Shree Choudhary Transport Company vs Income Tax Officer

HELD: 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. Indisputably, it was the responsibility of the appellant-assessee 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 part of the work undertaken by the contractor (i.e., the appellant) for the purpose of Section 194C(2) of the Income Tax Act, 1961. Thus, the provisions of Section 194C were 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. [Paras 15.1 and 20][197-G-H][198-A-C; 220-D-E] Palam Gas Service v. Commissioner of Income-Tax (2017) 394 ITR 300 – relied on.

Commissioner of Income-Tax v. Hardarshan Singh (2013) 350 ITR 427 – distinguished.

2.1 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. 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. 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 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. [Para 16][200D-F]

2.2. Section 40(a)(ia) provides for the consequences of default in the case where tax is deductible at source on any interest, commission, brokerage 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. 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 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. [Paras 16.1 and 16.2][200-F-H; 201-A-C]

Commissioner of Income-Tax v. Calcutta Export Company: (2018) 404 ITR 654 – relied on.

2.3 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. It is not correct to say that the expression “payable” should be read in contradistinction to the expression “paid”. Reference to the definition of the term “paid” in Section 43(2) of the Act is of no assistance to the appellant. [Para 16.11][209-G-H] *Palam Gas Service v. Commissioner of Income-Tax : (2017) 394 ITR 300 – relied on.

J.K. Synthetics Limited v. Commercial Taxes Officer: (1994) 4 SCC 276 – distinguished.

P.M.S. Diesels and Ors. v. Commissioner of Income-Tax: (2015) 374 ITR 562 – approved.

P.M.S. Diesels and Ors. v. Commissioner of Income-Tax: (2015) 374 ITR 562; Commissioner of Income-Tax, Kolkata-XI v. Crescent Export Syndicate: (2013) 216 Taxman 258; Institute of Chartered Accountants of India v. Price Waterhouse (1997) 93 Taxman 588 – referred to.

2.4 There is no substance in the plea that the decision in *Palam Gas Service case requires reconsideration. The decision of Co-ordinate Bench in Palam Gas Service case on the core 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. The Court finds none. [Para 16.8][206-F-H]

2.5 It is not correct that scope of Section 40(a)(ia) of the Act cannot be decided on the basis of Section 194C. 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 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. 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. [Para 16.10][207-D-F]

3.1. 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’; 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 1st day of April every year’. Sub-clause (ia) was inserted to clause (a) of Section 40 of the Act with effect from 01.04.2005 by Finance (No.2) Act, 2004. 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. 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. [Paras 17.4, 17.1 and 17.6][210-B-D; 208-D]

3.2. 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 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. [Para 17.7][211-H; 212-A-B]

3.3. 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. 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. [Para 17.7.1][212-C-E]

3.4 If 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. [Para 17.8][212-F-G]

3.5 It is also not correct that 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. 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). [Para 18][212-G-H; 213-A-B]

3.6 Even if it be assumed 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 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. [Para 18.1][213-B-C]

3.7 The appellant is not correct in saying that the amendment by way of Finance (No.2) Act, 2014, whereby disallowance under Section 40(a)(ia) has been limited to 30% of the sum payable, deserves to be held retrospective in operation. The amendment 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. [Paras 19 and 19.2][213-D; 216-E]

Commissioner of Income-Tax v. Calcutta Export Company (2018) 404 ITR 654 – distinguished.

3.8 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. [Para 19.6][220-A-C]

Karimtharuvi Tea Estate Ltd. v. State of Kerala (1966)

60 ITR 262 – followed.

Commissioner of Income-Tax, West Bengal v. Isthmian Steamship Lines (1951) 20 ITR 572 – relied on.

PIU Ghosh v. Deputy Commissioner of Income-Tax & Ors. (2016) 386 ITR 322 – not approved.

4. The payments in question have rightly been disallowed from deduction while computing the total income of the assesseeappellant. The Court does not find any case of prejudice or legal grievance with the appellant. 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) 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 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, 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, 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. [Para 21][221-A-E]