Requirement to deduct tax at source under section 194C is mandatory and, in case of assessee’s failure to do so in respect of contractual payments, disallowance has to be made under section 40(a)(ia) irrespective of fact as to whether assessee is following cash or mercantile system of accounting
HIGH COURT OF PUNJAB AND HARYANA
P.M.S. Diesels
v.
Commissioner of Income-tax-2, Jalandhar
S. J. VAZIFDAR, ACTG. CJ.
AND G.S. SANDHAWALIA, J.
AND G.S. SANDHAWALIA, J.
IT APPEAL NOS. 716 OF 2009 (O & M), 130 OF 2012 AND 171 & 188 OF 2014
APRIL 29, 2015
Section 194C, read with section 40(a)(ia), of the Income-tax Act, 1961 – Deduction of tax at source – Contractors/sub-contractors, payments to (Applicability of) – Assessment year 2005-06 – Whether requirement to deduct tax at source under section 194C is mandatory and, in case of assessee’s failure to do so in respect of contractual payments, disallowance has to be made under section 40(a)(ia) irrespective of fact as to whether assessee is following cash or mercantile system of accounting – Held, yes [Paras 14 and 21] [In favour of revenue]
Words and Phrases : Word ‘payable’ as occurring in section 40(a)(ia) of the Income-tax Act, 1961
FACTS
| ■ | The assessee filed its return declaring certain taxable income. The Assessing Officer, found that the TDS return for the assessment year in question along with proof of payment of TDS was not submitted. The assessee admitted that TDS had not been deducted in respect of the payments made/deemed to have been made who followed the mercantile system. It was also admitted that the TDS deducted had not been deposited to the credit of the Central Government. | |
| ■ | The Assessing Officer as well as the Tribunal held that where assessee was liable to deduct and pay over TDS under section 194C and the assessee failed to do so, said payments were to be disallowed under section 40(a)(ia). | |
| ■ | On appeal: |
HELD
| ■ | The liability to deduct tax at source under the provisions of Chapter XVII is mandatory. A person responsible for paying any sum is also liable to deposit the amount in the Government account. All the sections in Chapter XVII-B require a person to deduct the tax at source at the rates specified therein. The requirement in each of the sections is preceded by the word ‘shall’. The provisions are, therefore, mandatory. There is nothing in any of the sections that would warrant reading the word ‘shall’ as ‘may’. The point of time at which the deduction is to be made also establishes that the provisions are mandatory. | |
| ■ | For instance, under section 194C, a person responsible for paying the sum is required to deduct the tax ‘at the time of credit of such sum to the account of the contractor or at the time of the payment thereof. ……’. That the legislature has granted an assessee a relaxation from the rigours of section 40(a)(ia) does not detract from the mandatory nature of the liability to deduct the tax at source under the various provisions of Chapter XVII-B. [Para 11] | |
| ■ | The liability to deduct tax at source is, therefore, mandatory. [Para 14] | |
| ■ | This brings one to a consideration of the ambit of section 40(a)(ia). The words ‘payable’ and ‘paid’ have different connotations. The word ‘paid’ is, in fact, an antonym of the word ‘payable’. This, however, is not significant to the interpretation of section 40(a)(ia). [Para 15] | |
| ■ | It is necessary to first deal with the contention on behalf of the assessee that section 40(a)(ia) relates only to assessees who follow the mercantile system and does not pertain to the assessees who follow the cash system. [Para 16] | |
| ■ | There is nothing that persuades the Court to accept this submission. The purpose of the section is to ensure the recovery of tax. There is no indication in the section that this object was confined to the recovery of tax from a particular type of assessee or assessees following a particular accounting practice. As far as this provision is concerned, it appears to make no difference to the Government as to the accounting system followed by the assessees. The Government is interested in the recovery of taxes. If for some reason, the Government was interested in ensuring the recovery of taxes only from assessees following the mercantile system, one would have expected the provision to so stipulate clearly, if not expressly. | |
| ■ | It is not suggested that assessees following the cash system are not liable to deduct tax at source. It is not suggested that the provisions of Chapter XVII-B do not apply to assessees following the cash system. There is nothing in Chapter XVII-B either that suggests otherwise. [Para 17] | |
| ■ | This view is fortified by the Explanatory Note to Finance Bill (No.2) of 2004. Sub-clause (ia) of clause (a) of section 40 was introduced by the Finance Bill (No.2) of 2004 with effect from 01-04-2005. [Para 18] | |
| ■ | The adherence to the provisions ensures not merely the collection of tax but also enables the authorities to bring within their fold all such persons who are liable to come within the network of tax payers. The intention was to ensure the collection of tax irrespective of the system of accounting followed by the assessees. One can not see how this dual purpose of augmenting the compliance of Chapter XVII and bringing within the department’s fold tax payers is served by confining the provisions of section40(a)(ia) to assessees who follow the mercantile system. Nor one finds anything that indicates that for some reason the legislature intended achieving these objectives only by confining the operation of section 40(a)(ia) to assessees who follow the mercantile system. [Para 19] | |
| ■ | Section 40(a)(ia), therefore, applies not merely to assessees following the mercantile system but also to assessees following the cash system. [Para 21] | |
| ■ | If this view is correct and indeed one must proceed on the footing that it is, it goes a long way in indicating the fallacy in the assessees main contention, namely, if the payments have already been made by the assessee to the payee/contracting party, the provisions of section 40(a)(ia) would not be attracted even if the tax is not deducted and/or paid over to the Government account. [Para 21] | |
| ■ | Section 40(a)(ia) refers to the nature of the default and the consequence of the default. The default is a failure to deduct the tax at source under Chapter XVII-B or after deduction the failure to pay over the same to the Government account. The term ‘payable’ only indicates the type or nature of the payments by the assessees to the persons/payees referred to in section 40(a)(ia), such as, contractors. It is not in respect of every payment to a payee referred to in Chapter XVII-B that an assessee is bound to deduct tax. There may be payments to persons referred to in Chapter XVII-B, which do not attract the provisions of Chapter XVII-B. | |
| ■ | The consequences under section 40(a)(ia) would only operate on account of failure to deduct tax where the tax is liable to be deducted under the provisions of the Act and in particular Chapter XVII-B thereof. It is in that sense that the term ‘payable’ has been used. The term ‘payable’ is descriptive of the payments which attract the liability to deduct tax at source. It does not categorize defaults on the basis of when the payments are made to the payees of such amounts which attract the liability to deduct tax at source. [Para 22] | |
| ■ | 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. [Para 23] | |
| ■ | 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. [Para 24] | |
| ■ | 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 assessees 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. | |
| ■ | Once this is realized, the fallacy in the contention on behalf of the assessee becomes even more apparent. [Para 25] | |
| ■ | Section 40(a)(ia) also applies to assessees following the cash system and the liability of such assessees to deduct tax at source is only upon payment being made to the payee. If the appellant’s contention is accepted, once payment is made, the question of the amount being payable to the payee would not even arise. In that event, an assessee following the cash system would never be met with the consequences of section 40(a)(ia) even if he fails to comply with his obligation to deduct tax at source. | |
| ■ | If the assessee’s submission is accepted, there would be no connection or correlation between two ingredients in the opening part of sub-clause (ia) itself viz. the reference in the opening part to any amounts payable to a party on the one hand and the concluding words ‘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 the other. It is clear, therefore, that the use of the term ‘payable’ in section 40(a)(ia) is only descriptive of the type or nature of payments by the assessee to the payees referred to in section 40(a)(ia). [Para 26] | |
| ■ | The error in the submission of assessee is in reading the term ‘payable’ in isolation. The entire provision must be read as a whole. [Para 27] | |
| ■ | The first proviso to section 40(a)(ia) alleviated to a great extent the burden on the tax payer who had defaulted in deducting the tax at source. The proviso contemplates a situation where there was a failure to deduct tax at source. As mentioned earlier, the liability to deduct tax at source would arise in the case of an assessee following the cash system only upon payment of the amount to the payee/contracting party and in the case of an assessee following the mercantile system, upon the assessee crediting such sum to the account of the payee. | |
| ■ | Merely because an assessee has not deducted the tax at the relevant time, it does not follow that the assessee cannot thereafter deduct the same. If, for instance, an assessee recovers the amount from the payee subsequently, it would still constitute a deduction from the amount payable to the payee. It would only constitute a subsequent deduction. But, a deduction it still is. The verb ‘deduct’ means to take away and the noun ‘deduction’ is the act or process of deducting. If the tax has been deducted at source when it ought to have been, it would have constituted taking away a part of the money due to the payee. By recovering the amount from the payee subsequently, it would still amount to an act or process of deducting from the amount originally payable. That the same is done after the amount is paid or credited would make no difference. There would be a reduction in the amount paid nevertheless. The proviso is, therefore, not inconsistent with the view that has taken above. [Para 29] | |
| ■ | In view of aforesaid, impugned order of Tribunal was to be upheld [Para 38] |