5. Business expenditure – Disallowance – A tax
at source is to be deducted at the time of credit of such sum to the account of
the contractor or at the time of payment thereof, whichever is earlier – One
consequence for default in compliance with these provisions provided u/s.
40(a)(ia) of the Act is that the payments made by such a person to a contractor
shall not be treated as deductible expenditure – The word ‘payable’ occurring
in section 40(a)(ia) refers not only to those cases where the amount is yet to
be paid but also covers the cases where the amount is actually paid
Palam Gas Service vs. Commissioner of
Income Tax (2017) 394 ITR 300 (SC)
The Appellant-Assessee was engaged in the
business of purchase and sale of LPG cylinders under the name and style of
Palam Gas Service at Palampur. During the course of assessment proceedings, it
was noticed by the Assessing Officer that the main contract of the Assessee for
carriage of LPG was with the Indian Oil Corporation, Baddi. The Assessee had
received the total freight payments from the IOC Baddi to the tune of Rs.
32,04,140/-. The Assessee had, in turn, got the transportation of LPG done
through three persons, namely, Bimla Devi, Sanjay Kumar and Ajay to whom he
made the freight payment amounting to Rs. 20,97,689/-.
The Assessing
Officer observed that the Assessee had made a sub-contract with the said three
persons within the meaning of section 194C of the Act and, therefore, he
was liable to
deduct tax at source from the payment of Rs.
20,97,689/-. On account of his failure to do so, the said freight expenses were
disallowed by the Assessing Officer as per the provisions of section 40(a)(ia)
of the Act.
Against the order of the Assessing Officer,
the Assessee preferred an appeal before the Commissioner of Income Tax
(Appeals), Shimla who vide his order dated August 17, 2012 upheld the
order of the Assessing Officer.
The matter thereafter came up in appeal
before the Income Tax Appellate Tribunal which too met with the same fate.
In further appeal to the High Court u/s.
260A of the Act, the outcome remained unchanged as the High Court of Himachal
Pradesh also dismissed the appeal affirming the order of the ITAT.
The Supreme Court noted that section 40 of
the Act enumerates certain situations wherein expenditure incurred by the
Assessee, in the course of his business, will not be allowed to be deducted in
computing the income chargeable under the head ‘Profits and Gains from Business
or Profession’. One such contingency is provided in Clause (ia) of sub-section
(a) of section 40. As per Clause (ia), certain payments made, which include
amounts payable to a contractor or sub-contractor, would not be allowed as
expenditure in case the tax is deductible at source on the said payment under
Chapter XVIIB of the Act and such tax has not been deducted or, after
deduction, has not been paid during the previous year or in the subsequent year
before the expiry of the time prescribed under sub-section (1) of section 200
of the Act.
The Supreme Court further noted that in the
instant case, certain payments were made by the Appellant Assessee, in the
Assessment Year 2006-2007, but the tax at source was not deducted and deposited.
Also, as per section 194C of the Act, payments to contractors and
sub-contractors were subject to tax deduction at source. The Income Tax
Department/Revenue had, therefore, not allowed the amounts paid to the
sub-contractors as deduction while computing the income chargeable to tax at
the hands of the Assessee in the said Assessment Year.
The Supreme Court observed that section
40(a)(ia) uses the expression ‘payable’ and on that basis the question which
was 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?”
The Supreme Court observed that the question
was, as noted above, when the word used in section 40(a)(ia) is ‘payable’,
whether this section would cover only those contingencies where the amount is
due and still payable or it would also cover the situations where the amount is
already paid but no tax was deducted thereupon.
The Supreme Court noted that as per section
194C, it is the statutory obligation of a person, who is making payment to the
sub-contractor, to deduct tax at source at the rates specified therein. Plain
language of the section suggested that such a tax at source is to be deducted
at the time of credit of such sum to the account of the contractor or at the
time of payment thereof, whichever is earlier. Thus, tax has to be deducted in
both the contingencies, namely, when the amount is credited to the account of
the contractor or when the payment is actually made. Section 200 of the Act
imposes further obligation on the person deducting tax at source, to deposit
the same with the Central Government or as the Board directs, within the
prescribed time.
According to the Supreme Court, a conjoint reading
of these two sections would suggest that not only a person, who is paying to
the contractor, is supposed to deduct tax at source on the said payment whether
credited in the account or actual payment made, but also deposit that amount to
the credit of the Central Government within the stipulated time. The time
within which the payment is to be deposited with the Central Government is
mentioned in Rule 30(2) of the Rules.
The Supreme Court held that section
40(a)(ia) covers not only those cases where the amount is payable, but also
when it is paid. In this behalf, one has to keep in mind the purpose with which
section 40 was enacted. Once it is found that the aforesaid 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. Certain consequences of failure to deduct tax at source from
the payments made, where tax was to be deducted at source or failure to pay the
same to the credit of the Central Government, are stipulated in section 201 of
the Act. This section provides that in that contingency, such a person would be
deemed to be an Assessee in default in respect of such tax. While stipulating
this consequence, 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 u/s. 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. Default
is relatable to Chapter XVIIB (in the instant case sections 194C and 200, which
provisions are in the aforesaid Chapter). When the entire scheme of obligation
to deduct the tax at source and paying it over to the Central Government is
read holistically, it cannot be held that the word ‘payable’ occurring in
section 40(a)(ia) refers to only those cases where the amount is yet to be paid
and does not cover the cases where the amount is actually paid. If the
provision is interpreted in the manner suggested by the Appellant herein, then
even when it is found that a person, like the Appellant, has violated the
provisions of Chapter XVIIB (or specifically sections 194C and 200 in the
instant case), he would still go scot free, without suffering the consequences
of such monetary default in spite of specific provisions laying down these
consequences.
The Supreme Court accordingly dismissed the
appeal with costs.
6.
Income – Disallowance of expenditure in relation to income not forming
part of total income – If the income in question is taxable and, therefore,
includible in the total income, the deduction of expenses incurred in relation
to such an income must be allowed, however, such deduction would not be
permissible merely on the ground that the tax on the dividend received by the
Assessee has been paid by the dividend paying company and not by the recipient
Assessee, when u/s. 10(33) of the Act, such income by way of dividend is not a
part of the total income of the recipient Assessee – In the earlier assessment
years when the Revenue had failed to establish any nexus between the
expenditure disallowed and the earning of the dividend income in question, no
disallowance could have been for assessment year 2002-03
Godrej and Boyce Manufacturing Company
Limited vs. Dy. Commissioner of Income Tax and Ors. (2017) 394 ITR 449 (SC).
For the Assessment Year 2002-2003, the
Appellant-Company filed its return declaring a total loss of Rs. 45,90,39,210/-. In the said return, it had shown income by way of dividend
from companies and income from units of mutual funds to the extent of Rs.
34,34,78,686. Dividend income to the extent of 98% of the said amount was
contributed by the Godrej group companies, whereas only 0.05% thereof amounting
to Rs.1,71,000/- came from non-Godrej group companies. A sum of Rs.66,79,000/-
constituting 1.95% of the aforesaid dividend income, came from mutual funds.
Admittedly, a substantial part of the Appellant’s investment in the group
companies was in the form of bonus shares, which did not involve any fresh
capital investment or outlay.
The other relevant fact was that on the
first day of the previous year relevant to the Assessment Year 2002-2003 i.e. 1st
April, 2001, the investment in shares and mutual funds of the Appellant
company stood at Rs. 127.19 crore whereas at the end of the previous year i.e.
as on 31st March, 2002, the investment was Rs. 125.54 crore. The
above figures would go to show that there were no fresh investments made during
the previous year relevant to the Assessment Year 2002-2003. In fact, the
investments had come down to the extent noticed above.
Furthermore, as against the investment of
Rs. 125.54 crore as on 31st March, 2002, on the said date, the
Appellant had a total of Rs. 280.64 crore by way of interest free funds in the
form of share capital (Rs. 6.55 crore) as well as Reserves and Surplus (Rs.
274.09 crore). On the other hand, as against the investment of Rs. 127.19 crore
on the first day of the previous year i.e. 1st April, 2001, the
Appellant had a total of Rs. 270.51 crore by way of interest free
funds in the form of
share capital (Rs. 6.55 crore) and Reserves and Surplus (Rs.
263.96 crore). The above facts showed that the Appellant had sufficient
interest free funds available for the purpose of making investments.
For the Assessment Year 1998-1999, the
Appellant’s dividend income was Rs. 11,41,34,093/-. The Assessing Officer
notionally allocated Rs. 1,47,40,000/- out of the total interest expenditure of
Rs. 34,64,89,000/- as referable to the earning of the said dividend income and
had disallowed such interest expenditure and consequently reduced the exemption
available u/s. 10(33) of the Act to the net dividend. In appeal, the
Commissioner of Income Tax (Appeals) allowed exemption of the entire dividend
income on the ground that the Assessing Officer had failed to show any nexus
between the investments in shares and units of mutual funds on the one hand and
the borrowed funds on the other. The learned Income Tax Appellate Tribunal which was moved by the Revenue confirmed the
appellate order. The said order had attained finality.
For the Assessment Years 1999-2000 and
2001-2002, the issue with regard to exemption u/s. 10(33) of the Act was
similarly held in favour of the Assessee by the Commissioner of Income Tax
(Appeals) and the learned Tribunal, once again. Initially, the Assessing
Officer, in both the Assessment Years, had disallowed notionally computed
interest expenditure as being relatable to the earning of dividend income. The
said appellate order(s) had also attained finality. For the intervening
Assessment Year 2000-2001, there was no scrutiny of the Appellant’s return of
income. Consequently, the exemption for dividend income was allowed in full,
without disallowing any expenditure incurred in relation to earning such income.
However, for
the Assessment Year 2002-2003, the
Assessing Officer did not allow interest expenditure to the extent of
Rs. 6,92,06,000/- holding the same to be attributable to
earning the dividend
income of Rs. 34,34,78,686/-. The said figure of
interest expenditure disallowed was worked out from the total interest
expenditure for the year on a notional basis in the ratio of the cost of the
investments in shares and units of mutual funds to the cost of the total assets
appearing in the balance sheet. Though the aforesaid order of the Assessing
Officer was reversed by the Commissioner of Income Tax (Appeals) following the
earlier orders pertaining to the previous Assessment Years, the learned
Tribunal, in appeal, took a different view by its order dated 26th August,
2009. The learned Tribunal held that sub-sections (2) and (3) of Section 14A of
the Act (inserted by the Finance Act, 2006 with effect from 1st April,
2007) were retrospectively applicable to the Assessment Year 2002-2003 and, therefore,
the matter should be remanded to the Assessing Officer for recording his
satisfaction/findings in the light of the said sub-sections of section 14A of
the Act. This was notwithstanding the fact that the only disallowance made by
the Assessing Officer which was reversed in appeal by the Commissioner of
Income Tax (Appeals) was in respect of interest expenditure that was worked out
on a notional basis.
The High Court by the judgement dated 12th
August, 2010, inter alia, held that section 14A of the Act has to
be construed on a plain grammatical construction thereof and the said provision
is attracted in respect of dividend income referred to in section 115-O as such
income is not includible in the total income of the shareholder. Sub-sections
(2) and (3) of section 14A of the Act and Rule 8D of the Income Tax Rules, 1962
(hereinafter referred to as
“the Rules”) would,
however, not apply
to the AY 2002-03 as the said provisions do not have
retrospective effect. Notwithstanding the above, the High Court upheld the
remand as made by the Tribunal to the AO though for a slightly different
reason. The High Court in its judgment also held that the tax paid u/s. 115-O
of the Act is an additional tax on that component of the profits of the
dividend distributing company which is distributed by way of dividends and that
the same is not a tax on dividend income of the Assessee.
Aggrieved, the Assessee filed an appeal
before the Supreme Court raising the following two questions:
(a) Irrespective of the factual position and
findings in the case of the Appellant, whether the phrase “income which
does not form part of total income under this Act” appearing in section
14A includes within its scope dividend income on shares in respect of which tax
is payable u/s. 115-O of the Act and income on units of mutual funds on which
tax is payable u/s. 115-R.
(b) Whatever be the view on the legal
aspects, whether on the facts and in the circumstances of the Appellant’s case
and bearing in mind the unanimous findings of the lower authorities over a
considerable period of time (which were accepted by the Revenue), there could
at all be any question of the provisions of section 14A in the Appellant’s
case.
The Supreme Court held that the object
behind the introduction of section 14A of the Act by the Finance Act of 2001 is
clear and unambiguous. The legislature intended to check the claim of allowance
of expenditure incurred towards earning exempted income in a situation where an
Assessee has both exempted and non-exempted income or includible and
non-includible income. While there can be no scintilla of doubt that if
the income in question is taxable and, therefore, includible in the total
income, the deduction of expenses incurred in relation to such an income must
be allowed, such deduction would not be permissible merely on the ground that
the tax on the dividend received by the Assessee has been paid by the dividend
paying company and not by the recipient Assessee, when u/s. 10(33) of the Act,
such income by way of dividend is not a part of the total income of the
recipient Assessee. A plain reading of section 14A would go to show that the
income must not be includible in the total income of the Assessee. Once the
said condition is satisfied, the expenditure incurred in earning the said
income cannot be allowed to be deducted. The section does not contemplate a
situation where even though the income is taxable in the hands of the dividend
paying company and the same to be treated as not includible in the total income
of the recipient Assessee, yet, the expenditure incurred to earn that income
must be allowed on the basis that no tax on such income has been paid by the
Assessee. Such a meaning, if ascribed to section 14A, would be plainly beyond
what the language of section 14A can be understood to reasonably convey.
The Supreme Court further held that
irrespective of the question of sub-sections (2) and (3) of section 14A being
retrospective, what could not be denied was that the requirement for attracting
the provisions of section 14A(1) of the Act was proof of the fact, that the
expenditure sought to be disallowed/deducted had actually been incurred in
earning the dividend income.
According to the Supreme Court, insofar as
the Appellant-Assessee was concerned, the issues stood concluded in its favour
in respect of the Assessment Years 1998-1999, 1999-2000 and 2001-2002. Earlier
to the introduction of sub-sections (2) and (3) of section 14A of the Act, such
a determination was required to be made by the Assessing Officer in his best
judgement. In all the aforesaid assessment years referred to above, it was held
that the Revenue had failed to establish any nexus between the expenditure
disallowed and the earning of the dividend income in question. In the appeals
arising out of the assessments made for some of the assessment years, the
aforesaid question was specifically looked into from the standpoint of the
requirements of the provisions of sub-sections (2) and (3) of section 14A of
the Act which had by then been brought into force. It is on such consideration
that findings have been recorded that the expenditure in question bore no
relation to the earning of the dividend income and hence, the Assessee was
entitled to the benefit of full exemption claimed on account of dividend
income.
The Supreme
Court held that in the aforesaid fact situation, a different view could not
have been taken for the Assessment Year 2002-2003. Sub-sections (2) and (3) of
section 14A of the Act read with Rule 8D of the Rules merely prescribe a
formula for determination of expenditure incurred in relation to income which
does not form part of the total income under the Act, in a situation where the
Assessing Officer is not satisfied with the claim of the Assessee. Whether such
determination is to be made on application of the formula prescribed under Rule
8D or in the best judgment of the Assessing Officer, what the law postulates is
the requirement of a satisfaction in the Assessing Officer that having regard
to the accounts of the Assessee, as placed before him, it is not possible to
generate the requisite satisfaction with regard to the correctness of the claim
of the Assessee. It is only thereafter that the provisions of section 14A(2)
and (3) read with Rule 8D of the Rules or a best judgement determination, as
earlier prevailing, would become applicable.
In the present case, there was no mention of
the reasons which had prevailed upon the Assessing Officer, while dealing with
the Assessment Year 2002-2003, to hold that the claims of the Assessee that no
expenditure was incurred to earn the dividend income could not be accepted and
why the orders of the Tribunal for the earlier Assessment Years were not
acceptable to the Assessing Officer, particularly, in the absence of any new
fact or change of circumstances. Neither any basis had been disclosed
establishing a reasonable nexus between the expenditure disallowed and the
dividend income received. That any part of the borrowings of the Assessee had
been diverted to earn tax free income despite the availability of surplus or
interest free funds available (Rs. 270.51 crore as on 1.4.2001 and Rs. 280.64
crore as on 31.3.2002) remained unproved by any material whatsoever. While it
was true that the principle of res judicata would not apply to
assessment proceedings under the Act, the need for consistency and certainty
and existence of strong and compelling reasons for a departure from a settled
position had to be spelt out which conspicuously was absent in the present
case.
In the above circumstances, the Supreme
Court held that the second question formulated must go in favour of the
Assessee and it must be held that for the Assessment Year in question i.e.
2002-2003, the Assessee was entitled to the full benefit of the claim of
exemption in relation to dividend income without any deductions.
The Supreme Court allowed the appeal and the order of the High Court was set aside subject to the conclusions, as above, on the
applicability of section 14A with regard to dividend income on which tax is
paid u/s. 115-O of the Act. _
