TDS cannot be postponed till last date of accounting period, HC ruling in virgin Creations will not apply

IN THE ITAT RAJKOT BENCH

Income-tax Officer – Ward 1(4)

versus

Bhoomi Construction

IT APPEAL NO. 601 (RJT.) OF 2012

[ASSESSMENT YEAR 2006-07]

Date of Pronouncement: 08.02.2013

ORDER

D.K. Srivastava, Accountant Member 

The appeal filed by the Revenue is directed against the order passed by the CIT (A) on 31-08-2012, on the following grounds:-

“1.  The learned CIT(A)-I, has erred in law and on facts of the case in deleting the addition of Rs. 57,48,265/- u/s.40(a)(ia) made by the Assessing Officer on account of tax not been deposited or paid during the previous year.

 2.  On the facts of the case, learned CIT(A)-I, ought to have upheld the order of the Assessing Officer.

 3.  It is, therefore, prayed that the order of the learned CIT(A)-I may be set aside and that of Assessing Officer be restored.”

2. The assessee is a partnership firm. It is engaged in the business of civil construction. It filed its return of income for the assessment year under appeal on 22-12-2006 returning total income at Rs.1,37,383/- as against which the total income of the assessee was assessed by the Assessing Officer at Rs. 59,10,645/- after disallowing a sum of Rs. 57,48,265/- u/s. 40(a)(ia) of the Income-tax Act.

3. Before setting out the facts that led to the impugned disallowance, it may be relevant to mention at the outset that section 40(a)(ia), as it stood in the assessment year under appeal, provided that, notwithstanding anything to the contrary in sections 30 to 38, the amounts payable to a contractor or sub-contractor for carrying out any work on which tax is “deductible at source” under Chapter XVII-B of the Income-tax Act shall not be allowed deduction unless such tax has been deducted at source or, after deduction, has been paid on or before the last day of the previous year. The provisions of section 40(a)(ia) were amended by the Finance Act 2010 with effect from 1.4.2010. According to the amended provisions, tax deducted at source out of payments made to a contractor or sub-contractor could be paid on or before the due date specified in sub-section (1) of section 139. In its judgment dated 23rd November 2011 in CIT v. Virgin Creations, the Hon’ble Calcutta High Court has held that the aforesaid relaxation introduced by the Finance Act 2010 w.e.f. 1.4.2010 would be available in earlier years also.

4. We shall now turn to the facts of the case as placed before us. They are, in brief, as under:

(i)  The assessee had paid a sum of (i) Rs. 9,54,887/- on 12.5.2005; (ii) Rs.21,52,185/- + 17,52,906/- on 20.6.2005; and (iii) Rs.8,88,287/- on 8.11.2005 to M/s J.B. Construction for executing works on behalf of the assessee as its sub-contractor and claimed deduction thereof as expenditure.

(ii)  Tax was deductible at source out of the aforesaid payments u/s 194C but it was not deducted by the assessee at source out of the aforesaid payments. In other words, the impugned sums, which were claimed as expenditure, were paid by the assessee without deduction of tax at source on the aforesaid dates.

(iii)  The assessee claimed before the AO that tax amounting to Rs. 75,410/- was deducted by the assessee on 31.3.2006 by debiting the running account of M/s J.B. Construction and the same was deposited with the Government before the due date specified in sub-section (1) of section 139 and therefore the impugned payments were not hit by section 40(a)(ia).

(iv)  The AO did not accept the submissions of the assessee for the reasons given by him in the assessment order.

5. On appeal, the ld. CIT(A) allowed the claim of the assessee following the judgment of the Hon’ble Calcutta High Court in CIT v. Virgin Creations (supra).

6. Aggrieved by the order passed by the CIT(A), the Department is now in appeal before this Tribunal. In support of appeal, the ld. Departmental Representative invited out attention to the paper book filed by the assessee and more particularly to the details given by the assessee-firm, which is duly signed by its Chartered Accountant, in which it is stated that a sum of Rs.9,54,887/-; Rs.21,52,185/- + Rs.17,52,906/-; and Rs.8,88,287/- was paid by the assessee to M/s. J.B. Construction Co. on 12-05-2005, 20-06-2005, and on 08-11-2005 respectively. The ld. D.R. submitted that a sum of Rs.75, 410/- has been shown in the chart as deducted on 31-03-2006 towards tax by debiting the account of M/s J.B. Construction. He contended that section 194C required the assessee to deduct tax at source out of amounts paid/credited in favour of M/s. J.B. Construction Co, Junagadh and not to deduct the tax by debiting the running account of the payee in its books. He further submitted that the amount deducted on 31-03-2006 was not deducted at source in as much as it was not deducted out of the amount paid by the assessee on 12-05-2005, 20-06-2005 and 08-11-2005 and hence the aforesaid sum shown as deduction on 31-03-2006 did not constitute deduction of tax at source out of amounts paid/credited to M/s. J.B. Construction Co. in terms of section 194C of the Income-tax Act. According to him, there was thus failure on the part of the assessee in complying with the provisions of section 194C and therefore its case was not covered by the judgment of the Hon’ble Calcutta High Court in CIT v. Virgin Creations.

7. In reply, the ld. Authorized Representative for the assessee supported the order passed by the CIT (A). At the outset, he fairly submitted that the provisions of section 194C were fully applicable to the amounts paid by the assessee to its subcontractor, namely, M/s J.B. Construction. He further submitted that M/s. J.B. Construction Co. has running account with the assessee and therefore the assessee was justified in debiting the account of M/s. J.B. Construction Co. by a sum of Rs.75,410/- as representing the amount of tax deducted out of payments made on 12-05-2005, 20-06-2005 and 08-11-2005. He submitted that the amount of tax so deducted on 31.3.2006 was duly paid before the due date specified in section 139(1) and therefore the CIT(A) was justified in deleting the impugned disallowance following the judgment of the Hon’ble Calcutta High Court in Virgin Creations (supra).

8. We have heard both the parties and carefully considered their submissions including the orders passed by the AO/CIT(A) and the materials placed on record before us. The ld. Authorised Representative for the assessee was fair enough to concede at the outset that tax was deductible at source u/s 194C out of the amount paid by the assessee on 12.5.2005, 20.6.2005 and 8.11.2005 to M/s J.B. Construction. Tax was however not deducted by the assessee at source itself out of the payments made by the assessee on the aforesaid dates. In other words, payments were made by the assessee on the aforesaid dates to M/s J.B. Construction without deduction of tax at source. The case of the assessee however is that it has running account with M/s J.B. Construction and therefore it debited the said account by a sum of Rs.75,410/- on 31.3.2006 as representing deduction of tax and deposited the same with the Government before the due date specified in section 139(1) and therefore the AO was not justified in making the impugned disallowance under section 40(a)(ia).

9. The crucial question that arises for consideration is as to what constitutes deduction of tax at source u/s 194C read with section 40(a)(ia). Is it required to be deducted at source out of the amounts paid to a contractor/sub-contractor? Or, it is sufficient compliance with law if the running account of payee is debited by the deductor on the last date of the previous year without deducting the same from actual payments made by the assessee during the course of its accounting year.

10. Section 40(a)(ia), as it is now worded, reads as under:-

“Amounts not deductible.

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 any assessee-

        (i)**                                                             **                            **

(ia) any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, *[has not been paid on or before the due date specified in sub-section (1) of section 139:

**Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.]

Explanation.– ………………”

*Substituted for the following by the Finance Act, 2010, w.e.f. 1-4-2010:

“has not been paid,-

(A)  in a case where the tax was deductible and was so deducted during the last month of the previous year, on or before the due date specified in sub-section (1) of section 139; or

(B)  in any other case, on or before the last day of the previous year:”

Prior to its substitution, the quoted words were substituted by the Finance Act, 2008, w.r.e.f. 1-4-2005.

**Substituted by the Finance Act, 2010, w.e.f. 1-4-2010. Prior to its substitution, proviso as substituted by the Finance Act, 2008, w.e.f. 1-4-2005, read as under:

“Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted-

(A)  during the last month of the previous year but paid after the said due date; or

(B)  during any other month of the previous year but paid after the end of the said previous year, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.”

11. The provisions of section 40(a)(ia) apply only when tax is deductible at source under Chapter XVII-B of the Income-tax Act out of amount paid/payable by an assessee in respect of which deduction is claimed by him. Once tax is deductible at source out of such payments, the disallowance contemplated by section 40(a)(ia) would follow automatically unless an assessee satisfies twin conditions, namely, he first deducts such tax at source out of the amount payable by him and second pays the same to the Government within the specified time limit. In order to save a payment from disallowance u/s 40(a)(ia), an assessee must therefore show that the tax is either not deductible at source out of such payments or, if it is deductible, has been deducted at source and also paid to the Government within the specified time limit. Failure on the part of an assessee in either deducting tax at source out of amount payable or in depositing the same with the Government within the specified time limit leads to disallowance contemplated by section 40(a)(ia).

12. The applicability of section 194C to the impugned payments is not disputed by the assessee. What has now to be seen is whether tax was deducted at source by the assessee out of the aforesaid amounts, as required by section 194C read with section 40(a)(ia).

13. Section 40(a)(ia) applies only when “… tax is deductible at source under Chapter XVII-B and such tax has not been deducted ….”. The relevant question therefore is as to what is the import firstly of the phrase “deduction” of tax and secondly of such deduction being “at source”. “Deduct” means to take away or to subtract from the whole. “At source” means occurrence of an event that initiates a process. Therefore payment of any amount, on which tax is deductible at source, itself is the “source” at which tax should be deducted and it is after such deduction that the remaining amount should be paid to the payee. This position becomes quite clear on perusal of Chapter XVII-B of the Income-tax Act dealing with “Collection and Recovery of Tax – Deduction at Source”. “Deduction at source” means subtraction of the amount of tax from the whole amount payable by the assessee to the payee out of which tax is deductible. If tax is not so deducted out of the amount payable, it cannot be said to have been “deducted at source”. In other words, if tax is deducted at any other point of time than at the time when the amount exigible to deduction of tax at source is paid or is deducted out of any other sum than the sum out of which it is mandated to be deducted, such deduction of tax per se cannot be said to be at source. Source of deduction of tax statutorily emanates from payment. Deduction of tax at source, i.e., out of the amount payable in terms of section 194C read with section 40(a)(ia), is one thing and debiting the running account of the payee on the last date of the accounting period is altogether a different thing. Deduction of tax at source and its payment to the Government is a continuous source of revenue mobilisation throughout the year. The law mandates deduction of tax to be made at source, i.e., as and when amount is payable, and therefore deduction of tax cannot be postponed till the last date of the accounting period by debiting the running account of the payee. By no stretch of imagination, debiting the running account of a payee can be said to be deduction of tax at source as contemplated by section 194C read with section 40(a)(ia).

14. Chapter XVII-B of the Income-tax Act requires the person responsible for paying any sum out of which tax is required to be deducted at source to deduct the requisite amount of tax at source out of the amounts payable by him to the payee. Deduction of tax is made out of the amounts payable by the person responsible for paying the same. They further require the person responsible for deduction of tax at source to furnish a certificate of deduction of tax at source in the prescribed format detailing the date of payment/credit, amount paid/credited, amount of tax deducted at source out of such payments, etc. Section 194C requires deduction of tax at source out of payments made to a contractor or subcontractor. Section 199 provides that any deduction made in accordance with the provisions of Chapter XVII-B of the I-T Act shall be treated as payment of tax on behalf of the person from whose income the deduction is made. It thus follows that tax must be deducted out of the amount paid/credited by the assessee. Tax, which is not deducted out of the amount paid to a contractor or sub-contractor, cannot be said to have been deducted at source within the meaning of section 194C or Chapter XVII-B of the I-T Act.

15. In view of the foregoing, the amount claimed by the assessee to have been deducted by debiting the account of the sub-contractor on 31.3.2006 cannot be said to have been deducted at source, as mandated by law, out of the amounts paid on the aforesaid three dates. In the present case, the assessee claims deduction in respect of payments made by it on the aforesaid three dates to M/s J.B. Construction without deduction of tax at source and therefore its deductibility is squarely hit by section 40(a)(ia). The tax claimed to have been deducted by debiting the account of M/s J.B. Construction on 31.3.2006 does not constitute deduction of tax at source out of the amounts paid on the aforesaid three dates.

16. Judgment dated 23-11-2011 delivered by the Hon’ble Calcutta High Court in CIT v. Virgin Creations reads as under:

“The Court: We have heard Mr. Nizamuddin and gone through the impugned judgment and order. We have also examined the point formulated for which the present appeal is sought to be admitted.

It is argued by Mr. Nizamuddin that this court needs to take decision as to whether section 40(a)(ia) is having retrospective operation or not.

The learned Tribunal on fact found that the assessee had deducted tax at source from the paid charges between the period April 1, 2005 and April 28, 2006 and the same were paid by the assessee in July and August 2006, i. e., well before the due date of filing of the return of income for the year under consideration. This factual position was undisputed.

Moreover, the Supreme Court, as has been recorded by the learned Tribunal, in the case of Allied Motors Pvt. Ltd. and also in the case of Alom Extrusions Ltd., has already decided that the aforesaid provision has retrospective application. Again, in the case reported in 82 ITR 570, the Supreme Court held that the provision, which has inserted the remedy to make the provision workable, requires to be treated with retrospective operation so that reasonable deduction can be given to the sections as well.

In view of the authoritative pronouncement of the Supreme Court, this court cannot decide otherwise. Hence we dismiss the appeal without any order as to costs.”

17. A judgment is an authority for what it decides. It applies only to those cases in which the requisite amount of tax has been deducted at source out of payments made to the payee and thereafter deposited on or before the due date stipulated by law. The said judgment does not apply to a case where the assessee has failed to deduct the tax itself at source out of payments made to payee in accordance with the provisions of Chapter-XVII-B. In the present case, the assessee has failed to deduct the tax at source out of payments made to the sub-contractors on 12-05-2005, 20-06-2005 and 08-11-2005 and therefore the judgment of the Hon’ble Calcutta High court in CIT v. Virgin Creations is not applicable to the case of the assessee.

18. In view of the foregoing, the appeal filed by the Revenue is allowed.