Case Law Details
Brief of the Case
Delhi High Court held In the case of ANZ Grindlays Bank Ltd. vs. DCIT that absence of a provision similar to sec. 40(a) (i) does not mean that the Assessee would also be disentitled to claim deduction on account of salaries in the year to which such expenses pertained even though the Assessee has subsequently discharged its obligation to deposit the tax. In our view, this added condition that the tax must be deducted and paid within time, cannot be read in Section 40(a) (iii). The plain language of the Section 40(a) (iii) does not permit such interpretation. If the parliament so desired, it would have specifically enacted so. The Parliament has expressly enacted that deduction in respect of payments made under sub-clause (i) of clause (a) of Section 40 would not be available where such payments were made in India to a non-resident in respect of which tax had not been paid “before the expiry of time prescribed. However, no such condition for depositing the tax paid within a prescribed time was introduced in sub clause (iii) of clause (a) of Section 40.
Facts of the Case
The controversy involved in the present appeal relates to the denial of deduction of expenses by virtue of provision of Section 40(a) (iii) for failure on the part of the Assessee to deduct and deposit Tax Deducted at Source (TDS) within the prescribed time. The following question of law was framed in this context –
“Whether the Income Tax Appellate Tribunal was right in law in holding that salaries paid to ex-patriate employees overseas on which tax was paid in accordance with CBDT Circular dated 685 dated 17/20 June 94 and Circular 686 dated 12.8.94, is not permissible as a deduction in computation of taxable business income in view of the provisions of Section 40 (a) (iii) of the Income Tax Act, 1961 read with Article 7 of the Indo UK Double Taxation Avoidance Treaty?”
The assessments for the six assessment years from AY 1985-86 to 1990-91 stood concluded as on 28th July, 1994 and, thus, the Assessee could not claim any deduction on account of the payments made inrespect of the said years. However, the Assessee‟s appeal in respect of AY 1991-92 was pending before CIT(A) and the Assessee sought to claim a deduction of an amount of Rs.1,32,46,994/- in respect of payments made pertaining to the financial year 1990-91.
Contention of the Revenue
The ld counsel of the revenue submitted that there are twin requirements to be fulfilled; the first being that tax should have been deducted under Chapter XVII B of the Act; and second being that tax should have been paid. He argued that even if the tax is paid in subsequent years, deduction on account of expenses could not be allowed because the second condition which is deduction of tax at the time of payment of the amount as required under Section 192 of the Act would not be fulfilled. According to him, if the tax is not deducted and paid within the time prescribed for such deduction or payment under the relevant provisions, an assessee would not be entitled to claim that it had deducted or paid the tax under Chapter XVII B.
He also referred to the decision of the Supreme Court in Eli Lilly & Co. (India) P. Ltd. (supra) in support of his contention that Section 40(a)(iii) was an integrated code and Section 40(a)(iii) would have to be read in conjunction with Section 192 of the Act which required an employer (assessee) to deduct and deposit the tax payable in respect of payments chargeable under the head “Salaries”.
He further supported the Tribunal‟s view that absence of proviso similar to that as under Section 40(a)(i) also indicated that no deduction under Section 40(a)(iii) was allowable in case where tax was not deducted or paid within the prescribed time under Chapter XVII B of the Act.
Held by CIT (A)
CIT (A) rejected the Assessee’s claim by holding that such claim could not be made in appellate proceedings. He also observed that no deduction could be claimed in view of Section 40(a) (iii).He doubted whether the entire tax due had been paid by the Assessee since the amount of tax paid would also be includable as income of the employees and, therefore, have the effect of increasing their income and consequently, the tax payable thereon. He further observed that it was possible that the salaries paid to the employees overseas were a part of the head “office expenses”.
Held by ITAT
ITAT held that Section 40 is a ‘prohibitive’ or ‘disincentive’ provision and, thus, had to be considered strictly. It held that since no tax had been deducted at source under Chapter XVII B of the Act within the prescribed time, no deduction under Section 40(a) (iii) was permissible. The Tribunal was of the view that a deduction would be permissible only if the provisions of Chapter XVII B are strictly complied with and TDS is deducted and paid within the prescribed time. It observed that the CBDT Circular only gave immunity to the Assessee from penalty and prosecution but did not remove the disincentive under Section 40.
Further held that Section 40(a)(i) which expressly provided that no deduction would be allowed in respect of any interest, royalty, fees for technical services or other sum chargeable under the Act which is payable outside India and in respect of which no tax has been deducted and paid under Chapter XVII B of the Act. The Tribunal noted that proviso to Section 40(a)(i) of the Act expressly provided that where tax in relation to any sum mentioned in sub clause (i) of clause (a) of Section 40 of the Act is paid or deducted in any subsequent year, the deduction would be allowed in the previous year in which such tax was paid or deducted. The Tribunal reasoned that since no such similar provision existed in respect of sub clause (iii) of clause (a) of Section 40 of the Act, no deduction would be permissible for payments which are chargeable under the head “Salaries” if tax had not been paid or deducted under Chapter XVII B.
Held by High Court
High Court held that the question whether an assessee is liable to deduct tax at source on the salary payments made to and/or for benefit of its employees seconded from its head office situated outside India, is no longer res integra in view of the decision of the Supreme Court in Commissioner of Income Tax v. Eli Lilly & Co. (India) P. Ltd.: (2009) 312 ITR 225 (SC). The same is also not a subject matter of dispute in the present appeal.
Whether the provisions of Section 40(a)(iii) disentitles an assessee to claim a deduction on account of Salaries paid to its employees if the tax is not paid within the specified time but is paid subsequently
High Court held that the provisions of Section 192 fall within Chapter XVII B of the Act which relates to collection and recovery of tax. Provisions for deduction of tax at source are a part of the machinery provided for collection of taxes payable by a payee (recipient of income) by directly imposing upon the payer an obligation to withhold the tax due and deposit the same with the Government. Such tax is deposited to the credit of the payee and not the payer. In case of salaries, any person responsible for paying the income chargeable under the head “Salaries” – who would inevitably be the employer – is obliged to deduct the tax chargeable on the income of the employee (payee) under the head “Salaries”. Thus, in the present case, the tax deposited by the Assessee is clearly in discharge of its obligation under Chapter XVII B of the Act. In this view, the contention advanced by ld counsel of the revenue that the condition that the Assessee has not deducted and deposited the tax under Chapter XVII B of the Act, cannot be accepted. Indisputably, the Assessee has deposited the requisite amount which it was required to deposit in respect of amounts chargeable under the head “Salaries” that was payable to and or for the benefit of employees outside India. The said tax is deposited to the credit of such employees. Thus, for all intents and purposes the same is considered as a part of their Salaries which has not been paid to them but has been deposited directly with the Government.
In our view, an absence of a provision similar to the proviso to sub- clause (i) of clause (a) of Section 40 of the Act cannot be read as to disentitle an Assessee to claim a deduction even though it has complied with the condition under sub-clause (iii) of clause (a) of Section 40. A plain reading of proviso to sub-clause (i) of clause (a) of Section 40 of the Act indicates that where an Assessee has not deducted or paid the tax at source in terms of Chapter XVII B in respect of any sum as specified under sub-clause (i) of clause (a) of Section 40 of the Act, the Assessee can, nonetheless, claim a deduction in the year in which the assessee deposits the tax. This benefit is not available to an assessee in respect of payments chargeable under the head “Salaries” which fall within sub-clause (iii) of clause (a) of Section 40 and not sub-clause (i) of clause (a) of Section 40. Thus, an assessee would not be entitled to claim deduction on account of salaries if it fails to deduct or pay the amount under Chapter XVII B of the Act. In cases where such assessee deposits the amount in a subsequent year, the Assessee would still not be able to claim the deduction in the year in which such tax is deposited; his claim for deduction can be considered only in respect of the year to which such expense relates. Therefore, in cases where the assessments stand concluded, the Assessee would lose the benefit of deduction for the expenses incurred on account of its failure to have deposited the tax at source. Thus, concededly, in the present case the Assessee has lost its right to claim a deduction for a period of six years – AY 1985-86 to AY 1990-91- even though the Assessee has paid the TDS on the expenses pertaining to said period.
However, absence of a provision similar to that under sub-clause (i) of clause (a) of Section 40 does not mean that the Assessee would also be disentitled to claim deduction on account of salaries in the year to which such expenses pertained even though the Assessee has subsequently discharged its obligation to deposit the tax and has thus overcome the rigor of sub clause (iii) of clause (a) of Section 40. In our view, this added condition that the tax must be deducted and paid within time, cannot be read in Section 40(a) (iii) of the Act. The plain language of the Section 40(a) (iii) does not permit such interpretation. If the parliament so desired, it would have specifically enacted so. It is at once seen that where the legislature wanted to make payment of tax within a specified time a necessary pre-condition, it had expressly indicated so. The Parliament has expressly enacted that deduction in respect of payments made under sub-clause (i) of clause (a) of Section 40 of the Act would not be available where such payments were made in India to a non-resident in respect of which tax had not been paid “before the expiry of time prescribed under sub Section (i) of Section 200”. However, no such condition for depositing the tax paid within a prescribed time was introduced in sub clause (iii) of clause (a) of Section 40.
We are also unable to agree with contention that no deduction can be claimed by the Assessee as the salaries were not reflected in the profit and loss account. The controversy whether an Assessee can claim deduction on an expense which is not reflected in its profit and loss account for the relevant period has been authoritatively settled by the Supreme Court in its decision in The Kedarnath Jute Mfg. Co. Ltd. v. The Commissioner of Income Tax, (Central), Calcutta: [1971] 82 ITR 363 (SC) wherein the Court held that “Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter.”
In view of the above, the question of law is answered in the negative, that is, in favour of the Assessee and against the Revenue.
Accordingly, appeal of the assessee allowed.
