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Income Tax Appellate Tribunal, MUMBAI BENCH “A”, MUMBAI
Before: SHRI AMIT SHUKLA & SHRI RAJESH KUMAR
आदेश ORDER अिमत शु�ला : �या. स.: PER AMIT SHUKLA, JM: The aforesaid appeal has been filed by the revenue against impugned order dated 25.09.2012, passed by Commissioner of Income Tax (Appeals)-33 [CIT(A)] Mumbai, for the quantum of assessment completed under section 143(3) for the assessment year 2009-10, vide which following ground has been raised:-
1. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in restricting the addition of Rs.3,39,60,169/- to Rs.36,18,386/- under section 40(a)(ia) of the IT Act, relying on the judgment of Hon’be ITAT Special Bench Vishakhapatnam in the case of Merlyn Shipping 2 Khushal R Hefa Agency Pvt. Ltd., wherein, it is held disallowance under section 40(a)(ia) can be made on payable amount
2. Despite service of notice, none appeared on behalf of the assessee, therefore, the appeal is being disposed off after hearing Ld. DR and the facts as discussed by the authorities below.
The brief facts qua the issue raised is that, assessee as a Commission Agent of transport business, has received freight charges of Rs.3,51,64,121/- out of which a freight charges paid amounted to Rs.3,39,60,169/-. While making payment of the freight to various parties, the assessee had not deducted TDS in accordance with the section 194C(2). In response to the show cause notice, why disallowance under section 40(a)(ia) should not be made, the assessee’s submission has been noted by the AO in the following manner:-
In response to it Shri Gitesh Bhanushali, ITP has submitted the lists of vehicles number and amount paid. As per provisions of section assessee has submitted name and address of the person to whom freight/transportation charges paid. In case the owner is having less than two lorries and amount received less than Rs.50,000/- during the year than the copy of form 15-I regarding the declaration collected from the owner and the same should have submitted to the concerned authority and in case TDS has not deducted than the above details is required to be submitted before making the assessment. The assessee has not submitted the same till date.
The assessee has submitted list of vehicles number and amount paid without date of payment, destination of transportation, with name and address of owner and copies of form No.15-I filed to the respective authority.
3. In the audit report the author has not make any comments on the TDS provisions applicable.
Assessee is a contractor/sub-contractor and the received freight. The assessee has deposited the entire freight in his bank and from made payment by cash/cheques. It proves that assessee is a contractor / sub-contractor. It is their obligatory duty to verify/apply the provisions of section 194C(2) of the IT Act, while making payment.
The assessee has not submitted a copy of form No.15I also.
4. The AO further noted that assessee could not submit the list of the persons along with freight charges paid and the reasons for non-deduction of TDS. Accordingly, he made the disallowance of entire sum of Rs.3,39,60,169/- after observing and holding as under:- “In view of above the payment made to the lorry owners above Rs.50,000/- during the year is not quantified. The daily lorry freight register and memo book of freight of lorry and list of lorry owners, register along with Lorries owned by each owner to verify the transport charges paid was called for. The assessee has not submitted the list of persons along with the freight charges paid and reasons for non deduction. It is seen from the list submitted that the same is nothing but a file a irrelevant paper to make a confusion in the mind of the AO and therefore no accepted. In absence of the all details I treat that all the freight paid to the lorry owner is liable to deduct the tax at source. The assessee has failed to deduct the TDS at the time of making payment to the lorry owners and hence disallowances of Rs.3,39,60,169/- is made u/s 40(a)(ia) of the Act”.
5. Before the Ld. CIT(A), detailed submissions were made on merits and apart from that, alternative plea was taken that the payable amount as on 31.03.2009 was only Rs.23,89,429/- and rest of the amounts were paid, therefore, in view of Special Bench decision in the case of M/s Merlyn Shipping Transport Private Limited vs ACIT, no disallowance should be made on the balance amount. The Ld. CIT(A) though decided the issue against the assessee on merits declining to admit additional evidences filed before him, however, on the alternative plea, he accepted the assessee’s contention after observing and holding as under:-
I have also gone through assessment folder and it is noted that audit report filed in the case in Col. 16(f) shows amounts inadmissible u/s 40(ia) at NIL. Thus, the AO has correctly observed and brought it on record in the para 5.3 of the assessment order that the audit report given in Form No.3CD for the AY 2009-10 has not made any comments on TDS provisions applicable. The method of accounting as per this audit report is Mercantile. Then, looking into Profit & Loss Account, it is noted that the freight receipts are shown at Rs.3,51,64,121/- and hiring charges paid are reflected at Rs.3,39,60,169.70. This figure when cross checked with Profit & Loss Account filed with return of income filed for AY 2009-10 it is noted that the gross receipts of business are reflected at Rs.3,61,54,120/- and freight paid at Rs.3,39,60,170/-. There return shows debtors as on 31.3.2009 at ‘Nil’ and the creditors are shown at Rs.23,89,429/-. Then it is also noted that figure of sundry creditors does not go in line if opening balance as on 01.04.2008 is considered as per the Return of Income filed in immediately preceding AY i.e. 2008-09, when figures of closing balance of sundry creditors are shown at Rs.23,16,019/- as on 31.03.2008. In other words if opening 5 Khushal R Hefa Rs.3,39,60,169/- during the FY 2008-09, it leaves a closing balance of sundry creditor of Rs.36,18,386/- as on 31.3.2009 in place of Rs.23,16,019/-. The reason for difference is that opening balance as on 01.04.2008 is taken by the appellant wrongly at Rs.10,87,062/- only; in his hire of charges account in the books against sundry creditors balance at Rs.23,16,019/- as on 31.03.2008. This figure of opening balance of Rs.10,87,062/- taken wrongly, when is replaced by the correct figure of opening balance as on 1.4.2008 of Rs.23,16,019/-; this along with amount of freight received and hence credited during the year 3,39,60,169/- makes the total to Rs.3,62,76,188/-. Against this debit entry for the freight paid of Rs.3,26,57,802/- when taken, the actual sundry creditor balance comes to Rs.30,18,386/- as on 31.3.2009 in place of Rs.23,16,019/- shown by the appellant as payable amount. In view of this, even if alternative submission of appellant is accepted wherein he has relied upon decision of Merlyn Shipping Transport Private Limited vs. ACIT (ITAT Visakhapatnam Special Bench), the payable amount which is all related to transporters only, the disallowance under section 40(a)(ia) will have to made too Rs.36,18,386/- instead of Rs.23,16,019/- as claimed by the appellant. In view the decision cited thus the disallowance made u/s40(a)(ia) are restricted to Rs.36,18,386/-. The AO is accordingly directed to restrict the disallowance under section 40(a)(ia) at Rs.36,18,386/-. Ground No.2(a) is partly allowed
Before us, the Ld. DR submitted that after Merlyn Shipping Transport Private Limited, various decisions of the High Courts have come-up wherein it has been held that, provisions of section 40(a)(ia) is applicable both on the amount “payable” and “paid”. In support, he relied upon a decision of Hon’ble Calcutta 6 Khushal R Hefa High Court in the case of Crescent Export, reported in [2013] 262 CTR 525 and Gujarat High Court decision in the case of CIT vs Sikandarkhan Tunvar and Others, reported in [2013] 357 ITR 312. He further submitted that, the ratio of these two decisions and also decisions of the Allahabad High Court decision in the case of Sikandarkhan Tunvar (supra) has been dealt by the Tribunal in detail in the case of M/s ITO vs. Pratibhuti Viniyog Ltd in order dated 22.08.2014. He further submitted that, now, P&H High Court, vide judgment and order dated 29.04.2015 in the case of PMS Diesel vs. CIT have dealt the decision of Special Bench in the case of Merlyn Shipping Transport Private Limited (supra) and held that same is not a good law and also they have reiterated the ratio laid down by the Calcutta High Court and also explained the ratio of Allahabad High Court decision in the case of Vector Shipping Services Pvt. Ltd.
After considering the aforesaid submissions of Ld. DR and relevant finding given in the impugned orders, we find that the Ld. CIT(A) has given part relief following the ratio laid down by the Special Bench decision in the case of Merlyn Shipping Transport Private Limited (supra). The contrary view has been taken by the Hon’ble Calcutta High Court in the case of Crescent Exports (supra) disapproving the decision of the Special Bench and held that, provision of section 40(a)(ia) would apply on both “paid” and “payable”. The decision of Allahabad High Court in the case of Vector Shipping Services Pvt. Ltd. in of 2013 is not a ratio approving the decision of Special Bench and this has been elaborately dealt by the Tribunal in the case of M/s Pratibhuti Viniyog Ltd. The relevant observation and finding of the Tribunal reads as under:- 7. We have heard the rival contentions. On a perusal of the order of the Hon’ble Allahabad High Court in Vector Shipping Services Pvt. Ltd., ITA no.122 of 2013, judgment dated 9th 7 Khushal R Hefa July 2013, it is seen that only question of law which was formulated by the Hon’ble High Court was 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 Pvt. Ltd. and there was a Memorandum of Understanding signed between both the companies as per the definition of memorandum of understanding, it includes contract also.”
8. Thus issue of paid and payable was not subject of reference before the Hon’ble High Court. Further, from the facts which has been incorporated by the Hon’ble High Court, was that M/s. Mercator Lines Ltd. had deducted tax at source on the salaries paid by it on behalf of the assessee in respect of which the disallowance was made by the Assessing Officer under section 40(a)(ia). While answering the aforesaid question of law, the Hon’ble High Court held in the present case, tax was duly deducted as the TDS has been deducted from the salary of the employees paid by M/s. Mercator Lines Ltd. on behalf of Vector Shipping Service (the assessee) and the circumstances in which such salaries were paid by M/s. Mercator Lines Ltd., for M/s. Vector Shipping Services, where sufficiently explained by the assessee. Thus, the issue was decided on the ground that the tax has already been deducted, therefore, no disallowance under section 40(a)(ia) should be made. After having answered the question in the aforesaid manner, the Hon’ble High Court further observed as under:– “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.”
Such an observation of the Hon’ble High Court sans the issue in question of law formulated is in the form of obiter dicta. This observation was made by the Court because the Tribunal while dealing with the said disallowance has referred to the decision of the Special Bench in M/s. Merilyn Shipping and Transport Ltd., 136 ITD 23 (SB). It is not the case where the Hon’ble High Court has categorically affirmed the reasoning and interpretation given by the Special Bench. On the contrary, we find that the Hon’ble Calcutta High Court in CIT v/s Crescent Exports Syndicate, [2013] 262 CTR (Cal.) 525, has specifically examined the correctness of the majority view of Marilyn Shipping and disapproved the view taken by the Special Bench in the following manner:- The High Court examined the correctness of the majority views in the case of Merilyn Shipping. The main thrust of the majority view was based on the fact "that the Legislature has replaced the expression "amounts credited or paid" with the expression 'payable' in the final enactment. Comparison between the pre-amendment and post amendment law is permissible for the purpose of ascertaining the mischief sought to be remedied or the object sought to be achieved by an amendment. But the same comparison between the draft and the enacted law is not permissible. Nor can the draft or the bill be used for the purpose of regulating the meaning and purport of the enacted law. It is the finally enacted law which is the will of the legislature. CIT vs. Kelvinator reported in 2010(2) SCC 723, relied on. The Tribunal fell into an error in not realizing this aspect of the matter. The Tribunal held "that where language is clear the intention of the legislature is to be gathered from the language used". Having held so, it was not open to seek to interpret the section on the basis of any comparison between the draft and the section actually enacted nor was it open to speculate as to the effect of the so-called representations made by the professional bodies. The Tribunal held that "Section 40(a)(ia) of the Act creates a legal fiction by virtue of which even the genuine and admissible expenses claimed by an assessee under the head "income from business and profession" if the assessee does not deduct TDS on such expenses are disallowed".
9 Khushal R Hefa Having held so was it open to the Tribunal to seek to justify that "this fiction cannot be extended any further and, therefore, cannot be invoked by AO to disallow the genuine and reasonable expenditure on the amounts of expenditure already paid"? Does this not amount to deliberately reading something in the law which is not there? The Tribunal realized the meaning and purport of Sec. 40(a)(ia) correctly when it held that in case of omission to deduct tax even the genuine and admissible expenses are to be disallowed. But they sought to remove the rigour of the law by holding that the disallowance shall be restricted to the money which is yet to be paid. What the Tribunal by majority did was to supply the casus omissions which was not permissible and could only have been done by the Supreme Court in an appropriate case. Bhuwalka Steel Industries vs. Bombay Iron & Steel Labour Board reported in 2010 (2) SCC 273, relied on. The key words used in Sec. 40(a)(ia), are "on which tax is deductible at source under Chapter XVII–B". If the question is "which expenses are sought to be disallowed?" The answer is bound to be "those expenses on which tax is deductible at source under Chapter XVII -B. Once this is realized nothing turns on the basis of the fact that the legislature used the word 'payable' and not 'paid or credited'. Unless any amount is payable, it can neither be paid nor credited. If an amount has neither been paid nor credited, there can be no occasion for claiming any deduction. The language used in the draft was unclear and susceptible to giving more than one meaning. By looking at the draft it could be said that the legislature wanted to treat the payments made or credited in favour of a contractor or subcontractor differently than the payments on account of interest, commission or brokerage, fees for professional services or fees for technical services because the words "amounts credited or paid" were used only in relation to' a contractor or sub-contractor. This differential treatment was not intended. Therefore, the legislature provided that the amounts, on which tax is deductible at source under Chapter XVII-B payable on account of interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services or to a contractor or subcontractor shall not be deducted in computing the income of an assessee in case he has not deduced, or after deduction has not paid within the 10 Khushal R Hefa specified time. The language used by the legislature in the finally enacted law is clear and unambiguous whereas the language used in the bill was ambiguous. There can be no denial that the provision in question is harsh. But that was no ground to read the same in a manner which was not intended by the legislature. The contention that the second proviso sought to become effective from 1st April, 2013 should be held to have already become operative prior to the appointed date cannot also be acceded to. The law was deliberately made harsh to secure compliance of the provisions requiring deductions of tax at source. It is not the case of an inadvertent error. Thus the majority views expressed in the case of Merilyn Shipping & Transports was held to be not acceptable. The appeal was thus, allowed in favour of the revenue. Merilyn Shipping & Transports (ITA 477/Viz./2008, dated March 29, 2012), overruled.”
Similar interpretation has been reiterated and explained in detail by the Hon’ble Gujarat High Court, in CIT v/s Sikandarkhan N. Tunvar & Ors.[ 2013] 357 ITR 312 (Guj.). In this decision, again the Hon’ble Gujarat High Court has specifically dealt this issue in a great length and overruled Marilyn Shipping in the following manner:- For the purpose of the said section, the terms "payable" and "paid" are not synonymous. Word "paid" has been defined in Section 43(2) of the Act to mean actually paid or incurred according to the method of accounting, upon the basis of which profits and gains are computed under the head "Profits and Gains of Business or Profession". Such definition is applicable for the purpose of Sections 28 to 41 unless the context otherwise requires. In contrast, term "payable" has not been defined. The word "payable" has been described in Webster's Third New International Unabridged Dictionary as requiring to be paid: capable of being paid: specifying payment to a particular payee at a specified time or occasion or any specified manner. In the context of section 40(a)(ia), the word "payable" would not include "paid". In other words, therefore, an amount which is already paid over ceases to be payable and conversely what is payable cannot be one that is already paid. For the purpose of Section 40(a)(ia) of the Act, term "payable" cannot be seen to be including the expression "paid". The term "paid" and "payable" in 11 Khushal R Hefa Section 40(a)(ia) are not used interchangably. Despite this narrow interpretation of section 40(a)(ia), the question still survives if the Tribunal in case of M/s. Merilyn Shipping & Transports vs. ACIT (supra) was accurate in its opinion. In this context, Court examined two aspects. Firstly, what would be the correct interpretation of the said provision. Secondly, whether our such understanding of the language used by the legislature should waver on the premise that as propounded by the Tribunal, this was a case of conscious omission on part of the Parliament. If one looks closely to the provision, in question, adverse consequences of not being able to claim deduction on certain payments irrespective of the provisions contained in Sections 30 to 38 of the Act would flow if the following requirements are satisfied:- (a) There is interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to resident or amounts payable to a contractor or sub-contractor being resident for carrying out any work. (b) These amounts are such on which tax is deductible at source under Chapter XVII-B. (c) Such tax has not been deducted or after deduction has not been paid on or before due date specified in sub-Section (1) of Section 39.” U/s 40(a)(ia) the term used is interest, commission, brokerage etc. is payable to a resident or amounts payable to a contractor or sub-contractor for carrying out any work. The language used is not that such amount must continue to remain payable till the end of the accounting year. Any such interpretation would require reading words which the legislature has not used. No such interpretation would even otherwise be justified because the legislature could not have intended to bring about any such distinction nor the language used in the section brings about any such meaning. If the interpretation as advanced by the assessees is accepted, it would lead to a situation where the assessee who though was required to deduct the tax at source but no such deduction was made or more flagrantly deduction though made is not paid to the Government, would escape the consequence only because the amount was already paid over before the end of the year in contrast to another assessee who would otherwise be in similar situation but in whose case the amount remained payable till the end of the year.
12 Khushal R Hefa This brings us to the second aspect of this discussion, namely, whether this is a case of conscious omission and therefore, the legislature must be seen to have deliberately brought about a certain situation which does not require any further interpretation. While interpreting a statutory provision the Courts have often applied Hyden's rule or the mischief rule and ascertained what was the position before the amendment, what the amendment sought to remedy and what was the effect of the changes. In such context, the position prevailing prior to the amendment introduced in Section 40(a) would certainly be a relevant factor. However, the proceedings in the Parliament, its debates and even the speeches made by the proposer of a bill are ordinarily not considered as relevant or safe tools for interpretation of a statute. It would all the more be unsafe to refer to or rely upon the drafts, amendments, debates etc for interpretation of a statutory provision when the language used is not capable of several meanings. In the present case the Tribunal in case of M/s. Merilyn Shipping & Transports vs. ACIT fell in a serious error in merely comparing the language used in the draft bill and final enactment to assign a particular meaning to the statutory provision. The Courts in India have been applying the principle of deliberate or conscious omission. Such principle is applied mainly when an existing provision is amended and a change is brought about. While interpreting such an amended provision, the Courts would immediately inquire what was the statutory provision before and what changes the legislature brought about and compare the effect of the two. The other occasion for applying the principle, has been when the language of the legislature is compared with some other analogous statute or other provisions of the same statute or with expression which could apparently or obviously been used if the legislature had different intention in mind, while framing the provision. Tribunal committed an error in applying the principle of conscious omission in the present case. Firstly, Court have serious doubt whether such principle can be applied by comparing the draft presented in Parliament and ultimate legislation which may be passed. Secondly, the statutory provision is amply clear. Section 40(a)(ia) would cover not only to the amounts which are payable as on 31th March of a particular year but also which are payable at any time during the year. Of course, as long as the other requirements of the said provision exist. M/s. Merilyn Shipping & Transports v/s ACIT, incorrect law. Bhuwalka Steel Industries Ltd. vs. Bombay Iron and 13 Khushal R Hefa Steel Labour Board 2010 (Suppl.) 122, Agricultural Produce Market Committee, Narela, Delhi vs. Commissioner of Income Tax and anr. AIR 2008 SC (Supplement) 566; Greater Bombay Co-operative Bank Ltd. v/s M/s. United Yarn Tex. Pvt. Ltd & Ors. AIR 2007 SC 1584; National Mineral Development Corporation Ltd. vs. State of M.P and another reported in AIR 2004 SC 2456; Gopal Sardar, vs. Karuna Sardar AIR 2004 SC 3068, relied on.”
Thus, the decision of the Hon’ble Calcutta High Court and Hon’ble Gujarat High Court constitutes ratio decidendi on this issue which in our humble opinion should prevail. Thus, we do not find any merit in the contention raised by the learned counsel that the decision of the Allahabad High Court in Vector Shipping Services Pvt. Ltd. against which Special Leave Petition has been dismissed by the Hon'ble Supreme Court, lays down a ratio decidendi on the phrase paid and payable by approving the decision of Special Bench in Merlyn Shipping.
Now, Hon’ble P&H High court also in the case of PMS Diesel (supra) have reinforced the aforesaid view taken by the Tribunal by concurring with the decision of Hon’ble Calcutta High Court and explaining the decision of the Hon’ble Allahabad High Court in the case of Vector Shipping Services Pvt. Ltd. in of 2013 and specifically held that the decision of Special Bench in the case of M/s. Merilyn Shipping & Transports is not a correct decision. Accordingly, the order of the CIT(A) is reversed.
9. However, we find that on merits, the assessee has raised various contentions before the Ld. CIT(A) that, in most of the cases, the payment made by the assessee towards freight was within the statutory limits of attracting TDS provision and in support, assessee has disclosed and filed the details of payments, party- wise and month-wise payments; secondly, the assessee has also filed the copy of vehicle registration certificate, PAN card of the parties to substantiate the contention raised before the AO, who 14 Khushal R Hefa has held that, no details were filed. Further, the assessee has also filed Form 15-I and 15-J to show that, the income of the transporters were below taxable limits. The Ld. CIT(A) without any proper reason and analysis has dismissed the assessee’s contention. In the interest of justice, we are of the opinion that, the issue of disallowance under section 40(a)(ia) should be examined afresh on merits and after examining the details furnished by the assessee with regard to the claim that the individual payment did not exceed Rs.50,000/- to a single party during the year and also the Form 15-I and 15-J submitted in support of various transporters to whom the assessee has paid freight charges. Accordingly, the matter is remanded back to the file of the AO who shall examine the issue on merits and decide the appeal of the assessee in accordance with the law after providing due and effective opportunity to the assessee. Thus, revenue’s appeal is treated as partly allowed for statistical purposes.
Order pronounced in the open court on 7th April, 2016.
Sd/- Sd/- (राजेश कुमार ) (अिमत शु�ला) लेखा सद�य �याईक सद�य (RAJESH KUMAR) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Date: 7th April, 2016 ��त/Copy to:- 1) अपीलाथ� /The Appellant. 2) ��यथ� /The Respondent. 3) The CIT(A) -19, Mumbai. 4) The Commissioner of Income Tax –17, Mumbai. 5) िवभागीय �ितिनिध “ए”, आयकर अपीलीय अिधकरण, मुंबई/ The D.R. “A” Bench, Mumbai.