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Income Tax Appellate Tribunal, DELHI BENCH ‘SMC-2’, NEW DELHI
Before: SH. N. K. BILLAIYA
This appeal by the assessee is preferred against the order of the CIT(A)-15, New Delhi dated 20.11.2018 pertaining to A.Y. 2015-16.
2. The sum and substance of the grievance of the assessee is that the CIT(A) erred in upholding the disallowance of Rs.18.55 lacs made by the AO u/s. 40 (a) (ia) of the Act.
None appeared on behalf of the assessee. The notice issued by the registry returned un-served. I decide to proceed exparte. The DR was heard at length who placed strong reliance on the orders of the authorities below.
4. Briefly stated the facts of the case are that during the course of the scrutiny assessment proceedings the AO noticed that the assessee has made payments to M/s. Rising overseas amounting to Rs.61.85 lacs without deducting tax at source. The assessee was asked to explain why disallowance should not be made u/s.40(a)(ia) of the Act on payment of shipment expenses of Rs.61.85 lacs. The assessee filed a detailed reply objecting for the proposed disallowance. The reply of the assessee did not find any favour of the AO to proceeded by dismissing 30% of expenses paid Rs.61.85 lacs and made addition of Rs.18,55,500/-.
5. The assessee agitated the matter before the CIT(A) but without any success.
6. The relevant findings of the CIT(A) read as under :- DECISION : The contention of the Appellant has been considered and the order of AO has also been perused. It is seen from the order of the AO it is an admitted fact that the assessee had made payment of Rs. 61,85,000/- to M/s. Rising Overseas, on which no TDS was deducted. The appellant is relying on the decision of M/s. Vector Shipping Service Pvt. Ltd. Of Hon'ble Allahabad High Court.
Regarding the above judgment, the Hon'ble ITAT, Lucknow Bench ’B’ vide order dated 11.04.2014 in the case of DCIT Vs. Ama Medical & Diagnostic Centre, [2014] 45 taxmann.com 405 (Lucknow - Trib.) / [2014] 63 SOT 136, have analyzed the order of the Hon'ble High Court and has observed that: 7.3 Having carefully examined the judgment of Hon'ble Allahabad High Court in the case of Vector Shipping Services (P.) Ltd. (supra), we find that though there was dispute with regard to the disallowance of payment of salaries on account of non deduction of TDS as required u/s 40(a)(ia) of the Act but no question of law with regard to the ratio laid down by the Tribunal in the case of Merilyn Shipping & Transports (supra) was raised before the Hon'ble High Court. The question of law before the Hon'ble High Court is as under: Whether on the facts and in the circumstances of the case, the Hon'ble ITAT has rightly confirmed the order of the CIT(A) and thereby deleting the disallowance of Rs.1,17,68,621/- made by the Assessing Officer under section 40(a){ia) of the I.T. Act, 1961 by ignoring the fact that the company M/s Mercator Lines Ltd. had performed ship management work on behalf of the assessee M/s. Vector Shipping Services (P) Ltd. and there was a Memorandum of Understanding signed between both the companies and as per the definition of memorandum of understanding, it included contract also." 7.4 The main thrust of the argument before the Hon'ble High Court was that M/s Mercator Lines Ltd. had deducted TDS on salaries paid by it on behalf of the assessee. Under such circumstances, the assessee was not required to deduct TDS on reimbursement being made by it to M/s Mercator Lines Ltd. Besides reference was also made about the order of the Special Bench in the case of Merilyn Shipping & Transports (supra) wherein it has been held that if no amount remained payable at the year end, there would not be any disallowance as the provision of section 40(a)(ia) are not applicable. After recording the finding of the Tribunal and the CIT(A), the Hon'ble High Court has observed in last two paras that the provision of 40(a)(ia) was brought on statute to disallow the claim of even genuine and admissible expenses of the assessee under the head 'Income from Business and Profession' in case the assessee does not deduct TDS on such expenses and the default in deduction of TDS would result in disallowance of expenditure on which such TDS was deductible. Their Lordships have further observed that in the present case tax was deducted as TDS from the salaries of the employees paid by M/s. Mercator Lines Ltd. and the circumstances under which such salaries were paid by M/s. Mercator Lines Ltd., for M/s. Vector Shipping Services, the assessee were sufficiently explained. In last few lines, the Hon'ble High Court has made a reference to the ratio laid down by the Special Bench of the Tribunal and observed that it is noted that for disallowing expenses from business and profession on the ground that TDS has not been deducted, the amount should be payable and not which has been paid by the end of the year. Except these observations, the Hon'ble High Court has not adverted to the legal proposition laid down by the Special Bench of the Tribunal. For the sake of reference, we extract the finding of the judgment of Hon’ble jurisdictional High Court in this regard as under: "We do not find that the revenue can take any benefit from the observations made by the Special Bench of the Tribunal in the case of Merilyn Shipping & Transport v. Add!. CIT [20121 136 1TD 23 (Visakha) quoted as above to the effect Section 40(a)(ia) was introduced in the Act by the Finance Act, 2004 with effect from 1.4.2005 with a view to augment the revenue through the mechanism of tax deducted at source. This provision was brought on statute to disallow the claim of even genuine and admissible expenses of the assessee under the head 'Income from Business and Profession' in case the assessee does not deduct TDS on such expenses. The default in deduction of TDS would result in disallowance of expenditure or which such TDS was deductible. In the present case tax was deducted as TDS from the salaries of the employees paid by M/s. Mercator Lines Ltd. and the circumstances under which such salaries were paid by M/s. Mercator Lines Ltd., for M/s. Vector Shipping Services, the assessee were sufficiently explained. It is to be noted that for disallowing expenses from business and profession on the ground that TDS has not been deducted, the amount should be payable and not which has been paid by the end of the year. We do not find that the Tribunal has committed any error in recording the finding on the facts, which were not controverted by the department and thus the question of law as framed does not arise for consideration in the appeal." 7.5 The impact of the judgment of Hon'ble Allahabad High Court and other High Courts was also examined by the different benches of the Tribunal and they have categorically held that the Hon'ble Allahabad High Court has decided the issue referred to it on different footing and has made a passing reference about the decision rendered by the Special Bench. Therefore, we are of the view that the Hon'ble Jurisdictional High Court has not examined the impugned issue i.e. whether disallowance u/s 40(a)(ia) of the Act could be made only in respect of such amount which are payable as on 31st March of every year under consideration whereas the Hon’ble Gujarat High Court and Hon'ble Calcutta High Court have dealt with the issue in detail in the light of various judicial pronouncement and have categorically held that section 40{a}(ia) would cover not only to the amount which are payable as on 31st March of a particular year but also which are payable at any time during the year. 7.11 Our attention was also invited to a circular dated 16/12/2013 issued by the CBDT clarifying the stand of the Department in the light of the aforesaid judgments of different High Courts and it has been clarified that statutory provisions are amply clear and in the context of section 40(a)(ia) of the Act, the term payable would include amounts which are paid during the previous year. For the sake of reference, we extract the circular as under.
‘Circular No.10/DV/2013 (Department view) F. No.279/Misc./M-61/2012-ITJ (Vol.II) Government of India Ministry of Finance Department of Revenue Central Board of Direct Taxes New Delhi, The December 16th 2013 Subject: Circular or Section 40(a)(ia) of the income tax Act, 1961-reg. It has been brought to the notice of the Board that there are conflicting interpretations by judicial authorities regarding the applicability of the provisions of section 40(a)(ia) of the Income tax Act, 1961 (‘in Act’) with regard to the amount not deductible in the Income-tax Act, 1961 (‘the Act’) with regard to the amount not deductible in computing the income chargeable under the head 'Profits and gains of business or profession'.
Section 40(a)(ia) of the Act reads as under: "any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XV1I-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139..."
3. In the case of Merilyn Shipping & Transports v. Addl. CIT, it was held by Special Bench of ITAT, Vishakhapatnam, that the provisions of section 40(a)(ia) of the Act would apply only to the amount which remained payable at the end of the relevant financial year and could not be invoked to disallow the amount which had actually been paid during the previous year without deduction of tax at source. The order of the Special Bench has since been put under interim suspension by the Andhra Pradesh High Court. 3.1 The Hon'ble Calcutta High Court and Hon’ble Gujarat High Court in the case of Commissioner of Income-tax, Kolkata-XI v. Crescent Exports Syndicate and Commissioner of Income-tax-IV v. Sikandarkhan N Tunvar respectively, have held that section 40(a)(ia) of the Act would cover not only the amounts which are payable at the end of the previous year but also which are payable at any time during the year. 3.2 The Hon'ble High Courts have further held that the intention of the legislation was to disallow certain types of expense, subject to provisions of Chapter XVII-B, which are payable at any time during the year but no tax was deducted at source or if deducted was not p3id within the stipulated time. There is no such condition that amount should remain payable at the end of the year. 3.3 The Hon'ble Allahabad High Court in CIT v. Vector Shipping Service (P) Ltd . has affirmed the decision of the Special Bench in Merilyn Shipping that for disallowance under section 40(a) (ia) of the Act, the amount should be payable and not which has been paid during the year. However, the decisions of the Hon'ble Gujarat and Calcutta High Courts (supra) were not brought to the attention of the Hon'ble Allahabad High Court. 3.4 In the case of ACIT, Circle 4(2), Mumbai v. Rishti Stock and Shares Pvt. Ltd. in ITA No, 112/Mum/2012, Hon'ble ITAT, Mumbai in its order dated 02-08-2013 has examined the decision of the Hon'ble Allahabad High Court (supra) as regards to section 40(a)(ia) of the Act and concluded that the same was an "orbiter dicta" while the decisions of the Hon'ble Gujarat and Calcutta High Court (supra) were 'ratio decidendi’. The ITAT accordingly applied the view taken by the Hon'ble Gujarat and Calcutta High Court as ratio decidendi prevails over an orbiter dicta.
After careful examination of the issue, the Board is of the considered view that the provision of section 40(a) (ia) of the Act would cover not only the amounts which arc payable as on 31st March of a previous year but also amounts which are payable at any time during the year. The statutory provisions are amply clear and in the context of section 40(a) (ia) of the Act the term ’payable' would include 'amounts which are paid during the previous year'.
Where any High Court decides an issue contrary to the 'Departmental View', the 'Departmental View1 thereon shall not be operative in the area falling in the jurisdiction of the relevant High Court. However, the CCIT concerned should immediately bring the judgement to the notice of the CTC. The CTC shall examine the said judgement on priority to decide as to whether filing of SLP to the Supreme Court will be adequate response for the time being or some legislative amendment is called for.
The above clarification may be brought to the notice of all officers.'
Keeping in view the aforesaid judgments of various High Courts and the Tribunal, we are of the considered opinion that the view expressed or the ratio laid down by the Special Bench of the Tribunal in the case of Merilyn Shipping & Transports {supra)has been overruled. Therefore, it cannot be said that since the Hon'ble Jurisdictional High Court has approved the view taken by the Special Bench of the Tribunal in the case of Merilyn Shipping & Transports {supra), the same has to be followed by the Tribunal situated within the jurisdiction of Hon'ble Allahabad High Court. Had the impugned issue been examined and adjudicated by the Jurisdictional High Court, it would have been respectfully followed by the Tribunal irrespective of the fact that contrary view have been expressed by the different High Courts. The Hon'ble Jurisdictional High Court has not examined the impugned issue at all and simple passing reference was made with regard to the order of the Special Bench of the Tribunal in the case of Merilyn Shipping & Transports and the relief was granted to the assessee on merit. Therefore, the ratio laid down in the case of Merilyn Shipping & Transports (supra), which has been suspended by Hon'ble Andhra Pradesh High Court has not been approved by the Hon’ble Allahabad High Court. Therefore, subordinate judicial forum are not required to follow the ratio order laid down in the case of Merilyn Shipping & Transports (supra), as it was overruled by the other High Court. While discussing the above factual and legal position, the Hon'ble ITAT, Lucknow Bench-B, has finally held in para-9 of their order that: we hold that the provision of section 40(a)(ia) would cover not only to the amounts which are payable as on 31st March of a particular year but also which are payable at any time during the year. Therefore, respectfully following the discussions made, analysis done and the judgment passed by Hon’ble ITAT, Lucknow Bench-B in the case of Ama Medical & Diagnostic Centre (supra) , it is held that the assessee was required to deduct TDS on the full amount paid or payable during the year under consideration. Since, the same has not been done, which is an admitted fact by the appellant during the appellate proceedings, therefore, in my considered opinion, the A.O. has rightly made the disallowance of Rs. 18,55,500/- u/s 40(a)(ia) of the IT Act. Accordingly, the action of the A.O. is upheld.
I have given a thoughtful consideration to the findings of the CIT(A). I do not find error or infirmity in the findings of the CIT(A), therefore, the appeal filed by the assessee is dismissed. Order pronounced in the open court on 13.03.2020.