REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL No. 7865 OF 2009

SHREE CHOUDHARY TRANSPORT COMPANY …Appellant(s)

Vs

INCOME TAX OFFICER …Respondent(s)

JUDGMENT

Dinesh Maheshwari, J.

Preliminary

1. By way of this appeal, the assessee-appellant has called in question

the order dated 15.05.2009 passed in Income Tax Appeal No. 164 of 2008

whereby, the High Court of Judicature for Rajasthan at Jodhpur has summarily

dismissed the appeal against the order dated 29.08.2008 passed in ITA No.

117/JU/2008 by the Income Tax Appellate Tribunal, Jodhpur Bench at

Jodhpur; and thereby, the High Court has upheld the computation of total

income of the assessee-appellant for the assessment year 2005-2006 with

disallowance of payments to the tune of Rs. 57,11,625/-, essentially in terms

of Section 40(a)(ia) of the Income Tax Act, 1961

1

, for failure of the assessee-

appellant to deduct the requisite tax at source

2

.

1 Hereinafter referred to as ‘the Act of 1961’ or simply ‘the Act’.

2 ‘Tax deducted at source’ being referred as ‘TDS’

1

2. We may take note of the relevant factual and background aspects of

the case while keeping in view the root point calling for determination in this

appeal, that is, as to whether the payments in question have rightly been

disallowed from deduction in computation of total income of the appellant?

Relevant factual and background aspects; the impugned order of

assessment

3. In a brief outline of the relevant factual aspects, it could be noticed

that the assessee-appellant, a partnership firm, had entered into contract with

M/s Aditya Cement Limited, Shambupura, District Chittorgarh

3

for transporting

cement to various places in India. As the appellant was not having the

transport vehicles of its own, it had engaged the services of other transporters

for the purpose. The cement marketing division of M/s Aditya Cement Limited,

namely, M/s Grasim Industries Limited, effected payments towards

transportation charges to the appellant after due deduction of TDS, as shown

in Form No. 16A issued by the company.

4. On 28.10.2005, the assessee-appellant filed its return for the

assessment year 2005-2006, showing total income at Rs. 2,89,633/- in the

financial year 2004-2005 arising out of the business of ‘transport contract’.

5. In the course of assessment proceedings, the Assessing Officer

4

examined the dispatch register maintained by the appellant for the period

3 Hereinafter also referred to as “the consignor company” or “the company”.

4 ‘AO’ for short

2

01.04.2004 to 31.03.2005, containing all particulars as regards the trucks

hired, date of hire, bilty and challan numbers, freight and commission charges,

net amount payable, the dates on which the payments were made, and the

destination of each truck etc. The contents of the register also indicated that

each truck was sent only to one destination under one challan/bilty; and if one

truck was hired again, it was sent to the same or other destination/trip as per

separate challan/bilty. The commission charged by the appellant from the

truck operators/owners ranged from Rs. 100/- to Rs. 250/- per trip.

5.1. On verifying the contents of record placed before him, the AO

observed that while making payment to the truck operators/owners, the

appellant had not deducted tax at source even if the net payment exceeded

Rs. 20,000/-. Following this, a notice dated 05.11.2007 was issued to the

appellant, requiring the details of amount paid to the truck operators/owners,

TDS thereupon, and date of depositing the same in the Government account.

In reply, by its letters dated 12.11.2007 and 15.11.2007, the appellant

contended, inter alia, that the trucks hired were belonging to different

operators/owners who were not the sub-contractors or contractors; that they

came from different parts of India and mostly required cash payment for diesel

and other running expenses; that the appellant had no liability to deduct tax at

source because it had not made payments exceeding Rs. 20,000/- in a single

transaction; and that the provisions of Section 40(a)(ia) were not applicable to

the appellant.

3

5.2. While drawing up the assessment order dated 22.11.2007, the AO

observed that the payments to different truck operators/owners were made

directly by the appellant firm and not the consignor company; that the

appellant firm was responsible for transportation of goods of the company as

per the contract for which, the appellant received payment from the company

after tax being deducted at source therefrom. The AO also observed that the

appellant firm paid freight charges to the truck operators/owners from the

income so earned; and the remaining amount was shown as commission.

Looking to the nature of dealings of the parties, the AO observed that there

existed a contract between the appellant and the truck operators/owners in

respect of each challan/bilty for transportation. The AO also referred to the

Circular bearing No. 715 dated 08.08.1995 issued by the Central Board of

Direct Taxes

5

, to observe that each goods receipt could be considered a

separate contract. While further observing that a contract may be written or

oral, the AO held that when the truck operators/owners in the case at hand

were not to be considered as contractors, they were undoubtedly the sub-

contractors of the appellant. The AO also pointed out that despite sufficient

opportunity being given, a copy of the agreement of the appellant firm with the

company for providing transportation services was not furnished.

5.3.Having perused the material placed before him, the AO held on the

appellant’s responsibility for deducting tax at source while making payment to

the truck operators/owners where such payment exceeded Rs. 20,000/- on a

single bilty/challan or goods receipt in the following words:-

5 ‘CBDT’ for short

4

“The dispatch register of the assessee firm as well as the

cash book clearly establish beyond doubt that payment to the

truck operators was made by the assessee firm. In other

words, the assessee firm was the person responsible for

deducting the tax at source therefrom within the meaning of

Section 194C of the Act. Since the goods were transported

by trucks and every truck transported goods under a

separate bilty and challan to a particular destination, there

was a contract or sub-contract between the assessee firm

and the truck operator as per the provisions of Section 194C

of the Act and Board’s circular supra, and the assessee

should have deducted tax at source while making payment to

the truck operators as per the provisions of Section 194C(3)

of the Act where the amount of any sum credited or paid or

likely to be credited or paid to the account of, or to the

contractor or sub-contractor exceeded twenty thousand

rupees.

*** *** ***

From the facts and circumstances of the case discussed

above the final position emerging is that in view of the

provisions of Section 194C of the Act the assessee was liable

to deduct tax at source while making payment to truck

owners/operators where such payment exceeded Rs.

20,000/- on the basis of single bilty/challan or GR.”

5.4. After examining the details contained in the dispatch register, cash

book and payment vouchers, the AO found that tax was not deducted at

source by the appellant while making payment to the truck operator/owner,

even though the payment under a single goods receipt (challan/bilty)

exceeded the sum of Rs. 20,000/-. Thereupon, the assessee-appellant was

called upon to explain as to why deduction claimed on account of such

payment from the income be not disallowed in terms of Section 40(a)(ia) of the

Act. In the order of assessment, the AO took note of and dealt with various

submissions made on behalf of the assessee-appellant in this regard as

follows:-

5

“Since the assessee failed to deduct the tax at source while

making payment to truck owners/ operators exceeding Rs.

20,000/-, the assessee was asked to explain as to why

deduction claimed on account of such payments from the

income be not disallowed within the meaning of Section 40(a)

(ia) of the Act. The learned counsel of the assessee firm

stated that there was no payment exceeding Rs. 20,000/-. In

this regard he furnished photocopy of extract of cash book

and also payment vouchers which indicate that each

payment exceeding Rs. 20,000/- was shown in the cash book

in two parts though paid on the same date and the assessee

made two separate vouchers for such payment just to give an

impression that payment to truck owners/ operators was not

exceeding Rs. 20,000/-. In this regard it is pertinent to

mention that merely by showing payment of one challan/

bilty in two pieces the assessee cannot absolve itself of

the provisions of the Section 40(a)(ia) inasmuch as

Section 194C(3)(i) clearly speaks of – “the amount of any

sum credited or paid or likely to be credited or paid to the

account of, or to, the Contractor or sub-contractor, if such

sum does not exceed twenty thousand rupees”. The learned

counsel further submitted that the receipts of the assessee

firm are full vouched and verifiable and subject to TDS and

the payments to truck owners/ operators are made by the

assessee firm from such receipts and as such there as no

need for further TDS. He further stated that the assessee firm

prepares bills for claiming payments from the company on

the basis of freight charges payable to various truck owners/

operators and when the payment is received on the basis of

such bills, further payment is made to the truck owners/

operators and nominal commission is retained by the

assessee and, therefore, the payment made to the truck

owners/ operators was out of the purview of Section 194C of

the Act. He further stated that it is not practical to deduct tax

at source while making payment to a truck owner/ operator

because no truck owner accepts payment after TDS. This

argument put forth on behalf of the assessee firm is not

acceptable inasmuch as Section 194C(1) clearly says that -

“Any person responsible for paying any sum to any

resident…….” Since the assessee firm was responsible

for making payment to the truck owners operators, it was

mandatory on the part of the assessee to deduct tax at

source while making such payment. Further there is no

direct nexus between the Company and the truck

owners/operators and thus it cannot be said that the

6

assessee firm was a mediator between the company and

the truck owners/ operators…...”

(emphasis in bold supplied)

5.5. In view of the above, the AO proceeded to disallow the deduction of

payments made to the truck operators/owners exceeding Rs. 20,000/- without

TDS, which in total amounted to Rs. 57,11,625/-; and added the same back to

the total income of the assessee-appellant. The AO also disallowed a lump

sum of Rs. 20,000/- from various expenses debited to the Profit and Loss

Account and finalised the assessment, accordingly, as under:-

“Therefore, considering the provisions of Section 194C,

Section 40(a)(ia) and Board’s Circular No. 715, dated

08.8.1995, the payment made to the truck owners/operators,

exceeding to Rs. 20,000/- without deducting tax at source is

disallowed and added back to the total income of the

assessee firm which works out to Rs. 57,11,625/-, supra.

The assessee has shown total payments in Truck Freight

Account at Rs. 1,37,71,206/- and total receipts from the

company at Rs. 1,43,90,632/-.

The assessee has shown commission income of Rs.

6,23,300/- on which net profit of Rs. 2,89,694/- has been

shown giving N.P. rate of 46.47% as against N.P. rate of

50.91% declared in the immediate preceding year on

commission income of Rs. 6,00,450/-. The N.P. rate declared

this year is on the lower side. Considering the nature of

various expenses debited to the Profit and Loss Account like

Staff Welfare Expenses, Telephone Expenses, Travelling

expenses, Motor Cycle Repairs etc. where involvement of

personal element cannot be ruled out, a lump sum

disallowance of Rs. 20,000/- is made to the declared

income.”

Before the Commissioner of Income Tax (Appeals), Jodhpur

6. Aggrieved by the order so passed by the Assessing Officer, the

assessee-appellant preferred an appeal before the Commissioner of Income

7

Tax (Appeals)

6

, being Appeal No. 183 of 2007-08, that was considered and

dismissed on 15.01.2008.

6.1. The CIT(A) re-examined the record and rejected the contentions of

the appellant that it had only received commission income and was not liable

to deduct tax at source on payments made to the truck owners while observing

as under:-

“On careful consideration of the material facts, it is observed

that the appellant entered into a contract for transportation of

goods (cement) with M/s Aditiya Cement Limited in order to

honour the contract, the appellant hired various trucks all

through out the year for the purpose of transportation of

cement. The appellant received freight charges from M/s

Aditiya Cement Limited on which tax was deducted. The

appellant paid freight charges to individual truck owners, after

transportation of goods. There was no nexus between the

truck owners/ operators and M/s Aditiya Cement Limited.

How the appellant transported the goods (cement) was

the exclusive domain of the appellant firm. Under such

circumstances, the gross freight received by the

appellant from M/s Aditiya Cement Limited represents

gross income of the appellant firm. Since the appellant

made payments to various truck owners/ operators.

Such payments represent expenditure. It may be

mentioned here that the payments to the truck owners/

operators were made only after the goods were transported

by them satisfactorily at the given destinations. In other

words, there existed a contract or a sub-contract between the

appellant firm and the transporters. Under such

circumstances, the appellant was required to deduct tax at

source on the payments made to truck drivers/ owners within

the meaning of provisions of Section 40(a)(ia) read with

Section 194C of the Act. Under no circumstances, it can be

said that the appellant only received commission income and

therefore provisions of Section 194C are not applicable.”

(emphasis in bold supplied)

6.2. In regard to the contention that the appellant was not required to

deduct tax at source when no payment exceeded Rs. 20,000/-, the CIT(A)

6 ‘CIT(A)’ for short

8

found that the appellant had, for its convenience and to avoid the rigour of

Section 40A(3) of the Act, chose to split the payments into two parts but the

entries of such split payments were available consecutively in the cash book.

Thus, while not accepting such methodology, the CIT(A) observed that even in

the split payments, it was required of the appellant to deduct tax at the time of

making final payment. The relevant observation of the CIT(A) read as under:-

“The facts have been gone through and it is observed that

the appellant made payments in a manner according to which

individual payment to the truck owner(s) did not exceed Rs.

20,000/-. In other words, the payment was splitted into two

parts. However, the total amount paid to the truck owner(s)

for individual contract exceeded Rs. 20,000/-. For instance,

cashbook dated 31-1-2005 of the appellant shows payments

of Rs. 14,750/- and Rs. 10,510/- to Truck No.RJ14-G-5599

for transport of cement from the premises of the Cement

Company to Bhatinda. The same cashbook page also shows

payments of Rs. 14,750/- and Rs. 9,431/- to Truck No.RJ23-

G-3041 for transport of cement. It is the argument that since

the individual payment did not exceed Rs. 20,000/-, the

provisions of Section 194C are not applicable. On careful

consideration of the material facts, it is observed that both

the entries are consecutive in the cashbook and,

therefore, it is observed that the appellant, for its

convenience and to avoid rigors of the provisions of

Section 40A(3), splitted the payments into two parts. Had

the payments been really made in two parts, both the entries

should not have been consecutive. It is also not understood

as to why the truck owners after completing the contract,

would accept the amount in two parts and why they would

come to the office of the appellant twice for seeking

payments. The theory of making payments in two parts is

merely a story, which is capable neither on facts nor on

practicability. It is also surprising to note that in none of the

case the appellant made fully payment to any truck owner all

through out the year exceeding Rs.20,000/.”

(emphasis in bold supplied)

6.3. The CIT(A) also examined in detail the question as to whether

transport contracts were subject to deduction of tax at source and, with

9

reference to clause (c) of Explanation (iii) of Section 194C of the Act as also to

CBDT Circular Nos. 558 dated 28.03.1990 and 681 dated 08.03.1994, held

that the provisions of Section 194C of the Act were applicable to the contracts

for transportation of goods; and the appellant was required to deduct tax at

source if the gross credited or paid or likely to be credited or paid exceeded

the limit of Rs. 20,000/-. Having found that the appellant’s case was squarely

covered within the provisions of Section 194C of the Act, the CIT(A) held that

in view of the mandatory provisions of Section 40(a)(ia) of the Act, the

payments in question cannot be allowed as deduction while computing total

income. Thus, the CIT(A) proceeded to dismiss the appeal while holding, inter

alia, as under:-

“It is, therefore, clear that the appellant’s case was squarely

covered within the provisions of the Section 194C and,

therefore, it was required to deduct tax at sources while

making payments to the truck owners.

Provisions of Section 40(a)(ia) clearly provide that if any

amount payable to a contractor or subcontractor for carrying

out any work 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 during the previous year, or in

the subsequent year before the expiry of the time prescribed

under sub-section (1) of Section 200, such sum shall not be

allowed as a deduction while computing the total income. As

can be seen, the provisions are mandatorily to be complied

with in the case a default and the question of existence of

any reasonable cause has got no meaning.

In the light of the entire discussion as above, I hold that the

appellant was required by the provisions of the Act to deduct

tax on freight payments totalling to Rs.57,11,625/-. Since the

appellant failed to deduct tax at source the sum of

Rs.57,11,625/- was rightly disallowed by the Ld. AO. The Ld.

AO rightly invoked the provisions of Section 40(a)(ia) of the

Act. Therefore, on the given facts as also in law, the ground

of appeal fails.”

10

Before the Income Tax Appellate Tribunal, Jodhpur Bench

7. Aggrieved again, the appellant approached the Income Tax Appellate

Tribunal, Jodhpur Bench

7

in further appeal, being ITA No. 117/JU/2008. This

appeal was considered and dismissed by ITAT by way of its order dated

29.08.2008.

7.1. The ITAT pointed out that by an application dated 16.07.2008, the

appellant sought permission to produce additional evidence i.e., the

agreement dated 01.04.2003 executed between itself and M/s Grasim

Industries Limited, and as the Department had no-objection, the same was

admitted as additional evidence by the order dated 17.07.2008 but, another

application for admission of evidence in shape of affidavit of partner of the

appellant firm, was objected to by the Department and was rejected.

7.2. The ITAT found that the agreement in question was on principal to

principal basis whereby, the appellant was awarded the work of transporting

cement from Shambupura but, as the appellant did not own any trucks, it had

engaged the services of other truck operators/owners for transporting the

cement; and such a transaction was a separate contract between the appellant

and the truck operator/owner. The ITAT, therefore, endorsed the findings of AO

and CIT(A) in the following words:-

“13. The perusal of agreement on record reveals that the

assessee was awarded a works contract by M/s. Grasim

Industries Limited, a cement marketing division of M/s. Aditya

Cement Ltd. This agreement was on principal to principal

basis whereby the appellant was awarded the cement

transportation work and in terms of agreement the scope of

7 ‘ITAT’ for short

11

work was to include placement of trucks for cement

transportation from their plant at Shambupura on regular

basis in the state of Rajasthan. In case the assessee failed to

provide trucks as per contractual obligation, the company

was free to hire trucks from market at prevailing prices and

the amount of expenses incurred if any was to be debited to

the assessee’s account terming him to be a transporter. The

assessee merely acted as an independent contractor while

carrying on the aforesaid work contract awarded to it by M/s.

Grasim Industries Limited. Admittedly, the appellant did not

own trucks of its own for carrying out such transportation

contract and has engaged the services of other truck

owners/operators for lifting goods from the premises of M/s

Grasim Industries Limited and transporting the same to

various sites in Rajasthan. Goods receipt [GR]/bilty were

prepared and the same was to be taken as a contract

between the appellant and such truck owners/operators. A

clarification to this effect given vide Board Circular No. 715

dated 8.8.1995 has been brought on record by the Revenue

and strongly relied upon by the assessing authority as well so

as to consider the goods carried under particular

goods/receipt/bilty as a separate contract. The assignment of

such contract by the appellant to the truck operators/owners

was rightly taken as a sub contract for carrying out the job

awarded to the assessee by M /s. Grasim Industries Limited.

Provisions of Section 194C were duly attracted to such

payments which have been made/credited or was likely to be

paid on account of obligation under each goods receipt/bilty.

The assessing authority has found that the payments made

and credited with respect to each of such contracts involving

aggregate payment of Rs. 20,000/- on a particular day

amounted to Rs. 57,11,625/-. In the light of clear provisions

contained in Section 194C of the Act and having regard to the

fact that both the amounts actually paid or credited or likely to

be paid on account of each contract exceeded Rs. 20,000/-

on a single day. Section 194C has rightly found applicable.

We, therefore, do not find any wrong committed by the ld.

CIT(A) in holding that the assessee has committed default in

making deduction with respect to payments aggregating to

Rs. 57,11,625/- without deduction of tax at source.”

7.3. The ITAT also negated the argument that by the time of issuance of

Circular No. 5 dated 15.07.2005, the time for payment of tax at source had

expired and that Section 40(a)(ia) would only be applicable from the

12

assessment year 2006-2007 and not from the assessment year 2005-2006.

The ITAT also referred to the proviso to Section 40(a)(ia) of the Act and

pointed out that thereunder, the assessee was eligible to get deduction of such

expenditure in a subsequent year in which TDS was actually paid to the

Government. The ITAT observed in regard to these two aspects concerning

applicability of the provision in question as also the effect of proviso thereto, in

the following passage:-

“15. The assessee’s counsel also raised a plea that Circular

No. 5 was issued only on 15-7-2005 by which date the time

for payment of tax at source has also expired and as such it

was contended that the provisions as contained in Section

40(a)(ia) of the Act would be applicable not from A.Y. 2005-06

but from 2006-07. We, however, do not subscribe to the view

so canvassed by the assessee. The Finance (No.2) Act 2004

has brought an amendment in Section 40 of the Act making it

applicable w.e.f. 01/04/2004 (sic)

8

. Since this amendment

came before close of the financial year ended on

31/03/2005 in the statute books, the assessee cannot be

held to be ignorant of its liability to deduct tax at source.

The subsequent board circular issued is merely clarificatory.

The amendment in Section 40 of the Act does not take away

the right of the assessee to claim deduction for such

expenses for all times to come. It only mandates that the

deduction shall not be allowed in the relevant year in which

there was liability to deduct and pay tax at source but the

same has not been paid before the expiry of the time

prescribed under sub-section (1) of Section 200 of the act. It

also had proviso clause whereby the assessee was

eligible to get deduction of such expenditure in a

subsequent year in which such tax deducted at source

has actually been paid. The plea raised by the assessee,

therefore, does not support the claim.”

(emphasis in bold supplied)

8 The extraction is from the typed copy of the order of ITAT, placed on record as Annexure P-5 ( at

page 84 of the paper book) but there is obvious typographical error on this date “01.04.2004” because

the amendment of Section 40 of the Act of 1961 by the Finance (No.2) Act, 2004 was made applicable

with effect from “01.04.2005”. The effect and implication of the relevant date is examined in Question

No. 3 infra.

13

7.4. The ITAT further rejected the contention that the amount of

expenditure was not charged to the Profit and Loss Account and only

commission was shown as income. The ITAT observed that mere reflection in

two different account books would not qualify for distinct and different

treatment since both freight paid and freight charged partake the same

character. The ITAT, accordingly, dismissed the appeal.

Before the High Court

8. Aggrieved yet again, the appellant approached the High Court in

D.B. Income Tax Appeal No. 164 of 2008 against the order passed by ITAT.

However, the appeal so filed was dismissed summarily by the High Court, by

its short order dated 15.05.2009 that reads as under:-

“In our view, on the language of Section 194C(2), and the fact

that the good received were sent through truck owners by the

appellant, and there was no privity of direct contract between

the truck owners and the cement factory. According to the

contract between the appellant and the cement factory, it was

the appellant’s responsibility to transport the cement, and for

that the appellant hired the services of the truck owners,

obviously as sub-contractors. In that view of the matter, we

do not find any error in the impugned order of the Tribunal.

The appeal is, therefore, dismissed summarily.”

9. Thus, the net result of the proceedings aforesaid had been that the

consistent views of the AO, CIT(A) and ITAT, that deduction, of the payments

made to the truck operators/owners, cannot be allowed while computing the

total income of the assessee-appellant, came to be affirmed by the High Court.

Rival Submissions

Appellant

14

10. Assailing the order so passed by the High Court in summary

dismissal of the appeal as also the views expressed in the assessment and

appellate orders, learned counsel for the assessee-appellant has urged before

us multiple contentions on the scope and applicability of Section 194C of the

Act as also Section 40(a)(ia) thereof and has argued that these provisions

could not have been applied to the case at hand.

10.1.Learned counsel for the appellant has strenuously argued that the

provisions of Section 194C of the Act of 1961, particularly sub-section (2)

thereof, were not applicable to the present case for there was no oral or written

contract of the appellant with the truck operators/owners, whose vehicles were

engaged to execute the work of transportation of the goods. It has been

contended that the liability under Section 194C(2) would have arisen only if

payments were made to “sub-contractor” and that too “in pursuance of a

contract” for the purpose of “carrying whole or any part of work undertaken by

the contractor”. The learned counsel for the appellant would argue that when

there had not been any specific contract between the appellant and the truck

owners, whose vehicles were hired by the appellant on freelance and need

basis, the ingredients of Section 194C(2) were not satisfied and the obligation

of deducting tax at source could not have been fastened on the appellant.

10.1.1.The learned counsel has supported his contentions against the

applicability of Section 194C of the Act to the present case with reference to

the decision of Delhi High Court in the case of Commissioner of Income-Tax

v. Hardarshan Singh: (2013) 350 ITR 427 wherein it was held that when the

15

assessee merely acted as facilitator or intermediary in the process of

transportation of goods, he had no liability to deduct TDS under Section 194C

of the Act.

10.2.The main plank of the submissions of learned counsel for the

appellant has been that disallowance under Section 40(a)(ia) of the Act is

confined to the expenses that are booked during the year but remain payable

or outstanding and not the expenses that had already been paid. The learned

counsel has referred to the decision of this Court in the case of J.K.

Synthetics Limited v. Commercial Taxes Officer: (1994) 4 SCC 276; and

the definition of the term “paid” in Section 43(2) of the Act to submit that the

two expressions “payable” and “paid” are of entirely different connotations. The

learned counsel has painstakingly referred to the contents of the Bill

introducing the Finance (No.2) Act of 2004 where the expressions “credited or

paid” were used but in the provision as enacted, the expression “payable” has

occurred. According to the learned counsel, if the legislature intended to

disallow the deduction towards the payments made and incurred, it would

have used the expression “paid”, which term has been specifically defined for

the purposes of Sections 28 to 41 of the Act but the use of expression

“payable” makes it clear that the coverage of the provision is restricted and in

any case, it is not applicable over the amount already paid. The learned

counsel has also attempted to draw support to his contentions with reference

to the contents of the proviso to Section 40(a)(ia) of the Act with the

submissions that the meaning and scope of the main provision is accentuated

16

by the scope of proviso wherein, the expression “paid” is used while giving out

the circumstances when a deduction, not allowed under the main provision,

could be claimed in the subsequent year.

10.2.1.Taking this line of argument further, learned counsel would contend

that the scope of Section 40(a)(ia) of the Act cannot be decided on the basis of

the scope of Section 194C of the Act. Learned counsel would submit that

Section 201 of the Act provides for consequence of non-deduction of TDS

either at the time of payment or booking, whichever is earlier; and thus, the

said provision would apply to both the situations where the expenses amount

has been “paid” or is “payable”. However, according to the learned counsel,

the additional consequence of default as provided in Section 40(a)(ia) of the

Act would come into operation only if the alleged default strictly falls within the

language of this provision, which is limited to the amount “payable”. Learned

counsel would submit that the scope of Section 40(a)(ia) of the Act cannot be

expanded beyond its language merely because as per Section 194C, the

liability to deduct tax is at the time of “credit of such amount to the account of a

contractor” or at the time of “payment” whichever is earlier. With reference to

the decision of this Court in the case of Institute of Chartered Accountants

of India v. Price Waterhouse: (1997) 93 Taxman 588, the learned counsel

has argued that when the words are clear and there is no obscurity, the

intention of legislature has to be inferred only from the words used in the

provision.

17

10.2.2. Thus, learned counsel for the appellant has strenuously argued that

Section 40(a)(ia) of the Act remains limited in its scope and does not apply to

the amount already “paid”. However, being aware of the position that the

substratum of such contentions does not stand in conformity with the view

already taken by this Court in the case of Palam Gas Service v.

Commissioner of Income-Tax : (2017) 394 ITR 300, the learned counsel

has made elaborate submissions that the said decision in Palam Gas Service

requires reconsideration. According to the learned counsel, such

reconsideration is necessitated because of the factors that: (a) the taxing

provision for disallowance has to be strictly construed as per the language

used and there is no scope for adopting the so-called purposive construction;

(b) the change of words used in the Bill “credited or paid” to the word “payable”

has been ignored; (c) the effect of proviso making it clear that the intent of the

main provision is only to disallow the outstanding or payable amounts has not

been considered; and (d) the Court has widened the scope of consequences

provided under Section 40(a)(ia) of the Act based on the scope of Sections

194C and 201 of the Act, although such an approach is impermissible while

interpreting a provision in the taxing statute.

10.3.Learned counsel for the appellant has argued in the alternative that

the said sub-clause (ia), having been inserted to clause (a) of Section 40 of the

Act with effect from 01.04.2005 by the Finance (No.2) Act, 2004, would apply

only from the financial year 2005-2006 and hence, cannot apply to the present

case pertaining to the financial year 2004-2005. In support, the learned

18

counsel has referred to and relied upon the decision of Calcutta High Court in

the case of PIU Ghosh v. Deputy Commissioner of Income-Tax & Ors. :

(2016) 386 ITR 322. Supplemental to these contentions, the learned counsel

has also argued that, in any case, the Finance (No.2) Act, 2004 received the

assent of the President of India on 10.09.2004 and hence, the rigour of sub-

clause (ia) of Section 40(a) of the Act cannot be applied in relation to the

payments already made before 10.09.2004, the date of introduction of this

provision.

10.3.1.In yet another alternative, learned counsel for the appellant has

referred to the amendment made to Section 40(a)(ia) of the Act by the Finance

(No.2) Act, 2014, restricting and limiting the extent of disallowance to 30% of

the expenditure and has submitted that the said amendment, being curative in

nature and having been introduced to ameliorate the hardships faced by the

assessees, deserves to be applied retrospectively and from the date of

introduction of sub-clause (ia) to Section 40(a) of the Act. The learned counsel

has developed this argument by relying on the decision in Commissioner of

Income-Tax v. Calcutta Export Company: (2018) 404 ITR 654, wherein this

Court has held the remedial amendment of Section 40(a)(ia) of the Act by the

Finance Act, 2010 to be retrospective in nature and applicable from the date

of insertion of the said provision.

10.4.Learned counsel for the appellant has lastly submitted that the result

of applying the provisions in question to the entire payment practically leads to

a highly incongruous position that whole of the receipt from company is treated

19

as the income of the appellant and taxed accordingly, but without due

provision towards necessary expenses. According to the learned counsel, in

such contracts, the annual income of the transport contractor like the appellant

cannot be, and is not, to the extent of about Rs. 57 lakhs, as sought to be

taxed in the present matter.

Respondent

11. Per contra, the learned counsel for respondent-revenue has duly

supported the orders impugned, essentially with reference to the reasonings

therein and also with reference to the decision of this Court in Palam Gas

Service (supra).

11.1.Learned counsel for the revenue has, in the first place, contended

with reference to the decided cases that the concurrent findings of fact

recorded by the authorities and ITAT, as affirmed by the High Court call for no

interference for no case of apparent perversity being made out.

11.2.Learned counsel has further submitted that the appellant admittedly

carried out the work of transportation by hiring the trucks and made payments

to the operators/owners while issuing an invoice/bilty/challan for every such

hiring, which constituted a separate contract/sub-contract. According to the

learned counsel, in such dealings, the appellant was required to deduct tax at

source in terms of Section 194C of the Act when making payment to any truck

operator/owner in the sum exceeding Rs. 20,000/-; and the appellant having

failed to do so, the provisions of Section 40(a)(ia) have rightly been invoked.

20

11.3.Learned counsel for the revenue has made elaborate reference to

the decision of this Court in the case of Palam Gas Service (supra) and has

submitted that the principal contention on the part of the appellant, that the

expression “payable”, as occurring in Section 40(a)(ia) of the Act, refers only to

those cases where the amount is yet to be paid and does not cover the cases

where the amount is actually paid, has been duly considered and specifically

rejected by this Court; and the said decision squarely covers the present

matter. The learned counsel has argued that in the case of Palam Gas

Service (supra), this Court having holistically examined the scheme of the

provisions in question, there is no scope for reconsideration of the said

decision; and this appeal deserves to be dismissed for the question sought to

be raised as regard interpretation of Section 40(a)(ia) of the Act being no more

res integra.

11.4.Learned counsel for the revenue has further contended that the

amendment to Section 40(a) of the Act with insertion of sub-clause (ia) by the

Finance (No. 2) Act, 2004 with effect from 01.04.2005 directly applies to the

assessment year 2005-2006; and for the appellant having failed to deduct tax

at source from the payment made to the sub-contractors for the work of

transportation, deduction of such payment has rightly been disallowed.

11.5.The learned counsel has also argued that the proviso to Section

40(a)(ia) of the Act, as inserted by the Finance Act, 2014, does not apply to the

case at hand pertaining to the assessment year 2005-2006 and hence, the

21

argument for curative benefit with reference to the said proviso does not hold

the ground.

Questions for determination

12. Having regard to the submissions made by the learned counsel for

the parties and the observations occurring in the orders impugned, the

principal questions arising for determination in this appeal could be stated as

follows:-

1.As to whether Section 194C of the Act does not apply to the

present case?

2.As to whether disallowance under Section 40(a)(ia) of the Act is

confined/limited to the amount “payable” and not to the amount

“already paid”; and whether the decision of this Court in Palam Gas

Service v. Commissioner of Income-Tax: (2017) 394 ITR 300

requires reconsideration?

3.As to whether sub-clause (ia) of Section 40(a) of the Act, as

inserted by the Finance (No. 2) Act, 2004 with effect from

01.04.2005, is applicable only from the financial year 2005-2006

and, hence, is not applicable to the present case relating to the

financial year 2004-2005; and, at any rate, whole of the rigour of this

provision cannot be applied to the present case?

4.As to whether the payments in question have rightly been

disallowed from deduction while computing the total income of the

assessee-appellant?

22

Relevant Provisions

13. For determination of the questions aforesaid, we need to closely look

at the statutory provisions in the Act of 1961 which have material bearing on

this case.

13.1.It is noticed that elaborate provisions have been made in Chapter

XVII of the Act of 1961 for “Collection and Recovery of Tax” and Part B thereof

carries the provisions concerning “Deduction at Source”. Sections 194C, 200

and 201, which have come in reference in the present matter, are contained in

this part and the same, as existing at the relevant point of time pertaining to

the assessment year 2005-2006, may be usefully noticed.

13.1.1.The liability against the appellant has basically arisen because of its

alleged non-compliance of the requirements of Section 194C of the Act. At the

relevant point of time, this provision read as under:-

“194C. Payments to contractors and sub-contractors.-

(1) Any person responsible for paying any sum to any

resident (hereafter in this section referred to as the

contractor) for carrying out any work (including supply of

labour for carrying out any work) in pursuance of a contract

between the contractor and-

(a) the Central Government or any State Government;

or

(b) any local authority; or

(c) any corporation established by or under a Central,

State or Provincial Act; or

(d) any company; or

(e) any co-operative society; or

(f) any authority, constituted in India by or under any

law, engaged either for the purpose of dealing with

and satisfying the need for housing accommodation

or for the purpose of planning, development or

improvement of cities, towns and villages, or for

both; or

23

(g) any society registered under the Societies

Registration Act, 1860 (21 of 1860) or under any law

corresponding to that Act in force in any part of

India; or

(h) any trust; or

(i) any University established or incorporated by or

under a Central, State or Provincial Act and an

institution declared to be a University under section

3 of the University Grants Commission Act, 1956 (3

of 1956); or

(j) any firm,

shall, at the time of credit of such sum to the account of the

contractor or at the time of payment thereof in cash or by

issue of a cheque or draft or by any other mode, whichever is

earlier, deduct an amount equal to-

(i)one per cent in case of advertising,

(ii)in any other case two per cent,

of such sum as income-tax on income comprised therein.

(2) Any person (being a contractor and not being an

individual or a Hindu undivided family) responsible for paying

any sum to any resident (hereafter in this section referred to

as the sub-contractor) in pursuance of a contract with the

sub-contractor for carrying out, or for the supply of labour for

carrying out, the whole or any part of the work undertaken by

the contractor or for supplying whether wholly or partly any

labour which the contractor has undertaken to supply shall, at

the time of credit of such sum to the account of the sub-

contractor or at the time of payment thereof in cash or by

issue of a cheque or draft or by any other mode, whichever is

earlier, deduct an amount equal to one per cent of such sum

as income-tax on income comprised therein:

Provided that an individual or a Hindu undivided family,

whose total sales, gross receipts or turnover from the

business or profession carried on by him exceed the

monetary limits specified under clause (a) or clause (b) of

section 44AB during the financial year immediately preceding

the financial year in which such sum is credited or paid to the

account of the sub-contractor, shall be liable to deduct

income-tax under this sub-section.

Explanation I.- For the purposes of sub-section (2), the

expression “contractor” shall also include a contractor who is

carrying out any work (including supply of labour for carrying

out any work) in pursuance of a contract between the

contractor and the Government of a foreign State or a foreign

enterprise or any association or body established outside

India.

24

Explanation II. -For the purposes of this section, where any

sum referred to in sub-section (1) or sub-section (2) is

credited to any account, whether called “Suspense account”

or by any other name, in the books of account of the person

liable to pay such income, such crediting shall be deemed to

be credit of such income to the account of the payee and the

provisions of this section shall apply accordingly.

Explanation III. – For the purposes of this section, the

expression “Work” shall also include-

(a) advertising;

(b) broadcasting and telecasting including production of

programmes for such broadcasting or telecasting;

(c) carriage of goods and passengers by any mode of

transport other than by railways;

(d) catering.

(3) No deduction shall be made under sub-section (1) or

sub-section (2) from-

(i) the amount of any sum credited or paid or likely to be

credited or paid to the account of, or to, the contractor or sub-

contractor, if such sum does not exceed twenty thousand

rupees:

Provided that where the aggregate of the amounts of such

sums credited or paid or likely to be credited or paid during

the financial year exceeds fifty thousand rupees, the person

responsible for paying such sums referred to in sub-section

(1) or, as the case may be, sub-section (2) shall be liable to

deduct income-tax under this section; or

(ii) any sum credited or paid before the 1

st

day of June, 1972;

or

(iii) any sum credited or paid before the 1

st

day of June, 1973,

in pursuance of a contract between the contractor and a co-

operative society or in pursuance of a contract between such

contractor and the sub-contractor in relation to any work

(including supply of labour for carrying out any work)

undertaken by the contractor for the co-operative society.”

13.1.2.Sections 200 and 201 of the Act, respectively dealing with the duty of

the person deducting tax and consequences on failure to deduct or pay, as

applicable at the relevant time, could also be reproduced as under:-

“200. Duty of person deducting tax.

25

(1) Any person deducting any sum in accordance with the

foregoing provisions of this Chapter

9

, shall pay within the

prescribed time, the sum so deducted to the credit of the

Central Government or as the Board directs.

(2) Any person being an employer, referred to in sub-section

(1A) of section 192 shall pay, within the prescribed time, the

tax to the credit of the Central Government or as the Board

directs.

10

(3) Any person deducting any sum on or after the 1

st

day of

April, 2005 in accordance with the foregoing provisions of this

Chapter or, as the case may be, any person being an

employer referred to in sub-section (1A) of section 192 shall,

after paying the tax deducted to the credit of the Central

Government within the prescribed time, prepare quarterly

statements for the period ending on the 30

th

June, the 30

th

September, the 31

st

December and the 31

st

March in each

financial year and deliver or cause to be delivered to the

prescribed income-tax authority or the person authorised by

such authority such statement in such form and verified in

such manner and setting forth such particulars and within

such time as may be prescribed.

11

201. Consequences of failure to deduct or pay.

(1) If any such person referred to in section 200 and in the

cases referred to in section 194, the principal officer and the

company of which he is the principal officer does not deduct

the whole or any part of the tax or after deducting fails to pay

the tax as required by or under this Act, he or it shall, without

prejudice to any other consequences which he or it may

incur, be deemed to be an assessee in default in respect of

the tax:

Provided that no penalty shall be charged under section 221

from such person, principal officer or company unless the

Assessing Officer is satisfied that such person or principal

officer or company, as the case may be, has without good

and sufficient reasons failed to deduct and pay the tax.

(1A) Without prejudice to the provisions of sub-section (1), if

any such person, principal officer or company as is referred

9 The words “the foregoing provisions of this Chapter” were substituted for the previous expressions

carrying various provisions of the Act, by the Finance (No. 2) Act, 2004, w.e.f. 01.10.2004.

10 Sub-section (2) was inserted by the Finance Act, 2002.

11 Sub-section (3) was inserted by the Finance (No.2) Act, 2004, w.e.f. 01.04.2005.

26

to in that sub-section does not deduct the whole or any part

of the tax or after deducting fails to pay the tax as required by

or under this Act, he or it shall be liable to pay simple interest

at twelve per cent per annum on the amount of such tax from

the date on which such tax was deductible to the date on

which such tax is actually paid.

(2) Where the tax has not been paid as aforesaid after it is

deducted, the amount of the tax together with the amount of

simple interest thereon referred to in sub-section (1A) shall

be a charge upon all the assets of the person, or the

company, as the case may be, referred to in sub-section (1).”

13.2.Chapter IV of the Act of 1961 deals with the subject “Computation of

Total Income” and Section 40 occurs in Part D thereof, carrying the provisions

relating to the “Profits and Gains of Business or Profession”. Even when

Sections 30 to 38 provide for various allowances and deductions in

computation of the income from profits and gains of business or profession,

Section 40 specifically ordains that certain amounts shall not be deducted,

notwithstanding anything to the contrary contained in the said Sections 30 to

38 of the Act. In the present matter, we are concerned with the provisions

contained in sub-clause (ia) of clause (a) of Section 40 of the Act, which was

inserted by the Finance (No. 2) Act, 2004 with effect from 01.04.2005. Hence,

the extraction hereunder is essentially of the provision that could be read as

Section 40(a)(ia) of the Act after insertion by the Finance (No. 2) Act, 2004: -

“40. Amounts not deductible. - Notwithstanding anything to

the contrary in sections 30 to 38, the following amounts shall

not be deducted in computing the income chargeable under

the head “Profits and gains of business or profession”,-

(a) in the case of any assessee-

*** *** ***

(ia) any interest, commission or brokerage, fees for

professional services or fees for technical services payable

27

to a resident, or amounts payable to a contractor or sub-

contractor, being resident, for carrying out any work

(including supply of labour for carrying out any work), 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 during the previous year, or in the subsequent year

before the expiry of the time prescribed under sub-section (1)

of section 200:

Provided that where in respect of any such sum, tax has

been deducted in any subsequent year or, has been

deducted in the previous year but paid in any subsequent

year after the expiry of the time prescribed under sub-section

(1) of section 200, such sum shall be allowed as a deduction

in computing the income of the previous year in which such

tax has been paid.

Explanation.- For the purposes of this sub-clause,-

(i)“commission or brokerage” shall have the same meaning

as in clause (i) of the Explanation to section 194H;

(ii)“fees for technical services” shall have the same meaning

as in Explanation 2 to clause (vii) of sub-section (1) of

section 9;

(iii)“professional services” shall have the same meaning as

in clause (a) of the Explanation to section 194J;

(iv)“work” shall have the same meaning as in Explanation III

to section 194C;

*** *** ***”

12

13.3.Section 43 in the very same Part D of Chapter IV of the Act of 1961

defines various terms relevant to the income from profits and gains of business

or profession; and clause (2) thereof, carrying the definition of the expression

“paid”, having been referred in the present matter, could also be usefully

reproduced as under:-

“43. Definitions of certain terms relevant to income from

profits and gains of business or profession. - In sections

12 We may usefully indicate that Section 40(a)(ia) of the Act has undergone several amendments

from time to time and in one segment of arguments, the amendments as made in the years 2010 and

2014, have been referred on behalf of the appellant. We shall refer to the relevant contents of this

provision after such amendments while dealing with that part of arguments at the appropriate juncture

hereafter later.

28

28 to 41 and in this section, unless the context otherwise

requires-

*** *** ***

(2) “paid” means actually paid or incurred according to the

method of accounting upon the basis of which the profits or

gains are computed under the head “Profits and gains of

business or profession”;

*** *** ***”

13.4.For their relevance in relation to another segment of arguments, we

may also take note of the meaning assigned to the expression “assessment

year” in clause (9) of Section 2; and to the expression “previous year” in

Section 3 of the Act of 1961 as follows: -

“2. Definitions.- In this Act, unless the context otherwise

requires,-

*** *** ***

(9) “assessment year” means the period of twelve months

commencing on the 1

st

day of April every year;

*** *** ***”

“3. “Previous year” defined.- For the purposes of this Act,

“previous year” means the financial year immediately

preceding the assessment year:

*** *** ***”

14. We may now take up the questions involved in this matter ad

seriatim.

Question No.1

15. In order to maintain that the appellant was under no obligation to

make any deduction of tax at source, it has been argued that there was no

oral or written contract of the appellant with the truck operators/owners, whose

vehicles were engaged to execute the work of transportation of the goods only

on freelance and need basis. The submission has been that the question of

TDS under Section 194C(2) would have arisen only if the payment was made

29

to a “sub-contractor” and that too, in pursuance of a contract for the purpose

of “carrying whole or any part of work undertaken by the contractor”. In our

view, the submissions so made remain entirely baseless.

15.1.The nature of contract entered into by the appellant with the

consignor company makes it clear that the appellant was to transport the

goods (cement) of the consignor company; and in order to execute this

contract, the appellant hired the transport vehicles, namely, the trucks from

different operators/owners. The appellant received freight charges from the

consignor company, who indeed deducted tax at source while making such

payment to the appellant. Thereafter, the appellant paid the charges to the

persons whose vehicles were hired for the purpose of the said work of

transportation of goods. Thus, the goods in question were transported through

the trucks employed by the appellant but, there was no privity of contract

between the truck operators/owners and the said consignor company.

Indisputably, it was the responsibility of the appellant to transport the goods

(cement) of the company; and how to accomplish this task of transportation

was a matter exclusively within the domain of the appellant. Hence, hiring the

services of truck operators/owners for this purpose could have only been

under a contract between the appellant and the said truck operators/owners.

Whether such a contract was reduced into writing or not carries hardly any

relevance. In the given scenario and set up, the said truck operators/owners

answered to the description of “sub-contractor” for carrying out the whole or

30

part of the work undertaken by the contractor (i.e., the appellant) for the

purpose of Section 194C(2) of the Act.

15.2.The suggestions on behalf of the appellant that the said truck

operators/owners were not bound to supply the trucks as per the need of the

appellant nor the freight payable to them was pre-determined, in our view,

carry no meaning at all. Needless to observe that if a particular truck was not

engaged, there existed no contract but, when any truck got engaged for the

purpose of execution of the work undertaken by the appellant and freight

charges were payable to its operator/owner upon execution of the work, i.e.,

transportation of the goods, all the essentials of making of a contract existed;

and, as aforesaid, the said truck operator/owner became a sub-contractor for

the purpose of the work in question. The AO, CIT(A) and the ITAT have

concurrently decided this issue against the appellant with reference to the

facts of the case, particularly after appreciating the nature of contract of the

appellant with the consignor company as also the nature of dealing of the

appellant, while holding that the truck operators/owners were engaged by the

appellant as sub-contractors. The same findings have been endorsed by the

High Court in its short order dismissing the appeal of the appellant. We are

unable to find anything of error or infirmity in these findings.

15.3.The decision of Delhi High Court in the case of Hardarshan Singh

(supra), in our view, has no application whatsoever to the facts of the present

case. The assessee therein, who was in the business of transporting goods,

had four trucks of his own and was also acting as a commission agent by

31

arranging for transportation through other transporters. As regards the income

of assessee relatable to transportation through other transporters, it was found

that the assessee had merely acted as a facilitator or as an intermediary

between the two parties (i.e., the consignor company and the transporter) and

had no privity of contract with either of such parties inasmuch as he only

collected freight charges from the clients who intended to transport their goods

through other transporters; and the amount thus collected from the clients was

paid to those transporters by the assessee while deducting his commission.

Looking to the nature of such dealings, the said assessee was held to be “not

the person responsible” for making payments in terms of Section 194C of the

Act and hence, having no obligation to deduct tax at source. In

contradistinction to the said case of Hardarshan Singh, the appellant of the

present case was not acting as a facilitator or intermediary between the

consignor company and the truck operators/owners because those two parties

had no privity of contract between them. The contract of the company, for

transportation of its goods, had only been with the appellant and it was the

appellant who hired the services of the trucks. The payment made by the

appellant to such a truck operator/owner was clearly a payment made to a

sub-contractor.

15.4.Though the decision of this Court in the case of Palam Gas Service

(supra) essentially relates to the interpretation of Section 40(a)(ia) of the Act

and while the relevant aspects concerning the said provision shall be

examined in the next question but, for the present purpose, the facts of that

32

case could be usefully noticed, for being akin to the facts of the present case

and being of apposite illustration. Therein, the assessee was engaged in the

business of purchase and sale of LPG cylinders whose main contract for

carriage of LPG cylinders was with Indian Oil Corporation, Baddi wherefor, the

assessee received freight payments from the principal. The assessee got the

transportation of LPG done through three persons to whom he made the

freight payments. The Assessing Officer held that the assessee had entered

into a sub-contract with the said three persons within the meaning of Section

194C of the Act. Such findings of AO were concurrently upheld up to the High

Court and, after interpretation of Section 40(a)(ia), this Court also approved

the decision of the High Court while dismissing the appeal with costs. Learned

counsel for the appellant has made an attempt to distinguish the nature of

contract in Palam Gas Service by suggesting that therein, the assessee’s

sub-contractors were specific and identified persons with whom the assessee

had entered into contract whereas the present appellant was free to hire the

service of any truck operator/owner and, in fact, the appellant hired the trucks

only on need basis. In our view, such an attempt of differentiation is totally

baseless and futile. Whether the appellant had specific and identified trucks

on its rolls or had been picking them up on freelance basis, the legal effect on

the status of parties had been the same that once a particular truck was

engaged by the appellant on hire charges for carrying out the part of work

undertaken by it (i.e., transportation of the goods of the company), the

33

operator/owner of that truck became the sub-contractor and all the

requirements of Section 194C came into operation.

15.5.Thus, we have no hesitation in affirming the concurrent findings in

regard to the applicability of Section 194C to the present case. Question No.1

is, therefore, answered in the negative; against the assessee-appellant and in

favour of the revenue.

Question No.2.

16. While taking up the question of interpretation of Section 40(a)(ia), it

may be usefully noticed that Section 194C is placed in Chapter XVII of the Act

on the subject “Collection and Recovery of Tax”; and specific provisions are

made in the Act to ensure that the requirements of Section 194C are met and

complied with, while also providing for the consequences of default. As

noticed, Section 200 specifically provides for the duties of the person

deducting tax to deposit and submit the statement to that effect. The

consequences of failure to deduct or pay the tax are then provided in Section

201 of the Act which, as noticed, puts such defaulting person in the category

of “the assessee in default in respect of the tax” apart from other

consequences which he or it may incur. The aspect relevant for the present

purpose is that Section 40 of the Act, and particularly the provision contained

in sub-clause (ia) of clause (a) thereof, indeed provides for one of such

consequences.

16.1.Section 40(a)(ia) provides for the consequences of default in the

case where tax is deductible at source on any interest, commission, brokerage

34

or fees but had not been so deducted, or had not been paid after deduction

(during the previous year or in the subsequent year before expiry of the

prescribed time) in the manner that the amount of such interest, commission,

brokerage or fees shall not be deducted in computing the income chargeable

under “profits and gains of business or profession”. In other words, it shall be

computed as income of the assessee because of his default in not deducting

the tax at source.

16.2.In the overall scheme of the provisions relating to collection and

recovery of tax, it is evident that the object of legislature in introduction of the

provisions like sub-clause (ia) of clause (a) of Section 40 had been to ensure

strict and punctual compliance of the requirement of deducting tax at source.

In other words, the consequences, as provided therein, had the underlying

objective of ensuring compliance of the requirements of TDS. It is also

noteworthy that in the proviso added to clause (ia) of Section 40(a) of the Act,

it was provided that where in respect of the sum referable to TDS requirement,

tax has been deducted in any subsequent year, or has been deducted during

the previous year but paid in any subsequent year after the expiry of the time

prescribed in Section 200(1), such sum shall be allowed as a deduction in

computing the income of the previous year in which such tax has been paid.

16.3.The purpose and coverage of this provision as also protection

therein have been tersely explained by this Court in the case of Calcutta

Export Company (supra), which has been cited by learned counsel for the

appellant in support of another limb of submissions which we shall be dealing

35

with in the next question. For the present purpose, we may notice the relevant

observations of this Court in Calcutta Export Company as regards Section

40(a)(ia) of the Act as follows (at p. 662 of ITR):-

“16. The purpose is very much clear from the above referred

explanation by the Memorandum that it came with a purpose

to ensure tax compliance. The fact that the intention of the

Legislature was not to punish the assessee is further

reflected from a bare reading of the provisions of section

40(a)(ia) of the Income-tax Act. It only results in shifting of the

year in which the expenditure can be claimed as deduction.

In a case where the tax deducted at source was duly

deposited with the Government within the prescribed time,

the said amount can be claimed as a deduction from the

income in the previous year in which the TDS was deducted.

However, when the amount deducted in the form of TDS was

deposited with the Government after the expiry of period

allowed for such deposit then the deductions can be claimed

for such deposited TDS amount only in the previous year in

which such payment was made to the Government.”

16.4.Taking up the question as to whether disallowance under Section

40(a)(ia) of the Act is confined to the amount “payable” and not to the amount

“already paid”, we find that these aspects of interpretation do not require

much dilation in view of the ratio of the decision of this Court in the case of

Palam Gas Service (supra).

16.5.In fact, the decision in Palam Gas Service (supra) is a direct answer

to all the contentions urged on behalf of the appellant in the present case. In

that case, this Court approved the views of Punjab and Haryana High Court in

the case of P.M.S. Diesels and Ors. v. Commissioner of Income-Tax:

(2015) 374 ITR 562 as regards mandatory nature of the provisions relating to

the liability to deduct tax at source in the following words (at pp. 306-308 of

ITR):-

36

“11. The Punjab & Haryana High Court in P.M.S. Diesels v.

CIT [2015] 374 ITR 562 (P&H), has held these provisions to

be mandatory in nature with the following observations:

“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 our 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. ......’”

12. While holding the aforesaid view, the Punjab and

Haryana High Court discussed the judgments of the Calcutta

and Madras High Courts, which had taken the same view,

and concurred with the same, which is clear from the

following discussion contained in the judgment of the Punjab

and Haryana High Court:

“A Division Bench of the Calcutta High Court in CIT v.

Crescent Export Syndicate [2013] 216 Taxman 258

(Cal) held :

‘13. …

‘The term “shall” used in all these sections

make it clear that these are mandatory

provisions and applicable to the entire sum

contemplated under the respective sections.

These sections do not give any leverage to the

assessee to make the payment without making

TDS. On the contrary, the intention of the

Legislature is evident from the fact that timing of

deduction of tax is earliest possible opportunity

to recover tax, either at the time of credit in the

account of payee or at the time of payment to

payee, whichever is earlier.’

Ms. Dhugga invited our attention to a judgment of the

Division Bench of the Madras High Court in Tube

Investments of India Ltd. v. Asst. CIT (TDS) [2010]

325 ITR 610 (Mad). The Division Bench referred to

37

the statistics placed before it by the Department which

disclosed that TDS collection had augmented the

revenue. The gross collection of advance tax,

surcharge, etc. was Rs 2,75,857.70 crores in the

financial year 2008-09 of which the TDS component

alone constituted Rs 1,30,470.80 crores. The Division

Bench observed that introduction of section 40(a)(ia)

had achieved the objective of augmenting the TDS to

a substantial extent. The Division Bench also

observed that when the provisions and procedures

relating to TDS are scrupulously applied, it also

ensured the identification of the payees thereby

confirming the network of assessees and that once

the assessees are identified it would enable the tax

collection machinery to bring within its fold all such

persons who are liable to come within the network of

taxpayers. These objects also indicate the legislative

intent that the requirement of deducting tax at source

is mandatory.

The liability to deduct tax at source is, therefore,

mandatory.”

13. The aforesaid interpretation of sections 194C

conjointly with section 200 and rule 30(2) is unblemished

and without any iota of doubt. We, thus, give our

imprimatur to the view taken…...”

(emphasis in bold supplied)

16.5.1.Having said that deducting tax at source is obligatory, this Court

proceeded to deal with the issue as to whether the word 'payable' in Section

40(a)(ia) would cover only those cases where the amount is payable and not

where it has actually been paid. This Court took note of the exhaustive

interpretation of various aspects related with this issue by the Punjab and

Haryana High Court in the case of P.M.S. Diesels (supra) as also by the

Calcutta High Court in the case of Commissioner of Income-Tax, Kolkata-

XI v. Crescent Export Syndicate: (2013) 216 Taxman 258; and while

approving the same, this Court held, as regards implication and connotation of

the expression “payable” used in this provision, as follows (at p. 310 of ITR):-

38

“15. We approve the aforesaid view as well. As a fortiori, it

follows that section 40(a)(ia) covers not only those cases

where the amount is payable but also when it is paid. In

this behalf, one has to keep in mind the purpose with which

section 40 was enacted and that has already been noted

above. We have also to keep in mind the provisions of

sections 194C and 200. Once it is found that the aforesaid

sections mandate a person to deduct tax at source not only

on the amounts payable but also when the sums are actually

paid to the contractor, any person who does not adhere to

this statutory obligation has to suffer the consequences

which are stipulated in the Act itself. Certain consequences

of failure to deduct tax at source from the payments made,

where tax was to be deducted at source or failure to pay the

same to the credit of the Central Government, are stipulated

in section 201 of the Act. This section provides that in that

contingency, such a person would be deemed to be an

assessee in default in respect of such tax. While stipulating

this consequence, section 201 categorically states that the

aforesaid sections would be without prejudice to any other

consequences which that defaulter may incur. Other

consequences are provided under section 40(a)(ia) of the

Act, namely, payments made by such a person to a

contractor shall not be treated as deductible expenditure.

When read in this context, it is clear that section 40(a)(ia)

deals with the nature of default and the consequences

thereof. Default is relatable to Chapter XVII-B (in the instant

case sections 194C and 200, which provisions are in the

aforesaid Chapter). When the entire scheme of obligation

to deduct the tax at source and paying it over to the

Central Government is read holistically, it cannot be held

that the word “payable” occurring in section 40(a)(ia)

refers to only those cases where the amount is yet to be

paid and does not cover the cases where the amount is

actually paid. If the provision is interpreted in the manner

suggested by the appellant herein, then even when it is found

that a person, like the appellant, has violated the provisions

of Chapter XVII-B (or specifically sections 194C and 200 in

the instant case), he would still go scot-free, without suffering

the consequences of such monetary default in spite of

specific provisions laying down these consequences…...”

(emphasis in bold supplied)

16.6.We may profitably observe that in the case of P.M.S. Diesels

(supra), the Punjab and Haryana High Court had extensively dealt with myriad

39

features of Section 40(a)(ia) of the Act, including the term “payable” used

therein as also the proviso thereto; and expounded on the entire gamut of this

provision while making reference to Finance (No. 2) Bill of 2004 introducing

the provision and while also drawing support from the views expressed by

Calcutta High Court in the case of Crescent Export Syndicate (supra). As

regards the interpretation of the term “payable”, it was observed in P.M.S.

Diesels as under (at pp. 574-575 of ITR):-

“21. Section 40(a)(ia), therefore, applies not merely to

assessees following the mercantile system but also to

assessees following the cash system.

If this view is correct and indeed we must proceed on the

footing that it is, it goes a long way in indicating the fallacy in

the appellant's 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.

22. 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.”

(emphasis in bold supplied)

40

16.7.We find the above-extracted observations and reasonings, which

have already been approved by this Court in Palam Gas Service (supra), to

be precisely in accord with the scheme and purpose of Section 40(a)(ia) of the

Act; and are in complete answer to the contentions urged by the learned

counsel for the appellant. It is ex facie evident that the term "payable" has

been used in Section 40(a)(ia) of the Act only to indicate the type or nature of

the payments by the assessees to the payees referred therein. In other words,

the expression "payable" is descriptive of the payments which attract the

liability for deducting tax at source and it has not been used in the provision in

question to specify any particular class of default on the basis as to whether

payment has been made or not. The semantical suggestion by the learned

counsel for the appellant, that this expression “payable” be read in

contradistinction to the expression “paid”, sans merit and could only be

rejected. In a nutshell, while respectfully following Palam Gas Service

(supra), we could only iterate our approval to the interpretation by the Punjab

and Haryana High Court in P.M.S. Diesels (supra).

16.8.Faced with the position that declaration of law in Palam Gas

Service (supra) practically covers this matter, learned counsel for the

appellant has endeavoured to submit that the decision in Palam Gas Service,

requires reconsideration for the reason that certain aspects of law have not

been considered therein and correct principles of interpretation have not been

applied. We are unable to find substance in any of these contentions. The

decision of Co-ordinate Bench in Palam Gas Service (supra) on the core

41

question of law is equally binding on this Bench and could be doubted only if

the view, as taken, is shown to be not in conformity with any binding decision

of the Larger Bench or any statutory provisions or any other reason of the like

nature. We find none. In fact, a close look at the decision of P.M.S. Diesels

(supra), which has been totally approved by this Court in Palam Gas Service,

makes it clear that therein, every aspect of the matter, from a wide range of

angles, was examined by the Punjab and Haryana High Court while drawing

support from the decisions of other High Courts, particularly that of the

Calcutta High Court in the case of Crescent Export Syndicate (supra).

16.9.We are in respectful agreement with the observations in Palam Gas

Service that the enunciations in P.M.S. Diesels had been of correct

interpretation of the provisions contained in Section 40(a)(ia) of the Act. The

decision in Palam Gas Service covers the entire matter and the said decision,

in our view, does not require any reconsideration. That being the position, the

contention urged on behalf of the appellant that disallowance under Section

40(a)(ia) does not relate to the amount already paid stands rejected.

16.10.Another contention in regard to Section 40(a)(ia) of the Act, that its

scope cannot be decided on the basis of Section 194C, has only been noted

to be rejected. The interplay of these provisions is not far to seek where

Section 40(a)(ia) is not a stand-alone provision but provides one of those

additional consequences as indicated in Section 201 of the Act for default by a

person in compliance of the requirements of the provisions contained in Part B

of Chapter XVII of the Act. The scheme of these provisions makes it clear that

42

the default in compliance of the requirements of the provisions contained in

Part B of Chapter XVII of the Act (that carries Sections 194C, 200 and 201)

leads, inter alia, to the consequence of Section 40(a)(ia) of the Act. Hence, the

contours of Section 40(a)(ia) of the Act could be aptly defined only with

reference to the requirements of the provisions contained in Part B of Chapter

XVII of the Act, including Sections 194C, 200 and 201. Putting it differently,

when the obligation of Section 194C of the Act is the foundation of the

consequence provided by Section 40(a)(ia) of the Act, reference to the former

is inevitable in interpretation of the latter.

16.11.In view of the above, reference to the definition of the term “paid” in

Section 43(2) of the Act is of no assistance to the appellant. Similarly, the

observations in the case of J.K. Synthetics (supra), as regards the difference

in connotation of the expressions “payable” and “paid”, in the context of

liability to pay interest on the tax payable under the Rajasthan Sales Tax Act,

1954, has no co-relation whatsoever to the present case. Further, when it is

found that the process of interpretation of Section 40(a)(ia) of the Act in P.M.S.

Diesels (supra), as approved by this Court in Palam Gas Service (supra),

had been with due application of the relevant principles, reference to the

decision in the case of Institute of Chartered Accountants of India (supra),

on the general principles of interpretation, does not advance the case of the

appellant in any manner.

16.12.In view of the above, Question No.2 is also answered in the

negative; against the assessee-appellant and in favour of the revenue.

43

Question No.3

17. Quite conscious of the position that the decision of this Court in

Palam Gas Service (supra) practically covers the substance of present matter

against the assessee, learned counsel for the assessee-appellant has made a

few alternative attempts to argue against the disallowance in question.

17.1.The learned counsel would submit that the said sub-clause (ia),

having been inserted to clause (a) of Section 40 of the Act with effect from

01.04.2005 by Finance (No.2) Act, 2004, would apply only from the financial

year 2005-2006 and hence, cannot apply to the present case pertaining to the

financial year 2004-2005. The learned counsel, of course, drew support to this

contention from the decision of Calcutta High Court in the case of PIU Ghosh

(supra).

17.1.1.Before proceeding further, it appears apposite to observe, as

indicated in paragraph 7.3 hereinbefore, that in the copy of order passed by

ITAT in this case, there is obvious typographical error on the date of coming

into force of the amendment to Section 40 of the Act of 1961 by the Finance

(No.2) Act, 2004 inasmuch as the said amendment was made applicable with

effect from 01.04.2005 and not 01.04.2004, as appearing the copy of the order

of ITAT. However, this error is not of material bearing because the amendment

in question was applicable from and for the assessment year 2005-2006, for

the reasons occurring infra.

17.2.Reverting to the contentions urged in this case, there is no doubt

that in PIU Ghosh (supra), the Calcutta High Court, indeed, took the view

44

which the learned counsel for the appellant has canvassed before us. The

Calcutta High Court observed that the said Finance (No.2) Act, 2004 got

presidential assent on 10.09.2004 and it was provided that the provision in

question shall stand inserted with effect from 01.04.2005. According to the

Calcutta High Court, the assessee could not have foreseen prior to

10.09.2004 that any amount paid to a contractor without deducting tax at

source was likely to become not deductible in computation of income under

Section 40 and that the legislature, being conscious of the likely predicament,

provided that the provision shall become operative from 01.04.2005. The

High Court further proceeded to observe that any other interpretation would

amount to punishing the assessee for no fault of his. The High Court further

observed that Section 11 of the said Finance Act, inserting sub-clause (ia), did

not provide that the same was to become effective from the assessment year

2005-2006. We may usefully reproduce the opinion of the Calcutta High Court

in the case of PIU Ghosh, as under (at p. 326 of ITR):-

“9. Admittedly, the Finance Act, 2004 got presidential assent

on September 10, 2004. The assessee could not have

foreseen prior to September 10, 2004 that any amount paid

to a contractor without deducting tax at source was likely to

become not deductible under section 40. It is difficult to

assume that the Legislature was not aware or did not foresee

the aforesaid predicament. The Legislature therefore

provided that the Act shall become operative on April 1, 2005.

Any other interpretation shall amount to "punishing the

assessee for no fault of his" following the judgment in the

case of Hindustan Electro Graphites Ltd. (supra).

10. On top of that, section 4 relied upon by Mr. Agarwal

merely provides for an enactment as regards rate of tax to be

charged in any particular assessment year which has no

application to the case before us. Section 11 of the Finance

(No. 2) Act, 2004 by which sub-clause (ia) was added to

45

section 40(a) of the Income-tax Act does not provide that the

same was to become effective from the assessment year

2005-06. It merely says it shall become effective on April 1,

2005 which for reasons already discussed should mean to

refer to the financial year. There is, as such, no scope for any

ambiguity nor is there any scope for confusion…...”

17.3.Learned counsel for the appellant has submitted that the revenue

has accepted the said decision and has not filed any appeal against the same.

It appears, however, that the amount of deduction in the said case was only a

sum of Rs. 4,30,386/- and obviously, the net tax effect in that case, decided on

12.07.2016, was on the lower side. In any case, the said decision cannot be

treated as final declaration of law on the subject merely because the same

has not been appealed against. Having examined the law applicable, with

respect, we find it difficult to approve the above-quoted opinion of the Calcutta

High Court, particularly when it does not appear standing in conformity with

the scheme of assessment of income tax under the Act of 1961 and where the

High Court seems to have not noticed the proviso to clause (ia) of Section

40(a) of the Act forming the part of the amendment in question.

17.4.It needs hardly any detailed discussion that in income tax matters,

the law to be applied is that in force in the assessment year in question,

unless stated otherwise by express intendment or by necessary implication.

As per Section 4 of the Act of 1961, the charge of income tax is with reference

to any assessment year, at such rate or rates as provided in any central

enactment for the purpose, in respect of the total income of the previous year

of any person. The expression “previous year” is defined in Section 3 of the

Act to mean ‘the financial year immediately preceding the assessment year’;

46

and the expression “assessment year” is defined in clause (9) of Section 2 of

the Act to mean ‘the period of twelve months commencing on the 1

st

day of

April every year’.

17.5.In the case of Commissioner of Income-Tax, West Bengal v.

Isthmian Steamship Lines: (1951) 20 ITR 572, a 3-Judge Bench of this

Court exposited on the fundamental principle that ‘in income-tax matters the

law to be applied is the law in force in the assessment year unless otherwise

stated or implied.’ This decision and various other decisions were considered

by the Constitution Bench of this Court in the case of Karimtharuvi Tea

Estate Ltd. v. State of Kerala: (1966) 60 ITR 262 and the principles were laid

down in the following terms (at pp. 264-266 of ITR):-

“Now, it is well-settled that the Income-tax Act, as it

stands amended on the first day of April of any financial

year must apply to the assessments of that year. Any

amendments in the Act which come into force after the

first day of April of a financial year, would not apply to

the assessment for that year, even if the assessment is

actually made after the amendments come into force.

*** *** ***

The High Court has, however relied upon a decision of this

court in Commissioner of Income-tax v. Isthmian Steamship

Lines, where it was held as follows :

"It will be observed that we are here concerned with

two datum lines : (1) the 1st of April, 1940, when the

Act came into force, and (2) the 1st of April, 1939,

which is the date mentioned in the amended proviso.

The first question to be answered is whether these

dates are to apply to the accounting year or the year

of assessment. They must be held to apply to the

assessment year, because in income-tax matters the

law to be applied is the law in force in the

assessment year unless otherwise stated or implied.

The first datum line therefore affected only the

assessment year of 1940-41, because the

amendment did not come into force till the 1st of

47

April 1940. That means that the old law applied to

every assessment year up to and including the

assessment year 1939-40."

This decision is authority for the proposition that

though the subject of the charge is the income of the

previous year, the law to be applied is that in force in

the assessment year, unless otherwise stated or

implied. The facts of the said decision are different and

distinguishable and the High Court was clearly in error in

applying that decision to the facts of the present case.”

(emphasis in bold supplied)

17.6.We need not multiply on the case law on the subject as the

principles aforesaid remain settled and unquestionable. Applying these

principles to the case at hand, we are clearly of the view that the provision in

question, having come into effect from 01.04.2005, would apply from and for

the assessment year 2005-2006 and would be applicable for the assessment

in question. Putting it differently, the legislature consciously made the said

sub-clause (ia) of Section 40(a) of the Act effective from 01.04.2005, meaning

thereby that the same was to be applicable from and for the assessment year

2005-2006; and neither there had been express intendment nor any

implication that it would apply only from the financial year 2005-2006.

17.7.The observations of Calcutta High Court in the case of PIU Ghosh

(supra) as regards the likely prejudice to an assessee in relation to the

financial year 2004-2005, in our view, do not relate to any legal grievance or

legal prejudice. The requirement of deducting tax at source was already

existing as per Section 194C of the Act and it was the bounden duty of the

appellant to make such deduction of TDS and to make over the same to the

revenue. Section 201 was also in existence which made it clear that default in

48

making deduction in accordance with the provisions of the Act would make the

appellant “an assessee in default”. The appellant cannot suggest that even if

the obligation of TDS on the payments made by him was existing by virtue of

Section 194C(2), he would have honoured such an obligation only if being

aware of the drastic consequence of default that such payment shall not be

deducted for the purpose of drawing up the assessment.

17.7.1.Apart from the above, significant it is to notice that by the

amendment in question, clause (ia) was added to Section 40(a) of the Act with

a proviso to the effect that where, in respect of the sum referable to TDS

requirement, tax has been deducted in any subsequent year, or has been

deducted during the previous year but paid in any subsequent year after

expiry of the time prescribed in Section 200(1), such sum shall be allowed as

a deduction in computing the income of the previous year in which such tax

has been paid. The proviso effectively took care of the case of any bonafide

assessee who would earnestly comply with the requirement of deducting the

tax at source. It is evident that the said proviso has totally escaped the

attention of Calcutta High Court in the case of PIU Ghosh (supra). In fact, the

relaxation by way of the proviso/s to Section 40(a)(ia) of the Act had further

been modulated by way of various subsequent amendments to further

mitigate the hardships of bonafide assessees, as noticed hereafter later.

Suffice it to observe for the present purpose that the said decision in PIU

Ghosh cannot be regarded as correct on law.

49

17.8.In fact, if the contention of learned counsel for the appellant read

with the proposition in PIU Ghosh (supra) is accepted and the said sub-clause

(ia) of Section 40(a) of the Act is held applicable only from the financial year

2005-2006, the result would be that this provision would apply only from the

assessment year 2006-2007. Such a result is neither envisaged nor could be

countenanced. Hence, the contention that sub-clause (ia), of clause (a) of

Section 40 of the Act would apply only from the financial year 2005-2006 and

cannot apply to the present case pertaining to the financial year 2004-2005

stands rejected.

18. The supplemental submission that in any case, disallowance cannot

be applied to the payments already made prior to 10.09.2004, the date on

which the Finance (No.2) Act, 2004 received the assent of the President of

India, remains equally baseless. The said date of assent of the President of

India to Finance (No.2) Act, 2004 is not the date of applicability of the

provision in question, for the specific date having been provided as

01.04.2005. Of course, the said date relates to the assessment year

commencing from 01.04.2005 (i.e., assessment year 2005-2006).

18.1.Even if it be assumed, going by the suggestions of the appellant,

that the requirements of Section 40(a)(ia) became known on 10.09.2004, the

appellant could have taken all the requisite steps to make deductions or, in

any case, to make payment of the TDS amount to the revenue during the

same financial year or even in the subsequent year, as per the relaxation

available in the proviso to Section 40(a)(ia) of the Act but, the appellant simply

50

avoided his obligation and attempted to suggest that it had no liability to

deduct the tax at source at all. Such an approach of the appellant, when

standing at conflict with law, the consequence of disallowance under Section

40(a)(ia) of the Act remains inevitable.

19. In yet another alternative attempt, learned counsel for the appellant

has argued that by way of Finance (No.2) Act, 2014, disallowance under

Section 40(a)(ia) has been limited to 30% of the sum payable and the said

amendment deserves to be held retrospective in operation. This line of

argument has been grafted with reference to the decision in Calcutta Export

Company (supra) wherein, another amendment of Section 40(a)(ia) by the

Finance Act of 2010 was held by this Court to be retrospective in operation.

The submission so made is not only baseless but is bereft of any logic.

Neither the amendment made by the Finance (No.2) Act, 2014 could be

stretched anterior the date of its substitution so as to reach the assessment

year 2005-2006 nor the said decision in Calcutta Export Company has any

correlation with the case at hand or with the amendment made by the Finance

(No.2) Act of 2014.

19.1.By the amendment brought about in the year 2014, the legislature

reduced the extent of disallowance under Section 40(a)(ia) of the Act and

limited it to 30% of the sum payable. On the other hand, by the Finance Act of

2010, which was considered in the case of Calcutta Export Company

(supra), the proviso to Section 40(a)(ia) of the Act was amended so as to

provide relief to a bonafide assessee who could not make deposit of deducted

51

tax within prescribed time. In fact, even before the year 2010, the said proviso

was amended by the Finance Act 2008 and that amendment of the year 2008

was provided retrospective operation by the legislature itself. For ready

reference, we may reproduce in juxtaposition the main part of Section 40(a)

(ia) of the Act as it would read after the amendments of 2008, 2010 and 2014

respectively, as under

13

:-

(i) After the amendment by Finance Act, 2008

“40. Amounts not deductible. - Notwithstanding anything

to the contrary in sections 30 to 38, the following amounts

shall not be deducted in computing the income chargeable

under the head “Profits and gains of business or

profession”,-

(a) in the case of any assessee-

*** *** ***

(ia) any interest, commission or brokerage, rent, royalty

14

,

fees for professional services or fees for technical services

payable to a resident, or amounts payable to a contractor or

sub-contractor, being resident, for carrying out any work

(including supply of labour for carrying out any work), 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,-

(A) in a case where the tax was deductible and was so

deducted during the last month of the previous year, on or

before the due date specified in sub-section (1) of section

139; or

(B) in any other case, on or before the last day of the

previous year:

Provided that where in respect of any such sum, tax has

been deducted in any subsequent year or, has been

deducted –

(A) during the last month of the previous year but paid after

the said due date; or

(B) during any other month of the previous year but paid

after the end of the said previous year,

13 The Explanation part of the provision is omitted, for being not relevant for the present

purpose.

14 The expressions “rent, royalty” were inserted in the year 2006.

52

such sum shall be allowed as a deduction in computing the

income of the previous year in which such tax has been

paid.

*** *** ***”

(ii) After the amendment by Finance Act, 2010

“40. Amounts not deductible. - Notwithstanding anything to

the contrary in sections 30 to 38, the following amounts shall

not be deducted in computing the income chargeable under

the head “Profits and gains of business or profession”,-

(a) in the case of any assessee-

*** *** ***

(ia) any interest, commission or brokerage, rent, royalty, fees

for professional services or fees for technical services

payable to a resident, or amounts payable to a contractor or

sub-contractor, being resident, for carrying out any work

(including supply of labour for carrying out any work), 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 sub-section

(1) of section 139:

Provided that where in respect of any such sum, tax has

been deducted in any subsequent year, or has been

deducted during the previous year but paid after the due date

specified in sub-section (1) of section 139, such sum shall be

allowed as a deduction in computing the income of the

previous year in which such tax has been paid:

*** *** ***”

(iii) After the amendment by Finance (No.2) Act, 2014

“40. Amounts not deductible. - Notwithstanding anything

to the contrary in sections 30 to 38, the following amounts

shall not be deducted in computing the income chargeable

under the head “Profits and gains of business or

profession”,-

(a) in the case of any assessee-

*** *** ***

(ia) thirty per cent. of any sum payable to a resident, 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 sub-section

(1) of section 139:

53

Provided that where in respect of any such sum, tax has

been deducted in any subsequent year, or has been

deducted during the previous year but paid after the due

date specified in sub-section (1) of section 139, thirty per

cent. of such sum shall be allowed as a deduction in

computing the income of the previous year in which such

tax has been paid

15

:

Provided further 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 sub-section (1) of section 201, then, for the purpose of

this sub-clause, 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 resident payee referred

to in the said proviso.

16

*** *** ***”

19.2.The aforesaid amendment by the Finance (No.2) Act of 2014 was

specifically made applicable w.e.f. 01.04.2015 and clearly represents the will

of the legislature as to what is to be deducted or what percentage of deduction

is not to be allowed for a particular eventuality, from the assessment year

2015-2016.

19.3.On the other hand, in the case of Calcutta Export Company

(supra), this Court noticed the aforesaid two amendments to Section 40(a)(ia)

of the Act by the Finance Act, 2008 and by the Finance Act, 2010, which were

intended to deal with procedural hardship likely to be faced by the bonafide

tax payer, who had deducted tax at source but could not make deposit within

the prescribed time so as to claim deduction. In paragraph 17 of judgment in

Calcutta Export Company, this Court took note of the case of genuine

hardship, particularly of the assessees who had deducted tax at source in the

15 This proviso was substituted in the year 2008 and again in the year 2010; and then, was amended

by the Finance (No. 2) Act, 2014.

16 This proviso was inserted by Act No. 23 of 2012.

54

last month of previous year; and observed in paragraph 18 that the said

amendment of the year 2008 was brought about with a view to mitigate such

hardship. After reproducing the said amendment of the year 2008 and after

noticing its retrospective operation, this Court delved into the position

obtaining after 2008, where still remained one class of assessees who could

not claim deduction for the TDS amount in the previous year in which the tax

was deducted and who could claim benefit of such deduction in the next year

only; and, after finding that the amendment of the year 2010 was intended to

remedy this position, held that the said amendment, being curative in nature,

is required to be given retrospective operation that is, from the date of

insertion of Section 40(a)(ia).

19.4.Learned counsel for the appellant has only referred to the

concluding part of the decision in Calcutta Export Company but, a look at

the entire synthesis by this Court, of the reasons for the amendments of 2008

and 2010, makes it clear as to why this Court held that the amendment of the

year 2010 would be retrospective in operation. We may usefully reproduce the

relevant discussion and exposition of this Court in Calcutta Export Company

as under:- (at pp. 663-666 of ITR):-

“19. The above amendments made by the Finance Act, 2008

thus provided that no disallowance under section 40(a)(ia) of

the Income-tax Act shall be made in respect of the

expenditure incurred in the month of March if the tax

deducted at source on such expenditure has been paid

before the due date of filing of the return. It is important to

mention here that the amendment was given retrospective

operation from the date of April 1,2005, i.e., from the very

date of substitution of the provision.

55

20. Therefore, the assesses were, after the said amendment

in 2008, classified in two categories namely: one, those who

have deducted that tax during the last month of the previous

year and two, those who have deducted the tax in the

remaining eleven months of the previous year. It was

provided that in the case of assessees falling under the first

category, no disallowance under section 40(a)(ia) of the

Income-tax Act shall be made if the tax deducted by them

during the last month of the previous year has been paid on

or before the last day of filing of return in accordance with the

provisions of section 139(1) of the Income-tax Act for the said

previous year. In case, the assessees are falling under the

second category, no disallowance under section 40(a)(ia) of

Income-tax Act where the tax was deducted before the last

month of the previous year and the same was credited to the

Government before the expiry of the previous year. The net

effect is that the assessee could not claim deduction for the

TDS amount in the previous year in which the tax was

deducted and the benefit of such deductions can be claimed

in the next year only.

21. The amendment though has addressed the concerns of

the assesses falling in the first category but with regard to the

case falling in the second category, it was still resulting into

unintended consequences and causing grave and genuine

hardships to the assesses who had substantially complied

with the relevant TDS provisions by deducting the tax at

source and by paying the same to the credit of the

Government before the due date of filing of their returns

under section 139(1) of the Income-tax Act. The disability to

claim deductions on account of such lately credited sum of

TDS in assessment of the previous year in which it was

deducted, was detrimental to the small traders who may not

be in a position to bear the burden of such disallowance in

the present assessment year.

22. In order to remedy this position and to remove hardships

which were being caused to the assessees belonging to such

second category, amendments have been made in the

provisions of section 40(a) (ia) by the Finance Act, 2010.

*** *** ***

24. Thus, the Finance Act, 2010 further relaxed the rigors of

section 40(a)(ia) of the Income-tax Act to provide that all TDS

made during the previous year can be deposited with the

Government by the due date of filing the return of income.

The idea was to allow additional time to the deductors to

deposit the TDS so made. However, the Memorandum

56

Explaining the Provisions of the Finance Bill, 2010 expressly

mentioned as follows: "This amendment is proposed to take

effect retrospectively from April 1, 2010 and will, accordingly,

apply in relation to the assessment year 2010-11 and

subsequent years."

25. The controversy surrounding the above amendment was

whether the amendment being curative in nature should be

applied retrospectively, i.e., from the date of insertion of the

provisions of section 40(a)(ia) or to be applicable from the

date of enforcement.

*** *** ***

27. A proviso which is inserted to remedy unintended

consequences and to make the provision workable, a proviso

which supplies an obvious omission in the section, is required

to be read into the section to give the section a reasonable

interpretation and requires to be treated as retrospective in

operation so that a reasonable interpretation can be given to

the section as a whole.

28. The purpose of the amendment made by the Finance Act,

2010 is to solve the anomalies that the insertion of section

40(a)(ia) was causing to the bona fide tax payer. The

amendment, even if not given operation retrospectively, may

not materially be of consequence to the Revenue when the

tax rates are stable and uniform or in cases of big assessees

having substantial turnover and equally huge expenses and

necessary cushion to absorb the effect. However, marginal

and medium taxpayers, who work at low gross product rate

and when expenditure which becomes the subject matter of

an order under section 40(a)(ia) is substantial, can suffer

severe adverse consequences if the amendment made in

2010 is not given retrospective operation, i.e., from the date

of substitution of the provision. Transferring or shifting

expenses to a subsequent year, in such cases, will not wipe

out the adverse effect and the financial stress. Such could

not be the intention of the Legislature. Hence, the

amendment made by the Finance Act, 2010 being curative in

nature is required to be given retrospective operation, i.e.,

from the date of insertion of the said provision.”

19.5.A bare look at the extraction aforesaid makes it clear that what this

Court has held as regards “retrospective operation” is that the amendment of

the year 2010, being curative in nature, would be applicable from the date of

insertion of the provision in question i.e., sub-clause (ia) of Section 40(a) of

57

the Act. This being the position, it is difficult to find any substance in the

argument that the principles adopted by this Court in the case of Calcutta

Export Company (supra) dealing with curative amendment, relating more to

the procedural aspects concerning deposit of the deducted TDS, be applied to

the amendment of the substantive provision by the Finance (No.2) Act, 2014.

19.6. We may in the passing observe that the assessee-appellant was

either labouring under the mistaken impression that he was not required to

deduct TDS or under the mistaken belief that the methodology of splitting a

single payment into parts below Rs. 20,000/- would provide him escape from

the rigour of the provisions of the Act providing for disallowance. In either

event, the appellant had not been a bonafide assessee who had made the

deduction and deposited it subsequently. Obviously, the appellant could not

have derived the benefits that were otherwise available by the curative

amendments of 2008 and 2010. Having defaulted at every stage, the attempt

on the part of assessee-appellant to seek some succor in the amendment of

Section 40(a)(ia) of the Act by the Finance (No.2) Act, 2014 could only be

rejected as entirely baseless, rather preposterous.

19.7.Hence, Question No.3 is also answered in the negative, i.e., against

the assessee-appellant and in favour of the revenue.

Question No. 4

20. Before finally answering the root question in the matter as to whether

the payments in question have rightly been disallowed from deduction, we may

usefully summarise the answers to Question Nos. 1 to 3 that the provisions of

58

Section 194C were indeed applicable and the assessee-appellant was under

obligation to deduct the tax at source in relation to the payments made by it for

hiring the vehicles for the purpose of its business of transportation of goods;

that disallowance under Section 40(a)(ia) of the Act is not limited only to the

amount outstanding and this provision equally applies in relation to the

expenses that had already been incurred and paid by the assessee; that

disallowance under Section 40(a)(ia) of the Act of 961 as introduced by the

Finance (No.2) Act, 2004 with effect from 01.04.2005 is applicable to the case

at hand relating to the assessment year 2005-2006; and that the benefit of

amendment made in the year 2014 to the provision in question is not available

to the appellant in the present case. These answers practically conclude the

matter but we have formulated Question No. 4 essentially to deal with the last

limb of submissions regarding the prejudice likely to be suffered by the

appellant.

21. The suggestion on behalf of the appellant about the likely prejudice

because of disallowance deserves to be rejected for three major reasons. In

the first place, it is clear from the provisions dealing with disallowance of

deductions in part D of Chapter IV of the Act, particularly those contained in

Sections 40(a)(ia) and 40A(3)

17

of the Act, that the said provisions are

intended to enforce due compliance of the requirement of other provisions of

the Act and to ensure proper collection of tax as also transparency in dealings

17 Section 40A(3) envisaged at the relevant time that twenty percent of the expenditure exceeding

twenty thousand rupees, of which payment was made otherwise than by a crossed cheque or bank

draft, shall not be allowed as a deduction.

59

of the parties. The necessity of disallowance comes into operation only when

default of the nature specified in the provisions takes place. Looking to the

object of these provisions, the suggestions about prejudice or hardship carry

no meaning at all. Secondly, as noticed, by way of the proviso as originally

inserted and its amendments in the years 2008 and 2010, requisite relief to a

bonafide tax payer who had collected TDS but could not deposit within time

before submission of the return was also provided; and as regards the

amendment of 2010, this Court ruled it to be retrospective in operation. The

proviso so amended, obviously, safeguarded the interest of a bonafide

assessee who had made the deduction as required and had paid the same to

the revenue. The appellant having failed to avail the benefit of such relaxation

too, cannot now raise a grievance of alleged hardship. Thirdly, as noticed, the

appellant had shown total payments in Truck Freight Account at Rs.

1,37,71,206/- and total receipts from the company at Rs. 1,43,90,632/-. What

has been disallowed is that amount of Rs. 57,11,625/- on which the appellant

failed to deduct the tax at source and not the entire amount received from the

company or paid to the truck operators/owners. Viewed from any angle, we do

not find any case of prejudice or legal grievance with the appellant.

21.1.Hence, answer to Question No. 4 is clearly in the affirmative i.e.,

against the appellant and in favour of the revenue that the payments in

question have rightly been disallowed from deduction while computing the

total income of the assessee-appellant.

60

Conclusion

22. For what has been discussed hereinabove, this appeal fails and is,

therefore, dismissed with costs.

………………..………….J.

(A.M. KHANWILKAR)

…………..………….…….J.

(DINESH MAHESHWARI)

New Delhi,

Dated: 29

th

July, 2020.

61