ORDER
1. This Appeal under Section 260A of the Income-tax Act, 1961 (‘the Act’) is directed against the order dated 15th January 2019 passed by the Income Tax Appellate Tribunal, Mumbai Bench, (‘Tribunal’) in ACIT v. Media Worldwide Ltd [IT Appeal No. 5863 (Mum) of 2017] for Assessment Year 2012-13, whereby the Tribunal dismissed the Revenue’s appeal and upheld the order of the Commissioner of Income Tax (Appeals) deleting the disallowance made under Section 40(a) (ia) of the Act. According to the Revenue, the impugned order gives rise to the following four questions of law:-
| (i) |
|
Whether on the facts, in the circumstances of the case and as per law, the Hon’ble Tribunal has erred in directing to delete the disallowance u/s. 40(a) (ia) rws 194J in respect of ‘Channel placement Fees’ ‘UplinkingFees’ & ‘BandwidthCharges’ and failing to appreciate that the payments made for use/right to use of’process’ are ‘royalty’ as per Explanation 6 to section 9(1) (vi) hence such payments are covered u/s. 194J of the Income-tax Act, 1961. |
| (ii) |
|
Whether on the facts, in the circumstances of the case and as per law, the Hon’ble Tribunal has erred in directing to delete the disallowance u/s. 40(a) (ia) rws 194J of ‘Channel placement Fees’ ‘Uplinking Fees’ & ‘Bandwidth Charges’, whereas the jurisdictional ITAT, Mumbai ‘L’ Bench, in its order dated 28.03.2014 in the case of ADIT-(IT)-2(2), Mumbai v. Viacom 18 Media Pvt. Ltd., has confirmed that the payments made for use/right to use of ‘process’ are ‘royalty’ in terms of the Income-tax Act, 1961. |
| (iii) |
|
Whether on the facts, in the circumstances of the case and as per law, the Hon’ble ITAT has erred in directing to delete the disallowance u/s. 40(a)(ia) and thereby holding that the short deduction of tax will not result into disallowance u/s. 40(a)(ia) of the Act, without appreciating that the Hon’ble Kerala High Court in its judgment dated 20.07.2015 in the case of CIT-1, Kochi Vs PVS Memorial Hospital Ltd. has clearly laid down that the disallowance u/s. 40(a)(ia) would be made even in the cases of short deduction of tax. |
| (iv) |
|
Whether on the facts, in the circumstances of the case and as per law, the Hon’ble ITAT has erred in directing to delete the disallowance u/s. 40(a)(ia), without appreciating that Section 40(a)(ia) is not a charging Section but is a machinery Section and thus the expression “tax deductible at source under Chapter XVII-B” occurring in the said Section has to be understood as tax deductible at source under the appropriate provision of Chapter XVII-B and hence, tax deductible under wrong section of Chapter XVII-B would result into invoking of Section 40(a)(ia) of the Act.” |
2. Brief facts of the case are as under:
| (a) |
|
The Respondent-Assessee is engaged in the business of telecasting programmes. In the Assessment Order passed under Section 143(3), the Appellant noted that the Assessee had claimed expenditure towards channel carriage fees/channel placement fees of Rs. 11,65,28,137/-, uplinking charges of Rs. 98,09,816/- and bandwidth charges of Rs. 3,27,14,058/-. According to the Appellant, though tax had been deducted by the Assessee at 2% under Section 194C, the payments were in the nature of royalty since they were for use or right to use a “process” within the meaning of Explanation 6 to Section 9(1)(vi), and therefore, tax ought to have been deducted under Section 194J at 10%. On this basis, the Appellant held that there was non-compliance with the proper TDS provision and disallowed the aggregate expenditure of Rs. 15,90,52,011/- under Section 40(a)(ia). |
| (b) |
|
The Assessee carried the matter in appeal. By an order dated 5th June 2017, the Commissioner of Income Tax (Appeals) allowed the Assessee’s appeal and deleted the disallowance. The Commissioner (Appeals), inter alia, held that this was not a case of non-deduction of tax at source, but, at the highest, a case of lesser or short deduction of tax, and therefore, no disallowance under Section 40(a)(ia) could be made. |
| (c) |
|
Being aggrieved, the Revenue preferred an Appeal before the Tribunal. The Tribunal, while following the orders passed in the Assessee’s own case for earlier years, held that the tax had been correctly deducted under Section 194C and therefore, no disallowance under Section 40(a) (ia) is warranted. The Tribunal accordingly dismissed the Revenue’s appeal. |
3. In the present Appeal, the Revenue has challenged the order of the Tribunal. Four questions of law have been proposed as reproduced above. We intend to deal with Question Nos. (iii) and (iv) first.
4. Mr. Suresh Kumar, the learned Counsel for the Appellant contends that Section 40(a)(ia) requires deduction of tax under the correct provision of Chapter XVII-B, and that deduction under Section 194C, where according to the Revenue Section 194J applied, is no deduction in the eyes of law for the purposes of Section 40(a)(ia). In this regard, reliance is placed on the judgment of the Kerala High Court in CIT v. P V S Memorial Hospital Ltd. 380 ITR 284 (Ker), where the Court held that if tax is deductible under Section 194J, but is deducted under Section 194C, such deduction would not satisfy the requirements of Section 40(a)(ia), and deduction under a wrong provision would not save the Assessee from disallowance. He, accordingly, contended that short deduction of tax at source should meet the same fate as non-deduction and the amount under consideration should be disallowed under Section 40(a)(ia) of the Act.
5. On the other hand, Mr. Gandhi, the learned counsel for the Assessee, submitted that the issue is no longer res integra and that the consistent view of several High Courts is that short deduction of tax does not attract disallowance under Section 40(a)(ia). Reliance has been placed on the following decisions:
| (a) |
|
CIT v. S. K. Tekriwal 361 ITR 432 (Cal). |
| (b) |
|
Pr. CIT v. Future First Info Services (P.) Ltd. [2022] 447 ITR 299 (Delhi). |
| (c) |
|
CIT v. Kishore Rao & Others (HUF) [2016] 387 ITR 196 (Kar). |
| (d) |
|
CIT, International Taxation v. Samsung Heavy Industries Company Ltd. (Uttarakhand). |
6. He further submitted that even this Court, in
Pr. CIT v.
Morgan Stanley India Capital (P) Ltd [2025] has taken the same view. He also relied upon the decision of the Delhi High Court in case of
CIT v.
JDS Apparels (P.) Ltd. [2015] 370 ITR 454 (Delhi) to buttress his argument. He, accordingly, submitted that Questions (
iii) and (
iv) reproduced above do not give rise to any substantial questions of law.
7. We have heard the learned counsel for the parties and perused the papers. We agree with the submissions made by Mr. Gandhi that the issue, whether short deduction of tax at source would invite consequences under Section 40(a)(ia), has been settled by various High Courts, including this Court. The same is elaborated below.
8. In S. K. Tekriwal (supra), the Calcutta High Court approved the reasoning of the Tribunal that Section 40(a)(ia) refers to cases where tax is deductible and such tax has not been deducted or, after deduction, not paid. There is nothing in the Section to treat the Assessee as a defaulter where there is a shortfall in deduction, and that in cases of shortfall due to difference of opinion as to taxability or the nature of payments falling under various TDS provisions, the Assessee may be treated as an Assessee in default under Section 201, but no disallowance can be made under Section 40(a)(ia). The relevant extract of the judgment is as under:
“2. The reasoning appearing at paragraph 6 of the judgment and/or order under challenge reads as follows :
“In the present case before us the assessee has deducted tax u/s. 194C(2) of the Act being payments made to sub-contractors and it is not a case of non-deduction of tax or no deduction of tax as is the import of section 40a(ia) of the Act. But the revenue’s contention is that the payments are in the nature of machinery hire charges falling under the head ‘rent’ and the previous provisions of section 194I of the Act are applicable. According to revenue, the assessee has deducted tax @ 1% 2 u/s. 194C(2) of the Act as against the actual deduction to be made at 10% u/s. 194I of the Act, thereby lesser deduction of tax. The revenue has made out a case of lesser deduction of tax and that also under different head and accordingly disallowed the payments proportionately by invoking the provisions of section 40(a)(ia) of the Act. The Ld. CIT, DR also argued that there is no word like failure used in section 40(a)(ia) of the Act and it referred to only non-deduction of tax and disallowance of such payments. According to him, it does not refer to genuineness of the payment or otherwise but addition u/s. 40(a)(ia) can be made even though payments are genuine but tax is not deducted as required u/s.40(a)(ia) of the Act. We are of the view that the conditions laid down u/s.40(a)(ia) of the Act for making addition is that tax is deductible at source and such tax has not been deducted. If both the conditions are satisfied then such payment can be disallowed u/s. 40(a) (ia) of the Act but where tax is deducted by the assessee, even under bonafide wrong impression, under wrong provisions of TDS, the provisions of section 40(a) (ia) of the Act cannot be invoked.
Here in the present case before us, the assessee has deducted tax u/s. 194C(2) of the Act and not u/s. 194I of the Act and there is no allegation that this TDS is not deposited with the Government account. We are of the view that the provisions of section 40(a)(ia) of the Act has two limbs one is where, inter alia, assessee has to deduct tax and the second where after deducting tax, inter alia, the assessee has to pay into Government Account. There is nothing in the said section to treat, inter alia, the assessee as defaulter where there is a shortfall in deduction. With regard to the shortfall, it cannot be assumed that there is a default as the deduction is not as required by or under the Act, but the facts is that this expression, ‘on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction has not been paid on or before the due date specified in subsection 3 (1) of section 139’. This section 40(a)(ia) of the Act refers only to the duty to deduct tax and pay to government account. If there is any shortfall due to any difference of opinion as to the taxability of any item or the nature of payments falling under various TDS provisions, the assessee can be declared to be an assessee in default u/s. 201 of the Act and no disallowance can be made by invoking the provisions of section 40(a)(ia) of the Act.
Accordingly, we confirm the order of CIT (A) allowing the claim of assessee and this issue of revenue’s appeal is dismissed.”
3. We find no substantial question of law is involved in this case and therefore, we refuse to admit the appeal. Accordingly, the appeal is dismissed.”
9. In Kishore Rao & Others (HUF) (supra), the Karnataka High Court held that Section 40(a)(ia) may be invoked only in cases of absence of deduction. The Court further held that in a case of bona fide wrong impression, if deduction is made at a lesser rate, the same cannot be a ground for disallowance under Section 40(a)(ia). The Court specifically observed that once deduction had already been made, the case could not be regarded as one of “no deduction”. The relevant extract of the said judgment is as under:
| ”6. |
|
In our view, as per the decision of the Calcutta High Court, the view taken by the Tribunal is that Section 40(a)(ia) of the Act may be invoked only in case of there being an absence of deduction. Further, in case of bona fide wrong impression, if the deduction is at a lesser rate, the same cannot be a ground for disallowance by invoking the provisions of Section 40(a)(ia). |
| 7. |
|
Examining the matter, we find that there are two angles to the matter: The first is, whether it was a case of ‘no deduction’ or not in the present case. The answer would be in the negative because, the deduction was already made at the rate of 1%. The second angle would be as to whether it was under a bona fide wrong impression that only 1% was deducted instead of 2%. The contention of the assessee was that, having realized that deduction was 2% instead of 1%, the amount of TDS has been paid with interest. It is also a matter of fact that, two separate rate of deductions have been provided for the same work of contractor, one is at the rate of 1% if the contractor is individual or HUF, whereas, it is 2% if the contractor is other than individual or HUF. The Tribunal, in view of facts and circumstances, found that, it is a bona fide wrong impression. |
| 8. |
|
As such, on the aspects of the bona fide wrong impression keeping in view the contention of the assessee that in the middle of year, there is change of law about the deduction, as well as on the non- availability of the provisions of Section 40(a)(ia), when the issue is covered by the Calcutta High Court Judgment in case of S.K. Tekriwal (supra), we do not find that any substantial question of law would arise for consideration as sought to be canvassed. |
Hence, the appeal is dismissed.”
10. In Future First Info Services (P.) Ltd. (supra), the Delhi High Court expressly held that in cases of short deduction of TDS, disallowance under Section 40(a)(ia) cannot be made and that the correct course of action would be to invoke Section 201 of the Act. The Delhi High Court followed S. K. Tekriwal (supra) and held that no substantial question of law arose. Relevant paragraph of the said judgment is as under:
“5. Further, this Court is of the opinion that in cases of short deduction of TDS, disallowance under section 40a(ia) of the Act cannot be made and the correct course of action would have been to invoke Section 201 of the Act. On similar facts, the Calcutta High Court in
CIT v.
S.K. Tekriwal /361 ITR 432/[2013] 260 CTR 73/2012 SCC Online CAL 12147 dismissed the Revenue’s appeal. The relevant para of the said judgement is reproduced herein below:
11. In
Samsung Heavy Industries Company Ltd. (
supra), the Uttarakhand High Court held that Section 40(
a)(ia) cannot be made applicable to short deduction of tax at source. While doing so, the Court noticed the divergence between the view of the Kerala High Court in
P V S Memorial Hospital Ltd. (supra). and the Calcutta and Delhi High Courts, and relying upon the decision of the Supreme Court in
CIT v.
Vegetable Products Ltd. [1973] 88 ITR 192 (SC) held that when there are divergent views of various non-jurisdictional High Courts on an identical issue, the construction favourable to the Assessee should be adopted. Relevant portion of the said judgment is brought out hereunder:
“8. In view of the law laid down by Hon’ble Supreme Court in the aforesaid case, this Court has no hesitation in upholding the finding returned by learned Income Tax Appellate Tribunal, wherein it has held that Section 40(a)(ia) of the Income Tax Act, 1961 cannot be made applicable to short deduction of tax at source and the disallowance made was directed to be deleted. This finding of learned Income Tax Appellate Tribunal is based on the judgment rendered by Hon’ble Calcutta High Court in the case of S. K. Tekriwal (supra). Learned Income Tax Appellate Tribunal have negated the submission of the revenue, which relied on the decision of Kerala High Court in the case of PVS Memorial Hospital Ltd.(supra), by relying on the judgment passed by the Hon’ble Apex Court in the case of \ Vegetable Products (supra), wherein it was held that when there are divergent views of various non-jurisdictional High Courts on an identical issue, the construction that is favorable to the assessee should be considered.
9. Learned counsel for the appellant further submitted that the judgment of Hon’ble Kerala High Court has been challenged before the Hon’ble Supreme Court in PVS Memorial Hospital Ltd. v. Commissioner of Income Tax [Special Leave to Appeal No. 26075-26076 of 2016, dated 02-11-2018], the Hon’ble Supreme Court granted leave in the matter and now it has been converted to Civil Appeal No(s). 10915-10916/2018 and, as per the website of Hon’ble Supreme Court, the case is ripe-up for final hearing and is still pending consideration before the Hon’ble Supreme Court, therefore, the hearing of present Appeal may be deferred till decision in the aforesaid Civil Appeal.
10. We do not find any infirmity in the order of the Income Tax Appellate Tribunal.
11. In the light of above observations, in our considered view, no substantial question of law arises for consideration in the present Appeal and, therefore, we refuse to admit the Appeal.”
12. We are in respectful agreement with the view taken by the Calcutta, Delhi, Karnataka and Uttarakhand High Courts, that short deduction of tax at source does not invite disallowance under Section 40(a) (ia).
13. The issue, however, need not detain us further because this very Bench in the case of Morgan Stanley India Capital (P) Ltd (supra) has already considered the matter. In paragraph 8, we have expressed our agreement with the view taken by the Calcutta High Court in case of S. K. Tekriwal (supra). The relevant paragraph of the said judgment is as under:
“8. This now leaves us to deal with question (ii). Question No. (ii) is whether the ITAT was right in upholding the order of the CIT (Appeals) in directing the deletion of the disallowance made under 40(a)(ia) of the IT Act. The CIT (Appeals) as well as the ITAT ordered deleting this disallowance by relying upon a decision of the Calcutta High Court in the case of S. K. Tekriwal (supra). In the facts before the Calcutta High Court also, the Assessee had deducted tax under Section 194C(2) and not under Section 194-I. In other words there was a short deduction of TDS. The Calcutta High Court inter alia held that in such a case, if there is any shortfall due to the difference of opinion as to the taxability of any item, or the nature of payments falling under various TDS provisions, the assessee can be declared as an assessee in default under Section 201, but no disallowance can be made by invoking the provisions of Section 40(a)(ia) of the IT Act. Apart from the fact that we are in agreement with the decision of the Calcutta High Court, we also find that with effect from 1st April 2013 a very important proviso [second proviso to 40(a)(ia)] was inserted by the legislature which stipulated that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum, but is not deemed to be an assessee in default under the first proviso to subSection (1) of Section 201, then, for the purpose of sub-clause 40(a)(ia), it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the payee referred to in the said proviso. For the sake of convenience, the relevant proviso is produced hereunder:-
…”
(emphasis supplied)
14. Thus, even so far as this Court is concerned, the matter stands concluded in favour of the Assessee.
15. We may also usefully refer to the decision of the Delhi High Court in the case of JDS Apparels (P.) Ltd. (supra). Though the controversy there arose in the context of Section 194H, the Court considered the nature of Section 40(a)(ia) and held that it is a deterrent and penal provision and therefore requires strict construction. The Court observed that the principle against doubtful penalisation applies not only to criminal statutes but also to provisions creating deterrence and punitive consequences, and that when words are equally capable of more than one construction, the one not inflicting penalty or detriment should be preferred. Relevant paragraphs of the said decision are as under:
“17. Another reason why we feel Section 40(a)(ia) of the Act should not have been invoked in the present case is the principle of doubtful penalization which requires strict construction of penal provisions. The said principle applies not only to criminal statutes but also to provisions which create a deterrence and results in punitive penalty. Section 40(a)(ia) is a deterrent and a penal provision. It has the effect of penalising the assessee, who has failed to deduct tax at source and acts to the detriment of the assessee’s property and other economic interests. It operates and inflicts hardship and deprivation, by disallowing expenditure actually incurred and treating it as disallowed. The Explanation, therefore, requires a strict construction and the principle against doubtful penalization would come into play. The detriment in the present case, as is noticeable, would include initiation of proceedings for imposition of penalty for concealment, as was directed by the Assessing Officer in the present case. The aforesaid principle requires that a person should not be subjected to any sort of detriment unless the obligation is clearly imposed. When the words are equally capable of more than one construction, the one not inflicting the penalty or deterrent may be preferred. In Maxwell’s The Interpretation of Statutes, 12th edition (1969) it has been observed:—
“The strict construction of penal statutes seems to manifest itself in four ways: in the requirement of express language for the creation of an offence; in interpreting strictly words setting out the elements of an offence; in requiring the fulfilment to the letter of statutory conditions precedent to the infliction of punishment; and in insisting on the strict observance of technical provisions concerning criminal procedure and jurisdiction.”
18. The aforesaid principles and interpretations can apply to taxing statutes. In the present case we further feel the said principle should be applied as HDFC would necessarily have acted as per law and it is not the case of the Revenue that the bank had not paid taxes on their income. It is not a case of loss of revenue as such or a case where the recipient did not pay their taxes.”
16. In our view, this principle lends further support to the interpretation favourable to the Assessee in the context of short deduction cases.
17. In all fairness, we have to deal with the decision of the Kerala High Court in the case of P V S Memorial Hospital Ltd. (supra) as relied upon by Mr. Kumar. We are, with respect, unable to agree with the view taken therein. We are in agreement with the contrary view adopted by the other four High Courts noticed above. In any event, in the face of divergent High Court decisions, the principle laid down by the Supreme Court in Vegetable Products Ltd. (supra) requires that the interpretation favourable to the Assessee be preferred. Further, the reasoning of the Delhi High Court in JDS Apparels (P.) Ltd. (supra) on strict construction of a deterrent provision also persuades us against accepting the broader construction canvassed by the Revenue and accepted by the Kerala High Court.
18. We therefore hold that in a case of short deduction of tax at source, no disallowance under Section 40(a)(ia) is warranted. Once this position is accepted, Question Nos. (iii) and (iv) do not give rise to any substantial question of law.
19. In view of the above conclusion, Question Nos. (i) and (ii), which concern the characterisation of the payments as royalty and the applicability of Section 194J as against Section 194C, become academic in the facts of the present case and are kept open to be agitated in an appropriate case.
20. No substantial question of law arises. The Appeal is accordingly dismissed. There shall be no order as to costs.
21. This order will be digitally signed by the Private Secretary/Personal Assistant of this Court. All concerned will act on production by fax or email of a digitally signed copy of this order.
