There are 18 Sections in Income Tax Act, 1961 that provides for Deduction of Tax at Source. Out of these 18, only 3 sections [194C, 194J and 194L] use that phrase “on income comprised therein”. Further these words appear at the end of the taxing provision and naturally can not be ignored. All the other 15 do not contain this phrase.
Now the question that arises is WHY only for these 3 sections [194C, 194J and 194L] and not for other 15. It is very very simple, because in the case of the remaining 15 sections the question of “income and non income does not and can not arise.” In was only when Service Tax was introduced for Rent on commercial property the non income component namely the ST arose and the government promptly issued notification excluding the tax from TDS provision.
The very fact that this phrase “on income comprised therein” has been used naturally means that there can be non income component also being part of a payment. Further payments situation covered under these three sections alone can have both income and non-income component. [See the example given below]
If the legislatures’ intention was to tax on the whole payment this phrase “on income comprised therein” has no place in these sections / entire Income Tax Act, 1961.
The departmental circular “715 of 08-08-1995” makes this phrase “on income comprised therein” redundant [or unwanted; useless], and this can not be intention of the legislature. Otherwise they could have simply said “on such payment” instead of using the phrase “on income comprised therein”
SC decision on ACC will be dealt with appropriately in the end of this article.
Now the question is why only these 3 sections have this phrase “on income comprised therein”
Let us take an example (as amended by Finance Act 2010):
A CA raises a bill on his client Rs. 24,000 as Prof Fee + Rs. 4,000 towards hotel bill [bill produced as proof for reimbursement] + Rs. 2,472 towards service Tax Totalling to: Rs. 30,472.00. Then TDS is deductible. But the hotel bill which is a reimbursement and service tax can under no stretch of imagination be treated as income. Hence the TDS is to be made on Rs. 24,000.00 only (even though this alone does not exceed the threshold limit) which is the “income component” of the total bill.
Now the SC case: The detailed agreement of ACC has to be read before commenting on the SC judgement. How ever to a limited extent it can be said since the phrase “on income comprised therein” is used at the end of the taxing provision and, there are no punctuations between “…. deduct an amount equal to … of such sum as income-tax” and the phrase “on income comprised therein” the phrase can not excluded while reading or interpreting these three sections.
It is true that it is not the intention of the legislature to thrust on the deductor the task of finding the income component in general but any layman can say that a reimbursement that is supported with document and the indirect TAX component are not, repeat not, and can never constitute an income
I can see few professionals jumping on to their feet and question how I can hold SC wrong, quoting Article 141 of the Constitution that says that the Act defined by the SC is final.
Please read Article 137 also, that precedes Article 141:
137. Review of judgments or orders by the Supreme Court :— Subject to the provisions of any law made by Parliament or any rules made under article 145, the Supreme Court shall have power to review any judgment pronounced or order made by it.
After all they are human beings hence the “Lady Blindfolded” holding the Physical-Balance in hand is given as symbol for judiciary.
This amply means that even God can mistake and He and only He has the power to rectify it, either suo-moto or on appeal.
Please Note:- Currently Department insist on deduction of TDS on Gross amount which includes Service tax except in the case of Rent. In case of Rent Assessee need to deduct TDS only on Rent amount ,not on service tax component but in case of other expenses Assessee need to deduct TDS on service tax component also.
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