Issue for Consideration Section 40(a)(ia) of the Income-tax Act, 1961 provides for disallowance of 30% of any sum payable to a resident on which tax is deductible at source under chapter XVII-B, where such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in section 139(1). Till assessment year 2014-15, the whole of such sum payable was disallowable.
At times, a taxpayer deducts tax at source under a particular section of the Act, while the tax authorities take a view that tax ought to have been deducted under another section of the Act. For example, an assessee while deducting tax on payment deducts tax at 2% u/s. 194C, while the tax authorities take a view that the tax should have been deducted u/s. 194J as in their view the payment represented the payment of fees for the technical services. If the rate at which tax has been actually deducted is lower than the rate at which tax is deductible in the view of the tax authorities, it is usual for them to disallow the claim for deduction on the ground that the tax was not deducted at source leading to a violation of the provisions of section 40(a)(ia) of the Act. The question which arises for consideration, under the circumstances, is, whether the tax authorities can disallow the whole or part of the expenditure on the ground that tax has not been deducted at source on such expenditure ignoring altogether the fact that the tax was in fact deducted though under a different provision of the Act .
While the Calcutta High Court has taken the view that no disallowance u/s. 40(a)(ia) could be made in such cases, the Kerala High Court has taken a contrary view and has held that the provisions of section 40(a)(ia) would apply if tax was deducted under a wrong provision of law and the claim for deduction would be disallowed.
S. K. Tekriwal’s case:
The issue first arose for consideration before the Calcutta High Court in the case of CIT vs. S. K. Tekriwal, 361 ITR 432.
In this case, the assessee had deducted tax at source from payments made to a machinery contractor u/s. 194C as payment to a sub-contractor at the rate of 1%. The assessing officer took a view that the payments were in the nature of machinery hire charges, which amounted to rent under the provisions of section 194-I, and that tax therefore ought to have been deducted u/s. 194-I at the rate of 10%. The assessing officer therefore, disallowed proportionate payments (90%) by invoking section 40(a)(ia).
In the appeal, the Tribunal deleted the disallowance. The Tribunal noted that section 40(a)(ia) had 2 limbs – one requiring deduction of tax, and the second requiring payment of the tax into the government account. There was nothing in that section, treating the assessee as a defaulter where there was a shortfall in deduction. According to the Tribunal, it could not be assumed that on account of the shortfall, there was a default in the deduction. If there was any shortfall due to any difference of opinion as to the taxability of any item or the nature of payments falling under various TDS provisions, the assessee could be declared to be an assessee in default u/s. 201, and no disallowance could be made by invoking the provisions of section 40(a)(ia).
The Calcutta High Court, on an appeal by the Revenue, after noting the observations of the Tribunal, held that no substantial question of law was involved in the case before it, and therefore refused to admit the appeal.
PVS Memorial Hospital’s case:
The issue again came up before the Kerala High Court recently in the case of CIT vs. PVS Memorial Hospital Ltd, 60 taxmann.com 69. The 2 years involved in this appeal were assessment years 2005-06 and 2006-07.
In this case, the assessee was a hospital, which had entered into an agreement with another hospital, where that other hospital had undertaken to perform various professional services in the assessee’s hospital. The assessee, on payment to the other hospital for its services, deducted tax at source at 2% u/s. 194C by treating the payments as the payment for carrying out the work in pursuance of the contract.
The assessing officer took the view that the payment was in the nature of fees for technical services and the tax was deductible at 5% u/s. 194J, and therefore disallowed the entire payment u/s. 40(a)(ia) in both the years. For assessment year 2005-06, the Commissioner(Appeals) as well as the Tribunal confirmed the addition and rejected the appeals.
For assessment year 2006-07, the Tribunal allowed the appeal following the Calcutta High Court’s decision in S. K. Tekriwal’s case(supra). According to the Tribunal, the disallowance u/s. 40(a)(ia) could be made only if both the conditions were satisfied, i.e. tax was deductible at source and such tax had not been deducted. The Tribunal took the view that where tax was deducted by the assessee, even if it was under a wrong provision of law, the provisions of section 40(a)(ia) could not be invoked. The Kerala High Court, while examining the issue, noted that in the case before it, tax was deductible u/s. 194J and not u/s. 194C.
The Kerala High Court on examination of the provisions of section 40(a)(ia), expressed the view that the section was not a charging section but was a machinery section, and that such a provision should therefore be understood in such a manner that it was made workable. For this proposition, it relied on the Supreme Court observations in the case of Gurusahai Saigal vs. CIT 48 ITR 1, where the Supreme Court had observed that the provisions in a taxing statute dealing with machinery for assessment have to be construed by the ordinary rules of construction, that was to say, in accordance with the clear intention of the Legislature, which was to make effective a charge that was levied .
According to the Kerala High Court, if section 40(a)(ia) was to be understood in the manner as laid down by the Supreme Court, the expression “tax deductible at source under chapter XVII-B” had to be understood as a tax deductible at source under the appropriate provision of chapter XVII-B. Therefore, if tax was deductible u/s. 194J but was deducted u/s. 194C, according to the Kerala High Court, such a deduction did not satisfy the requirements of section 40(a)(ia). The latter part of the section that ‘such tax had not been deducted’, in the view of the Kerala High Court, again referred to the tax deducted under the appropriate provision of chapter XII-B.
The Kerala High Court held that a cumulative reading of the provision showed that deduction under a wrong provision of law would not save an assessee from the disallowance u/s. 40(a)(ia) expressly dissenting from the Calcutta High Court’s decision in S. K. Tekriwal’s case(supra), and confirmed the disallowance u/s. 40(a)(ia).
Observations
On a bare reading of the provisions of section 40(a)(ia), it is gathered
that the said provision requires a disallowance in a case where there
is a failure to deduct tax at source,where it was deductible, or after
deduction the same has not been paid on or before the due date specified
u/s. 139(1). It does not, at least expressly, cover a case of a partial
non-deduction on the lines similar to the one provided u/s. 201 which
provides for the consequences of the failure to deduct tax at source.
Section 201 by express language using the specific terms,“ wholly or
partly” seeks to rope in the cases of partial or a complete failure and
makes an assessee liable for the consequences. The legislature by not
including the above terms “ wholly or partly” in section 40(a)(ia) have
sought to cover the cases of the absolute failure to deduct tax and not
the case of the partial failure to deduct. Importantly section 201, as
it originally stood, did not provide for the cases of partial deduction
and hence did not seek to penalise an assessee in a case where there was
a short deduction of tax by him. Section 201 has since been amended to
rope in the cases of even a partial failure to pay the deducted taxes.
Further,
section 201 of the Income-tax Act clearly brings out that a failure in
whole or in part, would result in an assessee being treated as in
default. Similarly, section 271C clearly specifies that the penalty can
be levied for failure to deduct the whole or any part of the tax as
required by chapter XVII-B. Unlike both the sections, section 40(a)(ia)
uses the term “has not been deducted”, without specifying whether it
applies to deduction in whole or in part.
Secondly, even in
cases of acknowledged failure, the Andhra Pradesh High Court, followed
by many high courts, in the case of P. V. Rajagopal vs. Union of India
99 Taxman 475, held, in the context of the provisions of section 201 as
it then stood [the language of which was similar to the language used in
section 40(a)(ia)], that if there was any shortfall due to any
difference of opinion as to the taxability of any item, the employer
could not be declared to be an assessee in default. The Tribunal in the
cases of DCIT vs. Chandabhoy & Jassobhoy 49 SOT 448 (Bom), Apollo
Tyres vs. DCIT 60 SOT 1 (Coch) and Three Star Granites (P) Ltd vs. ACIT
32 ITR (Trib) 398, held that the provisions of section 40(a)(ia) would
be attracted only in the case of total failure to deduct tax at source,
and where tax had partly been deducted at source, it could not be said
that tax had not been deducted at source. In all these cases, the
tribunal noted the decision of the Andhra Pradesh High Court in the case
of P. V. Rajagopal vs. Union of India(supra) with approval.
The
enormous litigation on the subject of TDS clearly indicate that there
is a lack of clarity on the applicability of the appropriate provision
of chapter XVIIB for deducting tax at source on a particular payment,
which needs to be interpreted and settled by the courts alone. Over a
period of time, certain clarity has emerged on various types of
payments, but there are still various types of payments where the
position is still not so clear, some of which ultimately have to be
resolved by the Supreme Court.
In such a situation, where a tax
deductor has taken a bona fide view in respect of tax deductible from a
particular type of payment, adopting one of the two possible views on
the matter, should he be penalised by disallowance of the expenditure,
besides being asked to pay the tax short deducted, as well as interest
on such short deduction? Can a tax deductor be expected to have the same
legal competence in interpreting a legal provision as a High Court or a
Supreme Court?
In the context of penalty for concealment, the
Supreme Court in the case of CIT vs. Reliance Petroproducts (P) Ltd. 322
ITR 58 held that where a taxpayer based on a possible view of a matter,
claimed a deduction, a penalty for concealment could not be levied on
him even where his claim for deduction of such payment was disallowed in
assessment of his total income. The Supreme Court held that if the
contention of the revenue was accepted, then in case of every return
where the claim made was not accepted by the Assessing Officer for any
reason, the assessee would invite penalty u/s. 271(1)(c). That was
clearly not the intendment of the Legislature.
The disallowance
u/s. 40(a)(ia) is a form of penalty on a tax deductor for failing to
perform an onerous duty, and therefore where a taxpayer makes a genuine
mistake, taking a possible interpretation of the provision under which
tax should be deducted, he should not be penalised for it.
Undoubtedly,
the intention was to ensure that a deductor on payment did deduct tax
at source from payments on which tax was deductible at source and in
doing so he should tax at the rate applicable under a specific provision
which in his bona fide belief is the provision that is applicable to
such a payment. The intention of the Legislature certainly could not
have been to penalise actions taken under a bona fide belief of a
deductor, particularly when the view taken by him is a possible one.
The
better view therefore seems to be that taken by the Calcutta High
Court, that no disallowance can be made u/s. 40(a)(ia) where tax has
been deducted at source at a lower rate under a particular section,
though the rate of tax under the correct section under which tax is
deductible at source may be higher, particularly in cases where there is
a genuine dispute as to the appropriate section under which tax is
deductible at source. In our opinion, the mistake if any of deducting
under a wrong provisions of law, if based on a bona fide belief, is a
case of trivial mistake and should not even lead to holding the assessee
as in default as has been held by the apex court in the case of
Hindustan Steels Ltd., 83 ITR 26 (SC). The question of disallowance
should not arise at all.
