M/S. Palam Gas Service v. Commissioner Of Income Tax

[2017] 3 S.C.R. 836 MIS. PALAM GAS SERVICE COMMISSIONER OF INCOME TAX (Civil Appeal No. 5512 of 2017) MAY03,2017 [A. k SIKRI AND ASHOK BHUSHAN, J;J.) lncoine Tax Act, 1961 - s.40(a)(ia) and s.197 - Whether the provisions of s.40(a)(ia) shall be attracted when the amount is not c payable to a contractor or sub-contractor but has been actually paid - Question is when the word used in s.40(a)(ia) is 'payable', whether this Section would cover only those contingencies where the amount is due and still payable or it would also cover the situations where the amount is already paid but no advance tax is deducted thereupon - Held: The provision would cover even those D cases where the amount stands paid -As per s.194C, iax has to be deducted when the amount is credited to the account of the contractor or when the payment is actually made and by virtue of s.200, assessee is required to deposit that amount to the credit of Central Government within the stipulated time as mentioned in r.30(2) -E 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 s.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 - Otherwise, .even when it is found that a person, like the appellant, has violated F the provisions of Chapter XVllB (or specifically ss. 194C and 200 in the instant case), he would still go scot free, withoul suffering the consequences of such monetary default in spite of specific provisions laying down these consequences - Income Tax Rules - r. 30(2). Dismissing the appeal, the Court HELD: 1. As per Section 194C of the Income Tax Act, it is the statutory obligation of a person, who is making payment to the sub-contractor, to deduct tax at source at the rates specified therein. Plain language of the Section suggests that such a tax at source is to be deducted at the time of credit of such sum to the account of the contractor or at the time of payment thereof, A whichever is earlier. Thus, tax has to be deducted in both the contingencies, namely, when the amount is credited to the account of the contractor or when the payment is actually made. Section 200 of the Act imposes further obligation on the person deducting tax at source, to deposit the same with the Central Government B or as the Board directs, within the prescribed time. A conjoint reading of these two Sections would suggest that not only a person, who is paying to the contractor, is supposed to deduct tax at source on the said payment whether credited in the account or actual payment made, but also deposit that amount to the credit of the Central Government within the stipulated time. The time C within which the payment is to be deposited with the Central Government is mentioned in. Ruic 30(2) of the Rules. [Para 10][842-G-H; 843-A-C) 2. Section 40(a)(ia) covers not only those cases where the आर836 ( 2017 3 मई, 2017 ਮਈ 03, 2017 XXX XXX XXX XX " [ 201 amount is payable but also when it is paid. Certain consequences D of failure to deduct tax at source from the payments made, where tax was to be deducted at source or failure to pay tJle 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 ZOl E 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 XVIIB (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 · G 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.[Para 15](847-A-F] A V.M Salgaocar & Bros. (P) Ltd. v. Commissioner of Income Tax (2000) 243 ITR 383; Supreme Court Employees Welfare Association v. Union of India (1989) 4 SCC 187 : [1989) 3 SCR 488 - relied on. P.MS. Diesels & Ors. v. Commissioner of Income Tax B - 2, Jalandhar & Ors. (2015) 374 ITR 562 - approved. CITv. Vector Shipping Services (P) Ltd. (2013) 357 ITR 642 - overruled. Case Law Reference CIVIL APPELLATE JURISDICTION: Civil Appeal No. 5512 D of2017. From the Judgment and Order dated 25. 06.2014 of the High Court . · ofHimachal Pradesh at Shimla in ITA No. 9 of2014. Raj Kumar Mehta, Mrelangbam Premjit Singh, Ms. Himanshi Andley, Advs. for the Appellant. E Bhuvan Mishra, Ms. Bhakti Pasrija Sethi, Ritesh Kumar, Mrs. Anil Katiyar, Ad vs. for the Respondent. The Judgment of the Court was delivered by A. K. SIKRI, J. I. The neat question which arises for F , consideration in this appeal relates to the interpretation of Section 40(a)(ia) of the Income Tax Act, 1961 (hereinafter referred to as the 'Act'). Section l 97C of the Act has also some bearing on the issue involved. 2. Section 40 of the Act enumerates certain situations wherein expenditure incurred.by the assessee, in the course of his business, will G not be allowed to be deducted in computing the income chargeable under the head 'Profits and Gains from Business or Profession'. One such contingency is provided in clause (ia) of sub-section (a) of Section 40. This provision reads as under: "S. 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",- (ia) any interest; commission or brokerage, fees for professional B 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 oflabour for carrying . out any work), on which tax is deductible at source und~ Chapter XVII-B and such tax has not been deducted or, after deduction, c 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; · XXX XXX XXX" 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 sectioQ 200, such sum shall be·allowed as a deduction in computing the income of· the previous year in which such tax has been paid. xxx'' 3. As per clause (ia); certain payments made, which includes amounts payable to a contractor or sub-contractor, would not be allowed as expenditure in case the tax is deductible at source on the said payment under Chapter XVIIB of the Act 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 of the Act. In the instant case, certain payments were made by the appellant assessee, in the Assessment Year 2006-2007 but the tax at source was not deducted and deposited. We may point out here itself that as per Section l 94C of the Act, payments to contractors and sub-contractors are subject to tax deduction at source. The Income Tax Department/Revenue has, therefore, not allowed the amounts paid to the sub-contracton• as deduction while computing the income chargeable to tax at the hands of the assessee in the said Assessment Year. 4. It can be seen that Section 40(a)(ia) uses the expression 'payable' and on that basis the question which is raised for consideration "Whether the provisions of Section 40(a)(ia) shall be attracted when the amount is not 'payable' to a contractor or sub-contractor B but has been actually paid?" 5. Some facts which will have bearing on the aforesaid issue need to be mentioned at this stage: The appellant-assessee is engaged in the business of purchase and sale of LPG cylinders under the name and style of Mis. Palam Gas c Service at Palampur. During the course of assessment proceedings, it - was noticed by the Assessing Officer that the main contract of the assessee for carriage of LPG was with the Indian Oil Corporation, Baddi. The assessee had received the total freight payments from the IOC Baddi to the tune ofRs.32,04,140/-. The assessee had, in turn, got the D transportation of LPG done through three persons, namely, Bimla Devi, Sanjay Kumar and Ajay to whom he made the freight payment amounting to Rs. 20,97,689/-. The Assessing Officer observed that the assessee had made a sub-contract with the said three persons within the meaning of Section l 94C of the Act and, therefore, he was liable to deduct tax at source from the payment of Rs. 20,97,689/-. On account of his failure E to do so the said freight expenses were disallowed by the Assessing Officer as per the provisions of Section 40(a)(ia) of the Act. Against the order of the Assessing Officer, the assessee preferred an appeal before the Commissioner oflncome Tax (Appeals), Shimla who vi de its order datedAugust 17, 2012 upheld the order dated November 30, 2011. F [The ][matter thereafter ][came ][up ][in ][appeal ][before ][the ][Income ][Tax ][Appellate ]Tribunal (for short 'ITAT') which too met with the same fate. In further appeal to the High Court under Section 260A of the Act, the outcome remained unchanged as the High Court of Himachal Pradesh also dismissed the appeal affirming the order of the ITAT, 6. It may be pertinent to observe that the question raised now and formulated above was specifically raised before the authorities below, including the High Court. 7. The question is, as noted above, when the word used in Section 40(a)(ia) is 'payable', whether this Section would cover only those