Case Law Details

Case Name : CIT Vs PVS Memorial Hospital Ltd (Kerala High Court)
Appeal Number : ITA Nos. 2 of 2012 & 16 of 2014
Date of Judgement/Order : 20/5/2015
Related Assessment Year : 2005-06 & 2006-2007.
Courts : All High Courts (4264) Kerala High Court (192)

Brief Facts of the Case:

The assessee, a hospital, entered into an agreement with M/S Lakeshore Hospital and Research Centre Limited (herein after “M/s Lakeshore”) by which, the latter had undertaken to perform various professional services in the assessee’s hospital. During the year under consideration, the assessee paid a sum of Rs. 69,06,644/- to M/s Lakeshore. On the payments made, the assessee deducted tax at the rate of 2% under Section 194C of the Income Tax Act 1961 (herein after “Act”). However, assessment was completed on the basis that tax deductible was at 5% as prescribed under Section 194J the AO disallowed proportionate amount relatable to short deduction of tax at source, which was worked out to Rs. 41,43,986/- by invoking provisions of sec. 40(a)(ia) of the Act. The CIT(A) confirmed the assessment and the Tribunal also rejected the appeal filed by the assessee concerning the assessment year 2005-2006.

However, in 2006-2007, the Tribunal followed the Calcutta High Court judgment in Commissioner of Income Tax v. S.K.Tekriwal [2014] 361 ITR 432 (Cal) and held that where tax is deducted by the assessee, even if it is under a wrong provision of law, as in this case, the provisions of Section 40(a)(ia) of the Act cannot be invoked.

Question of Law:

Whether TDS on the consideration paid by Assessee should be withheld under Section 194C or 194J of the Act?

Whether the Assessee is in default under Section 40(a)(ia) of the Act?

Contention of the Revenue:

The Revenue took the view that the services rendered by M/s Lakeshore fall under the category of” professional services”, and hence the assessee should have deducted tax at source u/s 194J of the Act @ 5%. The agreement entered into between the Assessee and M/s Lakeshore clearly indicates that the services rendered by M/s Lakeshore are in nowhere in the nature of contract of a work undertaken.

The Revenue was of the view that the provisions of section 40(a)(ia) of the Act has two limbs one is where, inter alia, assessee has to deduct tax and the second where after deducting tax, inter alia, the assessee has to pay into Government Account. To make this section workable, the TDS should be collected correctly and then deposited. Short deduction of TDS because of deducting under wrong section amounts to Non deduction because of which Section 40(a)(ia) of the Act is invoked.

Contention of the Assessee:

The Assessee contended that there is no failure on the part of the assessee to deduct tax at source. In fact, the assessee has deducted tax at source u/s 194C of the Act under the bonafide belief that the said provision only shall apply to the payments made to M/s Lakeshore, since the payment was made in pursuance of contract entered between them.

The Assessee also argued that there could be a short deduction of tax at source in the instant year. But the provisions of sec. 40(a)(ia) cannot be invoked in case of short deduction of tax at source, as the provisions of sec. 40(a)(ia) do not provide for such a contingency unlike the provisions of sec. 201 of the Act, wherein the short deduction of tax at source would also get attracted.

Held by the High Court (“Court”):

The Court relied on the agreement concluded between Assessee and M/s Lakeshore according to which M/s Lakeshore would run Gastroenterology, Gastrointestinal surgery, Urology, Nephrology and Anesthesiology departments of the assessee upon receipt of payments as per the agreement which was not the case of undertaking a contract work. Therefore, tax was deductible under Section 194J as the services were rendered by Professionals and not under Section 194C as done by the assessee. Hence the first question of law stays explained.

A plain reading of Section 40(a)(ia) shows that any fees for professional services or fees for technical services payable to a resident ‘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 Section 200(1) of the Act, this provision is attracted.

Section 40(a)(ia) (supra) is not a charging Section but is a machinery Section. The expression “tax deductible at source under Chapter XVII-B” occurring in the Section has to be understood as tax deductible at source under the appropriate provision of Chapter XVII-B. The latter part of this Section that such tax has not been deducted, again refers to the tax deducted under the appropriate provision of Chapter XVII-B.

Thus, a cumulative reading of this provision, therefore, shows that deduction under a wrong provision of law will not save an assessee from Section 40(a)(ia). Therefore the Assessee is an Assessee in default. Hence the second question of law stays explained.

The Kerala High Court citing the above points answered the questions of law in favour of the Revenue.

For reference – The Section 40(a)(ia) as it stood at the relevant time reads as under:

“(ia) any interest, commission or brokerage, rent, royalty, fees or 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 during the previous year, or in the subsequent year before the expiry of time prescribed under sub section (1) of Section 200.”

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