Section 40 (a) (ia) applies even in respect of amount paid and not merely payable to the contractors and therefore CIT (A) was justified in confirming dis-allowances under section 40 (a) (ia) as the assessee had failed to deduct tax under section 194C
Valibhai Khanbhai Mankad Vs DCIT (ITAT Ahmedabad)
Whether CIT(A) has erred in confirming the dis-allowance of Rs. 7,93,34,193/- u/s 40(a)(ia) on the ground that the assessee has filed Form No. 15J with CIT on 26.02.2009 instead of on or before 30th June, 2006 in as much the there is no failure to deduct tax at source under section 194C since the assessee has received Form No.15-I from the sub-contractors before making payment to them. Held , No“The decision on deductibility of tax on payment made to sub-contractor is to be taken at time when contractor is releasing payments to sub-contractors and it is at that point of time second proviso to section 194C(3)(i) would come into play and when Form No. 15-I are submitted by sub-contractors to contractor, then contractor is not required to deduct tax from such payments, whereas compliance of third proviso can be deferred till 30th June of next financial year.”
The three proviso mentioned in sub-section (3) under clause (i) are in continuity, as they are separated only by a colon (:) and not by word ‘or’ meaning thereby the condition laid down in all the three provisos are to be satisfied simultaneously and cumulatively. In other words not only the assessee has to obtain Form No. 15-I from the sub-contractors while making the payment to them but it has also to file Form No. 15J to the Commissioner before 30th June following financial year. In the instant case, other conditions like payment of above Rs. 50,000 was not disputed as the assessee had admitted that payment to each sub-contractor exceeded the sum in one full year. But since according to the assessee, he had obtained Form No. 15-I then second proviso would be applicable, therefore, he was not required to deduct tax. The short question which arose in the instant case was where assessee had obtained Form No. 15-I was the assessee still liable to deduct tax under section 194C. It was to be held that once assessee had obtained Form No. 15-I from the sub-contractors whose contents were not disputed or whose genuineness was not doubted then assessee was not liable to deduct tax from the payments made to sub-contractors. Once assessee was not liable to deduct tax under section 194C then addition under section 40(a)(ia) could not be made.
The conditions laid down u/s 40(a)(ia) for making addition is that tax is deductible at source and such tax has not been deducted. If both the conditions are satisfied then such payment can be disallowed u/s 40(a)(ia). In other words where tax is not deductible addition u/s 40(a)(ia) cannot be made. From this it follows that second proviso to section 194C(3) (i) alone would be operative for deciding whether tax is deductible or not deductible. Non-furnishing of form No.15J to the Commissioner is an act posterior in time to payments made to subcontractors. This cannot by itself, undo the eligibility of exemption created by second proviso by virtue of which sub-contractors have submitted form No. 15-I. The deductibility of tax is, therefore, confined or limited to applicability of second proviso only because it is at that point of time of assessee has to decide whether it has to deduct the tax or not. Where forms No.15-I are not submitted, it has to deduct the tax. Conversely where form No.15-I is submitted to the assessee by the subcontractors, the tax is not deductible and once tax is not deductible no addition u/s 40(a)(ia) can be made. From this it follows that third proviso to section 194C(3)(1) which requires the assessee to submit form No.15J is only procedural formality and cannot undo what has been done by second proviso. Non-submission of form No.15J to the Commissioner within the time prescribed in rule 29D cannot have any effect on deciding as to whether tax was deductible or not deductible from the payments made by the assessee to the sub-contractors. This can be decided under second proviso alone. Even though the Legislature in their wisdom have added third proviso as addenda to the second proviso by mentioning “provided also” meaning thereby that Legislature intended to put both the conditions mentioned in second and third proviso together to be satisfied by the assessee but in effect both the conditions cannot be satisfied together as both are not the events taking place simultaneously at the same time. One event is the submission of form No. 15-I by the subcontractors to the contractor and takes place at the time or prior to the payment made to them by the contractor. The other event is the submission of form No. 15J by the Contractor to the Commissioner of Income-tax giving the details contained in form No. 15-I. This event in practice takes place after the contractor has released the payment to the sub-contractor after receiving form No. 15-I. The upper time limit for submitting such form no. 15J to the Commissioner as laid down in the Rules is on or before 30th June following the FY. The two events are spatially kept apart by the Legislature thus giving a latitude to the assessee to submit form No. 15J to the Commissioner much after he receives form No. 15-I from the sub-contractors. Apparently the Legislature intended that the contractor should not only obtain the form No. 15I from the sub-contractors but should also submit form No. 15J to the Commissioner immediately after releasing the payments to the subcontractors without deducting the tax on the strength of form No. 15-I and if both the conditions are satisfied, then the assessee may not be treated as in default for not complying the provisions of section 194C. Thus satisfaction of the conditions in 2nd and third proviso of section 194C(3)(i) may be necessary for an assessee to save himself from being declared as an assessee in default but conditions laid down for invoking section 40(a)(ia) are not the same as cumulative conditions mentioned in second and third proviso of section 194C(3) (i). For invoking section 40(a)(ia) it is to be decided whether tax was deductible or not, if yes, whether deducted/paid or not. When we look into section 194C(3)(i) for the purposes of invoking 40(a)(ia) we find that only 2nd proviso to it is sufficient to decide whether tax was deductible or not. There is another reason for holding so. Time factor involved for compliance of the conditions mentioned in two provisions are different. 2nd proviso is to be complied with at the time of making payment to the sub-contractor, whereas compliance of third proviso can be deferred till 30th June of next FY. In other words the contractor can wait to comply with third proviso till 30th June of next FY after complying with second proviso. However, the decision on deductibility of tax from the payment made to the subcontractor cannot be deferred till 30th June of next FY. He has to take this decision (about deductibility of tax from payments being made by it to the sub-contractors) just at the time when he is releasing the payments to the sub-contractors. It is at this point of time second proviso would come into play and when form No. 15 are submitted by the sub contractors to the contractor then contractor is not required to deduct tax from such payments. Once deductibility of tax depends upon submission or non submission of form No. 15-I from the sub-contractor to the assessee then non-compliance of third proviso becomes merely technical without affecting in substance the deductibility or non-deductibility of tax on payments made by the assessee to the sub-contractors. Therefore, in our considered view non-compliance of third proviso becomes merely a technical default, which even if, remained non-complied would not affect the operation of section 40(a)(ia).