Disallowance under Section 40(a)(ia) of IT Act whether confined to the amount “payable” and not to the amount “already paid”?SC explains

Supreme Court: Dealing with the question as to whether disallowance under Section 40(a)(ia) of the Income Tax Act, 1961 is confined/limited to the amount “payable” and not to the amount “already paid”, the bench of AM Khanwilkar and Dinesh Maheshwari, JJ held that 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. Stating 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, the Court said that the argument that the expression “payable” be read in contradistinction to the expression “paid”, sans merit and could only be rejected.

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”.

The Court, further, said that

“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.”

Explaining the scheme of the Act, the Court said 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. 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. 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.

Hence, holding that 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, the Court said that 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.

On the question 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 not retrospectively, the Court said that

“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’; 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’. 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.

The Court, hence, said

“We need not multiply on the case law on the subject as the principles aforesaid remain settled and unquestionable.”

 

[Shree Choudhary Transport Company v. Income Tax Officer, 2020 SCC OnLine SC 610 , decided on 29.07.2020]

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