Disallowance us 40(a)(ia) applies to amounts paid also-Supreme Court. Allahabad HC judgment holding that it applies to amount payable at the year end overruled
ABCAUS Case Law Citation:
ABCAUS 1227 (2017) (04) SC
Date/Month of Pronouncement: May, 2017
The Controversy-Section 40(a)(ia) applies to sums paid or payable?
Section 40(a)(ia) of the Income Tax Act, 1961 (‘the Act’) provides for thirty percent disallowance on any sum payable to a resident if tax has not been deducted at source in accordance with the provisions of Chapter XVII-B or if after deduction has not been paid before the due date for filing of income tax return.
However, difference of opinion existed on whether the disallowance would apply only where such payment remain payable as on the close of the financial year or would cover even the cases where the sum has been paid and not outstanding as at the close of the financial year.
Various High Courts had interpreted the section differently.
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 was later put under interim suspension by the Hon’ble Andhra Pradesh High Court.
The Hon’ble Calcutta High Court and Hon’ble Gujarat High Court in the case of Commissioner of Income-tax, Kolkata-XI vs. Crescent Exports Syndicate and Commissioner of Income-tax-IV vs. Sikandarkhan N Tunvar respectively held that section 40(a)(ia) of the Act would cover not only the amounts which are payable at the end of the previous year but also which are payable at any time during the year. It was further held that the intention of the legislation was to disallow certain types of expense, subject to provisions of Chapter 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 stipulated time. There is no such condition that amount should remain payable at the end of the year.
However, the Hon’ble Allahabad High Court in CIT v. Vector Shipping Service (P) Ltd had affirmed the decision of the Special Bench in Merilyn Shipping that for disallowance under section 40(a) (ia) of the Act, the amount should be payable and not which has been paid during the year. It is notable that Special Leave Petition thereagainst was dismissed by the Supreme Court in limine.
In the case of ACIT, Circle 4(2), Mumbai v. Rishti Stock and Shares Pvt. Ltd., ITAT Mumbai had 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 decisions 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.
Thus in view of such divergent decisions, CBDT vide Circular no. 10/DV/2013 had clarified 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. It was clarified that the term ‘payable’ as appearing in the section would include ‘amounts which are paid during the previous year’.
However, the circular further clarified that where any High Court decided an issue contrary to the ‘Departmental View’, the `Departmental View’ thereon shall not be operative in the area falling in the jurisdiction of the relevant High Court.
Hon’ble Supreme Court puts controversy to rest
The Hon’ble Apex Court has put the above said controversy to an end by ruling out the
The Question for determination:
The Supreme Court observed that section 40(a)(ia) uses the expression ‘payable’ and on that basis the question raised for consideration was :
“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?”
Observations made by the Hon’ble Supreme Court :
The Hon’ble Supreme Court observed that the issue had come up for hearing before various High Courts and there were divergent views of the various High Courts there upon. It was noted that most of the High Courts which included High Courts of Madras, Calcutta and Gujarat, had taken the view that the aforesaid provision would cover even those cases where the amount stands paid. However a contrary view was taken by the Allahabad High Court. In a recent judgment, the Punjab & Haryana High Court took note of the judgments of the aforesaid High Courts and concurred with the view taken by the Madras, Calcutta and Gujarat High Courts and showed its reluctance to follow the view taken by the Allahabad High Court.
Dealing with the issue, namely, whether the word ‘payable’ as appearing in Section 40(a)(ia) would mean only when the amount is payable and not when it is actually paid, the Hon’ble Supreme Court approved the view taken by P&H High Court. The Hon’ble Supreme Court concurred that section 40(a)(ia) covers not only those cases where the amount is payable but also when it is paid. According to the Hon’ble Supreme Court , one has to keep in mind the purpose with which Section 40 was enacted and the provisions of Sections 194C and 200. When such sections mandate a person to deduct tax at source not only on the amounts payable but also when the sums are actually paid to the contractor, any person who does not adhere to this statutory obligation has to suffer the consequences which are stipulated in the Act itself.
It was noted that section 201 categorically states that the aforesaid Sections would be without prejudice to any other consequences which that defaulter may incur. Other consequences are provided under Section 40(a)(ia) of the Act, namely, payments made by such a person to a contractor shall not be treated as deductible expenditure. When read in this context, it is clear that Section 40(a)(ia) deals with the nature of default and the consequences thereof.
The Hon’ble Supreme Court observed that if the provision is interpreted in the manner suggested by the appellant, then even despite the violation of the provisions of Chapter XVIIB, he would still go scot free, without suffering the consequences of such monetary default in spite of specific provisions laying down these consequences.
Regarding the judgment of the Allahabad High Court, the Hon’ble Supreme Court opined that reading thereof would reflect that the High Court, after noticing the fact that since the amounts had already been paid, it straightaway concluded, without any discussion, that Section 40(a)(ia) would apply only when the amount is ‘payable’ and dismissed the appeal of the Department stating that the question of law framed did not arise for consideration.
The Hon’ble Supreme Court clarified that dismissal of the Special Leave Petition in limine against the judgment of Allahabad High Court however, would not amount to confirming the view of the Allahabad High Court.
It was held that 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. The Hon’ble Supreme Court overruled the judgment of the Allahabad High Court. The question framed was answered against the appellant assessee.