Section 40(a)(ia) cannot be read in isolation but must be read along with its proviso and when it is read in that manner, there would be no scope to hold that there will be any harsh treatment meted out to any assessee in the matter of dis-allowance of any expenditure validly made by them.
CASE LAW DETAILS
Decided by: HIGH COURT OF MADRAS, In The case of: Tube Investments of India Ltd. v. ACIT, Appeal No.: Writ Petition Nos.33766 of 2007, 1106, 1107, 1690, 1691, 2478, 2479, 3330, 3331, 4782, 5109, 5110, 28097, 1056, 1057, 1717, 1718, 2013, 2014 & 9142 of 2008, 10750 & 10751 of 2009, Decided on: September 29, 2009
47. As the challenge in all these writ petitions is to the vires of Section 40(a)(ia) of the Act, it will be appropriate to extract the provision as it stood as on the date of the challenge:
“Section 40. 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 an 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 or 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) “commissioner 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;
(v) “rent” shall have the same meaning as in clause (i) to the Explanation to section 194I;
(vi) “royalty” shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9.”
59. When we test the above submissions in the anvil of the provisions contained in Chapter XVII-B, vis-a-vis Section 40(a)(ia), we notice that under Section 194C the provision which is relating to TDS in regard to payment to contractors and sub-contractors, it is stipulated that at the time of credit of such payment to the accounts of the contractor or at the time of payment in cash or by cheque or by any other mode, in respect of contractors, 2% deduction from such payment is to be made. As per the Rules, such deduction once made should be deposited to the accounts of the State within one week from the last date of the month in which deduction is made and in respect of the month of March, before the submission of returns of that accounting year.
60. The contention of the learned counsel is that under Section 40(a)(ia) either due to the failure to deduct as stipulated under Section 194C or after deduction if not paid as provided under the relevant rules, the draconic effect of disallowance to the whole of the expenditure is so harsh that it will have to be held to be highly arbitrary and unreasonable and in violation of Article 14. Stretching the argument a little further, we find that the argument does not proceed on the footing that any severe hurdle created in regard to the compliance of the procedure prescribed in respect of the various deductions to be made under Chapter XVII-B. On the other hand, if and when a default is committed in complying with the provisions, whether the assessee should be meted out with such a harsh treatment of disallowance of the entirety of the expenditure, in spite of the fact that such expenditure was really incurred.
61. When we consider the said submission, we find that there is no demur in so far as the various procedure prescribed for making the deduction at source as prescribed under Chapter XVII-B. Therefore, it has now come to stay that the provisions contained under Chapter XVII-B is one form of recovery of tax by way of TDS at the point where the payment is made or credited to a third party. It is also true that in the event of failure to deduct or pay as prescribed in the said Chapter, Section 201 automatically comes into play, by which, the person who is obligated upon to make the deduction himself will be deemed to be an assessee in default in respect of such deduction which is liable to deduction at source. The proviso to the said Section however makes the said provision less rigourous by stating that the Assessing Officer if satisfied with such persons with good and sufficient reasons failed to deduct and pay, no penalty as could be levied under Section 221 need be charged. The said provision at best would only relate to the amount of tax that could be deducted by way of TDS as compared to Section 40(a)(ia) which would result in the disallowance of whole of the expenditure and thereby the entire sum expended would attract the levy of tax at a prescribed rate with all other conditions such as surcharge etc.,
62. In this context when we examine the object for the introduction of the impugned provision, the Finance Bill No.2 of 2004 states that the insertion of such clause (ia) in clause (a) to Section 40 of the Act was with a view to augment compliance of TDS provisions. While we are on that, it will be also useful to refer to the statistics placed before us by the learned standing counsel for the Department which discloses that the TDS collection had really augmented the revenue. Amongst various components such as Advance Tax, Surcharge etc., which constituted total gross collection of Rs.2,75,857. 7 crores in the financial year 2008-09, the TDS component alone constituted a sum of Rs.1,30,470. 8/- crores. Apparently, it only shows that the introduction of Section 40(a)(ia) had its own consequential effect and it only proves that the objective was achieved to substantial extent viz., augmentation of TDS was fairly achieved.
63. To counter the various submissions made on behalf of the petitioners, it was also contended on behalf of the Revenue that such a disallowance as provided under Section 40(a)(ia) is not a new phenomenon, but an identical provision was existing and was working well for more than two decades which is now made as Section 40(a)(i) in so far as it relates to a non-resident. In other words, the contention is that in regard to a non-resident, such a stringent provision was in the Statute Book and was unquestionably working for more than two decades. It was therefore contended that a similar provision in regard to a resident payee, cannot be held to be so grossly unreasonable or arbitrary as alleged by the petitioners. The said submissions of the Revenue commends acceptance. As between Section 40(a)(i) and 40(a)(ia), the only difference is while the former relates to a non-resident, the later concerns a resident. After all the purport of imposing such a restriction was to augment the system of TDS.
64. As rightly contended by the learned standing counsel for the Revenue when the provisions and procedures relating to TDS are scrupulously applied, first and foremost it ensures the identification of the payees and thereby network of assesses gets confirmed. When once such identity of assesses who are in receipt of the income can be ascertained, it will enable tax collection machinery to bring within its fold all such persons who are liable to come within the network of tax payers.
65. In fact in the submission of the Department, it was pointed out that normally TDS is to be deposited to the Government Accounts by the 7th of the following month and if any delay is caused beyond that, Section 201 would come into operation and thereby interest would become payable. It was also stated that Section 40(a)(ia) grants time till 31st March next following and that any tax deducted in April of that year can be paid into the Government accounts on 31st March of the subsequent year to avail the deduction while the deduction to be made in March of that year could be paid in the Government accounts before the end of September of the subsequent year and thereby sufficient time is available to correct any errors in tax deduction during the year.
66. One other contention of the learned counsel appearing for the petitioners was that going by the specific provision contained under Section 194C, where it stipulate that the deduction is to be made at the point of either credit or payment, in the event of any default in compliance with the said provision, Section 40(a)(ia) would immediately come into play. Such a submission of the learned counsel appearing for the petitioners, in our opinion is taken care of by virtue of the stipulations contained under Section 200 read along with Rule 30 of the Income Tax Rules. It is rightly pointed out by the learned standing counsel appearing for the Revenue that sufficient time is provided for depositing the deducted amount into the coffers of the State. When such procedures in the matter of making the TDS and in depositing such deducted amount is provided under Chapter XVII-B, it is difficult to hold that implication of Section 40(a)(ia) works out harshly or can be held to be arbitrary or unreasonable. Therefore on the one hand in respect of non-resident when an identical provision has been successfully working without any challenge for more than two decades, there is no reason why a similar provision in respect of a resident should be held to be arbitrary or unreasonable. Equally the contention based on Section 194C that it stipulates deduction at the point of payment and therefore Section 40(a)(ia) would cause hardship and consequently should be held as unreasonable and arbitrary cannot be accepted. In fact, the submission of discrimination cannot also stand when we find that a resident or non-resident has now been brought on par when it comes to the question of disallowance while committing default in the compliance of TDS.
67. One other argument made on behalf of the petitioners is that when under Chapter XVII-B stringent provisions have been made for imposing penalty, interest etc., for committing any default in making the TDS, creating a disallowance of the entirety of the expenses should be held to be arbitrary or unreasonable and violate Articles 14 and 19(1)(g) of the Constitution. As far as the said submission is concerned, with reference to a provision contained in Chapter XVII-B, the relevant Sections are 199, 201 and 221. Section 199 states that all taxes made in accordance with the provisions of that Chapter and paid to the Central Government to be treated as payment of tax on behalf of the persons on whose income the deduction is made. Section 200 prescribes the period within which the deducted amount should be paid to the Government. Section 201 talks of the consequence of failure to deduct or pay, in which event, the payer by virtue of the default could be deemed to be an assessee in default of the TDS amount and nothing more. As far as the implication of Section 221 is concerned, by virtue of the deemed to be an assessee as provided under Section 201, the scope for imposition of penalty is provided. As is the usual stipulations, Section 221 creates an obligation on the Authority to give necessary opportunity etc., before imposing any penalty. Further under the proviso to Section 201, it is specifically provided that if the payer satisfies the Assessing Officer, the failure to make the deduction or payment was for good and sufficient reasons no penalty need be imposed.
68. All the above consequence are all related and restricted to the amount of TDS to be deducted under Chapter XVII-B. The purport and intent of the above said provision are only to ensure that in the event of any default in making the deduction, the required amount to be deducted is ultimately collected. As compared to those provisions, the legislative intent of the introduction of Section 40(a)(ia) is in the larger perspective of augmenting the very TDS provisions themselves. It is not merely related to the collection of TDS alone. In this context, it will be appropriate to refer to one of the submission of the learned standing counsel for the Revenue that only about 3% of the Returns filed are taken up for scrutiny, in view of the fact that the Act and administration have been moving towards self-assessment. In other words, reposing higher amount of confidence in the law abiding citizens that they would voluntarily come forward to pay the tax as a Honourable Citizen, scrutiny is stated to have been limited to 3% of the Returns. Having regard to such a notable advancement in the revenue administration, it cannot be said that the objective sought to be achieved viz., augmentation of TDS provisions by bringing out a stringent provision in the form of Section 40(a)(i) or 40(a)(ia) can be said to be draconic or highly excessive in its approach. Here again, the resultant position in the TDS recoveries for the year 2008-09 discloses that the objective sought to be achieved has been successfully realized by the introduction of Section 40(a)(ia). Therefore, the submission made on that footing also does not inspire us to hold that the provision should be held to be unreasonable or arbitrary and in violation of Article 14 of the Constitution.
69. For the same reason, the contention that it is in violation of Article 265 of the Constitution is also liable to be rejected. The contention here is also on the footing that by sheer accounting adjustment or mechanism of non-deduction of expenses a disguised taxation or levy is camouflaged in terms of Section 40(a)(ia) therefore in the guise of recovery, no tax can be levied. The contention fails to take note of the salient feature of the proviso which runs along with the substantive provision of Section 40(a)(ia). The intention of the Legislature is not to tax the payer ‘X’ for its failure to deduct the tax at source. The object of introduction of Section 40(a)(i) as well as Section 40(a)(ia) is to ensure that one of the modes of recovery as provided in Chapter XVII-B is scrupulously implemented without any default, in order to augment the said mode of recovery. As has been considered and explained in the earlier paragraphs, such an objective is stated to have been achieved to a greater extent after the introduction of Section 40(a)(ia). With the proviso to Section 40(a)(ia) the deduction in the subsequent year by rectifying the default committed in the matter of TDS in the previous year, a defaulting assessee cannot be heard to say that irrespective of the deliberate default committed by it in implementing the provision relating to TDS, it should be held that a higher tax liability is mulcted on it. In other words, when there is a provision inbuilt in the impugned Section itself providing for rectification of any default and thereby restore the financial implications suffered, it will have to be held that by virtue of such a procedural safeguard provided in the provision, it would be well within the Legislative competence of the Parliament in having set out a provision as contained in Section 40(a)(ia) of the Act.
70. One other submission made is on the ground that the provision seeks to tax the income of the payee in the hands of the payer and therefore it imposes an arbitrary and unreasonable restriction. According to the learned counsel for the petitioners while under Chapter XVII-B, the TDS is only to the prescribed percentage of the payment to be made to the payee by the payer, the consequence of default in compliance of TDS would result in entirety of the payment to the payee subjected to tax. It is therefore contended that while on the one hand the payer parts with the entire amount of the payee while at the same time for the said payment already made a further sum at 30% of that amount plus 5% surcharge and other liabilities are imposed which is highly excessive and it will have to be held to be unauthorized as stipulated under Article 265 of the Constitution. When we consider the said submission, as rightly pointed out by the learned standing counsel for the revenue, proviso to Section 40(a)(ia) will have to be read along with the main provision. Under the proviso to Section 40(a)(ia), the assessee is entitled for claiming the deduction in the event of a defaulted payment is made good in any subsequent year. The provision however makes it clear that such deduction are allowed in computing the income of the previous year in which such tax has been paid. If the proviso is read along with Section 40(a)(ia) there can be no dispute that the assessee who committed any default in complying with Chapter XVII-B of the Act is not left high and dry. The proviso provides a remedial measure and thereby enable the assessee to claim for deduction either in the immediate subsequent year or in any other subsequent year to the relevant year in which the default came to be committed. The learned counsel attempted to point out that proviso cannot be said to cover all the situations of default, in as much as, the TDS has to be made at the point of payment either by way of credit or by way of direct payment and there is no specific provision contained in the proviso to cover such situation. In other words, the contention is that while under Chapter XVII-B the deduction can be made only at the point of payment and in the event of default being committed, there would be no scope for the payer to make any deduction at any later point of time, the proviso will be really unworkable.
71. While meeting the said argument, the learned standing counsel pointed out that such a contention is far fetched in as much as a reading of Section 201 makes it clear that the default in respect of TDS would not only cover failure to deduct or after deduction failure to pay, but even failure to pay on its own thus covering default in all situations. The learned standing counsel for the Revenue therefore contended that the proviso will not only come to the rescue for those who failed to pay after deduction but to also those who though not made any deduction were prepared to make the payment on their own and thereby rectify the defect who can validly take umbrage under the proviso and consequently claim the benefit of allowance in the subsequent year. The submission of the learned standing counsel is in consonance with what is stipulated in the proviso and therefore there is every justification in accepting the said submission. When the said submission can be validly accepted, it will have to be held that the effect or the rigour of restriction of disallowance made under Section 40(a)(ia) can be rectified by the assessee himself by resorting to the benefits contained in the proviso to that Section. Therefore, when Section 40(a)(ia) is read along with its proviso, there is no scope to hold that the said provision is so very harsh or creates any insurmountable situation for the assessee to claim the deduction of expenditure actually made. We therefore hold that Section 40(a)(ia) cannot be read in isolation but must be read along with its proviso and when it is read in that manner, there would be no scope to hold that there will be any harsh treatment meted out to any assessee in the matter of disallowance of any expenditure validly made by them.
72. Yet another argument made on behalf of the petitioners was that the impugned Section seeks to deduct the income of the payee in the hands of the payer. The argument is on the footing that by virtue of the disallowance provided under Section 40(a)(ia) the entirety of the expense incurred by way of payment to a third party is disallowed on which the assessees failed to deduct TDS but even the income which has been received by a third party is treated as the income of the assessee. To counter such an argument on the side of the Revenue, reference was made to similar such disallowance provided under Section 37, 40, 40A and 43B. It would be sufficient if we make reference to Section 40A(4) and 43B. Section 40A provides for certain expenses not deductible under certain circumstances. One such circumstance is provided under Section 40A(4). Under the said provision, in respect of payments made over and above 10,000/-, if such payment is not made by way of crossed cheque it is bound to be disallowed. The said provision however provides certain explainable situations where such disallowance can be rectified. Such extraordinary situations apart, if going by Section 40A(4) the payment made beyond the permissible limit otherwise than by way of crossed cheque which results in the disallowance of the payment, the consequence would be irrespective of the payment having been already made to a third party, the assessee will be subjected to payment of tax on the very same sum. Whatever be the purport of the Legislation in creating such a disallowance under Section 40A(4), the fact remains that the payment made to a third party which in other words an income of a third party is sought to be taxed at the hands of the assessee. Nevertheless such a statutory imposition of liability is not frowned upon. Therefore, it is not as if Section 40(a)(ia) alone create such a situation where a third party’s income is sought to be taxed at the hands of the assessee.
73. Similarly Section 43B provides for certain deductions only on actual payments. In fact the learned standing counsel for the Revenue brought to our notice the challenge made to Section 43B in respect of assessees who followed mercantile system of accounting where the actual payment would be on a later date while a provision is made in the books of accounts on accural basis. The learned standing counsel relied upon a Division Bench decision of the Andhra Pradesh High Court reported in (1988) 173 ITR 708 (S.Subba Rao & Co. Vs. Union of India). At page 714 the Division Bench rejected the contention by holding as under:
“…..The taxes and duties collected but remaining unpaid to the Government on account of orders of stay, etc., were claimed as a deduction for income-tax purposes setting up an attractive plea that the accounts are made up on mercantile system and , consequently, the disputed taxes and duties constituted legitimate deductions as the liability to pay the same was incurred in the accounting years concerned, albeit the amounts were not actually paid. The Revenue was told that in a system of mercantile accounting, actual payment is unnecessary and the profits and gains under the head “Profits and gains of business or profession” would have, therefore, to be computed deducting these taxes and duties. Thus, on the one hand, the businessmen had free use of the funds collected from the public by way of taxes for the ostensible purpose of making them over to the public exchequer and at the same time secured tax reliefs without paying the same. The provisions of law, as they stood at the relevant time, could not remedy the situation and the result was that “taxes and duties” aggregating to thousands of crores of rupees lay in the hands of the tax payers while the Government was reeling under the pressure of finding moneys to discharge commitments. That was the alarming situation when the Legislature felt concerned to find a remedy to the problem. The result was that section 43B was inserted in the Act which has the effect of compelling the assessees to pay the disputed taxes which they had otherwise collected from the consuming public, if they wanted such amounts to be deducted by way of expenses. The Legislature did not act unreasonably in making a wholesome change that all expenses incurred by an assessee maintaining accounts under the mercantile system would not be deducted unless the expenditure was actually paid out. In choosing only the statutory liabilities by way of taxes and duties for a special treatment under section 43B, the Legislature had shown awareness of the growing incidence of public funds being caught up in the hands of the business community. It was for this reason that “taxes and duties” were chosen for a special treatment and we do not see any hostile discrimination or arbitrariness violating article 14 in the Legislature so acting.” (Emphasis added)
The reasoning, highlighted by us, which weighed with the Andhra Pradesh High Court will have application to all cases, wherever, deduction is claimed without either sufferance of tax or tax suffered but not brought into the coffers of the State Exchequer. Even in those cases, all other penal and other provisions providing for deterrent action for the failure of fulfilment of assessees obligation as provided under Chapter XVII continue to exist, but yet, such added stipulation as contained in Section 43B was held to be not so unreasonable or discriminatory or arbitrary in order to strike it down. We are therefore convinced that whatever stated with reference to Section 43B can be applied in all force to the grounds of challenge made to Section 40(a)(ia) and hold that the said impugned provision does not suffer from any of the vice alleged to strike it down.
74. In fact Section 43B was introduced by Finance Act, 1983 and the provision came into force w.e.f. 01.04.1984. The said provision came up for interpretation before the Delhi High Court and a Division Bench of the Delhi High Court in the decision reported in (1991) 187 ITR 703 (Sanghi Motors Vs. Union of India) has held that Section 43B as it stood then is clear and unambiguous and all that it provides is deduction on account of sales tax would be allowed when the money is actually paid and not when the liability is incurred. In fact following the Division Bench decision of the Andhra Pradesh High Court upholding the Constitutional validity of Section 43B, when notice came to be issued under Section 153 of the Act, the challenge came to be made to the said notice before the Division Bench of the Delhi High Court and the Division Bench in the decision reported in (1991) 189 ITR 81 (Escorts Ltd., Vs. Union of India and others) upheld the said notice as valid in law.
75. The said provision along with Sections 37(3A), 40A (8), (9) & (10) came to be challenged before the Karnataka High Court also. The Division Bench of the Karnataka High Court in the decision reported in (1986) 160 ITR 50 (Mysore Kirloskar Ltd. And Others Vs. Union of India and Others) upheld the constitutional validity of the said provision. While so holding, the Division Bench held as under at page 66 :
“Section 43B does not disallow the payments made towards taxes and contributions made to superannuation fund or gratuity fund or any other fund for the welfare of the employees but allows them as deductions only when actually made or for the very accounting year in which they are so paid and not otherwise.
That the provision to some extent interferes with the mercantile system of accounting normally adopted by business organisations can hardly be doubted. But, that practice can hardly be treated as a constitutional or legal right to hold that Parliament was bound to accept the claims made in the accounts but not actually paid as deductions under the Act. When the section recognises the payments actually made, we fail to see as to how the same contravenes article 14 of the Constitution.
When Government and Parliament found that the system had led to large scale abuse by many tax payers, we cannot say that Parliament was not competent or unjustified in intervening and recognising only the actual payments. If the Parliament decides that an evil should be curbed without in any way affecting the rights of the parties, then the court cannot condemn the same as violative of article 14 of the Constitution.
Even otherwise, Parliament had treated all alike and has not made any invidious distinction or discrimination and has not pricked up anybody for a hostile and discriminatory treatment. When that is so, it is difficult to hold that section 43B of the Act contravenes article 14 of the Constitution.
We have carefully examined the impugned provision from the standpoint of the new dimension of article 14 of the Constitution, namely, that arbitrariness was the very anthithesis of the rule of law enshrined in article 14 of the Constitution. We are of the view that every one of them do not smack of arbitrariness. We are also of the view that the Act though primarily a tax measure, is also a measure intended to achieve social justice enshrined in our Constitution and so examined also, we cannot condemn them as violative of article 14 of the Constitution. ” (Emphasis added)
76. In fact the challenge was on identical ground as has been made in these writ petitions, which has been set out at page 54 of the said decision which reads as under:
“The petitioner have challenged the validity of section 37(3A), 40A(8), (9), (10) and 43B of the Act either separately or cumulatively on three substantial grounds and they are–(i) the provisions do not relate to entry No.82 of List I of the Seventh Schedule to the Constitution and were beyond the legislative competence of the Union Parliament; (ii) that the provisions suffer from the vice of impermissible classification or were irrational, unconscionable, arbitrary and were violative of article 14 of the Constitution; and (iii) that the provisions unreasonably interfere with their freedom of trade and business guaranteed to them under article 19(1)(g) of the Constitution and were not saved by sub-article (6) of article 19 of the Constitution. “
77. The above reasoning of the Division Bench decisions of the Andhra Pradesh High Court and Karnataka High Court are well founded. We have no hesitation to follow the same while rejecting the challenge made by the petitioners on the above grounds.
78. One other argument made on behalf of the petitioners is that it is a hostile scheme of taxation, in which on the ground of default of tax recovery from a contractor’s income, the whole of the contractors income is taxed at the hands of the petitioners while such tax on the said sum is paid by the contractor himself in his returns even in the absence of the TDS effected by the petitioners. In the first blush though the said submission looks attractive, when a detailed consideration of the said submission is made, it can be noticed that the disallowance provided under Section 40(a)(ia) is for the failure of the petitioners in making the TDS as provided under Chapter XVII-B of the Act, which varies from 2% to 10%. If the TDS has been effected, such deduction would be credited to the tax liability of the contractor when his liability is assessed. Only in the event of non-deduction or non-payment of the deducted amount, there would be scope for the contractor being mulcted with the entire liability inclusive of TDS which could have been otherwise made under Chapter XVII-B.
79. As far as the disallowance of the entire expenses as provided under Section 40(a)(ia) is concerned, by virtue of the proviso to the said Section, the petitioner would be entitled to seek for adjustments in the subsequent years when the deductions are made good. In other words, by virtue of the proviso contained in Section 40(a)(ia), the assessee can seek for reversal of the disallowance, by rectifying the default in any of the subsequent year. Therefore, the argument of the petitioners which proceeds on the basis of double taxation is palpably erroneous. Since the submission has been made by an erroneous reading of the relevant provision, the said submission is liable to be rejected at the very outset. Certainly on this ground, it cannot be held that there was any hostile treatment meted out to the petitioners as that would amount to any arbitrariness or unreasonableness violative of Article 14 of the Constitution.
80. Yet another contention made on this aspect was by stating that by virtue of the disallowance made under Section 40(a)(ia), the tax at the rate of 30% plus 10% surcharge plus cess is imposed on the entire sum paid to the contractor which would have otherwise entitled a deduction of only 2%. It is contended that it would result in 15 times of the tax of the contractor and thereby the provision imposed an arbitrary and disproportionate tax on the petitioners, which default in payment can very well be remedied and recovered with interest under the provisions contained under Chapter XVII itself. This contention also does not merit any consideration, in as much as, the contention fails to take note of the fact that Section 40(a)(ia) has got an inbuilt safety valve in the form of a proviso which would entitle the petitioner to seek for an adjustment of the entire amount by rectifying the default in implementing the TDS provision prescribed under Chapter XVII-B of the Act. In fact the petitioners failed to realise that while the various recovery procedure prescribed under Chapter XVII-B would ensure the recovery of the defaulted TDS under the said Chapter, the moment the recoveries are effected under the said Chapter, the same would automatically entitle the assessee to fall back upon the proviso to Section 40(a)(ia) and thereby the disallowance will get reversed in any of the subsequent year in which such recoveries are made. Therefore the said contention also does not merit acceptance.
81. The other contentions made on behalf of the petitioner that the proviso is illusory cannot be accepted, in as much as, it proceeds on the footing that unless the TDS deducted from the payment made to the contractor in the previous year or in the subsequent year, it has no operation. As stated by us earlier, on a reading of the Section 201, where the expression “it is not deducted, or does not pay or after so deducted fails to pay” makes it clear that the proviso would be applicable even in respect of rectification of the TDS provision by the assessee itself/himself making the payment on its/his own without there being any scope for deduction from the payment made to the contractor.
82. The contention of the petitioners that Section 194C(1) authorises deduction only at the time of credit or at the time of payment without there being any other provision to deduct the said payment in a subsequent year to the year of credit or payment, in our considered view is an interpretation which completely omitted to note the other provisions in the same Chapter which enables an assessee to make the payment by way of TDS on its own. On the other hand it can be said that there is no prohibition in the said Chapter XVII-B as against the assessee either from making any deduction in the subsequent year from and out of the amount payable to the contractors or the assessee itself making the payment from its own funds and recover the same in any manner it likes from the contractor. When all other such options for recovering the TDS which the assessee failed to deduct in the relevant year and is permitted to make it in any subsequent year from its contractors are available, there is no reason why the provision should be faulted which came to be introduced with a laudable object of strict implementation of the tax recovery measure. We are not therefore impressed by such an argument made on behalf of the petitioners in stating that the proviso is illusory.
83. One other argument on this ground stated was that the relief through the mechanism of the proviso is onerous and near impossible since Section 40(a)(ia) shifts the business expenditure of the previous year, to the subsequent year which when computed along with regular expenditure of the subsequent year, exaggerates the expenditure to yield huge loss neutralizing the profit with mere carry forward facility under Section 72 and thereby the tax referred in the year of assessment can hardly be secured back unless business is carried on with profit to absorb the loss of the subsequent year. The said argument is to be stated only to be rejected. Such a submission made on hypothetical basis cannot invalidate the provision. After all the proviso has been inserted in order to ensure that even a defaulter is not put to serious prejudice, in as much as, by operation of the substantive provision, the expenditure which is otherwise allowable as a deduction is denied on the ground that the obligation of TDS provisions are violated. The law makers while imposing such a stringent restriction wanted to simultaneously provide scope for the defaulter to gain the deduction by complying with the TDS provision at a later point of time. Therefore such a remedial measure provided in the form of a proviso cannot be tested in the anvil of the grievance which is sought to be demonstrated by stating that in order to get the adjustments one has to survive in the business and that in the course of such survival, he should also make a profit. On the basis of such extreme imaginary consideration, which in our opinion are farfetched, the vires of a provision cannot be tested. We are therefore rejecting such a contention at the very outset.
84. One other argument of the learned counsel appearing for the petitioners is that Section 2(24) having defined the term ‘income’ have included only profits or gains of business or profession and the disallowance provided under Section 40(a)(ia) is indisputably an expenditure in the hands of the assessee and in the absence of deeming such expenditure as income of the assessee falling under Section 2(24) of the Act, no tax liability can be imposed on the assessee. The said submission failed to take note of one important factor viz., the proviso which would enable the assessee to claim the deduction as and when in any subsequent year compliance of the TDS provisions are duly made. It can also be stated that the disallowance committed under Section 40(a)(ia) is not a disallowance in toto but a temporary phenomenon, the ratification of which is in the hands of the assessee themselves. Therefore, it is a misnomer to call it an income while as a matter of fact it is an expenditure not properly claimed. The provision under Section 40(a)(ia) while treating the same as an expenditure only disables the assessee to claim the deduction for his failure to comply with the statutory provision relating to TDS. Therefore, the argument that unless it is called a deemed income, the disallowance is not permissible is un-called for. Certainly on that ground it cannot be held that it is in violation of Article 14 or 19(1)(g) of the Constitution.
85. The contention of the petitioners that the expenses incurred as mentioned in Section 40(a)(ia) does not partake the character of income and therefore it cannot be taxed as income, fails to note that the disallowance provided under Section 40(a)(ia) is to ensure that the various contingencies to be satisfied in order to entitle for deduction is scrupulously fulfilled. The assessee cannot be heard to say that knowing full well that he is bound to follow the procedure prescribed under Chapter XVII-B, the compliance of which is mandatorily required but yet contend that his failure to comply with the stipulations contained therein should be ignored and whatever expenditure claimed should be allowed enuring to its benefit. As stated earlier, even in the said provision, the assessee has been provided with a measure by which he can rectify the default committed in the subsequent year and seek for restoration of the deduction by following such measure whenever disallowance is made under Section 40(a)(ia) and the benefit can be availed by the assessee. When once the assessee is able to resort to such a measure and rectify itself, there would be no question of the expenditure partaking the character of income as made in the said contention. Therefore the said contention also fails.
86. The argument of the petitioners that Section 40(a)(ia) does not serve any socio-economic cause. Even assuming to be true, it cannot be a ground for striking down the said provision. It is besides the fact that after the introduction of Section 40(a)(ia), the object with which the provision came to be introduced was nearly achieved, in as much as, the statistical data of collection and refund for the financial year 2008-09 upto 01.08.2009, discloses that at least 50% of such collection was by way of TDS. It is common knowledge that the revenue set up of the Country is substantially supported by the fiscal Statutes and even amongst them in the recent past due to wide spread network of the income tax coverage, the economy of the State is substantially supported by the tax revenue. Viewed in that respect, such economic support to the State will enable the State to concentrate on other welfare activities catering to the needs of the downtrodden by virtue of the improved financial status comfortable and thereby fulfil the socio economic obligation enshrined under the Preamble of our Constitution. Therefore, we do not find any substance in the said submission.
87. The contention comparing Section 40(a)(ia) with the proviso to Section 40A(3)(b) of the Act as introduced through Finance Act, 2007, can have no relevance, in as much as in the first place, the two substantive provisions are not comparable at all. While the purport of Section 40A(3)(b) is to have effective control over cash expenditure over and above a sum of Rs.20,000/- and thereby restrict the generation of any unaccounted money, the provision contained in Section 40(a)(ia) is for augmenting the TDS. The proviso to Section 40A(3)(b) is mainly intended to cover certain extraordinary situations such as non-availability of banking facilities and business expediency. On the otherhand, the proviso to Section 40(a)(ia) would act as a remedial measure to rectify any default committed by an assessee in complying with the TDS provision. We therefore do not find any scope to consider the said ground based on a wrong comparison of the proviso to Section 40A(3)(b), while challenging the vires of Section 40(a)(ia).
88. The submission made based on Section 40A(4) of the Act, which allows any payment to the Provident Fund in the event of the assessee having made effective arrangement to secure the tax is concerned, in the case of disallowance, under Section 40(a)(ia) a safety valve in the form of proviso has been provided and therefore by merely making a comparison of Section 40(a)(ia) with Section 40A(4) it cannot be held that the impugned provision suffers from any arbitrariness or unreasonableness.
89. As far as the contention based on Section 195(5) of the Income Tax Act, which provides for non-deduction of tax at source by providing a certificate under the provisions of the Rules and Notifications of the CBDT and that no such safety valve has been provided in respect of contractors, the answer can be straightaway held to be available under Section 197 of the Act, where similar such benefit has been extended in respect of any person to whom Sections 192, 193, 194, 194A, 194C, 194D, 194G, 194H, 194I, 194J and 194LA including Section 195 applies. In the said provision also it is specifically provided that if the the Assessing Officer is satisfied that the total income of the recipient justifies deduction of income tax at any lower rate or nil deduction on an application made by the assessee, the Assessing Officer can issue appropriate certificate. Therefore, the said submission does not deserve any consideration.
90. The contention raised on behalf of the petitioners that Section 40(a)(ia) fails to cover all assessee in all situation and thereby it is highly inequitable and unreasonable is to be stated only to be rejected. Section 40(a)(ia) will apply wherever Chapter XVII-B gets attracted. Therefore, in respect of all those assessee who are governed by Chapter XVII-B would be equally governed by Section 40(a)(ia). We are unable to understand as to how there could be any inequality or unreasonableness in such a situation. On the other hand, in respect of assessees who are governed by Chapter XVII-B of the Act, Section 40(a)(ia) does not make any discrimination and consequently the said contention has no legs to stand.
91. The argument based on Section 10A/10B and those availing deduction under Section 80(ia) cannot be accepted for the reason that in the first place it is not the case of the petitioners that total exemption has been granted from the applicability of Section 10A(1A). Secondly, by applying Section 40(a)(ia) if an assessee is governed by Sections 10A/10B or 80(IA) 80(IE) and is able to get any benefit by virtue of the applicability of those other provisions, it cannot be stated that they were on par with the assessees not governed by those provisions in order to state that any discriminatory treatment is meted out. Certainly such grievances based on incomparable situation cannot be a ground for striking down a provision. Equally, the contention as between the profit making assessee and loss making assessee are all highly hypothetical grounds and do not merit any consideration.
92. Similarly, the contentions by making a comparison with an assessee in the preoperative stage or defaulting assessee, cannot be considered as a ground which can be urged while challenging a provision as violative of Articles 14 or 19(1)(g) of the Constitution. The said submission therefore does not merit any consideration.
93. Reliance was placed upon 1997 (89) E.L.T. 28 (Mad.) (Eternit Everest Ltd. Vs. Union of India). In the said case, the challenge was to Section 11D of the Central Excises and Salt Act, 1944, and it was contended that the said Section lacked legislative competence and violative of Article 265 of the Constitution. The Division Bench of this Court held that the said Section was valid in Law. The Division Bench however noted that there was a conspicuous omission in Section 11D of the Central Excises and Salt Act, that any provision whatsoever to initiate any proceedings or entertain and adjudicate upon any dispute with reference to the liability to pay any amount said to have been collected by a person who was said to have so collected the amount from the buyer or any goods in any manner as representing the duty of excise but who seriously disputes or denies of having so collected. The Division Bench also held that interpretation of a taxing provision has been held to necessarily involve the application of the well settled rule that construction should be preferred which makes the machinery workable, “ut res valeat potius qua pereat”. While upholding the said provision, the Division Bench ultimately held as under in paragraph 24:
“24…..On and from the date on which the respondent-Union of India take steps and provide for the required machinery, it shall be open to the respondent-Union of India or designated authority as the case may be to work out or quantify and determine the liability in the manner so prescribed or provided for in any liability thereof and recover the same in accordance with law……… “
In so far as implication of Section 40(a)(ia), it is not the case of the petitioners that they would be deprived of taking the stand that after complying with the requirement of TDS provisions under Chapter XVII-B and to put forth their stand, they are deprived of any such machinery and thereby prevent the Department from invoking Section 40(a)(ia). In other words, when the petitioners can vindicate their stand in the assessment proceedings as regards the non-applicability of Section 40(a)(ia) under Chapter XIV of the Act, we do not find any support to the petitioners in relying upon the above decision. In other words, in the said decision, this Court noted that though the provision impugned therein did not suffer from any Constitutional vires, yet, the absence of a machinery for an assessee to agitate the justifiability of a disputed right needed rectification. In the case on hand having regard to the existing availability of a right in an assessee to question any erroneous disallowance made under Section 40(a)(ia) in the assessment proceedings, there is no scope to compare the ratio of the said decision to the facts of this case.
94. One other contention raised on behalf of the petitioners was that Section 40(a)(ia) is the only provision where it provides for Double Taxation. The said submission was made by referring to Sections 64 and 205 of the Act, wherein the provision itself specifically provided that the income on being included in the total income of one individual, it should be excluded from the total income of others or where the tax is deductible at source under Chapter XVII of the Act, the assessee shall not be called upon to pay the tax himself to the extent to which the TDS has been effected. Here again, it is relevant to note that the distinctive feature as between those provisions and Section 40(a)(ia) is the recovery provision contained in Chapter XVII and once implemented would result in the collection of tax of the income of ‘Y’ at the hands of ‘X’ and such tax collected would be to the account of ‘Y’ and to that extent there can be no further imposition of tax. Similar condition provided in Section 64 to the effect that the income of another individual namely spouse, minor child etc., is excluded from that part of income which is already included in the total income of the prime individual and to that extent, it would ensure that such income is not taxed twice. It is relevant to note that while providing such safeguard to ensure that no particular income of an individual is not taxed twice, conversely ensure that at one point atleast recovery of tax is ensured. As compared to those provisions Section 40(a)(ia) will operate only when default is committed in implementing the TDS mode of recovery. At the same time, as and when that default is rectified, the rigour of Section 40(a)(ia) is relaxed and thereby whatever tax liability created due to disallowance can be retrieved and thereby in the ultimate process, the collection of tax will be only that of the payee. Once we steer clear of such ultimate consequence, it is a misnomer to call the process created under Section 40(a)(ia) as one resulting in Double Taxation. We are not therefore impressed with such a contention of the petitioners.
95. To support the contention that there cannot be a double taxation under the guise of disallowance, reliance was placed upon the decision of the Hon’ble Supreme Court reported in (2007) 293 ITR 226 (SC) (Hindustan Coca Cola Beverage P. Ltd. Vs. Commissioner of Income Tax). That was a case where the assessee deducted 2% on the warehousing charges treating them as one falling under Section 143C. The Assessing Authority however held the said payment as rent and passed orders for recovery of difference in tax and interest under Section 194-I and 201(1A). Subsequently the deductee paid tax on the entire sum received by it. In the above stated background the Appellate Tribunal held that there cannot be a recovery once again from the assessee considering the fact that the deductee had already paid the tax on the amount received from the assessee. In the special facts of that case, the High Court reversed the order of the Tribunal on a different ground. The Hon’ble Supreme Court went into the merits of the case and upheld the ultimate order of the Tribunal. In the first place the question of invocation of Section 40(a)(ia) did not arise in that case. Secondly in the special facts of that case, the Hon’ble Supreme Court while upholding the order of the Tribunal held that the decision that the assessee is only to pay interest under Section 201(1A) was valid. Moreover, the Hon’ble Supreme Court has referred to Circular No.275/201/95- IT(B) dated 29.01.1997 issued by the CBDT, which specifically declares “no demand visualized under Section 201(1) of the Income Tax Act should be enforced after the tax deductor has satisfied the officer-in-charge of TDS, that taxes due have been paid by the deductee-assessee. However, this will not alter the liability to charge interest under Section 201(1A) of the Act till the date of payment of taxes by the deductee-assessee or the liability for penalty under Section 271C of the Income Tax Act.” It was in the above stated legal position that decision came to be rendered by the Hon’ble Supreme Court. The said decision rendered in the light of Sections 201(1) and 201(1A) cannot be applied to a situation where Section 40(a)(ia) gets attracted which stands entirely on a different set of circumstances. We are not therefore in a position to apply the ratio of the said decision to the case on hand.
96. The decision reported in (1996) 219 ITR 330 (Union of India and another Vs. A.Sanyasi Rao and others) was relied upon to support the contention based on the legislative competence in enacting Section 40(a)(ia). In the said decision the Hon’ble Supreme Court while interpreting Article 265 vis-a-vis Entry 82 of List I of Schedule VII of the Constitution has held as under at page 348 :
“The above decisions establish that the word “income” occurring in entry 82 in List I of the Seventh Schedule should be construed liberally and in a wide manner and the power to legislate will take in all incidental and ancillary matters including the authorisation to make provision to prevent evasion of tax, in any suitable manner…… .”
In the said decision, the issue related to validity of Sections 44AC and 206C of the Act which provided for collection of tax at the time of purchase of goods. While dealing with the said question, the Hon’ble Supreme Court took the view that even at the time of purchase, income can be said to have been accrued to attract imposition of tax. The Hon’ble Supreme Court therefore held that by virtue of Section 44AC read with Section 206C when it is brought to tax, though levied with reference to the purchase price and at an earlier point is nevertheless the income liable to be taxed under the Income Tax Act. The plea of the assessee to the contrary was repelled. However, on the plea of discrimination based on Article 14 of the Constitution, the Hon’ble Supreme Court held that the denial of relief provided by Sections 28 to 43C to particular businesses or trades dealt with under Section 44AC had no nexus to the object sought to be achieved by the Legislature, in as much as, there was a discrimination to a particular business and trade covered by Section 44AC of the Act, in so far as it denied the relief provided under Sections 28 to 43C to those business or trade dealt with in the said Section. In other words, the Hon’ble Supreme Court held that Section 44AC read with Section 206C is wholly hit by the Constitution. The said decision of the Hon’ble Supreme Court was in the peculiar nature of the provisions viz., Sections 44AC and 206C which came to be enacted to enable the Revenue to collect the legitimate dues of the State from the persons carrying on particular trade in view of the peculiar difficulties expressed in the past and the measure was so enacted to check evasion of substantial revenue due to the State. Nevertheless, when the Hon’ble Supreme Court noticed that while enacting the said provisions it denied the relief provided by Sections 28 to 43C applicable to all other assessees, the Hon’ble Supreme Court held the non-obstinate clause under Section 44AC to the extent of such denial of particular business or trade was discriminatory. When we consider the ratio of the said decision to the case on hand, we find that there is no scope for comparison of any particular assessee with any other set of assessee to whom there was anything provided in the impugned Section 40(a)(ia) providing for different treatment. In other words, the applicability of Section 40(a)(ia) being common to all assessees whomsoever, who were to comply with the TDS provisions contained under Chapter XVII-B, there is no question of discriminatory treatment being meted out to any particular set of assessees as against those for whom the said provision is made inapplicable. The said decision therefore does not in any way help the petitioners.
97. The reliance placed upon the decision reported in (1998) 2 SCC 1 (Malpe Vishwanath Acharya and Others Vs. State of Maharashtra and another) for unreasonable treatment, cannot be applied, in as much as that related to a provision contained in a Rent Control Act, where the Hon’ble Supreme Court held that the provision in the Rent Control Act in Bombay Rents, Hotel and Lodging House Rates Control Act, 1947 providing for determination and fixation of rent by freezing or pegging down of rent as on 01.09.1940 or as on the date of first letting was arbitrary and unreasonable, in as much as, it confers disproportionately larger benefit to tenants to the disadvantage of the landlords. In as much as, in regard to applicability of Section 40(a)(ia), there being no scope for comparison of two different set of assessees or category of persons, we do not find any scope to apply the ratio of the said decision to the facts of this case.
98. Similarly reliance was placed upon the decision of the Hon’ble Supreme Court reported in (2004) 4 SCC 311 (Mardia Chemicals Ltd. Vs. Union of India) wherein the Hon’ble Supreme Court struck down the condition precedent of the requirement of deposit of 75% of the amount claimed by the financial institutions/ banks while working out the remedy before the Tribunal as oppressive, onerous, arbitrary and against all cannons of reasonableness. It is relevant to note that the provision in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SRFAESI Act) after the issuance of notice under Section 13(4) of the SRFAESI Act. While an Appeal remedy is provided under Section 17 of the Act, the said provision as it stood prior to its striking down imposed a condition that the debtor in order to work out such appellate remedy should deposit 75% of the amount claimed in the notice issued under Section 13(4) of the SRFAESI Act. It is also relevant to note that barring the only remedy provided immediately after the issuance of notice under Section 13(4) of the SRFAESI Act by way of appeal under Section 17, the debtor was not provided with any other remedy at that stage. Therefore, the said decision of the Hon’ble Supreme Court in striking down that part of the provision contained under Section 17(2) of the SRFAESI Act cannot be taken to have laid down a general proposition of law applicable to all situations in order to apply the said principle to a case falling under Section 40(a)(ia) of the Act.
99. As far as the reliance placed upon the decision reported in (2009) 5 SCC 342 (Grand Kakatiya Sheraton Hotel & Towers Employees & Workers Union Vs. Srinivasa Resorts Ltd.) is concerned, the said case has absolutely no comparison to the case on hand. That was a case arising under the provisions of the Andhra Pradesh Shops and Establishments Act, 1966. Section 47(3) of the said Act provided for payment of gratuity even if an employe has put in one year of service, the said provision virtually confronted with the provisions contained in the Payment of Gratuity Act, 1972 which prescribes a minimum period of 5 years of continuous service for an employee to claim gratuity. The Hon’ble Supreme Court upheld the decision of the Andhra Pradesh High Court which struck down the provision under the Shops Act as unreasonable and violative of the Constitution. In fact similar such provision contained in the Andhra Pradesh Shops and Establishment Act of 1966 was also held to be unconstitutional in the decision reported in (1972) 2 AnLT 163 (Suryapet Coop. Mktg. Society Ltd. Case) which has reached a finality. Having regard to the nature of enactment and the conflict as between the Special Act providing for payment of Gratuity enacted by the Parliament vis-a-vis the State Act, the provision was held to be unreasonable. There is no scope to equate Section 40(a)(ia) with the situation contained in either the Payment of Gratuity Act or Andhra Pradesh Shops and Establishment Act, 1966 in order to apply the ratio of the said decision to the facts of this case. In this context, it will be appropriate to refer to what the Hon’ble Supreme Court has held in paragraph 15 of the decision reported in State of Madras Vs. V.G.Row (AIR 1952 SC 196). Para 15 reads as under:
“15…..It is important in this context to bear in mind that the test of reasonableness, wherever prescribed, should be applied to each individual statute impugned, and no abstract standard, or general pattern of reasonableness can be laid down as applicable to all cases. The nature of the right alleged to have been infringed, the underlying purpose of the restrictions imposed, the extent and urgency of the evil sought to be remedied thereby, the disproportion of the imposition, the prevailing conditions at the time, should all enter into the judicial verdict.”
Applying the said test, we do not find any scope to apply the decision reported in (2009) 5 SCC 342 to the case on hand.
100. Similar is the case, with the one reported in (2009) 5 SCC 608 (V.Subramaniam Vs. Rajesh Raghuvandra Rao). That was a case where the challenge was to the vires of Section (2-A) and (3-a) of Section 69 of the Partnership Act, 1932 introduced by the Maharashtra Amendment Act, 29 of 1984. While countenancing the challenge made to the sub-section (2-A) of Section 69, the Hon’ble Supreme Court held as under in paragraph 25 and 26:
“25. The effect of the 1984 Amendment is that a partnership firm is allowed to come into existence and function without registration but it cannot go out of existence (with certain exceptions). This can result into a situation where in case of disputes amongst the partners the relationship of partnership cannot be put to an end by approaching a court of law. A dishonest partner, if in control of the business, or if simply stronger, can successfully deprive the other partner of his dues from the partnership. It could result in extreme hardship and injustice. Might would be right. An aggrieved partner is left without any remedy whatsoever. He can neither file a suit to compel the mischievous partner to cooperate for registration, as such a suit is not maintainable, nor can he resort to arbitration if any, because the arbitration proceedings would be hit by Section 69(1) of the Act (Jagdish Chandra Gupta Vs. Kajaria Traders (India) Ltd.)
26. In our opinion the restrictions placed by sub-section (2-A) of Section 69 introduced by the Maharashtra Amendment Act, for the reasons given above, are arbitrary and of excessive nature and go beyond what is in the public interest. Hence the restrictions cannot be regarded as reasonable.”
The reasoning set out in the above paragraphs itself are sufficient to show how the said decision can have no application to the provision impugned in these writ petitions viz., Section 40(a)(ia) of the Act, which as stated by us earlier has got an inbuilt safeguard providing for a defaulting assessee to set right the disallowance by correcting its default in any subsequent year.
101. As far as decision reported in (2000) 118 STC 297 (Steel Authority of India Ltd. Vs. State of Orissa and Others) the challenge relates to Section 13-AA of the Orissa Sales Tax Act, which came into effect on 04.10.1993. The said provision provided for deduction of tax at source of the State sales tax that is payable by the Contractor on the value of the works contract. The Court held that such a provision providing for deduction of sales tax at 4% regardless of the contractor’s payment and regardless of the fact that the value of the contract included the value of interstate sales, outside sales or sales in the course of import and therefore the said provision was beyond the power of the State Legislature which had no legislative competence to levy sales tax on interstate sales, outside sales or sales in the course of import by virtue of Article 286(1) of the Constitution read with Entry 54 of List II of the Seventh Schedule. As lack of legislative competence was writ large, the said provision came to be struck down. We are not therefore persuaded to apply the ratio of the said decision to the facts of this case.
102. In the decision reported in AIR 2000 SC 109 (Mathuram Agrawal Vs. State of Madhya Pradesh) the challenge was to the proviso to a clause in sub-section A(2) of Section 127 of the Madhya Pradesh Municipalities Act, 1961 and the said provision by virtue of deeming fiction provided for exemption from levy of property tax in respect of buildings and lands the annual letting value of which does not exceed Rs.1,800/- was brought within the charging section without providing for the rate at which the tax is to be levied. Applying the well settled principle that the fiscal Statute should clearly and unambiguously convey the three condition of the tax law viz., (i) the subject of the tax, (ii) the person who is liable to pay the tax and (iii) the rate at which the tax is to be paid, the Hon’ble Supreme Court on finding that there was a lacunae in the provision which did not provide for the rate of tax to be applied to such an exempted provision rendered the proviso invalid and ultra vires of the Constitution. The ratio of the said decision was exclusively applicable to the nature of provision dealt with therein and we do not find any scope to apply the said ratio to the provision impugned in these writ petitions. We do not find any ambiguity in the language used in Section 40(a)(ia), where it seeks to disallow the expenditure for the stated reasons. The settled principles in the said decision viz., the subject of the tax, the person who is liable to pay the tax and the rate at which the tax is to be paid are all clear while applying Section 40(a)(ia) and therefore the said decision does not help the petitioners.
103. In the decision reported in (1993) 4 SCC 380 (State of Haryana Vs. Santlal) the challenge was to Section 38 of Haryana General Sales Tax Act, 1973 and Rule 53 of the Haryana General Sales Tax Rules, 1975. The Punjab and Haryana High Court struck down the said provision as unconstitutional. Section 38(3) provided for exemption of the penalty on the clearing or forwarding agent, dalal or any other person transporting the goods within the state if it contravenes the provisions of Section 38(1) & (2) of the said Act at the rate of 20% of the value of goods. While upholding the decision of the High Court, the Hon’ble Supreme Court held as under in paragraph 16 :
“16. It is difficult to hold that a clearing or forwarding agent, ‘dalal’ or person transporting goods can be made liable to a penalty equivalent to 20 per cent of the value of the goods in respect of which no particulars and information have been furnished. Given the obligation to furnish particulars and information, a penalty for evasion of tax, in addition to the tax evaded, can reasonably and fairly be imposed which bears a proportion to the quantum of tax that has escaped assessment but it cannot reasonably and fairly bear a proportion to the value of the goods the sale of which has occasioned the liability to tax. A penalty as high as that sought to be imposed could well put a smaller clearing or forwarding agent or ‘dalal’ or person transporting goods out of business.”
In the first place Section 40(a)(ia) of the Act is in no way comparable to Section 38 of the Haryana General Sales Tax Act. The implication of both the provisions vary in very many degrees. While Section 40(a)(ia) is relatable to an assessee, Section 38 of the said Act was relatable to a mere clearing or forwarding agent who would be neither an assessee to the value of the goods dealt with by it, nor in any way connected with the goods dealt with by him except as a forwarding or transporting agent on behalf of the principal. For carrying out the said exercise as an agent of the principal, when some payment is made as a commission or charges which would be a very nominal sum as compared to the value of the goods transported or dealt with by such persons the Hon’ble Supreme Court held that the penalty as high as at the rate of 20% sought to be imposed would be wholly unreasonable which may result in extinguishment of that person from the business and therefore the provision was liable to be struck down. The said reasoning which weighed with the High Court and the Hon’ble Supreme Court cannot be applied to the impugned provision viz., Section 40(a)(ia) is as much as the two provisions are not comparable in any manner. We are not therefore in a position to apply the said decision to the facts of these cases.
104. Similar is the ratio laid down in the decisions reported in (1999) 2 SCC 253 (Tripura Goods Transport Association Vs. Commissioner of Taxes) and (2005) 6 SCC 424 (A.B.C.(India) Ltd. Vs. State of Assam) where more or less identical provisions under the Provisions of Tripura Sales Tax Act, 1976 and Assam General Sales Tax Act, 1993 respectively and the rules framed thereunder came up for challenge and for the very same reasons stated above, we do not find any scope to apply the said decisions to the facts of these cases.
105. As far as the reliance placed upon the decisions reported in (2008) 175 Taxman 77 (SC) (Vijay Ship Breaking Corporation Vs. Commissioner of Income Tax, Ahmedabad) is concerned, the ratio decided therein is in relation to the merits of the claim in respect of an allowable deduction. In so far as such a controversy is concerned, that can always be worked out by the assessee by taking the stand that the TDS was not made and the same would not be covered by the provisions of Chapter XVII-B. Such a stand if taken, it will be for the appropriate Assessing Authority to decide the claim on its own merits, which decision will always be open to challange before the higher authorities. When we consider with the vires of Section 40(a)(ia), in our considered opinion the decision rendered in the said judgment can have no application. In fact, the question framed in the said decision themselves show as to the nature of the controversy involved which was on the merits of the claim and not on the validity of any provisions of law. The said decision therefore does not help the petitioners.
106. Similar is the position in regard to the decision reported in (2009) 312 ITR 225 (SC) (Commissioner of Income Tax Vs. Eli Lilly and Co (India) P. Ltd.).
107. Mr.V.Ramachandran, learned senior counsel appearing for some of the petitioners alternatively contend that wherever there is reasonable doubt about the applicability of Chapter XVII-B, it should be held that Section 40(a)(ia) cannot be invoked and that the provision should be read down to that extent. In support of his submissions, the learned senior counsel relied upon the decisions reported in AIR 2002 (SC) 2004 (Rakesh Wadhawan Vs. M/s.Jagadamba Industrial Corporation) , (1992) 194 ITR 539 (Commissioner of Wealth Tax Vs. S.Jindal), (1985) 156 ITR 323 (Commissioner of Income Tax, Bangalore Vs. J.H.Gotla), (1994) (1994) 208 ITR 649 (C.W.S. (India) Ltd., Vs. Commissioner of Income Tax), (2002) 254 ITR 337 (Omkars S.Kanwar Vs. Union of India and others) and AIR 1980 SC 1042 (All Saints High School Vs. Govt. of A.P.). In the above decisions the principles applicable for reading down a provision has been set out.
108. To appreciate the contention, it would be worthwhile to extract those principles set out in the various decisions:
(i) In the decision reported in AIR 2002 (SC) 2004 (Rakesh Wadhawan Vs. M/s.Jagadamba Industrial Corporation) the Hon’ble Supreme Court has held as under in paragraph 19:
“19……Firstly, it is in conformity with the object of enactment. The legislation was enacted to protect the tenants from the hands of unscrupulous landlords and any interpretation to the contrary would give an upper hand to the landlords and provide a tool in their hands to be cracked like a whip on weaker tenants. Secondly, such an interpretation would bring the provision in conformity with the several other legislations of the times such as Section 13 of the M.P. Accommodation Control Act, 1961, Section 11 of A.P. Buildings (Lease and Eviction) Control Act, 1960, Section 11(4) of Bombay Rents, Hotels and Lodging House Rates Control Act, 1947, Section 15 of Delhi Rent Control Act, 1958 and so on. Thirdly, the provision suffers from ambiguity. In the absence of any in-built indication enabling determination of the quantum of arrears, if disputed, and the period for which interest at six per cent per annum is to be calculated, the provision would become unworkable and hence liable to be struck down under Article 14 of the Constitution. An obligation is case on the Court to interpret it in such a manner as to make it workable and save it from the vice of being rendered unconstitutional. “
(ii) In the decision reported (1992) 194 ITR 539 (Commissioner of Wealth Tax Vs. S.Jindal) the principle has been set down as under at page 544:
“Several decisions were cited enunciating the principle of interpretation of the word “shall” as either mandatory or directory. It is unnecessary to repeat them. One of the principles is to find out the consequence of reading the provision as mandatory and if the consequence is to render the statutory provision harsh, onerous or arbitrary, such a reading should be avoided. Another principle is to “read down” a statutory provision so as to make it a valid provision and prevent its nullification as unconstitutional; the third principle applicable is to read the provision so as to be in consonance with the object and scheme of the statute and thus limit the operation of the particular provision to effectuate the said statutory object.”
(iii) In the decision reported in (1985) 156 ITR 323 (Commissioner of Income Tax Vs. J.H.Gotla) the Hon’ble Supreme Court has held as under at page 339:
“In the case of Varghese Vs. ITO (1981) 131 ITR 597, this court emphasised that a statutory provision must be so construed, if possible, that absurdity and mischief may be avoided.
Where the plain literal interpretation of a statutory provision produces a manifestly unjust result which could never have been intended by the Legislature, the court might modify the language used by the Legislature so as to achieve the intention of the Legislature and produce a rational construction. The task of interpretation of a statutory provision is an attempt to discover the intention of the Legislature from the language used. It is necessary to remember that language is at best an imperfect instrument for the expression of human intention. It is well to remember the warning administered by Judge Learned Hand that one should not make a fortress out of the dictionary but remember that statutes always have some purpose or object to accomplish and sympathetic and imaginative discovery is the surest guide to their meaning.”
(iv) In the decision reported in (1994) 208 ITR 649 (C.W.S. (India) Ltd. Vs. Commissioner of Income Tax) the Hon’ble Supreme Court has held as under at page 656:
“…..While we agree that literal construction may be the general rule in construing taxing enactments, it does not mean that it should be adopted even if it leads to a discriminatory or incongruous result. Interpretation of statutes cannot be a mechanical exercise. The object of all the rules of interpretation is to give effect to the object of the enactment having regard to the language used. The intention of Parliament in enacting section 40(a)(v) can be gleaned from the memorandum explaining the provisions of the Finance Bill, 1968, which sets out the object behind this clause. The Full Bench of the Kerala High Court has set out the memorandum in the judgment under appeal. In this connection, we may refer to the well-recognised rule of interpretation of statutes that where a literal interpretation leads to an absurd or unintended result, the language of the statute can be modified to accord with the intention of Parliament and to avoid absurdity… ….”
(v) In the decision reported in (2002) 254 ITR 337 the Gujarat High Court has held as under at page 352:
“…..The doctrine of reading down, as one of the principles of interpretation of the statute, cannot be applied to add and read additional words into a statutory order as would transgress the limits of such order and the Scheme. The doctrine of reading down as a permissible means of the process of interpretation of statutes can be restored to to give the statute reasonable meaning and to make it constitutionally valid but not for adding or supplementing any alleged unconscious omissions sought to be perceived in it.”
(vi) In the decision reported in AIR 1980 SC 1042 (All Saints High School Vs. Government of Andhra Pradesh) the Hon’ble Supreme Court has held as under in para 111:
“111……This Court has in several cases adopted the principle of reading down the provisions of the Statute. The reading down of a provision of a statute puts into operation the principle that so far as it is reasonably possible to do so, the legislation should be construed as being within its power. It has the principal effect that where an Act is expressed in language of a generality which makes it capable, if read literally of applying to matters beyond the relevant legislative power, the Court will construe it in a more limited sense so as to keep it within power.”
109. For the very same proposition the learned senior counsel appearing for the petitioners also relied upon the decisions reported in (2000) 120 STC 302 (B.R.Enterprises Vs. State of U.P.), AIR 1996 S.C. 1023 (Panalal Bansilal & Others Vs. State of Andhra Pradesh), (1989) 178 ITR 31 (Sanyasi Rao Vs. Government of A.P.) and 236 ITR 380 (Geetha Hariharan Vs. Reserve Bank of India).
110. In (1991) Supp (1) SCC 600 (Delhi Transport Corporation Vs. D.T.C.Mazdoor Congress) the Hon’ble Supreme Court has held as under in paragraph 323:
“323. In Craies Statute Law (7th edn., Chapter 5 at page 64) it is stated that where the words of an Act are clear, there is no need for applying any of the principles of interpretation which are merely presumptions in cases of ambiguity in the statute. The safer and more correct course of dealing with the question of construction is to take the words themselves and arrive, if possible, at their meaning without in the first place referring to cases. Where an ambiguity arises to supposed intention of the legislature, one of the statutory constructions, the court propounded, is the doctrine of reading down. Lord Reid in Federal Steam Navigation Co. Vs. Department of Trade and Industry (as also extracted by Cross Statutory Interpretation, Butterworths’ edition, 1976 at page 43 in proposition 3) has stated thus:
“…..the judge may read in words which he considers to be necessarily implied by words which are already in the statute and he has a limited power to add to, alter or ignore statutory words in order to prevent a provision from being unintelligible, absurd or totally unreasonable, unworkable or totally irreconcilable with the rest of the statute.”"
111. A conjoined reading of the various principles laid down in the above decisions, boils down to the position viz.,
(a) That so far as it is reasonably possible to read down a provision in order to construe the legislation as being within its power.
(b) By applying the doctrine of Reading Down, no additional words into a statutory order which would transgress the limits of such order or the scheme. It can only be resorted to to give the statute a reasonable meaning in order to make it constitutionally valid.
(c) Under the guise of Reading Down a provision nothing can be supplemented. Where a literal interpretation leads to an absurd or intended result, the language of the statute can be modified to accord with the intention of Parliament and to avoid absurdity.
(d) The Doctrine of Reading Down a statutory provision is to make it a valid provision and prevents its nullification as unconstitutional.
112. Keeping the above principles in mind when we consider the submissions of the learned counsel appearing for the petitioners, at the outset, it will have to be stated that having considered the various submissions on the grounds of arbitrariness, unreasonableness as well as discrimination, we have found that such grounds are not available for the petitioners when challenging the impugned Section 40(a)(ia). Therefore when we have held that there is no ambiguity to be cleared, the question of applying the doctrine of Reading Down to Section 40(a)(ia) does not arise. Equally, there is no doubt in our minds that the provision is constitutionally valid, having regard to the various inbuilt safeguards in the substantive Section read along with its proviso. In such circumstances, the very question of applying the doctrine of Reading Down does not arise. When that be so, if it where to be held that in the event of a reasonable doubt about the applicability of Chapter XVII-B, Section 40(a)(ia) cannot be invoked, would be stretching our jurisdiction beyond the permissible limit which cannot be done. In as much as we have reached a conclusion that the object sought to be achieved while enacting Section 40(a)(ia) was for augmenting the provision of TDS, with which object we do not find any impermissibility or lack of constitutionality and hence there is no scope for applying the doctrine of Reading Down to the said provision. Therefore the last contention of the learned senior counsel appearing for the petitioners cannot also be accepted.