Article
The Finance (No. 2) Act, 2009 has introduced S. 206AA in the
Income-tax Act, 1961 (Act in short). This Section employs provisions relating to
collection and recovery of tax to enforce certain requirements in relation to
permanent account number (PAN in short). This Section has come into force with
effect from 1-4-2010. Among the several sub-sections of this provision, it is S.
206AA(1) which has wide ranging impact on the working of tax collection
mechanism in India. In this article we examine the scope and applicability of S.
206AA(1).
S. 206AA :
S. 206AA(1) requires any person (deductee in short),
receiving any sum, income or amount which is liable to tax deduction at source (TDS
in short), to furnish his PAN to the person responsible to deduct tax at source
(deductor in short). In case the deductee fails to furnish his PAN, the deductor
is liable to deduct tax on the sum, income or amount (income in short) payable
to the deductee, at a rate which is higher of (1) the rate specified in the Act;
(2) the rate or rates in force or (3) 20%. S. 206AA(1) provides as under :
“(1) Notwithstanding anything contained in any other
provisions of this Act, any person entitled to receive any sum or income or
amount, on which tax is deductible under Chapter XVIIB (hereafter referred to
as deductee) shall furnish his Permanent Account Number to the person
responsible for deducting such tax (hereafter referred to as deductor),
failing which tax shall be deducted at the higher of the following rates,
namely :
(i) at the rate specified in the relevant provision of
this Act; or
(ii) at the rate or rates in force; or
(iii) at the rate of 20%.”
S. 206AA(1) will be attracted only if the following
ingredients thereof are fulfilled :
(a) The deductee in question should be entitled to receive
any sum, income or amount;
(b) Tax should be deductible at source from such income
under Chapter XVIIB;
(c) The deductee should be liable to furnish his PAN to
person responsible to deduct tax at source on such income.
(d) The deductee should have failed to furnish his PAN to
the person responsible to deduct tax at source.
The implication of these conditions is as under :
(a) Entitled to receive any sum, income or amount :
The first requirement is that the deductee should be entitled
to receive any income. S. 206AA(1) employs the words ‘entitled to receive’. The
term ‘entitle’ is defined in the case of Jopp v. Wood, (1865) 46 ER 400
(cited from Advanced Law Lexicon, P. Ramanatha Aiyer, 3rd Edition, 2005, page
1611) as ‘to give a claim, right, or title to; to give a right to demand or
receive, to furnish with grounds for claiming.’.
This indicates that a prior right to receive the income
should exist before S. 206AA(1) is attracted. In the absence of any prior right
to receive the income, whether contractually or statutorily, S. 206AA(1) is not
triggered. For example, gift of money or property, would not attract S.
206AA(1), even though if falls within the definition of term ‘income’ under S.
2(24) and is subject to provisions of Chapter XVIIB.
(b) Tax should be deductible at source under Chapter XVIIB :
S. 206AA(1) applies only when the tax is deductible at source
under Chapter XVIIB on the income under consideration. Use of the word
‘deductible’ indicates that there should be a statutory obligation to deduct tax
at source. In other words, where tax is deducted at source by abundant caution
or by mistake, though not required by Chapter XVIIB, S. 206AA(1) would not
apply.
Further, such obligation to deduct tax at source should exist
after 1-4-2010. S. 206AA(1) would not apply to a case where a person is entitled
to receive any income, on which tax has already been deducted prior to 1-4-2010.
This is for the reasons that no tax would be again deductible on the said sum
after 1-4-2010.
Obligation to deduct tax at source under Chapter XVIIB is
attracted only if there is any income which is chargeable to tax in the hands of
the deductee u/s.4(1). Without the charging provision u/s.4(1) getting
attracted, the machinery provision for collection of taxes due thereon would not
apply. This is by virtue of S. 4(2) which is the enabling provision for
collection of tax. S. 4(2) enables collection of taxes by various methods
including by deduction of tax at source only in respect of income chargeable
u/s.4(1). S. 4(2) provides as under :
“(2) In respect of income chargeable U/ss.(1), income-tax
shall be deducted at the source or paid in advance, where it is so deductible
or payable under any provision of this Act.”
The provisions of Chapter XVIIB deal with collection and
recovery of tax by way deduction at source. These provisions draw their support
from S. 4(2), which is the enabling provision. S. 206AA being part of Chapter
XVIIB is attracted only when the deductee is entitled to receive any income
which is chargeable to tax u/s.4(1).
Tax will not be deductible merely because S. 4(1) is
satisfied. There should be a specific provision in Chapter XVIIB for deduction
of tax at source on the income received by the deductee. There are several
incomes which are not subject to TDS provisions. In case the deductee is
entitled to receive such incomes, S. 206AA(1) would not be attracted.
(c)
Obligation to
furnish PAN :
In case the first two requirements stated above are
satisfied, S. 206AA(1) requires the deductee to furnish his PAN to the person
responsible to deduct tax at source. Once the assessee has PAN, he becomes
obligated to furnish it to the person responsible to deduct the same. This
aspect of the matter is discussed in detail later.
(d) Failure to furnish PAN :
The fourth condition is that there should be a failure to furnish PAN once an obligation to furnish PAN gets attached. S. 206AA(1) employs the words ‘failing which’. The word ‘failing’ stems from the word ‘fail’. Word ‘fail’ means ‘to leave something unperformed though required to be performed’. It also means ‘to fall short in attainment or performance or in what is expected’. Thus the term ‘failing’ pre-supposes a requirement to perform.
Another form of the same word, namely, ‘failed’ had been the subject of the discussion in Ahmed Abdul Quader v. Raffat, AIR 1978 AP 417. Dealing with the expression ‘failed to provide’, the AP High Court held that the “words ‘failed to provide’ do imply a duty to provide. If there is no such duty to provide, it cannot be said that the husband had failed to provide maintenance to his wife.”
The word ‘failure’ is also defined on similar lines. The difference between ‘failure’ and ‘omission’ has been the subject matter of discussion in Pannalal Nandlal Bhandari v. CIT, (1956) 30 ITR 139 (Bom.), where the Bombay High Court held that the word ‘failure’ pre-supposes an obligation to do the thing in which there is a failure. The Court held:
“The Legislature has advisedly used two expres-sions ‘omission’ and ‘failure’ on the part of the assessee. Failure must connote that there is an obligation which has not been carried out and if there was no obligation upon the assessee to make a return, then it would not be a failure on his part to carry out that obligation. But the Legislature has also used the expression ‘omission’, and it is clear that the expression ‘omission’ does not connote any obligation as the expression ‘failure’ does.”
This observation of the Bombay High Court has been followed by the AP High Court in Mullapudi Venkatarayudu v. UOI, (1975) 99 ITR 448 (AP). Similarly in Royal Calcutta Turf Club v. WTO, (1984) 148 ITR 790 (Cal.), in a matter rendered under the Wealth-tax Act, the Calcutta High Court observed:
“The word ‘failure’ means non-fulfilment of an obligation imposed on the assessee by law or by statute. In the case of absence of obligation of the assessee, such non-filing would be an act of omission and as ‘omission’ is mentioned as an element, the result would be, whenever there is an absence of a return or an absence of disclosure, it would be unnecessary to enquire whether or not an obligation lay on the assessee to file a return or to make a disclosure.”
The word ‘failing’ is therefore to be read as non-fulfilment of a pre-existing obligation. In case no obligation exists, there can be no ‘failing’. It follows that S. 206AA(1) would come into operation only in case an obligation exists requiring the deductee to furnish PAN to the deductor. Where no obligation exists to furnish PAN, there can be no failure u/s.206AA(1). Consequently the question of deducting tax at source at higher of the tax rates mentioned therein would not arise.
Further, S. 206AA(1) applies when an obligation requiring furnishing of PAN to the person responsible to deduct tax at source exists. If such an obligation exists, furnishing PAN to a person other than the person responsible to deduct tax at source or furnishing of an incorrect PAN, whether intentionally or accidentally, would also amount to a ‘failure’ u/s.206AA(1).
Conclusion:
The four conditions stated above are cumulative in nature. It is only when all four conditions stated above are satisfied, that tax can be deducted by the person responsible to deduct at the higher of the three rates mentioned in S. 206AA(1).
Obligation to furnish PAN:
The obligation to furnish PAN pre-supposes that the deductee already possesses a PAN. In case the deductee possesses a PAN, he is bound to furnish it to the deductor. However it is possible that the deductee may not possess a PAN. Under such circumstances several important questions arise.
Question No. 1:
The primary question that arises is whether S. 206AA(1) imposes an obligation on a person to obtain PAN, if he does not possess one. This question requires an answer in the negative. S. 206AA(1) does not impose any obligation to obtain PAN. This is for the following reasons:
S. 206AA is a part of Chapter XVIIB dealing with deduction of tax at source. No part of S. 206AA or Chapter XVIIB specifically imposes any obli-gation to obtain PAN. Therefore, no such new obligation can be read into S. 206AA(1).
It is contrary to all rules of construction to read words into an Act unless it is absolutely necessary to do so. One may refer to decisions in Renula Bose v. Rai Manmathnath Bose, AIR 1945 PC 108; Director General, Telecommunication v. T N. Peethambaran, (1986) 4 SCC 348 and Assessing Officer v. East India Cotton Manufacturing Co. Ltd.; AIR 1981 SC 1610 in support of this principle. S. 206AA(1) employs the words ‘shall furnish’ and not ‘shall obtain and furnish’. The words ‘obtain and’ cannot be read into S. 206AA(1). No necessity exits in the context to do so.
It is S. 139A, contained in Chapter XIV (Proce-dure for Assessment) which deals with rules for obtaining of PAN. Further, in S. 139A only Ss.(1), Ss.(1A) and Ss.(1B) mandate certain persons to obtain PAN.
U/s.139A(1), persons who meet certain income or turnover criteria and persons who are required to file S. 139(4A) returns or FBT returns are required to obtain PAN. S. 139A(1) provides as under:
“(1) Every person:
i) if his total income or the total income of any other person in respect of which he is assess-able under this Act during any previous year exceeded the maximum amount which is not chargeable to income-tax; or
ii) carrying on any business or profession whose total sales, turnover or gross receipts are or is likely to exceed five lakh rupees in any previous year; or
iii) who is required to furnish a return of income U/ss.(4A) of S. 139; or
iv) being an employer, who is required to furnish a return of fringe benefits u/s.115WD,
and who has not been allotted a permanent account number shall, within such time, as may be prescribed, apply to the Assessing Officer for the allotment of a permanent account number.”
U/ss.(1A) the Central Government is empowered to notify certain categories of persons who are required under any fiscal law to pay tax or duties including exporters and importers to obtain PAN. In exercise of its powers u/s.206AA(1A), the Central Government has notified certain persons vide Notification No. 11468, dated 29-8-2000 and Notification No. 355/2001, dated 12-12-2001. S. 139A(1A) provides as under:
“(1A) Notwithstanding anything contained in Ss.(1), the Central Government may, by Notification in the Official Gazette, specify, any class or classes of persons by whom tax is payable under this Act or any tax or duty is payable under any other law for the time being in force including importers and exporters whether any tax is payable by them or not and such persons shall, within such time as mentioned in that Notification, apply to the Assessing Officer for the allotment of a permanent account number.”
U/s.139A(1B), the Central Government is empowered to notify certain categories of person and require them to obtain PAN to facilitate collection of information relevant and useful for the purposes of the Act. S. 139A(1B) provides as under?:
“(1B) Notwithstanding anything contained in Ss.(1), the Central Government may, for the purpose of collecting any information which may be useful for or relevant to the purposes of this Act, by Notification in the Official Gazette, specify, any class or classes of persons who shall apply to the Assessing Officer for the allotment of the permanent account number and such persons shall, within such time as mentioned in that Notification, apply to the Assessing Officer for the allotment of a permanent account number.
Apart from the above three provisions, u/s. 139A(2), the Assessing Officer is required to al-lot PAN to assessees having regard to certain transactions undertaken by them, whether or not such transactions have any tax implications. S. 139A(2) provides as under:
The Assessing Officer, having regard to the nature of the transactions as may be pre-scribed, may also allot a permanent account number, to any other person (whether any tax is payable by him or not), in the manner and in accordance with the procedure as may be prescribed.”
In other words, there are certain categories of per-son who are mandatorily required to obtain or have a PAN, by virtue of sub-sections mentioned above. As far as assessees not covered by these sub-sections are concerned, there is no obligation to obtain or have PAN. They can at their option apply for PAN u/s.139A(3), which provides as under:
“(3) Any person, not falling U/ss.(1) or U/ss.(2), may apply to the Assessing Officer for the allotment of a permanent account number and, thereupon, the Assessing Officer shall allot a permanent account number to such person forthwith.”
Therefore it is clear that S. 139A is a specific provision, covering all cases where obtaining or allotting of PAN is compulsory. In the presence of a specific provision in the form of S. 139A requiring persons to obtain PAN, S. 206AA(1) cannot be read as creating parallel regime requiring certain other persons to obtain PAN.
S. 206AA(1) cannot be interpreted in isolation just by reference to the language employed therein. It has to be interpreted in the context in which it is created, keeping the entire statute in mind. The principle that a statute must be read as a whole and in its context is upheld by the Supreme Court in State of West Bengal v. UOI, AIR 1963 SC 1241, where it observed:
“The Courts must ascertain the intention of the Legislature by directing its attention not merely to the clauses to be constructed but to the entire statute; it must compare the clauses with the other parts of the law, and the setting in which the clause to be interpreted occurs.”
The Supreme Court in Gurudevdatta VKSSS Maryadit v. State of Maharashtra, AIR 2001 SC 1980, quoted the following observations of Australian Court in CIC Insurance Ltd. v. Bankstown Football Club Ltd., (1997) 187 CLR 384 with approval.
“the modern approach to statutory interpretation (a) insists that the context be considered in the first instance, and not merely at some later stage when ambiguity might be thought to arise, and (b) uses context in its widest sense to include such things as the existing state of law and the mischief which, by legitimate means — one may discern the statute was intended to remedy.”
Similar decisions have been rendered by the Supreme Court in R. S. Raghunath v. State of Karnataka, AIR 1992 SC 81 and Union of India v. Elphinstone Spinning and Weaving Co. Ltd., AIR 2001 SC 724 (Constitutional Bench). In these decisions the Court has defined the ‘context’ to include the statute as a whole, previous state of law, other statutes in pari materia, general scope of the statute and the mischief that the statute intends to remedy.
The purpose behind introducing S. 206AA(1) has been stated in the Memorandum explaining the provision of the Finance (No. 2) Bill, 2009 as under:
“d. Improving compliance with provisions of quoting PAN through the TDS regime.
Statutory provisions mandating quoting of Permanent Account Number (PAN) of deductees in Tax Deduction at Source (TDS) statements exist since 2001 duly backed by penal provisions. The process of allotment of PAN has been streamlined so that over 75 lakh PANs are being allotted every year. Publicity campaigns for quoting PAN are being run since the last three years. The average time of allotment of PAN has come down to 10 calendar days. Therefore, non-availability of PAN has ceased to be an impediment. In a number of cases, the non-quoting of PAN’s by deductees is creating problems in the processing of return of income and in granting credit for tax deducted at source, leading to delays in issue of refunds.
In order to strengthen the PAN mechanism, it is proposed to make amendments in the Income-tax Act to provide that any person whose receipts are subject to deduction of tax at source i.e., the deductee, shall mandatorily furnish his PAN to the deductor, failing which the deductor shall deduct tax at source at higher of the following rates
i) the rate prescribed in the Act;
ii) at the rate in force, i.e., the rate mentioned in the Finance Act; or at the rate of 20%.”
The object of S. 206AA(1) is to (a) ensure compliance with the PAN mechanism; (b) address problems associated with non-quoting (and not non-obtaining) of PAN, like processing of returns, claiming credit for TDS and granting of refund; and (c) ensure that assessee do not give reason like non-issuance of PAN as a reason for not furnishing it, keeping in mind that the PAN allotment machinery has been fully strengthened and streamlined.
The mischief sought to be remedied by S. 206AA(1) has been stated in the memorandum extracted above. The position that existed in the past was that the system for allotment of PAN had not been fully streamlined for a long time since its inception. This was one of the main excuses for non-compliance with PAN mechanism. This position ceased to exist. Now that the system for allotment of PAN had been streamlined, the law-makers have thought it fit not to accept non -quoting of PAN on the reason that the same had not been allotted. The existing law [as it stood before the Finance (No. 2) Act, 2009 becoming operative] was not sufficient to enforce furnishing of PAN by those who were required to do so. Hence S. 206AA(1) has been inserted.
As stated above, S. 206AA(1) has to be read along with other provisions of the Act. Since S. 139A deals with the PAN mechanism, S. 206AA(1) has be read in conjunction with S. 139A. Consequently, purpose of S. 206AA(1) would be require persons already possessing PAN or required to obtain PAN u/s.139A to furnish the same, if they are subject to TDS. S. 206AA(1) does not create any obligation to obtain PAN independent of S. 139A.
It should also be noted that obligation of the deductee to furnish PAN to the deductor, once tax is deductible under Chapter XVIIB, already exists u/s.139A(5A) (extracted and discussed in detail below). Therefore the obligation imposed by S. 206AA(1) is not new. The scope of S. 206AA(1) as seen from the Memorandum to the Finance (No. 2 Act), 2009, is only to ensure better compliance of existing PAN mechanism. Therefore, S. 206AA(1) only has the effect of introducing an additional punitive measure for enforcing deductees to furnish/quote their PAN once TDS provisions are attracted.
In case the object of the law was to ensure every deductee liable to TDS obtains a PAN and furnishes them, provisions of S. 139A would have been amended suitably making all deductees obli-gated to obtain PAN. Since the intention was only to add an additional measure to ensure compliance with S. 139A, S. 206AA(1) has been added as a part of the TDS provisions, while S. 139A(1) has been left un-amended.
Question No. 2:
The next important question that arises is as to whether S. 206AA(1) will apply in cases where obtaining PAN is not mandatory. There are several arguments both for and against such a conclusion. The following arguments support the contention that S. 206AA(1) will apply to cases where obtaining PAN is not mandatory.
S. 206AA(1) overrides S. 139A. This is for the reason that S. 206AA(1) starts with the words ‘Notwithstanding anything contained in any other provision of this Act’. The effect of use of such non-obstante clause is that the provisions covered by such clause, namely, ‘any other provisions of this Act’ will be overridden by provision in which the non-obstante clause is placed, namely, S. 206AA(1).
In South India Corporation (P) Ltd. v. Secy., Board of Revenue, Trivandrum, AIR 1964 SC 207; Chandravarkar Sita Ratna Rao v. Ashalata S. Guram, (1986) 4 SCC 447; P. E. K. Kalliani Amma v. K Devi, AIR 1996 SC 1963, etc., the Supreme Court observed that the presence of a non-obstante clause is equivalent to saying that in spite of the provision or Act mentioned in the non-obstante clause [the words ‘any other provisions of this Act’ in S. 206AA(1)] the enactment following it [the words ‘any person entitled to rate of 20%’ in S. 206AA(1)] will have its full operation or that the provisions embraced in the non-obstante clause will not be an impediment for the operation of the enactment.
It follows that S. 206AA(1) will have full effect in spite of other provisions of the Act. Furnishing the PAN becomes mandatory to avoid higher rate of deduction of tax at source, whether or not S. 139A or any other provision of the Act mandates that a person obtain his PAN.
In case of conflict between the two statutes, it is generally the later law which will override the earlier law. This principle has been applied by the Supreme Court in K. M. Nanavati v. State of Bombay, AIR 1961 SC 112. While S. 206AA(1) mandates PAN to be furnished in all cases where there is a duty to deduct tax under Chapter XVIIB, S. 139A dealing with PAN does not mandate obtaining of PAN. There is an apparent conflict between S. 206AA(1) and 139A. In such circumstances, S. 206AA(1) being a subsequent legislation will override S. 139A.
When the language of a statute is plain and clear, effect must be given to it irrespective of its consequences. This is one of cardinal principles of interpretation. The Supreme Court in Nelson Motis v. Union of India, AIR 1992 SC 1981 and Gurdevdatt VKSSS Maryadit v. State of Maharashtra, (supra) has upheld this principle. Language of S. 206AA(1) is plain and clear. There is no ambiguity in the language of S. 206AA(1). Hence it has to be given effect to irrespective of the consequences that ensue.
By virtue of S. 206AA(2) to S. 206AA(4), persons are required to furnish/quote their PAN in applications u/s.197 or declarations in Forms 15G and 15H u/s.197A, for such applications or declarations to be valid. Persons who do not have any tax liability are eligible to give declaration u/s.197A to avoid any deduction of tax at source. Though S. 139A does not require such persons to obtain PAN, such persons are required to furnish PAN for taking benefit u/s.197 and u/s.197A. Thus obligations u/s.206AA are independent of obligations u/s.139A. Once obligation to furnish PAN arises u/s.206AA(1), it would, as a natural consequence require the deductee to obtain PAN if he does not have one.
The following arguments support the view that S. 206AA(1) will not apply in cases where there is no requirement to obtain PAN u/s.139A.
It is not possible to decide whether a provision is plain or ambiguous unless it is studied in its context. Decisions in D. Saibaba v. Bar Council of India, AIR 2003 SC 123; Ibrahimpatnam Taluk Vyavasaya Coolie Sangham v. K. Suresh Reddy, (2003) 7 SCC 662 and UOI v. Sankalchand, AIR 1977 SC 2328 are in support of this principle. In case of S. 206AA(1), the object as gathered from the memorandum to the Finance (No.) Bill, 2009, is to ensure compliance with PAN mechanism and not to create additional situations where obtaining PAN is mandatory. A bare reading of the language of S. 206AA(1) indicates that it does not create an obligation to obtain PAN where none exists. Hence the language of S. 206AA(1) cannot be treated as plain and clear. The language therein is subject to construction.
It has been upheld in various cases that even a non-obstante clause has to be applied based on the scope and objects of two or more provisions involved. This is more so when the non-obstante clause does not refer to any particular provision which it intends to override, but refers to the provisions of the statute generally. The decision of the Supreme Court in A. G. Varadarajulu v. State of Tamil Nadu, AIR 1998 SC 1388 is in support of restricting the operation of a non-obstante clause when it is worded generally and broadly.
In the present case, the words used in S. 206AA(1) are ‘Notwithstanding anything contained in any other provision of this Act’, which is very general in nature. Under such circumstances, the scope and object of the two provisions should be considered. While S. 139A deals with cases where obtaining and quoting of PAN is mandatory, 206AA(1)(1) deals with consequences of non-furnishing of PAN by a deductee. The two operate in different fields and hence, S. 206AA(1) cannot be said to over S. 139A. It cannot warrant a person not required to have PAN to furnish it, and in case the same is not furnished, it cannot prescribe higher rate of deduction of tax at source.
While interpreting provisions, it is the duty of the Court to ensure that a ‘head-on’ clash between two provisions is avoided. It is the duty of the Courts to ensure, whenever it is possible to do so, to construe provisions which appear to conflict, so that they harmonise. The Supreme Court in University of Allahabad v. Amritchand Tripathi, AIR 1987 SC 57 and Venkataramana Devaru v. State of Mysore, AIR 1958 SC 255 have upheld this principle of harmonious interpretation. In case S. 206AA(1) is interpreted to operate only in cases where there is an obligation to obtain PAN or quote PAN, then both the provisions would operate without any clash. Effect could be given to both the provisions.
If so, this interpretation is to be adopted. Literal interpretation of any provision should not be adopted if it causes inconvenience, absurdity, hardship or injustice. The Supreme Court in Tirath Singh v. Bachittar Singh, AIR 1955 SC 830; K. P. Varghese ITO, AIR 1981 SC 1922; CIT v. J. H. Gotla Yadgier, AIR 1985 1698 and CWS India Ltd. v. CIT, JT 1994 (3) SC 116 approved the following observation in Maxwell Interpretation of Statutes, 11th Edition:
“Where the language of a statute, in its ordinary meaning and grammatical construction, leads to a manifest contradiction of the apparent purpose of the enactment, or to some inconvenience or absurdity, hardship or injustice, presumably not intended, a construction may be put upon it which modifies the meaning of the words, and even the structure of the sentence”.
In the present case, an assessee would have to face higher deduction of tax at source for the only reason that he does not have a PAN. On a literal reading, S. 206AA(1) does not discriminate between cases (a) where obtaining PAN is mandatory; (b) where obtaining PAN is voluntary, and (c) where obtaining PAN is exempt. In case of an assessee who falls under the categories (b) or (c), forcing the assessees to furnish PAN would lead not just to inconvenience or hardship but also to injustice and absurdity. Such a literal interpretation should be avoided and the application of S. 206AA(1) should be restricted only to the first category of cases.
Any interpretation that renders a provision futile is to be avoided. Courts strongly lean against a construction which reduces the statute to a futility. One may refer to the decisions of the Supreme Court in M. Pentaiah v. Veera Mallappa Muddala, AIR 1961 SC 1107 and Tinsukhia Electric Supply Co. Ltd. v. State of Assam, AIR 1990 SC 123 in support of this proposition. This proposition is based on the Latin maxim ‘ut res magis valeat quam pereat’. This maxim has been upheld by the Supreme Court in CIT v. S. Teja Singh, AIR 1959 SC 666; CIT v. Hindusthan Bulk Carriers, (2003) 3 SCC 57 and D. Saibaba v. Bar Council of India, AIR 2003 SC 123.
139A(8)(d) read with Rule 114C exempts certain persons from the provisions of S. 139A. S. 139A(8) (d), introduced by the Finance (No. 2) Act, 1998 with effect from 1-8-1998, empowers the Board to make rules providing for class or classes of person to whom the provisions of S. 139A shall not apply. Relevant part of S. 139A(8) provides as under:
“(8) The Board may make rules providing for:
d) Class or classes of persons to whom the provisions of this Section shall not apply;”
In exercise of its powers vested u/s.139A(8) the CBDT has inserted Rule 114C(1) by Income-tax (16th Amendment) Rules, 1998 with effect from 1-11-1998. Rule 114(1) lists out persons to whom S. 139A shall not apply. Clause (b) of this rule exempts non-residents referred in S. 2(30) from the application of S. 139A. Rule 114C(1) provides as under:
“(1) The provisions of S. 139A shall not apply to fol-lowing class or classes of persons, namely:
(a) the persons who have agricultural income and are not in receipt of any other income chargeable to income-tax: Provided that such persons shall make declaration in Form No. 61 in respect of transactions referred to in Rule 114B;
b) the non-residents referred to in clause (30) of S. 2;
c) Central Government, State Governments and Consular Offices in transactions where they are the payers.”
In case S. 206AA(1) is interpreted literally as extending to all persons, S. 139A(8)(d) would be rendered otiose and futile. Hence S. 206AA(1) is to be inter-preted as limited to cases where obtaining PAN is mandatory.
Further, it should not be lightly assumed that ‘Parliament has given with one hand what it took away with the other’. This principle has been applied by the Supreme Court in Tahsildar Singh v. State of UP, AIR 1959 SC 1012; K. M. Nanavati v. State of Bombay, AIR 1961 SC 112 and CIT v. Hindustan Bulk Carriers, (2003) 3 SCC 57. In the present case S. 206AA(1) can-not be interpreted as having taken away the benefit granted by S. 139A(8)(d) read with Rule 114C.
It should be noted that S. 139A(8)(d) is a special provision granting exemption from obligation of obtaining PAN. A general provision in the form of S. 206AA(1) cannot override the same, even though it contains a non-obstante clause. In such cases as held by the Supreme Court in R. S. Raghunath v. State of Karnataka, AIR 1992 SC 81 there should be a clear inconsistency between the two before giving an overriding effect to the non-obstante clause. No such inconsistency would arise if both these provisions are harmoniously construed so as to restrict operation of S. 206AA(1) to cases where obtaining or quoting of PAN is mandatory. In such a situation S. 206AA(1) cannot be said to have an overriding effect.
The arguments in favour of holding that S. 206AA(1) operates in cases where obtaining and quoting PAN is not mandatory outweigh the argu-ments in favour of S. 206AA(1) operating even in cases where obtaining and quoting of PAN is either voluntary or exempted. Consequently S. 206AA(1) does not apply to cases where obtaining PAN is not mandatory.
Question No. 3:
The next question is whether S. 206AA(1) read with S. 139A(5A) imposes an obligation to obtain PAN, in case of persons, whose income is subject to TDS and who do not have PAN.
S. 139A(5A) creates an obligation similar to the one created in S. 206AA(1). S. 139A(5A) requires every person who has received any sum, amount or income which has been subjected to TDS under Chapter XVIIB to intimate his PAN to the person responsible to deduct tax at source. S. 139A(5A) provides as under:
“(5A) Every person receiving any sum or income or amount from which tax has been deducted under the provisions of Chapter XVIIB, shall intimate his permanent account number to the person responsible for deducting such tax under that Chapter:
Provided further that a person referred to in this sub -section shall intimate the General Index Register Number till such time permanent account number is allotted to such person.”
The requirement of intimating PAN u/s.139A(5A) pre-supposes that the assessee has a PAN. In case, the assessee does not have a PAN, the question for consideration is whether an obligation to obtain PAN is imposed by S. 139A(5A) independent of Ss.(1) to Ss.(1B). There are arguments to support an affirmative answer as well as a negative answer to this question. The following arguments support the view that S. 139A(A) creates an obligation to obtain PAN, where no such obligation is imposed by other provisions of the Section.
S. 139A(5A) was introduced by the Finance Act, 2001. Purpose of S. 139(5A) can be gathered from the Memorandum explaining the provisions in the Finance Bill, 2001, (2001) 248 ITR 162 (St.). The Memorandum provides as under:
“With a view to enable processing of information contained in such returns or certificates for the purposes of unearthing undisclosed income and discovering new taxpayers, it is proposed to insert new Ss.(5A), Ss.(5B), Ss.(5C) and Ss.(5D) in S. 139A to make it obligatory for every person receiving income from which tax has been deducted or from whom tax is collectible, to furnish his PAN to the person responsible for deducting and collecting such tax, and also to make it obligatory for the person deducting or collecting tax to quote the PAN of such persons in the returns of tax deducted or collected at source prescribed u/s.206 and u/s. 206C, respectively, and in the certificates issued u/s.203 and u/s.206C(5), respectively.”
Further, the CBDT Circular No. 14 of 2001, (2001) 252 ITR 65 (St.) explaining the provisions of the Finance Act, 2001 observed in para 66 as under:
“With a view to enable processing of the information contained in such returns or certificates for the purposes of matching of information and discovering new taxpayers, the Act has inserted new Ss.(5A), Ss.(5B), Ss.(5C) & Ss.(5D) in S. 139A of the Income-tax Act to make it obligatory for every person receiving income from which tax has been deducted or from whom tax is collectible, to furnish his PAN to the person responsible for deducting or collecting such tax, and also to make it obligatory for the person deducting or collecting tax to quote the PAN of such persons in the returns of tax deducted or collected at source prescribed u/s.206 and u/s.206C, respectively, and in the certificates issued u/s.203 and u/s.206C(5), respectively. Such number will also be required to be quoted in statements of perquisites required to be furnished u/s.192 of the Income- tax Act. The requirement u/s.(5A) and u/s.(5B) will not apply in respect of certain non-residents and other persons who are not required to file returns of income.”
The intention of the law is clear. It is to bring more income-earners into the tax net. By insisting on compulsory furnishing of PAN, more people can be forced to fall in the tax net. The above object is aimed at persons who are not required to have PAN. Thus S. 139A(5A) is incorporated and aimed at creating an obligation on persons outside the tax net and not having a PAN to obtain and furnish PAN to the deductor of tax at source.
When introduced S. 139A(5A) had two provi-sos. The first proviso has been omitted by Finance (No. 2) Act, 2004 with effect from 1-4-2005. The first proviso stood as under?:
“Provided that nothing contained in this sub-section shall apply to a non-resident referred to in Ss.(4) of S. 115AC, or Ss.(2) of S. 115BBA, or to a non-resident Indian referred to in S. 115G:”
This proviso was deleted with the intention of denying all person including non-residents from claiming credit without furnishing PAN. In this regard the Notes on Clauses to the Finance (No. 2) Bill, 2004, (2004) 268 ITR 113 (St.) 143, provides as under:
“Clause 30 of the Bill seeks to amend S. 139A of the Income-tax Act relating to permanent ac-count number.
The existing provisions contained in the first proviso to Ss.(5A) of the said Section provide that a non-resident referred to in Ss.(4) of S. 115AC, or Ss.(2) of S. 115BBA or a non -resident Indian referred to in S.?115G?shall not be required to intimate his permanent account number Ss.(a) seeks to omit the said first proviso.
After the proposed amendment, the person referred to in the omitted provisions shall be required to intimate his permanent account num-ber to the person responsible for deducting tax under Chapter XVII-B.
The amendment will take effect from 1st April, 2005.”
The CBDT Circular No. 5 of 2005, dated 15- 7-2005 explaining the provisions of the Finance (No. 2) Act, 2004 provides as under:
“All assessees, including non-residents, will be re-quired to intimate the permanent account number to the person deducting or collecting tax in the absence of which credit for TDS or TCS cannot be given. Hence, the first proviso to Ss.(5A) of S. 139A not requiring quoting of PAN by non-residents, has been omitted.”
The Memorandum Explaining the provisions in the Finance (No. 2) Bill, 2004, (2004) 268 ITR 174 (St.) 193, states the object behind S. 139A(5A) as facilitating computerisation and dematerialisation of TDS and TCS certificates. The memorandum states at under:
“De-materialisation of TDS and TCS certificates?: Under the existing provisions of the Income-tax Act, returns of income required to be filed u/s.139 are to be accompanied by TDS/TCS certificates for claiming credit of tax deducted or collected. Computerisation of TDS/TCS functions will eventually dispense with this requirement and will also pave the way for filing of returns through the internet. The Finance Bill incorporates the necessary legislative amendments required to facilitate the above process of computerisation. The bill proposes to provide that:
i) Credit for tax deducted or collected shall be given to the assessee without production of a certificate;
ii) returns will not be deemed to be defective if they are not accompanied by such certificates;
iii) every person deducting or collecting tax shall be required to furnish quarterly statements to the prescribed income-tax authority who will in turn furnish an annual statement of the tax deducted or collected to the assessee;
iv) all assessees, including non-residents, will be required to intimate the PAN to the person deducting or collecting tax as otherwise credit for TDS/TCS can be given; and
v) penalty shall be levied in case quarterly state-ments are not furnished in time.
These amendments will take effect from 1st April, 2005.”
This indicates that S. 139A(5A) has to be interpreted as applicable to all persons, without exception, whether or not they are covered by Ss.(1) to Ss.(3) of S. 139A.
3) It is to be noted that S. 139A(5A) was introduced after S. 139A(8)(d) and Rule 114C(1) were introduced. While S. 139A(8)(d) and Rule 114C were introduced in the year 1998, S. 139A(5A) was introduced in 2001. At the time of introduction of S. 139A(5A) by virtue of the first proviso (extracted above), as it stood then, only few categories of non-residents were exempt from application of S. 139A(5A). This implied that other non-residents were covered by S. 139A(5A). When the first proviso was removed in 2004, the intention was to cover all persons within the scope of S. 139A(5A) (as seen from the extracts cited above).
This was in spite of blanket exemption to non-residents and others under Rule 114C read with S. 139A(8)(d). This creates an apparent contradiction between the two provisions, namely, S. 139A(8)(d) and S. 139A(5A). No such conflict exists between S. 139A(8)(d) read with Rule 114C(1) and other sub-section of S. 139A, whether inserted prior to or after the insertion of S. 139A(8)(d).
Under such circumstances one cannot jump to any conclusion of S. 139A(8)(d) being impliedly repealed or rendered futile. As stated above, any interpretation which renders a provision otiose has to be rejected. Further it is an irrefutable presumption that Parliament was aware of the existing provisions, when it introduced a new provision.
In such cases, the warring provisions should be harmoniously construed in a manner to make both provisions workable. The principle of harmonious construction is described by the Supreme Court in Venkataramana Devaru v. State of Mysore, AIR 1958 SC 255 in the following words:
“The rule of construction is well settled that when there are in an enactment two provisions which cannot be reconciled with each other, they should be so interpreted that, if possible, effect should be given to both. This is what is known as the rule of harmonious construction.”
The Supreme Court has applied this principle for harmoniously construing two conflicting sub-sec-tions of the same Section. In Madanlal Fakirchand Dhudhediya v. Shree Changdeo Sugar Mills Ltd., AIR 1962 SC 1543, the Supreme Court observed that “the sub-sections must be read as parts of an integral whole and as being interdependent; an attempt should be made to construing them to reconcile them if it is reasonably possible to do so, and to avoid repugnancy.”
In the present case Ss.(5A) and Ss.(8)(d) have to be harmoniously construed. Considering that S. 139A(5A) came later, if it is read as an exception or proviso to S. 139A(8)(d), then the conflict between them ceases to exist. Both provisions would then operate in the manner intended by the law-makers. As a consequence, all persons would be bound by S. 139A(5A), irrespective of Rule 114C.
4) S. 206AA(1) employs the words ‘any person’. The Courts have defined the word ‘any’ in a wide manner to mean ‘all’ or ‘each and every’, unless such a construction is limited by the subject matter. One may refer to decisions in G. Narsingh Das Agarwal v. UOI, (1967) 1 MLJ 197 in support of this proposition. Therefore, S. 206AA(1) applies all persons including non-residents.
The following arguments support the view that S. 139A(5A) does not impose any obligation to obtain PAN where no such obligation exists under other provisions of S. 139A.
1) S. 139A(5A) has to be read in the context and structure of S. 139A and other provisions of the Act. The structure of S. 139A clearly indicates that different sub-sections have different roles to play.
As discussed above, Ss.(1), (1A) and (1A) deal with general and special cases where obtaining PAN is mandatory; Ss.(2) deals with cases where the As-sessing Officer is bound to allot PAN in case the assessee carries out certain transactions; Ss.(3) deals with voluntarily obtaining PAN; Ss.(4) empowers the Board to notify dates within which PAN holders under the old scheme are required to obtain PAN under the new series; etc.
The role of S. 139(5A) is therefore limited to cre-ating an obligation to intimate his PAN where the assessee subject to TDS under Chapter XVIIB has a PAN. The structure of S. 139A clearly indicates that Ss.(5A) is not intended to create an obligation to obtain PAN, where no such obligation to obtain PAN exist otherwise.
2) If the intention of the Legislature was to require every assessee subject to the provisions of Chapter XVIIB to obtain PAN, it would have created such an obligation in Ss.(1) itself. This is not the intention of the Legislature. It only requires the person who have PAN to furnish it to person responsible to deduct tax at source under Chapter XVIIB.
3) It is for the same reason that S. 139A(5) imposes an obligation to quote PAN only in cases where PAN has been obtained or possessed otherwise. This can be gathered from the use of the words ‘such number’ in the provision. The same logic has to be extended to S. 139A(5A). S. 139A(5) provides as under:
“(5) Every person shall:
a) quote such number in all his returns to, or correspondence with, any income-tax authority;
b)quote such number in all challans for the payment of any sum due under this Act;
c) quote such number in all documents pertaining to such transactions as may be prescribed by the Board in the interests of the revenue, and entered into by him:
Provided that the Board may prescribe different dates for different transactions or class of transactions or for different class of persons:
Provided further that a person shall quote General Index Register Number till such time Permanent Account Number is allotted to such person;
d) intimate the Assessing Officer any change in his address or in the name and nature of his business on the basis of which the permanent account number was allotted to him.”
4) S. 139A(5B) requires the deductor of tax to quote the PAN of the deductee in TDS returns and certificates. This obligation arises only when the deductee has furnished the PAN and not otherwise. This provision does not mandate a deductor to force the deductee to obtain and furnish PAN. The scope of the provision is therefore limited in nature as in the case of S. 139A(5A).
5) Just because S. 139A(5A) is to be construed as an exception to S. 139A(8)(d), it does not mean S. 139A(8)(d) ceases to be an exception to S. 139A(1) to (1B). Persons covered by Rule 114C(1) are not obligated to obtain PAN as the S. 139A(8)(d) continues to operate. The effect of S. 139A(5A) would be that in case persons who are exempt have voluntarily obtained PAN, they would be bound to intimate the deductor, but there would be no obligation to obtain PAN if they do not have one.
In our opinion arguments supporting the second view, i.e., that S. 139A(5A) does not create any new obligation to obtain PAN, outweighs the first view. Hence S. 139A(5A) does not create any obligation to obtain PAN, where PAN is not required to be obtained. Consequently, all persons who have obtained PAN, either voluntarily or due to mandatory requirements, will be bound to furnish PAN to the deductor. Persons not having a PAN are not obliged to obtain and furnish it to the deductor, even if the amounts they receive are subject to withholding under Chapter XVIIB.
If it is assumed otherwise for the sake of argument, then it is possible to argue that the obligation to obtain and furnish PAN need not be again imposed u/s.206AA(1), once it is imposed u/s. 139A(5A), for both provisions are similar. Further, the scope of S. 139A(5A) is wider than that of S. 206AA(1), in the sense that there is no pre-condition in S. 139A(5A) that the deductee should be entitled to the income (sum or amount), for the obligation to intimate PAN to be triggered. U/s. 139A(5A), the obligation to furnish PAN is in respect of all incomes, amounts or sums, whether the deductee is entitled thereto or not. As a result, any obligation is created u/s.139A(5A) will apply even u/s.206AA(1).
However the above argument will not stand, for the reason that there is a timing difference between the two provisions. The obligation to obtain PAN, if assumed to exist u/s.139A(5A), will arise only after the tax has been deducted at source and not before. This is because S. 139A(5A) is triggered only after the tax has been deducted. Use of the words ‘has been deducted’ in S. 139A(5A) is to be noted. This obligation will not arise at the time person becomes entitled to any sum, amount or income which is subject to withholding under Chapter XVIIB, which is the event triggering S. 206AA(1). As mentioned above, S. 206AA(1) employs the word ‘deductible’.
Therefore, we are of the view that S. 206AA(1) whether independently or in conjunction with S. 139A(5A) does not create any obligation to obtain PAN, where the deductee does not have one. Both S. 139A(5A) and S. 206AA(1) will only apply to cases where the deductee has a PAN or is mandated by law to obtain one, and not otherwise.
Question No. 4:
The next question that arises is whether non-resident assessees are also bound by S. 206AA(1). There could be two views on this question. The following arguments support the view that even non-residents are bound by S. 206AA(1).
1) S. 206AA(1) employs the words ‘any person entitled to receive any sum or income or amount’. The word ‘any’ qualifies the word ‘person’. As stated above, unless the context otherwise requires the word ‘any’ has to be understood as ‘all’. In the present case, there is nothing in the context of S. 206AA(1) which restricts the scope of the word ‘any’. Hence it is to be given its full operation. As such, the words ‘any person’ would mean ‘all persons’. This would include even the non-residents.
2) The memorandum explaining the provisions of the Finance (No. 2) Bill, 2009 clearly states that 209AA is applies to non-residents. It provides: “These provisions will also apply to non-residents where TDS is deductible on payments or credits made to them. To ensure that the deductor knows about the correct PAN of the deductee, it is also proposed to provide for mandatory quoting of PAN of the deductee by both the deductor and the deductee in all correspondence, bills and vouchers exchanged between them.” (emphasis supplied)
3) The CBDT has issued a press release, bearing No. 402/92/2006-MC (04 of 2010), dated 20-1-2010 which reiterates that non-residents are governed by S. 209AA. The press release states:
“A new provision relating to tax deduction at source (TDS) under the Income-tax Act, 1961 will become applicable with effect from 1st April 2010. Tax at higher of the prescribed rate or 20% will be deducted on all transactions liable to TDS, where the Permanent Account Number (PAN) of the deductee is not available. The law will also apply to all non-residents in respect of payments/remittances liable to TDS. As per the new provisions, certificate for deduction at lower rate or no deduction shall not be given by the Assessing Officer u/s.197, or declaration by deductee u/s.197A for non-deduction of TDS on payments shall not be valid, unless the application bears PAN of the applicant/deductee.” (emphasis supplied)
4. S. 206AA(1) starts with a non-obstante clause. It overrides all other provisions of the Act, which may directly or impliedly indicate a different conclusion.
On the other hand, the following arguments support the view that S. 206AA(1) does not apply to non-residents.
i) S. 139A(8)(d) read with Rule 114C exempts certain persons and transaction from obtaining and quoting of PAN. The CBDT in Rule 114C(1)(b) has exempted non-residents referred in S. 2(30) from the application of S. 139A.
2(30) has defined the term ‘non-resident’ to mean ‘a person who is not a resident and for the purposes of S. 92, S. 93 and S. 168, includes a person who is not ordinarily resident within the meaning of clause (6) of S. 6’. The term ‘resident’ is defined in S. 2(42) to mean ‘a person who is resident in India within the meaning of S. 6’. Hence all non-residents under the Act are exempted from the application of S. 139A.
All arguments stated above in support of reading down of the non-obstante clause in S. 206AA(1) have to be read even in case of non -residents. As stated above, once a benefit is given by one provision, the same cannot be said to be taken away by another provision so as to render the former provision otiose. Therefore S. 206AA(1) cannot be said to apply to non-residents.
2) S. 206AA(4) requires the applicant u/s.197 to quote his PAN for his application to be considered.
206AA(4) provides as under:
“(4) No certificate u/s.197 shall be granted unless the application made under that Section contains the Permanent Account Number of the applicant.”
S. 197 provides for an assessee/deductee to obtain a certificate from the Assessing Officer, directing the deductor to deduct tax at a lower rate. S. 206AA(4) does not apply in respect of the deductions to be made u/s.195. U/s.195 the non-resident deductee can apply for lower deduction of tax at source. In this regard S. 195(3) provides as under:
“(3) Subject to rules made U/ss.(5), any person entitled to receive any interest or other sum on which income-tax has to be deducted U/ss.(1) may make an application in the prescribed form to the Assessing Officer for the grant of a certificate authorising him to receive such interest or other sum without deduction of tax under that sub-section, and where any such certificate is granted, every person responsible for paying such interest or other sum to the person to whom such certificate is granted shall, so long as the certificate is in force, make payment of such interest or other sum without deducting tax thereon U/ss.(1).”
S. 206AA(1) does not have provisions requiring PAN to be quoted compulsorily for applications u/s.195(3) to be processed and certificates to be issued thereunder. This indicates that S. 206AA(1) was never intended to apply to non-residents.
As discussed in detail below, certain non-residents enjoy a fixed rate of tax on certain incomes, which rates are lower than 20 percent in certain cases. One may refer to S. 115A, S. 115AB, S. 115AD and S. 115BBA, where the gross income is subject to tax at rates of 10 percent. In such cases, it would not be permissible to deduct a higher rate of tax at source. This aspect is discussed in detail below.
This also indicates that S. 206AA(1) does not apply to non-residents.
The argument that S. 206AA(1) does not apply to non-residents outweighs the opposite view. Hence in case of non-residents, S. 206AA(1) does not create a liability to furnish PAN and failure to furnish or quote the same should not lead to a higher rate of tax.
Question No. 5:
In case S. 206AA(1) is presumed to apply to non-residents, the next question that arises is whether S. 206AA(1) overrides S. 90(2). In other words, the question is whether S. 206AA(1) is to be applied after application of S. 90(2) or before.
S. 90(2) provides the option to an assessee whose income is doubly taxed, to take advantage of ei-ther the provisions of the Act or the provisions of double taxation avoidance agreements (DTAA in short) entered into by the Central Government with Government or specified territory, whichever is beneficial. In this regard S. 90(2) provides:
“(2) Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, U/ss.(1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.”
If S. 206AA(1) overrides S. 90(2), i.e., is applied after application of S. 90(2), the benefit of lower rates of tax or exemption from tax under the double taxation avoidance agreements India has entered into with other countries will be denied on non-furnishing of the PAN. The following arguments support this proposition:
1) S. 206AA(1) contains a non-obstante provision and therefore overrides all other provisions of the Act including S. 90(2). The operation of S. 90(2) is subject to S. 206AA(1). Therefore S. 90(2) will have to be applied first, followed by S. 206A.
2) Once S. 206AA(1) is applicable, the higher of rates mentioned in the Act, (b) rate or rates in force, or (c) twenty percent will have to adopted as the rate of TDS. The term ‘rate or rates in force’ is defined in S. 2(37A). In clause (iii) of this definition, for S. 195 purposes even DTAA rate is considered.
The relevant part of S. 2(37A) provides as under:
“(37A) ‘rate or rates in force’ or ‘rates in force’, in relation to an assessment year or financial year, means:
iii) for the purposes of deduction of tax u/s. 195, the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year or the rate or rates of income-tax specified in an agreement entered into by the Central Government u/s. 90, or an agreement notified by the Central Government u/s.90A, whichever is applicable by virtue of the provisions of S. 90, or S. 90A, as the case may be;”
It is clear that in applying S. 206AA(1), rates under DTAAs or S. 195 rates, whichever is beneficial is to be first computed, before comparing the same with the rate of 20%. Hence one can conclude that S. 206AA(1) will have to be applied after application of S. 90(2).
The following arguments support the view that S. 90(2) has to be applied after application of S. 206AA(1).
i) S. 90 of the Act overrides all other provisions of the Act including charging provision u/s.4. This is, inter alia, for the reason that S. 90 aims to give effect to international fiscal agreements entered into between India and other Governments. The Constitutional mandate backing these treaties requires the provisions of the Indian tax laws to give way to the treaty law.
One may refer to decisions in CIT v. Visakhapatnam Port Trust, (1988) 144 ITR 146 (AP); CIT v. Davy Ashmore India Ltd., (1991) 190 ITR 626 (Cal.); Leonhardt Andra and Partner, Gmbh v. CIT, (200]) 249 ITR 418; CIT v. R. M. Muthaiah, (1993) 202 ITR 508 (Kar.); Union of India and Others v. Azadi Bachao Andolan and Others, (2003) 263 ITR 706 (SC) which support this view. Similar view has been upheld by the CBDT in its Circular No. 333 dated 2-4-1982, where the CBDT observed:
“The correct legal position is that where a specific provision is made in the Double Taxation Avoidance Agreement, that provision will prevail over the general provisions contained in the Income-tax Act, 1961. In fact the Double Taxation Avoidance Agreements which have been entered into by the Central Government u/s.90 of the Income-tax Act, 1961, also provide that the laws in force in either country will continue to govern the assessment and taxation of income in the respective country, except where provisions to the contrary have been made in the Agreement.
Thus, where a Double Taxation Avoidance Agreement provided for a particular mode of computation of income, the same should be followed, irrespective of the provisions in the Income -tax Act. Where there is no specific provision in the Agreement, it is the basic law, i.e., the Income-tax Act, that will govern the taxation of income.”
The Supreme Court in the Azadi Bachao Andolan case (supra) after examining the decisions referred above and the Circular issued by the CBDT observed as under:
“A survey of the aforesaid cases makes it clear that the judicial consensus in India has been that S. 90 is specifically intended to enable and empower the Central Government to issue a Notification for implementation of the terms of a double taxation avoidance agreement. When that happens, the provisions of such an agreement, with respect to cases to which where they apply, would operate even if inconsistent with the provisions of the Income-tax Act. We approve of the reasoning in the decisions which we have noticed. If it was not the intention of the Legislature to make a departure from the general principle of chargeability to tax u/s.4 and the general principle of ascertainment of total income u/s.5 of the Act, then there was no purpose in making those Sections ‘subject to the provisions of the Act’. The very object of drafting the said two Sections with the said clause is to enable the Central Government to issue a Notification u/s.90 towards implementation of the terms of the DTAAs which would automatically override the provisions of the Income-tax Act in the matter of ascertainment of chargeability to income tax and ascertainment of total income, to the extent of inconsistency with the terms of the DTAA.”
As discussed above, S. 206AA(1) is attracted only if Chapter XVIIB is attracted. Chapter XVIIB is attracted only if S. 4(1) is attracted. Since S. 90 overrides S. 4 and other provisions of the Act, it also overrides S. 206AA(1). This is in spite of absence of a non-obstante clause in S. 90(2). It would mean the rate under the Act will have to be first determined after application of S. 206AA(1) and thereafter a comparison is to be made with the rate in the DTAA.
2) The term ‘rate or rates in force’ in S. 206AA(1) will have to be construed as rates as stated in the
Finance Act and not as rates specified in the Finance Act or rates under the relevant DTAAs, whichever is beneficial.
In support of this, one may refer to the Memorandum explaining the provisions of the Finance (No. Bill, 2009, which is extracted above. The memorandum clearly qualifies the term ‘rate in force’ to mean ‘rates mentioned in the Finance Act’ and not rates in force after applying the DTAA rates.
Hence in S. 206AA, the definition of the term ‘rate or rates in force’ in S. 2(37A) cannot be adopted in the context.
When a word has been defined in the interpretation clause, prima facie that definition governs whenever that word is used in the body of the statute. However this principle is applicable only if the context permits. In fact S. 2 where the above clause (37A) is placed, starts with the words “In this Act, unless the context otherwise requires,-”. Context in which a word is used in, is therefore decisive of its meaning. One may refer to decisions in State Bank of Maharashtra v. Indian Medical Association, AIR 2002 SC 302 and Chowgule and Co. Pvt. Ltd. v. UOI, AIR 1986 SC 1176 in support of this proposition.
In the context of S. 206AA, the words ‘rate or rates in force’ cannot mean ‘rate or rates in force’ as defined in S. 2(37A). This is because S. 90(2) overrides the provisions of the Act, and rates u/s.90(2) will be applied after the final rate under the provisions of the Act is determined. S. 206AA(1) being part of the provisions of the Act, will have to be applied before DTAA rates are applied in determining the rate under the Act.
3) S. 206AA has overriding effect by virtue of the language employed therein and S. 90(2) has overriding effect by virtue of the Constitutional and contextual mandate. Under such circumstance one cannot apply the principle that the later provision overrides the earlier. This is because S. 90(2) as it stands came in existence along with S. 206AA, by virtue of the Finance (No. 2) Act, 2009. Further, an interpretation which is in line with the Constitution has to be adopted as against the one which is not in line with the Constitution.
In light of the above, the arguments in favour of the view that S. 90(2) overrides S. 206AA outweigh the other view. Hence S. 90(2) will have to be ap-plied after applying S. 206AA(1).
Question No. 6:
Assuming that S. 206AA(1) applies to all persons, the next question which requires examination is whether S. 206AA(1) will apply to cases where the ultimate tax liability on certain incomes is fixed at rates below 20%, and assessees have no income chargeable at normal rates or rates at 20% or above.
Under Chapter XII of the Act, certain incomes are taxed?at?special?rates.?While?some?provisions of this chapter?are?applicable?to?all?assessees,?some?are?applicable only to non-residents. Among these provisions, few provisions are applicable only to certain categories of resident or non -resident assessees. Further, in respect of certain specific types of incomes, the special rate of tax is below 20%.
For example?: u/s.115A, non-residents (other than companies) and foreign companies in receipt of royalty or fees for technical services is subject to tax at a fixed rate of ten percent. S. 115A is applicable to cases where royalties or fees for technical services is paid by the Indian Government or from any Indian concern under an agreement made on or after 1-6-2005. This is provided by sub-clauses (AA) and (BB) of S. 115A(1)(b). The relevant part of S. 115A(1)(b) provides as under:
“(1) Where the total income of:
b) a non-resident (not being a company) or a foreign company, includes any income by way of royalty or fees for technical services other than income referred to in Ss.(1) of S. 44DA received from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or the Indian concern after the 31st day of March, 1976, and where such agreement is with an Indian concern, the agreement is approved by the Central Government or where it relates to a matter included in the industrial policy, for the time being in force, of the Government of India, the agreement is in accordance with that policy, then, subject to the provisions of Ss.(1A) and Ss.(2), the income-tax payable shall be the aggregate of,?:
AA) the amount of income-tax calculated on the income by way of royalty, if any, included in the total income, at the rate of 10% if such royalty is received in pursuance of an agreement made on or after the 1st day of June, 2005;
BB) the amount of income-tax calculated on the income by way of fees for technical services, if any, included in the total income, at the rate of 10% if such fees for technical services are received in pursuance of an agreement made on or after the 1st day of June, 2005; and Explanation — For the purposes of this Section:
i) ‘fees for technical services’ shall have the same meaning as in Explanation 2 to clause (vii) of Ss.(1) of S. 9;
ii) ‘royalty’ shall have the same meaning as in Ex-planation 2 to clause (vi) of Ss.(1) of S. 9;”
The following are the other incomes which suffer tax at a fixed rate lower than 20%:
1) Short-term capital gains arising from transfer of equity shares or units of equity-oriented fund, which has suffered security transaction tax, shall be subject to tax at the rate of 15% (S. 111A)
2) Long-term capital gains from transfer of and any other income received in respect of units purchased in foreign currency by an overseas financial organisation is subject to tax at the rate of 10% (S. 115AB)
3) Interest on certain bonds purchased in foreign currency or dividend on certain GDRS is taxable in the hands of a non-resident at the rate of 10% (S. 115AC)
4) Dividend and long-term capital gains from global depository receipts issued by income company engaged in specified knowledge-based industries or services issued under a scheme ESOPS notified by the Central Government is taxable in the hands of the resident employees of such companies at the rate of 10% (S. 115ACA)
5) Long-term capital gains on transfer of securi-ties (other than those mentioned in S. 115AB) by a Foreign Institutional investor is taxable at the rate of 10% (S. 115AD)
6) Profits and gains of a life insurance business will be taxable at a rate of 12½% (S. 115AB)
7) Income of non-resident, non-citizen sports-person from participation in India, advertise-ment or contribution of articles in India, as well as income guaranteed to non-resident sports associations or institutions for games or sports played in India will be taxable at a rate of 10% (S. 115BBA).
In case an eligible assessee has no other income than those stated above, including royalty and fee for technical services u/s.115A, the ultimate tax liability would be lower than 20%. In such cases, the question that arises is whether the deductor can deduct tax at the rate of 20% on the ground that PAN has not been furnished. In other words, question is whether S. 206AA(1) would apply in case of deductees who have only those incomes which suffer tax at a fixed rate lower than 20%.
Two possible views could arise on this question, one affirmative and another negative. The following arguments support the view that S. 206AA(1) applies to assessees who only earn the income subject to fixed rate of tax lower than 20%.
1) As stated above, all persons are covered by S. 206AA(1). This is due to the use of the word ‘any’, as discussed above.
2) S. 206AA(1) cannot be applied in a discrimi-natory manner. It cannot be said that S. 206AA(1) applies to persons who have both the incomes stated above as well as other incomes taxable at rates higher than twenty percent or normal rates, while it does not apply to persons with income taxable at fixed rates lower than 20%. This may not withstand the test of reasonable classification under Article 14 of the Constitution.
3) No harm would be caused to the assessees earning incomes enumerated above, if they are required to furnish their PAN, failing which tax is deducted at twenty percent. They are entitled under law to claim refund of the excess taxes deducted from them.
On the other hand the following arguments support the view that S. 206AA(1) does not apply to assessees whose ultimate tax liability is less than twenty percent by virtue of their income falling under the categories mentioned above.
It is the constitutional mandate under Article 265 that “No tax shall be levied or collected except by authority of law.” The authority to collect tax as stated above is u/s.4(2). S. 4(2), as extracted above, authorises the Central Government to collect tax at source only in respect of the income chargeable u/s.4(1). Charge of income-tax u/s.4(1) is at the rate or rates specified by any Central Act and should be in accordance with and subject to the provisions of the Act. S. 4(1) provides as under:
“(1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person:
Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly.”
Therefore charge u/s.4(1) is limited to rate or rates specified in any Central Act — whether the Finance Act or the Income-tax Act itself. Where the rates are fixed by Act, the charge of income-tax cannot be beyond such rates and consequently taxes cannot be collected beyond the rates charged. Additionally, where charge of tax is restricted under the substantive provisions of the Act to a particular amount, the machinery provisions cannot collect tax in excess of such an amount.
As such, where rates of tax at which a particular income is chargeable to tax under the Act is restricted to a particular percentage as enumerated above, withholding of tax cannot exceed such percentages. It is for the same reason that where ever a special rate has been prescribed under the Act, the Finance Act in Schedule II limits the with-holding rates to the same rate.
Provision requiring deducting of taxes at a higher rate than what is charged as taxes under the Act would be in violation of Article 265 and hence bad in law. Since, any interpretation which would render any provision unconstitutional should therefore be avoided, interpretation in favour of applying S. 206AA(1) to cases where the income is charged at fixed rates lower than 20 percent should be avoided.
2) It is not the object of law to first collect tax in excess of the charge and then refund the excess. One may refer to the decisions of the Supreme Court in Bhawani Cotton Mills Ltd. v. State of Punjab,
(1967) 20 STC 290 (SC), the Full Bench of Supreme Court observed as under:
“If a person is not liable for payment of tax at all, at any time, the collection of tax from him with a possible contingency of refund at a later stage, will not make the original levy valid; because, if particular sales or purchases are exempt from taxation altogether, they can never be taken into account, at any stage, for the purpose of calculating or arriving at the taxable turnover and for levying tax.”
Similarly, the Karnataka High Court in Hyderabad Industries Limited v. ITO and Another, (1991) 188 ITR 749 (Kar.) observed:
“The construction sought to be placed by the respondents is based on a distinction which has no substance in it. It is not understandable as to why a benefit which will not be included in the total income of a person, should be considered as ‘income’ for the purpose of deduction of tax at source at all. The purpose of deduction of tax at source is not to collect a sum which is not a tax levied under the Act; it is to facilitate the collection of the tax lawfully leviable under the Act. The interpretation put on those provisions by the respondents would result in collection of certain amounts by the State which is not a tax qualitatively. Such an interpretation of the taxing statute is impermissible.”
3) The Department also does not consider amount deducted at source in excess of the income that accrues in the hands of the non-resident as tax. Amounts deducted at source in excess of tax liability would not be ‘tax deducted at source’ as per chapter XVIIB, but ‘amounts deducted at source’. According to the CBDT Circular No. 7, dated 23-10-2007:
“Refund to the person making payment u/s.195 is being allowed as income does not accrue to the non-resident or if the income is accruing no tax is due or tax is due at a lesser rate. The amount paid into the Government account in such cases to that extent, is no longer ‘tax’. In view of this, no interest u/s.244A is admissible on refunds to be granted in accordance with this Circular or on the refunds already granted in accordance with Circular No. 769 or Circular No. 790.”
Chapter XVIIB permits only tax to be deducted at source and does not permit any amount to be deducted at source. If tax is determined at special rates lower than twenty percent, S. 206AA(1) cannot be used to deducted amounts at source in excess of the special rates, for such excess amounts deducted at source would not be tax.
4) If S. 206AA(1) is attracted to situations under discussion, then the assessees will be forced apply for refund. This would require them to file their return of income tax. In some of the cases discussed above, non-resident assesses are exempt from filing of returns u/s.139. In this regard S. 115A(5) provides as under:
“(5) It shall not be necessary for an assessee referred to in Ss.(1) to furnish U/ss.(1) of S. 139 a return of his or its income if:
a) his or its total income in respect of which he or it is assessable under this Act during the previous year consisted only of income referred to in clause (a) of Ss.(1); and
b) the tax deductible at source under the provi-sions of Chapter XVII-B has been deducted from such income.”
Similar provisions are contained in S. 115AC(4) and S. 115BBA(2). These two sub-sections are extracted below:
“(4) It shall not be necessary for a non-resident to furnish U/ss.(1) of S. 139 a return of his income if:
a) his total income in respect of which he is assessable under this Act during the previous year consisted only of income referred to in clauses (a) and (b) of Ss.(1); and
b) the tax deductible at source under the provisions of Chapter XVII-B has been deducted from such income.”
“(2) It shall not be necessary for the assessee to furnish U/ss.(1) of S. 139 a return of his income if?: his total income in respect of which he is assessable under this Act during the previous year consisted only of income referred to in clause (a) or clause (b) of Ss.(1); and the tax deductible at source under the provisions of Chapter XVII-B has been deducted from such income.”
These sub-sections are attracted only if two condi-tions are fulfilled, namely, (1) the assessees covered by the respective Sections do not have any income which is subject to tax at the normal rates, and (2) tax has been deducted at source as per Chapter XVIIB. At the time these provisions were inserted S. 206AA was not present and the Parliament was aware that rates of withholding were the same as the special rates at which income covered by these provisions were to be charged.
These sub-sections being beneficial in nature will have to be interpreted in favour of the assessee. Therefore, even after the insertion of S. 206AA, the words ‘tax deductible at source under the provisions of Chapter XVII-B’ have to be interpreted as referring only to rates mentioned in schedule II of the Finance Acts.
If S. 206AA(1) were to be applied to such cases, then since tax would be deducted at rates higher than the charge of tax, returns would be required to be filed. This interpretation would render these three sub-sections otiose. As stated above, any interpretation which renders any provision otiose should be avoided.
Further, benefits granted by one provision cannot be lightly presumed to be taken away by another provision of the Act. Hence S. 206AA will not apply to cases whether a fixed rate of tax lower than 20% is chargeable under Chapter XII of the Act.
It is a settled principle that one has to avoid interpretation causing hardship, injustice or absurdity. The Supreme Court in Tirath Singh v. Bachittar Singh, AIR 1955 SC 830; K. P. Varghese v. ITO, AIR 1981 SC 1922; CIT v. J. H. Gotla Yadgier, AIR 1985 1698 and CWS India Ltd. v. CIT, JT 1994 (3) SC 116 have applied the following observation from Maxwell Interpretation of Statutes, 11th Edition:
“Where the language of a statute, in its ordinary meaning and grammatical construction, leads to a manifest contradiction of the apparent purpose of the enactment, or to some convenience or absurdity, hardship or injustice, presumably not intended, a construction may be put upon it which modifies the meaning of the words, and even the structure of the sentence.”
If higher rate of 20% is deducted as tax by applying S. 206AA(1), then assessees would have to face hardship in the form of filing of returns and wait for refunds. In case the assessees are non-residents they would have to be in communication with income-tax authorities in India till refund is granted, and may have to open and operate bank accounts solely for the said purpose. Further they would not be entitled to any interest on refund by virtue of Circular No. 7 of 2007. In light of the absurdity and hardship associated with this inter-pretation, such interpretation should be avoided.
Any interpretation which furthers the objects of the law should be adopted in favour of those which are counter-productive. One may refer to the decision of the Supreme Court in Workmen of Dimakuchi Tea Estate v. Management of Dimakuchi Tea Estate, AIR 1958 SC 353 and Ashok Singh v. ACCE, AIR 1992 SC 1756 in support of this principle. In the Dimakuchi Tea Estate case, the Supreme Court observed as under?:
“The words of a statute, when there is doubt about their meaning, are to be understood in the sense in which they best harmonise with the subject of the enactment and the object which the Legislature has in view. Their meaning is found not so much in a strict grammatical or etymological proprietary of language, nor even in its popular use, as in the subject or in the occasion on which they are used and the object to be attained.”
The object of S. 206AA(1) is to ensure compliance of PAN mechanism and to streamline the process of processing returns and granting credit. The object is not to increase the burden on the Tax Department by requiring it to process more returns and grant more refunds. Therefore the interpretation which requires assessees to claim refund towards excess tax deducted at source would not serve the purpose of introducing S. 206AA. On the other hand it would be counter-productive to the objects of introducing S. 206AA. Hence the interpretation in favour applying S. 206AA to the assessees covered by this question should be avoided.
The second view clearly outweighs the first view. S. 206AA(1) cannot be applied in cases where the total income of an assessee includes only those incomes which are chargeable to tax at fixed rates lower than 20 percent.
Conclusion:
The above article is an in depth examination of the position of law on S. 206AA(1) on first principles. It aims to lend support to any deductor or deductee in case of litigation arising out of this provision. However if S. 206AA(1) is implemented taking a pro-Department view, it is going to remain a pain both to the deductees and the deductors until either the Courts or the Parliament interferes.
