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Income Tax Appellate Tribunal, MUMBAI BENCH “H” MUMBAI
Before: SHRI C.N. PRASAD & SHRI N.K. PRADHAN
ORDER
PER N.K. PRADHAN, AM
This is an appeal filed by the assessee. The relevant assessment year is 2011-12. The appeal is directed against the order of the Commissioner of Income Tax (Appeals)-45 [in short ‘CIT(A)’], Mumbai and arises out of the assessment completed u/s 143(3) of the Income Tax Act 1961, (the ‘Act’).
The ground of appeal filed by the assessee reads as under: “The Ld. CIT(A) 45 erred in law in upholding the order of the Income-tax Officer and disallowing a sum of Rs.1,64,34,265/- being disallowance u/s 40(a)(ia).”
3. Briefly stated, the facts of the case are that the assessee filed its return of income for the assessment year (AY) 2011-12 on 30.09.2011 showing total income at Rs.1,40,000/-. The assessee is engaged in the business of construction activities. During the course of assessment proceedings, the Assessing Officer (AO) noticed that as per the audit report, TDS has been made on the following amounts but not deposited in the government treasury : Sr. No. Nature of Payment Gross Amount (Rs.) Amount Deducted (Rs.) 1. U/s 194C 1,37,25,513 2,74,575 2. U/s 194J 11,37,071 89,760 3. U/s 194A 86,301 8,630 4. U/s 194H 14,84,880 1,48,490 Total 1,64,34,265 In response to a query raised by the AO vide notice u/s 142(1) to explain as to why the above amount of Rs.1,64,34,264/- should not be disallowed as per provisions of section 40(a)(ia), the assessee filed a reply dated 13.03.2014 stating that part of the amount stands as advances and balance under work-in-progress and it has not claimed the same as expenses from the total income and hence the said amount should not be disallowed. However, the AO was not convinced with the above explanation of the assessee for the reason that it has deducted tax on the said expenses but not paid the same into the government treasury which is mandated as per the Act, thereby early collection of tax on the said amount has not happened as is the intention of the legislature. Therefore, he made a disallowance of Rs.1,64,34,265/- u/s 40(a)(ia) of the Act.
4. Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A) and referred to the ratio laid down by the Special Bench of the Tribunal in Merilyn Shipping & Transports v. CIT (2012) 20 taxmann.com 244(Visakhapatnam). However, the Ld. CIT(A) was not convinced with the above explanation of the assessee in view of the decision in Cresent Exports Syndicate (2013) 33 taxmann.com 250 (Cal) and Sikandar Khan N. Tunvar & Ors (2013) 33 taxmann.com 133 (Guj). Relying on the above two decisions the Ld. CIT(A) confirmed the disallowance of Rs.1,64,34,265/- made by the AO u/s 40(a)(ia) of the Act.
5. Before us, the Ld. counsel of the assessee files a Paper Book (P/B) containing (i) balance sheet as at 31.03.2011, (ii) details of tax deducted at source and payments made to the Central Government in AY 2011-12 and (iii) submissions before the CIT(A). Reliance is also placed on the order of the ITAT ‘A’ Bench Mumbai in assessee’s own case for AY 2009-10. 6. On the other hand, the Ld. DR supports the order passed by the Ld. CIT(A) confirming the disallowance of Rs.1,64,34,265/- made by the AO u/s 40a(ia) of the Act. Reliance is placed by him on the decision in Palam Gas Service v. CIT [2017] 81 taxmann.com 43 (SC). 7. We have heard the rival submissions and perused the relevant materials on record. The reasons for our decision are given below. During the course of hearing, the Bench directed the Ld. counsel to file the details of TDS deposited. In response to it, a chart containing (i) nature of payment, (ii) date of credit/payment, (iii) amount deducted, (iv) gross amount, (v) payment date, (vi) unpaid was filed by M/s Kalindi Estate Ld. counsel. From the details is evident that the tax deducted were not deposited by the assessee in government treasury by due dates during the impugned assessment year. We may refer to the scope and effect of amendments w.e.f. 01.04.2010 made in section 40(a)(ia), as also amendment made in section 201 by the Finance Act, 2010. The section 40(a)(ia) has been amended to provide that no disallowance will be made if after deduction of tax during the previous year, the same has been paid on or before the due date of filing of return of income specified in sub- section (1) of section 139. The amendment took effect retrospectively from 01.04.2010 and will, accordingly, apply in relation to assessment year 2010-11 and subsequent years. Under the existing provisions of section 201(1A) of the Act, a person is liable to pay simple interest at 1% for every month or part of the month in case of failure to deduct tax or payment of tax after deduction. In order to discourage the practice of delaying the deposit of tax after deduction, the Act has been amended to increase the rate of interest for non-payment of tax after deduction from the present 1% to 1 ½ % for every month or part of month. This amendment by the Finance Act 2010 took effect from 01.07.2010. 7.1 In the instant case, the tax audit report has correctly mentioned that the TDS made has not been paid to the government treasury in due dates. In the order of the Tribunal in assessee’s own case for AY 2009- 10, it has been held that: “The Assessing Officer made the addition under section 40(a)(ia) solely on the ground that tax was deducted but not deposited with Government by M/s Kalindi Estate due date. If we consider that the expenses relates to Tower “B, then the Ld. CIT(A) made no mistake because in our view, the disallowance of 40(a)(ia) can be made only when the assessee claimed deduction of expenditure in its Profit & Loss A/c. However, if the expenses is disallowable as on income from Tower “ A” has been assessed, and in any case, there is no finding that the expenses pertains to Tower “A”. Thus, we uphold the decision of Ld. CIT(A) ultimately. In the result, the appeal filed by the Revenue is dismissed.” 7.2 However, we are of the considered view that the correct position of law in this regard has been clearly explained in Palam Gas (supra) and K. Venkataraju Vemagiri v. Addl. CIT (2013) 34 taxmann.com 94 (Visakhapatnam – Trib). 7.3 In Palam Gas Service (supra), the Hon’ble Supreme Court at para 15 has held : “We approve the aforesaid view as well. As a fortiorari, it follows that Section 40(a)(ia) covers not only those cases where the amount is payable but also when it is paid. In this behalf, one has to keep in mind the purpose with which Section 40 was enacted and that has already been noted above. We have also to keep in mind the provisions of Sections 194C and 200. Once it is found that the aforesaid Sections mandate a person to deduct tax at source not only on the amounts payable but also when the sums are actually paid to the contractor, any person who does not adhere to this statutory obligation has to suffer the consequences which are stipulated in the Act itself. Certain consequences of failure to deduct tax at source from the payments made, where tax was to be deducted at source or failure to pay the same to the credit of the Central Government, are stipulated in Section 201 of the Act. This Section provides that in that contingency, such a person would be deemed to be an assessee in default in respect of such tax. While stipulating this consequence, Section 201 categorically states that the aforesaid Sections would be without prejudice to any other consequences which that defaulter may incur. Other consequences are provided under Section 40(a)(ia) of the M/s Kalindi Estate Act, namely, payments made by such a person to a contractor shall not be treated as deductible expenditure. When read in this context, it is clear that Section 40(a)(ia) deals with the nature of default and the consequences thereof. Default is relatable to Chapter XVIIB (in the instant case Sections 194C and 200, which provisions are in the aforesaid Chapter). When the entire scheme of obligation to deduct the tax at source and paying it over to the Central Government is read holistically, it cannot be held that the word 'payable' occurring in Section 40(a)(ia) refers to only those cases where the amount is yet to be paid and does not cover the cases where the amount is actually paid. If the provision is interpreted in the manner suggested by the appellant herein, then even when it is found that a person, like the appellant, has violated the provisions of Chapter XVIIB (or specifically Sections 194C and 200 in the instant case), he would still go scot free, without suffering the consequences of such monetary default in spite of specific provisions laying down these consequences. The Punjab & Haryana High Court has exhaustively interpreted Section 40(a(ia) keeping in mind different aspects. We would again quote the following paragraphs from the said judgment, with our complete approval thereto: "26. Further, the mere incurring of a liability does not require an assessee to deduct the tax at source even if such payments, if made, would require an assessee to deduct the tax at source. The liability to deduct tax at source under Chapter XVII-B arises only upon payments being made or where so specified under the sections in Chapter XVII, the amount is credited to the account of the payee. In other words, the liability to deduct tax at source arises not on account of the assessee being liable to the payee but only upon the liability being discharged in the case of an assessee following the cash system and upon credit being given by an assessee following the mercantile system. This is clear from every section in Chapter XVII.
Take for instance, the case of an assessee, who follows the cash system of accounting and where the assessee who though liable to pay the contractor, fails to do so for any reason. The assessee is not then liable to deduct tax at source. Take also the case of an assessee, who follows the M/s Kalindi Estate mercantile system. Such an assessee may have incurred the liability to pay amounts to a party. Such an assessee is also not bound to deduct tax at source unless he credits such sums to the account of the party/payee, such as, a contractor. This is clear from Section 194C set out earlier. The liability to deduct tax at source, in the case of an assessee following the cash system, arises only when the payment is made and in the case of an assessee following the mercantile system, when he credits such sum to the account of the party entitled to receive the payment.
The government has nothing to do with the dispute between the assessee and the payee such as a contractor. The provisions of the Act including Section 40 and the provisions of Chapter XVII do not entitle the tax authorities to adjudicate the liability of an assessee to make payment to the payee/other contracting party. The appellant's submission, if accepted, would require an adjudication by the tax authorities as to the liability of the assessee to make payment. They would then be required to investigate all the records of an assessee to ascertain its liability to third parties. This could in many cases be an extremely complicated task especially in the absence of the third party. The third party may not press the claim. The parties may settle the dispute, if any. This is an exercise not even remotely required or even contemplated by the section." 7.4 In K. Venkataraju Vemagiri (supra), the Tribunal at para 12 & 13 has held: “12. We have heard the rival contentions on this issue and carefully perused the record and the decisions relied upon by Learned A.R. We notice that the decision rendered by the Hyderabad bench of the Tribunal has been followed by the Cuttack bench of the Tribunal. The Hyderabad bench of the Tribunal, in the case of Teja Constructions (supra) has taken the view that the rejection of books of accounts and the book result and consequent estimation of income takes care of the irregularities committed by the assessee.
However, we find that the disallowance prescribed under section 40(a)(ia) is a technical disallowance, which shall be attracted only if there is a failure on the part of the assessee to deduct and pay the TDS amounts as per the relevant provisions of the Act. It is also further seen that the expenses so disallowed can be claimed as expenditure in the year in which such failure is made good. The modalities prescribed in sec. 40(a)(ia) would show that the disallowance prescribed in that section is not an absolute disallowance to be made once for all, but it is only deferment of allowance of expenditure for non-compliance of TDS provisions. Whereas, in the case of disallowances prescribed in other provisions like sec. 40A(1), 40A(3) etc., they are absolute disallowances, which are not allowed as expenses at all in computing the business income. Further such disallowances shall apply uniformly to all assessees. For example, if income tax expense is debited to the Profit and loss account, it is not allowable in the hands of all assessees. However, in the case of expenses, which attract the provisions of section 40A(a)(ia) of the Act, they are otherwise allowable as deduction in the hands of all the assessees and they shall be liable to disallowed only in the case of those assessee, who have failed to comply with the TDS provisions. As stated earlier, the expenses so disallowed shall be allowable as deduction in the subsequent year in which the assessee complies with TDS provisions. Thus, the disallowances prescribed under section 40(a)(ia) of the Act is linked to compliance of TDS provisions, meaning thereby, the purpose of disallowance is to enforce the assessee to comply with the TDS provisions. In such a scenario, in our view, the disallowance prescribed under section 40(a)(ia) cannot be equated with other disallowances prescribed under sections 40, 40A etc., of the Act. Accordingly, in our view, non-compliance of TDS provisions cannot be considered as an irregularity committed in the process of earning the business income so that such kind of irregularities are automatically taken care of, if the business income of the assessee is estimated after rejecting book results.” Thus disallowance u/s 40(a)(ia) can be made independently, even if the amounts are paid during the year or outstanding at the end M/s Kalindi Estate of the year. However, the sum is allowed as a deduction in the year of actual payment of the TDS. Respectfully following the ratio laid down in Palam Gas Service (supra) and K. Venkataraju Vemagiri (supra), we uphold the order of the Ld. CIT(A). 8. In the result, the appeal is dismissed. Order pronounced in the open Court on 23/10/2018.