Tuesday, 14 May 2013

HC reverses ITAT Special Bench decision; rules provisions of Sec 40(a)(ia) cover not only sums, which are payable as on 31st March of a particular year but also which are payable at any time during year

THE issues before the Bench are - Whether the provisions of Sec 40(a)(ia) cover not only the sums, which are payable as on March 31 of a particular year but also which are payable at any time during the year - Whether the principle of conscious omission can be applied in case there is a doubt regarding the draft presented in Parliament and the final legislation passed. And the verdict goes in favour of Revenue.
Facts of the case
Assessee is engaged in the business of Transport Contractor and Commission Agent. It provides the service of transportation through trucks. For the AY 2007-08, it had filed his ROI declaring total income of Rs.3,82,290/-. During assessment, AO had scrutinized the expenditure
in the nature of payments made by the assessee to its sub-contractors and called upon him to explain the total payment of Rs 8.74 crores made by him to the subcontractors without deducting TDS. The AO had disallowed the entire expenditure on the ground that the assessee had not deducted TDS, though payments were made to transporters which exceeded to Rs. 20,000/- in a single trip and aggregated above Rs.50,000/- in the year. It was observed that the assessee had obtained Form No.15-I from such contractors. However, such forms were not furnished along with necessary particulars in Form-15J to the CIT before due date. On appeal, CIT(A) had confirmed the view of AO. It was further observed that the genuineness of the expenditure was also not proved by the assessee and despite opportunities amount-wise break-up of the payments made was not furnished. It was observed that photocopies filed by the assessee showed not just the same name but also same address of the individuals owning several trucks. Complete addresses were not given. In several cases, vague addresses were supplied. On further appeal, Tribunal had allowed the assessee’s appeal. Relying on the decision of Special Bench of the Tribunal (Visakhapatnam) in the case of M/s. Merilyn Shipping & Transports vs. ACIT, the Tribunal had deleted the entire disallowance. The Tribunal believed that the word “payable” used in Section 40(a)(ia) would make the provision applicable only in respect of expenditure payable on 31st March of a particular year and that such provision cannot be invoked to disallow the amounts which had already been paid during such year even though tax may not have been deducted at source.
Before the HC, the Revenue’s counsel had contended that the Tribunal had committed serious error in holding that provision of Section 40(a)(ia) would apply only when the amount had remained payable till the end of the accounting year. They pointed out that the word “payable” had not been defined under the Act and the same would, in the context of the provision under consideration, include the expression “paid”. Any other interpretation would lead to absurd results. They contended that the interpretation which advances the true meaning of the provision should be adopted and not one which frustrates the provision. It was also contended that interpretation made by the Tribunal leads to results wholly unintended by the legislature. If disallowance u/s 40(a)(ia) was applied only in case of amounts payable as on 31st March of the year under consideration, in large number of cases where the assessees might have actually paid the amounts but might not have either deducted tax at source though required under the Act or even after deduction not deposited with the Government, would escape the consequences envisaged under the said provision. It was further contended that Section 40(a)(ia) in its plain language does not permit such interpretation adopted by the Tribunal in the case of M/s. Merilyn Shipping & Transports vs. ACIT. Even on the premise of literal construction, the view adopted by the Tribunal should be rejected. On the other hand, the assessee’s counsel had supported the view of the Tribunal. They contended that in taxing statute there was no room for intendment. The provisions must be construed strictly on the basis of plain language used by the legislature. According to them only meaning that can be ascribed to Section 40(a)(ia) is that the disallowance can be made in respect of amounts, which were payable but not yet paid till 31st March of the year under consideration and no other. It was contended that in any case, Section 40(a)(ia) creates deeming fiction where the sum though not an income of the assessee was taxed as such. It was, therefore, contended that such provision should be interpreted strictly and narrowly. Even if the intention of the legislature may not had been to limit such provision, if the plain language of the section permits no other meaning, HC cannot and would not expand the meaning of the section to cover any legislative imperfections or errors. It was strongly contended that terms “payable” and “paid” are not synonymous. Section 40(a)(ia), therefore, when uses the expression “payable”, such term must be given its ordinary meaning and the expression “paid”, cannot be read into it. Counsel further submitted that the Finance Bill No.2 of 2004 under which Section 40 was proposed to be amended to include clause (a)(ia) originally used different language. In place of the word “payable” expression used was “amount credited or paid”. In the amendment, which was ultimately brought about, the said expression was consciously dropped. Thus, there was conscious omission on the part of the legislature. They, therefore, contended with all the more force that the term “payable” used in Section 40(a)(ia) would not include expression “paid”. They pointed out that term “paid” has been defined u/s 43(2) whereas the word “payable” has not been defined in the Act.
Held that,
++ in the present case, we have no hesitation in accepting the contention that the provision must be construed strictly. This being a provision which creates an artificial charge on an amount which is otherwise not an income of the assessee, cannot be liberally construed. Undoubtedly if the language of the section is plain, it must be given its true meaning irrespective of the consequences. We have noticed that the provision makes disallowance of an expenditure which has otherwise been incurred and is eligible for deduction, on the ground that though tax was required to be deducted at source it was not deducted or if deducted, had not been deposited before the due date. By any intendment or liberal construction of such provision, the liability cannot be fastened if the plain meaning of the section does not so permit. For the purpose of the said section, we are also of the opinion that the terms “payable” and “paid” are not synonymous. Word “paid” has been defined in Section 43(2) 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. 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), term “payable” cannot be seen to be including the expression “paid”. The term “paid” and “payable” in the context of Section 40(a)(ia) are not used interchangably. In the case of Birla Cement Works and another vs. State of Rajasthan and another reported in AIR 1994 (SC) 2393, the Apex Court observed that “the word payable is a descriptive word, which ordinarily means that which must be paid or is due or may be paid but its correct meaning can only be determined if the context in which it is used is kept in view. The word has been frequently understood to mean that which may, can or should be paid and is held equivalent to “due”. 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 was accurate in its opinion;
++ in this context, we would like to examine 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. Both these aspects we would address one after another. 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. It is, of course, true that 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, we notice from various decisions of the SC, 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;
++ in the case of Bhuwalka Steel Industries Ltd. vs. Bombay Iron and Steel Labour Board reported in AIR 2010 (Suppl.) 122, the Apex Court observed that the omission of the words as proposed earlier from the final definition is a deliberate and conscious act on the part of the legislature, only with the objective to provide protection to all the labourers or workers, who were the manual workers and were engaged or to be engaged in any scheduled employment. Therefore, there was a specific act on the part of the legislature to enlarge the scope of the definition and once we accept this, all the arguments regarding the objects and reasons, the Committee Reports, the legislative history being contrary to the express language, are relegated to the background and are liable to be ignored. In the case of Agricultural Produce Market Committee, Narela, Delhi vs. CIT and anr. (2008-TIOL-155-SC-IT), the SC noticed that prior to Finance Act, 2002, the Income Tax Act did not contain the definition of words “Local Authority”. The word came to be defined for the first time by the Finance Act of 2002 by explanation/ definition clause to Section 10(20). It was further noticed that there were significant difference in the definition of term “local authority” contained under Section 3(31) of the General Clauses Act, 1987 as compared to the definition clause inserted in Section 10(20) of the Income Tax Act, 1961 vide Finance Act, of 2002. In the case of Gopal Sardar, vs. Karuna Sardar reported in AIR 2004 SC 3068, the Apex Court in the the context of limitation within which right of preemption must be exercised and whether in the context of the relevant provisions contained in West Bengal Land Reforms and Limitation Act, 1963 applied or not, observed that prior to 15-2-1971, an application under Section 8 was required to be made to the “Revenue Officer specifically empowered by the State Government in this behalf.” This phrase was substituted by the phrase “Munsif having territorial jurisdiction” by the aforementioned amendment. Even after this amendment when an application is required to be made to Section 8 either to apply Section 5 of the Limitation act or its principles so as to enable a party to make an application after the expiry of the period of limitation prescribed on showing sufficient cause for not making an application within time. The Act is of 1955 and for all these years, no provision is made under Section 8 of the Act providing for condonation of delay. Thus, when Section 5 of the Limitation Act is not made applicable to the proceedings under Section 8 of the Act unlike to the other proceedings under the Act, as already stated above, it is appropriate to construe that the period of limitation prescribed under Section 8 of the Act specifically and expressly governs an application to be made under the said section and not the period prescribed under Article 137 of the Limitation Act;
++ in our opinion, the Tribunal committed an error in applying the principle of conscious omission in the present case. Firstly, as already observed, we 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. In the result, we are of the opinion that 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. In that context, in our opinion the decision of the Special Bench of the Tribunal in the case of M/s. Merilyn Shipping & Transports vs. ACIT, does not lay down correct law. All Tax Appeals are allowed. Decisions of the Tribunal under challenge are reversed. In the earlier portion of the judgment, we had recorded that the Tribunal in all cases had proceeded only on this short basis without addressing other issues. We, therefore, place all these matters back before the Tribunal for fresh consideration of other issues, if any, regarding disallowance u/s 40(a)(ia). All appeals are disposed of accordingly.

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