WAS NOT INTENDED. THEREFORE, THE LEGISLATURE PROVIDED 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 SHALL NOT BE DEDUCTED IN COMPUTING THE INCOME OF AN ASSESSEE IN CASE HE HAS NOT DEDUC ED, 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. 15 A FEW WORDS ARE NOW NECESSARY TO DEAL WITH THE SU BMISSION OF MR. BAGCHI AND MS. ROYCHOWDHURI. THERE CAN BE NO DENIAL THAT THE PROVISION IN QUESTION IS HARSH. BUT THAT IS NO GROUND TO READ THE SAME IN A MANNER WHICH WAS NOT INTENDED BY THE LEGISLATURE. THIS IS OUR ANSWER TO THE SUBMISSION OF MR. BAGCHI. T HE SUBMISSION OF MS. ROYCHOWDHURI THAT THE SECOND PROVISO SOUGHT TO BECOME EFFECTIVE FROM 1ST APRIL, 2013 SHOULD BE HELD TO HAVE ALREADY BECOME OPERATIVE PRIOR TO THE APPOINTED DATE CANNOT ALSO BE ACCEDED TO FOR THE SAME REASON INDICATED ABOVE. THE LAW WAS DELIBERATELY MADE HARSH TO SECURE COMPLIANCE OF THE PROVISIONS REQUIRING DEDUCTIONS OF TAX AT SOURCE. IT IS NOT THE CASE OF AN INADVERTENT ERROR. FOR THE REASONS DISCUSSED ABOVE, WE ARE OF THE OPINION THAT THE MAJORITY VIEWS EXPRESSED IN THE CASE OF MERILYN SHIPPING & TRANSPORTS ARE NOT ACCEPTABLE. THE SUBMISSIONS ADVANCED BY LEARNED ADVOCATES HAVE ALREADY BEEN DEALT WITH AND REJECTED. THE APPEAL IS, THUS, ALLOWED IN FAVOUR OF THE REVENUE. 7.11 OUR ATTENTION WAS ALSO INVITED TO A CIRCULAR DATED 16/12/2013 ISSUED BY THE CBDT CLARIFYING THE STAND OF THE DEPARTMENT IN THE LIGHT OF THE AFORESAID JUDGMENTS OF DIFFERENT HIGH COURTS AND IT HAS BEEN CLARIFIED THAT STATUTORY PROVISIONS ARE AMPLY CLEAR AND IN THE CONTEXT OF SECTION 40(A)(IA) OF THE ACT, THE TERM PAYABLE WOULD INCLUDE AMOUNTS WHICH ARE PAID DURING THE PREVIOUS YEAR. FOR THE SAKE OF REFERENCE, WE EXTRACT THE CIRCULAR AS UNDER: CIRCULAR N O. 10/DV/2013 (DEPARTMENTAL VIEW) F. NO. 279/MISC./M - 61/2012 - ITJ (VOL. - II) GOVERNMENT OF INDIA MINISTRY OF FINANCE DEPARTMENT OF REVENUE CENTRAL BOARD OF DIRECT TAXES NEW DELHI, THE DECEMBER 16TH 2013 SUBJECT: CIRCULAR ON SECTION 40(A)(IA) OF THE INCOME TAX ACT, 1961 - REG. IT HAS BEEN BROUGHT TO THE NOTICE OF THE BOARD THAT THERE ARE CONFLICTING INTERPRETATIONS BY JUDICIAL AUTHORITIES REGARDING THE APPLICABILITY OF THE PROVISIONS OF 16 SECTION 40(A)(IA) OF THE INCOME - TAX ACT, 1 961 (`THE ACT') WITH REGARD TO THE AMOUNT NOT DEDUCTIBLE IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION'. 2. SECTION 40(A)(IA) OF THE ACT READS AS UNDER: '.....ANY INTEREST, COMMISSION OR BROKERAGE, RENT, ROYALTY, FEES FOR PROFESSIONAL SERVICES OR FEES FOR TECHNICAL SERVICES PAYABLE TO A RESIDENT, OR AMOUNTS PAYABLE TO A CONTRACTOR OR SUB CONTRACTOR, BEING RESIDENT, FOR CARRYING OUT ANY WORK (INCLUDING SUPPLY OF LABOUR FOR CARRYING OUT ANY WORK), 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 ON OR BEFORE THE DUE DATE SPECIFIED IN SUB - SECTION (1) OF SECTION 139...' 3. IN THE CASE OF MERILYN SHIPPING & TRANSPORTS V. ADDL. CIT , IT WAS HELD BY SPECIAL BENCH OF ITAT, VISHAKHAPATNAM, THAT THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT WOULD APPLY ONLY TO THE AMOUNT WHICH REMAINED PAYABLE AT THE END OF THE RELEVANT FINANCIAL YEAR AND COULD NOT BE INVOKED TO DISALLOW THE AMOUNT WHICH HAD ACTUALLY BEEN PAID DURING THE PREVIOUS YEAR WITHOUT DEDUCTION OF TAX AT SOURCE. THE ORDER OF THE SPECIAL BENCH HAS SINCE BEEN PUT UNDER INTERIM SUSPENSION BY THE ANDHRA PRADESH HIGH COURT. 3.1 THE HON'BLE CALCUTTA HIGH COURT AND HON'BLE GUJAR AT HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME - TAX, KOLKATA - XI V. CRESCENT EXPORTS SYNDICATE AND COMMISSIONER OF INCOME - TAX - IV V. SIKANDARKHAN N TUNVAR RESPECTIVELY, HAVE HELD THAT SECTION 40(A)(IA) OF THE ACT WOULD COVER NOT ONLY THE AMOUNTS WHICH AR E PAYABLE AT THE END OF THE PREVIOUS YEAR BUT ALSO WHICH ARE PAYABLE AT ANY TIME DURING THE YEAR. 3.2 THE HON'BLE HIGH COURTS HAVE FURTHER HELD THAT THE INTENTION OF THE LEGISLATION WAS TO DISALLOW CERTAIN TYPES OF EXPENSE, SUBJECT TO PROVISIONS OF CHAP TER XVII - B, WHICH ARE PAYABLE AT ANY TIME DURING THE YEAR BUT NO TAX WAS DEDUCTED AT SOURCE OR IF DEDUCTED WAS NOT PAID WITHIN THE 17 STIPULATED TIME. THERE IS NO SUCH CONDITION THAT AMOUNT SHOULD REMAIN PAYABLE AT THE END OF THE YEAR. 3.3 THE HON'BLE ALLAHABAD HIGH COURT IN CIT V. VECTOR SHIPPING SERVICE (P) LTD . HAS AFFIRMED THE DECISION OF THE SPECIAL BENCH IN MERILYN SHIPPING THAT FOR DISALLOWANCE UNDER SECTION 40(A) (IA) OFTHE ACT, THE AMOUNT SHOULD BE PAYABLE AND NOT WHICH HAS BEEN PA ID DURING THE YEAR. HOWEVER, THE DECISIONS OF THE HON'BLE GUJARAT AND CALCUTTA HIGH COURTS (SUPRA) WERE NOT BROUGHT TO THE ATTENTION OF THE HON'BLE ALLAHABAD HIGH COURT. 3.4 IN THE CASE OF ACIT, CIRCLE 4(2), MUMBAI V. RISHTI STOCK AND SHARES PVT. LTD. I N ITA NO. 112/MUM/2012, HON'BLE ITAT, MUMBAI IN ITS ORDER DATED 02 - 08 - 2013 HAS EXAMINED THE DECISION OF THE HON'BLE ALLAHABAD HIGH COURT (SUPRA) AS REGARDS TO SECTION 40(A)(IA) OF THE ACT AND CONCLUDED THAT THE SAME WAS AN 'ORBITER DICTA' WHILE THE DECISIO NS OF THE HON'BLE GUJARAT AND CALCUTTA HIGH COURT (SUPRA) WERE 'RATIO DECIDENDI'. THE ITAT ACCORDINGLY APPLIED THE VIEW TAKEN BY THE HON'BLE GUJARAT AND CALCUTTA HIGH COURT AS RATIO DECIDENDI PREVAILS OVER AN ORBITER DICTA. 4. AFTER CAREFUL EXAMINATION OF THE ISSUE, THE BOARD IS OF THE CONSIDERED VIEW THAT THE PROVISION OF SECTION 40(A) (IA) OF THE ACT WOULD COVER NOT ONLY THE AMOUNTS WHICH ARC PAYABLE AS ON 31ST MARCH OF A PREVIOUS YEAR BUT ALSO AMOUNTS WHICH ARE PAYABLE AT ANY TIME DURING THE YEAR. THE STATUTORY PROVISIONS ARE AMPLY CLEAR AND IN THE CONTEXT OF SECTION 40(A) (IA) OF THE ACT THE TERM 'PAYABLE' WOULD INCLUDE 'AMOUNTS WHICH ARE PAID DURING THE PREVIOUS YEAR'. 5. WHERE ANY HIGH COURT DECIDES AN ISSUE CONTRARY TO THE 'DEPARTMENTAL VIEW', T HE `DEPARTMENTAL VIEW' THEREON SHALL NOT BE OPERATIVE IN THE AREA FALLING IN THE JURISDICTION OF THE RELEVANT HIGH COURT. HOWEVER, THE CCIT CONCERNED SHOULD IMMEDIATELY BRING THE JUDGEMENT TO THE NOTICE OF THE CTC. THE CTC SHALL EXAMINE THE SAID JUDGEMENT ON PRIORITY TO DECIDE AS TO WHETHER FILING OF SLP TO THE SUPREME COURT WILL BE ADEQUATE RESPONSE FOR THE TIME BEING OR SOME LEGISLATIVE AMENDMENT IS CALLED FOR. 18 6. THE ABOVE CLARIFICATION MAY BE BROUGHT TO THE NOTICE OF ALL OFFICERS. 8. KEEPING IN VIE W THE AFORESAID JUDGMENTS OF VARIOUS HIGH COURTS AND THE TRIBUNAL, WE ARE OF THE CONSIDERED OPINION THAT THE VIEW EXPRESSED OR THE RATIO LAID DOWN BY THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF MERILYN SHIPPING & TRANSPORTS HAS BEEN OVERRULED. THEREF ORE, IT CANNOT BE SAID THAT SINCE THE HON'BLE JURISDICTIONAL HIGH COURT HAS APPROVED THE VIEW TAKEN BY THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF MERILYN SHIPPING & TRANSPORTS , THE SAME HAS TO BE FOLLOWED BY THE TRIBUNAL SITUATED WITHIN THE JURISDIC TION OF HON'BLE ALLAHABAD HIGH COURT. HAD THE IMPUGNED ISSUE BEEN EXAMINED AND ADJUDICATED BY THE JURISDICTIONAL HIGH COURT, IT WOULD HAVE BEEN RESPECTFULLY FOLLOWED BY THE TRIBUNAL IRRESPECTIVE OF THE FACT THAT CONTRARY VIEW HAVE BEEN EXPRESSED BY THE DI FFERENT HIGH COURTS. THE HON'BLE JURISDICTIONAL HIGH COURT HAS NOT EXAMINED THE IMPUGNED ISSUE AT ALL AND SIMPLE PASSING REFERENCE WAS MADE WITH REGARD TO THE ORDER OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF MERILYN SHIPPING & TRANSPORTS AND THE RELIEF WAS GRANTED TO THE ASSESSEE ON MERIT. THEREFORE, THE RATIO LAID DOWN IN THE CASE OF MERILYN SHIPPING & TRANSPORTS, WHICH HAS BEEN SUSPENDED BY HON'BLE ANDHRA PRADESH HIGH COURT HAS NOT BEEN APPROVED BY THE HON'BLE ALLAHABAD HIGH COURT. THEREFORE, SUBORDINATE JUDICIAL FORUM ARE NOT REQUIRED TO FOLLOW THE RATIO ORDER LAID DOWN IN THE CASE OF MERILYN SHIPPING & TRANSPORTS (SUPRA), AS IT WAS OVERRULED BY THE OTHER HIGH COURT. 9. IN THE INSTANT CASE, THE CIT(A) HAS ADJUDICATED THE ISSUE FOLLOWING THE ORDER OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF MERILYN SHIPPING & TRANSPORTS AND DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE WITHOUT ADJUDICATING THE APPEAL ON MERIT, THOUGH SPECIFIC GROUNDS WERE RAISED BEFORE CIT(A). THOUGH THE REVENUE HAS C HALLENGED THE ORDER OF CIT(A) ON MERIT ALSO BUT NO FINDING WAS GIVEN BY THE CIT(A) ON MERIT WITH REGARD TO THE NATURE OF PAYMENTS. WE, THEREFORE, SET ASIDE THE ORDER OF CIT(A) AND REVERSE THE FINDING OF CIT(A) GIVEN FOLLOWING THE ORDER OF THE SPECIAL BENC H OF THE TRIBUNAL IN THE CASE OF MERILYN SHIPPING & TRANSPORTS. SINCE THE CIT(A) HAS NOT GIVEN ANY FINDING ON MERIT, WE RESTORE THE MATTER TO HIS FILE WITH THE DIRECTION TO ADJUDICATE THE ISSUE ON MERIT AS TO WHETHER THE PROVISIONS OF SECTION 194C ARE APP LICABLE TO THE PRESENT CASE AND FOR THE REMAINING ISSUE, WHETHER THE PROVISION OF SECTION 19 40(A)(IA) IS APPLICABLE IN RESPECT OF SUCH AMOUNTS, WHICH ARE PAYABLE AS ON 31 ST OF MARCH OF THE YEAR UNDER CONSIDERATION, WE HOLD THAT THE PROVISION OF SECTION 40(A) (IA) WOULD COVER NOT ONLY TO THE AMOUNTS WHICH ARE PAYABLE AS ON 31 ST MARCH OF A PARTICULAR YEAR BUT ALSO WHICH ARE PAYABLE AT ANY TIME DURING THE YEAR. ACCORDINGLY, THE MATTER IS RESTORED TO THE FILE OF THE CIT(A) FOR ADJUDICATION ON MERIT. 8. RESPECTFULLY FOLLOWING THIS TRIBUNAL DECISION, WE HOLD THAT IN THE PRESENT CASE ALSO , DISALLOWANCE MADE BY THE ASSESSING OFFICER U/S 40(A)(IA) CANNOT BE DELETED ON THIS BASIS ALONE THAT THE AMOUNT IN QUESTION WAS NOT UNPAID/PAYABLE ON THE LAST DATE OF THE PREVIOUS YEAR RELEVANT TO THE PRESENT ASSESSMENT YEAR . HENCE, ON THIS ISSUE, WE REVERSE THE ORDER OF CIT(A) AND RESTORE THAT OF THE ASSESSING OFFICER. THIS PART OF GROUND NO. 2 IS ALLOWED. 9. THE SECOND PART OF GROUND NO. 2 OF REVENUES APPEAL IS REGARD ING DISALLOWANCE MADE BY THE ASSESSING OFFICER OF RS.21.35 LAC ON ACCOUNT OF REMUNERATION, WHICH HAS BEEN DELETED BY CIT(A). IN THIS REGARD, WE FIND THAT THE ISSUE WAS DECIDED BY CIT(A) AS PER PARA 6.3 OF HIS ORDER, WHICH IS REPRODUCED BELOW FOR THE SAKE OF READY REFERENCE: 6.3 I HAVE CONSIDERED THE MATTER. IN THE ASSESSMENT ORDER AS WELL AS THE REMAND ORDER, THE AO HAS FAILED TO COMMENT UNDER WHICH SECTION THE APPELLANT WAS LIABLE TO DEDUCT TDS SO AS TO ATTRACT THE PROVISIONS OF SECTION 40(A)(IA) OF T HE ACT. IT HAS BEEN SIMPLY MENTIONED THAT THE PAYMENT OF LIASIONER REMUNERATION IS IN THE NATURE OF CONTRACT WITHOUT CONDUCTING ANY ENQUIRY. ON PERUSAL OF THE SALARY AND DAILY ATTENDANCE REGISTER FOR ALL THE EMPLOYEES IT IS NOTED THAT 15 EMPLOYEES WHO HAVE BEEN PAID LIASIONER REMUNERATION ARE LISTED AS MARKETING STAFF AND THEIR DAILY ATTENDANCES HAVE BEEN MARKED ON A REGISTER. THEY HAVE BEEN PAID MONTHLY SALARY. SINCE THEIR TOTAL INCOME WAS BELOW TAXABLE LIMIT, THE APPELLANT WAS NOT REQUIRED TO DEDUCT ANY T AX U/S 192 OF THE ACT. IT MAY BE MENTIONED THAT EVEN IF THE APPELLANT FAILS TO DEDUCT TAX U/S 192 OF THE ACT IN RESPECT OF SALARY, NO DISALLOWANCE U/S 40(A)(IA) OF THE ACT CAN BE MADE AS SUCH PAYMENTS ARE NOT COVERED BY THE SAID SECTION. FURTHER PERUSAL OF 20 THE APPOINTMENT LETTER ISSUED BY THE APPELLANT TO SH. SANJAY SINGH ON 05.04.2008 AS MANAGER OF M/S CARE PHARMA CLEARLY SHOW THAT THERE IS AN EMPLOYER - EMPLOYEE RELATIONSHIP BETWEEN THEM. IT IS ALSO SEEN THAT THE AMOUNT OF RS.1,68,000/ - RECEIVED FROM THE AP PELLANT HAS BEEN SHOWN UNDER THE HEAD INCOME FROM SALARY IN THE RETURN OF INCOME FILED BY SH. SANJAY KUMAR SINGH ON 22.03.2010 FOR AY 2009 - 10. SINCE THE TAX PAYABLE BY SH. SANJAY KUMAR SINGH WAS BELOW TAXABLE LIMIT AFTER CLAIMING DEDUCTION UNDER CHAPTER VI A NO TAX U/S 192 WAS DEDUCTED. THE AO HAS FAILED TO PLACE ANY MATERIAL ON RECORD TO DEMONSTRATE THAT THE PAYMENTS MADE TO THE MARKETING STAFF WAS IN PURSUANCE OF ANY CONTRACT AND WAS COVERED BY SECTION 194C. IN VIEW OF THE ABOVE, I HOLD THAT THE ADDITION OF RS.21,35,000/ - HAS BEEN MADE ON THE BASIS OF CONJECTURES OR SURMISES WITHOUT BRINGING ANY MATERIAL EVIDENCE ON RECORD. HENCE THE SAME IS DELETED. REGARDING THE OBSERVATION OF THE AO THAT THE APPELLANT IS NOT COMPLYING WITH THE PROVISIONS OF PROVIDENT FU ND ACT WOULD NOT EFFECT THE CASE OF THE APPELLANT AS THE VIOLATION OF SOME OTHER ACT WOULD NOT, MAKE HIM LIABLE TO TDS IN RESPECT OF LIASIONER REMUNERATION AND CONSEQUENT DISALLOWANCE UNDER THE PROVISIONS, OF SECTION 40(A)(IA) OF THE ACT. 9.1 FROM THE AB OVE PARA OF CIT(A), WE FIND THAT IT IS NOTED BY CIT(A) THAT ON PERUSAL OF THE SALARY AND DAILY ATTENDANCE REGISTER FOR ALL THE EMPLOYEES , IT IS NOTED THAT 15 EMPLOYEES WHO HAVE BEEN PAID LIASIONER REMUNERATION ARE LISTED AS MARKETING STAFF AND THEIR DAILY ATTENDANCES HAVE BEEN MARKED ON A REGISTER. HE HAS ALSO GIVEN A FINDING THAT T HEY HAVE BEEN PAID MONTHLY SALARY. SINCE THEIR TOTAL INCOM E WAS BELOW TAXABLE LIMIT, THE APPELLANT WAS NOT REQUIRED TO DEDUCT ANY TAX U/S 192 OF THE ACT. THIS FINDING OF CIT(A) COULD NOT BE CONTROVERTED BY LEARNED D.R. OF THE REVENUE. WE ALSO FIND THAT IT IS ALSO OBSERVED BY CIT(A) THAT ALTHOUGH DISALLOWANCE WA S MADE BY THE ASSESSING OFFICER UNDER THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT, THE ASSESSING OFFICER HAS FAILED TO COMMENT UNDER WHICH SECTION THE ASSESSEE WAS LIABLE TO DEDUCT TDS SO AS TO ATTRACT SECTION 40(A)(IA) OF THE ACT. THE ASSESSING OFFICE R HAS SIMPLY MENTIONED THAT THE PAYMENT OF LISISONER REMUNERATION IS IN THE NATURE OF CONTRACT WITHOUT CONDUCTING ANY ENQUIRY. HE 21 HAS ALSO GIVEN A FINDING THAT THE ASSESSING OFFICER HAS FAILED TO PLACE ANY MATERIAL ON RECORD TO DEMONSTRATE THAT THE PAYMEN TS MADE TO THE MARKETING STAFF WAS IN PURSUANCE OF ANY CONTRACT AND WAS COVERED BY SECTION 194C OF THE ACT . CONSIDERING ALL THESE FACTS, WE DO NOT FIND ANY REASON TO INTERFERE IN THE ORDER OF CIT(A) ON THIS ISSUE ALSO. ACCORDINGLY, THE SECOND PART OF GRO UND NO. 2 IS DECIDED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. HENCE, GROUND NO. 2 IS PARTLY ALLOWED. 10. REGARDING GROUND NO. 3 OF THE APPEAL, WE FIND THAT THIS ISSUE HAS BEEN DECIDED BY CIT(A) AS PER PARA 7.3 OF HIS ORDER, WHICH IS REPRODUCED BELOW FOR THE SAKE OF READY REFERENCE: 7.3 I HAVE CONSIDERED THE MATTER. DURING THE APPELLATE PROCEEDINGS THE APPELLANT HAS FURNISHED HIS CONFIRMED LEDGER ACCOUNT IN THE BOOKS OF M/S BALAJI FURNISHERS HAVING PAN AEXPA6675C. THE APPELLANT ALSO FURNISHED THE COPIES OF INVOICES OF M/S. BALAJI FURNISHERS MOST OF WHICH WERE RELATED TO PURCHASE OF CHAIRS, TABLES AND OTHER FURNITURES. THE FURNITURES SO PURCHASED HAVE BEEN SUPPLIED TO VARIOUS HOSPITALS. THE APPELLANT FURNISHED THE INVOICES RAISED TO THE CMOS OF DISTRICT HOSPITALS IN RESPECT OF SUPPLY OF CHAIRS AND TABLES TO SHOW THAT THE CHAIRS AND TABLES PURCHASED FROM BALAJI FURNISHERS HAVE, IN TURN, BEEN SUPPLIED TO VARIOUS DISTRICT HOSPITALS. IN VIEW OF THE ABOVE, I FIND THAT THE AO HAS MADE THE DISALLOWANCE SOLELY ON THE BASIS OF NON RECEIPT OF REPLY FROM THE CREDITOR WITHOUT MAKING ANY PROPER ENQUIRY AND BRINGING ANY MATERIAL ON RECORD EITHER DURING THE ASSESSMENT PROCEEDINGS OR REMAND PROCEEDINGS. M/S. BALAJI FURNISHERS IS A LUCKNOW BASED PARTY AND THE AO HAS NOT THOUGHT IT FIT TO EVEN DEPUTE AN INSPECTOR TO MAKE AN ENQUIRY IN THIS REGARD. IN VIEW OF THE ABOVE, DISALLOWANCE OF RS. 12,29,404/ - MADE BY THE AO IS DELETED. 11. WE FIND THAT THIS DISALLOWANCE WAS MADE BY THE ASSESSING OFFICER ON ACCOUNT OF NON RECEIPT OF REPLY FROM THE CREDITOR M/S BALAJI FURNISHERS TO THE NOTICE SERVED ON HIM U/S 13 3 ( 6 ) /131 OF THE ACT. WE ARE OF THE CONSIDERED OPINION THAT IN RESPECT OF CREDITOR, ADDITION CAN BE MADE ON TWO BASIS. FIRST 22 BASIS CAN BE THAT A LIABILITY HAS CEASED TO EXIST AND THIS ADDITION CAN BE MADE BY INVOKING THE PROVISIONS OF SECTION 4 1 (1) OF THE ACT. IN THE PRESENT CASE, IT IS NOT THE CASE OF THE ASSESSING OFFICER THAT THE LIABILITY HAS CEASED TO EXIST. THE SECOND BASIS CAN BE THAT THE CREDITOR IS BOGUS. IN THIS REGARD, WE FIND THAT IT IS NOTED BY CIT(A) THAT THE ASSESSEE HAS FURNISHED THE CONFIRMED LEDGER ACCOUNT IN THE BOOKS OF M/S BALAJI FURNISHERS HAVING PAN AEXPA6675C. IT IS ALSO NOTED BY CIT(A) THAT THE ASSESSEE HAS ALSO FURNISHED THE COP IES OF INVOICES OF M/S. BALAJI FURNISHERS MOST OF WHICH WERE RELATED TO PURCHASE OF CHAIRS, TABLES AND OTHER FURNITURES. HE HAS ALSO NOTED THAT T HE FURNITURES SO PURCHASED HAVE BEEN SUPPLIED TO VARIOUS HOSPITALS. HENCE, IF SALE IS THERE, CORRESPONDING PU RCHASE CANNOT BE SAID TO BE BOGUS. IT IS ALSO OBSERVED BY CIT(A) THAT THE ASSESSING OFFICER HAS NOT BROUGHT ON RECORD ANY ADVERSE MATERIAL EVEN IN COURSE OF REMAND PROCEEDINGS. HE HAS ALSO OBSERVED THAT THIS PARTY IS LUCKNOW BASED AND THE ASSESSING OFFIC ER HAS NOT THOUGHT IT FIT TO EVEN DEPUTE AN INSPECTOR TO MAKE AN ENQUIRY IN THIS REGARD. CONSIDERING ALL THESE FACTS, WE ARE OF THE CONSIDERED OPINION THAT THERE IS NO INFIRMITY IN THE ORDER OF CIT(A) ON THIS ISSUE. GROUND NO. 3 IS REJECTED. 12. IN THE R ESULT, THE APPEAL OF THE REVENUE STANDS PARTLY AL LOWED. (ORDER WAS PRONOUNCED IN THE OPEN COURT ON THE DATE MENTIONED ON THE CAPTION PAGE) SD/. SD/. (SUNIL KUMAR YADAV) ( A. K. GARODIA ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 0 4 /07/2014. *C.L.SINGH COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. CONCERNED CIT 4. THE CIT(A) 5. D.R., I.T.A.T., LUCKNOW ASSTT. REGISTRAR