REPORTABLE IN SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 5512 OF 2017 M/S. PALAM GAS SERVICE .....APPELLANT(S) VERSUS COMMISSIONER OF INCOME TAX .....RESPONDENT(S) JUDGMENT A.K. SIKRI, J. neat question which arises for consideration in this appeal relates to interpretation of Section 40(a)(ia) of Income Tax Act, 1961 (hereinafter referred to as 'Act'). Section 197C of Act has also some bearing on issue involved. 2) Section 40 of Act enumerates certain situations wherein expenditure incurred by assessee, in course of his business, will not be allowed to be deducted in computing Signature Not Verified Digitally signed by NIDHI AHUJA Date: 2017.05.03 17:43:03 IST income chargeable under head 'Profits and Gains from Reason: Business or Profession'. One such contingency is provided in Civil Appeal No. 5512 of 2017 Page 1 of 18 clause (ia) of sub-section (a) of Section 40. This provision reads as under: S. 40 - Amounts not deductible: Notwithstanding anything to contrary in Sections 30 to [38], following amounts shall not be deducted in computing income chargeable under head Profits and gains of business or profession , xxx xxx xxx (ia) any interest, commission or brokerage, fees for professional services or fees for technical services payable to resident, or amounts payable to 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 previous year, or in subsequent year before expiry of 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 previous year but paid in any subsequent year after expiry of time prescribed under sub-section (1) of section 200, such sum shall be allowed as deduction in computing income of previous year in which such tax has been paid. xxx xxx xxx 3) As per clause (ia), certain payments made, which includes amounts payable to contractor or sub-contractor, would not be allowed as expenditure in case tax is deductible at source on said payment under Chapter XVIIB of Act and such tax has not been deducted or, after deduction, has not been paid Civil Appeal No. 5512 of 2017 Page 2 of 18 during previous year or in subsequent year before expiry of time prescribed under sub-section (1) of Section 200 of Act. In instant case, certain payments were made by appellant assessee, in Assessment Year 2006-2007 but tax at source was not deducted and deposited. We may point out here itself that as per Section 194C of Act, payments to contractors and sub-contractors are subject to tax deduction at source. Income Tax Department/Revenue has, therefore, not allowed amounts paid to sub-contractors as deduction while computing income chargeable to tax at hands of assessee in said Assessment Year. 4) It can be seen that Section 40(a)(ia) uses expression 'payable' and on that basis question which is raised for consideration is: Whether provisions of Section 40(a)(ia) shall be attracted when amount is not 'payable' to contractor or sub-contractor but has been actually paid?" 5) Some facts which will have bearing on aforesaid issue need to be mentioned at this stage: appellant-assessee is engaged in business of purchase and sale of LPG cylinders under name and style of M/s. Palam Gas Service at Palampur. During course of Civil Appeal No. 5512 of 2017 Page 3 of 18 assessment proceedings, it was noticed by Assessing Officer that main contract of assessee for carriage of LPG was with Indian Oil Corporation, Baddi. assessee had received total freight payments from IOC Baddi to tune of Rs.32,04,140/-. assessee had, in turn, got transportation of LPG done through three persons, namely, Bimla Devi, Sanjay Kumar and Ajay to whom he made freight payment amounting to Rs. 20,97,689/-. Assessing Officer observed that assessee had made sub-contract with said three persons within meaning of Section 194C of Act and, therefore, he was liable to deduct tax at source from payment of Rs. 20,97,689/-. On account of his failure to do so said freight expenses were disallowed by Assessing Officer as per provisions of Section 40(a)(ia) of Act. Against order of Assessing Officer, assessee preferred appeal before Commissioner of Income Tax (Appeals), Shimla who vide its order dated August 17, 2012 upheld order dated November 30, 2011. matter thereafter came up in appeal before Income Tax Appellate Tribunal (for short ITAT ) which too met with same fate. In further appeal to High Court under Section 260A of Act, outcome remained unchanged as High Court of Civil Appeal No. 5512 of 2017 Page 4 of 18 Himachal Pradesh also dismissed appeal affirming order of ITAT. 6) It may be pertinent to observe that question raised now and formulated above was specifically raised before authorities below, including High Court. 7) question is, as noted above, when word used in Section 40(a)(ia) is 'payable', whether this Section would cover only those contingencies where amount is due and still payable or it would also cover situations where amount is already paid but no advance tax was deducted thereupon. This issue has come up for hearing before various High Courts and there are divergent views of High Courts there upon. In fact, most of High Courts have taken view that aforesaid provision would cover even those cases where amount stands paid. This is view of Madras, Calcutta and Gujarat High Courts. Contrary view is taken by Allahabad High Court. In recent judgment, Punjab & Haryana High Court took note of judgments of aforesaid High Courts and concurred with view taken by Madras, Calcutta and Gujarat High Courts and showed its reluctance to follow view taken by Allahabad High Court. Civil Appeal No. 5512 of 2017 Page 5 of 18 8) In this scenario, we would like to first discuss reasons given by High Courts in two sets of judgments, arriving at contrary conclusion. Before that, we would also like to reproduce relevant portions of Section 194C and 200 of Act as well as Rule 30(2) of Income Tax Rules, since they are also relevant to decide controversy. These provisions make following reading: 194-C. Payments to contractors. (1) Any person responsible for paying any sum to any resident (hereafter in this section referred to as contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of contract between contractor and specified person shall, at time of credit of such sum to account of contractor or at time of payment thereof in cash or by issue of cheque or draft or by any other mode, whichever is earlier, deduct amount equal to . . 200. Duty of person deducting tax. (1) Any person deducting any sum in accordance with foregoing provisions of this chapter] shall pay within prescribed time, sum so deducted to credit of Central Government or as Board directs. (2) Any person being employer, referred to in subsection (1-A) of Section 192 shall pay, within prescribed time, tax to credit of Central Government or as Board directs. (3) Any person deducting any sum on or after 1st day of April, 2005 in accordance with foregoing provisions of this chapter or, as case may be, any person being employer referred to in sub-section (1-A) of Section 192 shall, after paying tax deducted to credit of Central Government within prescribed time, prepare such statements for such period as may be prescribed] and deliver or cause to be delivered to prescribed income tax authority or person authorised by such authority Civil Appeal No. 5512 of 2017 Page 6 of 18 such statement in such form and verified in such manner and setting forth such particulars and within such time as may be prescribed. 9) Rule 30(2) of Income Tax Rules which stipulates time prescribed for payment of tax deducted to credit of Central Government as required by Section 200(1) and relevant portion thereof reads as under: Time and mode of payment to Government account of tax deducted at source or tax paid under sub-section (1A) of section 192. 30(1) All sums deducted in accordance with provisions of Chapter XVII-B by office of Government shall be paid to credit of Central Government- . .. . .. .. (2) All sums deducted in accordance with provisions of Chapter XVII-B by deductors other than office of Government shall be paid to credit of Central Government- (a) on or before 30th day of April where income or amount is credited or paid in month of March; and (b) in any other case, on or before seven days from end of month in which- (i) deduction is made; or (ii) income-tax is due under sub-section(1A) of section 192. 10) As per Section 194C, it is statutory obligation of person, who is making payment to sub-contractor, to deduct tax at source at rates specified therein. Plain language of Section suggests that such tax at source is to be deducted at Civil Appeal No. 5512 of 2017 Page 7 of 18 time of credit of such sum to account of contract or at time of payment thereof, whichever is earlier. Thus, tax has to be deducted in both contingencies, namely , when amount is credited to account of contractor or when payment is actually made. Section 200 of Act imposes further obligation on person deducting tax at source, to deposit same with Central Government or as Board directs, within prescribed time. conjoint reading of these two Sections would suggest that not only person, who is paying to contractor, is supposed to deduct tax at source on said payment whether credited in account or actual payment made, but also deposit that amount to credit of Central Government within stipulated time. time within which payment is to be deposited with Central Government is mentioned in Rule 30(2) of Rules. 11) Punjab & Haryana High Court in P.M.S. Diesels & Ors. v. Commissioner of Income Tax 2, Jalandhar & Ors., (2015) 374 ITR 562, has held these provisions to be mandatory in nature with following observations: 13. liability to deduct tax at source under provisions of Chapter XVII is mandatory. person responsible for paying any sum is also liable to deposit amount in Government account. All sections in Chapter XVII-B require person to deduct Civil Appeal No. 5512 of 2017 Page 8 of 18 tax at source at rates specified therein. requirement in each of sections is preceded by word shall . provisions are, therefore, mandatory. There is nothing in any of sections that would warrant our reading word shall as may . point of time at which deduction is to be made also establishes that provisions are mandatory. For instance, under Section 194C, person responsible for paying sum is required to deduct tax at time of credit of such sum to account of contractor or at time of payment thereof. 12) While holding aforesaid view, Punjab & Haryana High Court discussed judgments of Calcutta and Madras High Courts, which had taken same view, and concurred with same, which is clear from following discussion contained in judgment of Punjab & Haryana High Court: 14. Division Bench of Calcutta High Court in Commissioner of Income Tax v. Crescent Export Syndicate, (2013) 216 Taxman 258 (Calcutta) held:- 13. term shall used in all these sections make it clear that these are mandatory provisions and applicable to entire sum contemplated under respective sections. These sections do not give any leverage to assessee to make payment without making TDS. On contrary, intention of legislature is evident from fact that timing of deduction of tax is earliest possible opportunity to recover tax, either at time of credit in account of payee or at time of payment to payee, whichever is earlier. 15. Ms. Dhugga invited our attention to judgment of Division Bench of Madras High Court in Tube Investments of India Ltd. v. Assistant Commissioner of Civil Appeal No. 5512 of 2017 Page 9 of 18 Income-Tax (TDS), [2010] 325 ITR 610 (Mad). Division Bench referred to statistics placed before it by Department which disclosed that TDS collection had augmented revenue. gross collection of advance tax, surcharge, etc. was Rs. 2,75,857.70 crores in financial year 2008-09 of which TDS component alone constituted Rs. 1,30,470.80 crores. Division Bench observed that introduction of Section 40(a)(ia) had achieved objective of augmenting TDS to substantial extent. Division Bench also observed that when provisions and procedures relating to TDS are scrupulously applied, it also ensured identification of payees thereby confirming network of assessees and that once assessees are identified it would enable tax collection machinery to bring within its fold all such persons who are liable to come within network of tax payers. These objects also indicate legislative intent that requirement of deducting tax at source is mandatory. 16. liability to deduct tax at source is, therefore, mandatory. 13) aforesaid interpretation of Sections 194C conjointly with Section 200 and Rule 30(2) is unblemished and without any iota of doubt. We, thus, give our imprimatur to view taken. As would be noticed and discussed in little detail hereinafter, Allahabad High Court, while interpreting Section 40(a)(ia), did not deal with this aspect at all, even when it has clear bearing while considering amplitude of said provision. 14) In aforesaid backdrop, let us now deal with issue, namely, word 'payable' in Section 40(a)(ia) would mean only when amount is payable and not when it is actually paid. Civil Appeal No. 5512 of 2017 Page 10 of 18 Grammatically, it may be accepted that two words, i.e. 'payable' and 'paid', denote different meanings. Punjab & Haryana High Court, in P.M.S. Diesels & Ors., referred to above, rightly remarked that word 'payable' is, in fact, antonym of word 'paid'. At same time, it took view that it was not significant to interpretation of Section 40(a)(ia). Discussing this aspect further, Punjab & Haryana High Court first dealt with contention of assessee that Section 40(a)(ia) relates only to those assessees who follow mercantile system and does not cover cases where assessees follow cash system. Those contention was rejected in following manner: 19. There is nothing that persuades us to accept this submission. purpose of section is to ensure recovery of tax. We see no indication in section that this object was confined to recovery of tax from particular type of assessee or assessees following particular accounting practice. As far as this provision is concerned, it appears to make no difference to Government as to accounting system followed by assessees. Government is interested in recovery of taxes. If for some reason, Government was interested in ensuring recovery of taxes only from assessees following mercantile system, we would have expected provision to so stipulate clearly, if not expressly. It is not suggested that assessees following cash system are not liable to deduct tax at source. It is not suggested that provisions of Chapter XVII-B do not apply to assessees following cash system. There is nothing in Chapter XVII-B either that suggests otherwise. 20. Our view is fortified by Explanatory Note to Finance Bill (No. 2) of 2004. Sub-clause (ia) of clause Civil Appeal No. 5512 of 2017 Page 11 of 18 (a) of Section 40 was introduced by Finance Bill (No. 2) of 2004 with effect from 01.04.2005. Explanatory Note to Finance Bill-2004 stated:- .. .. .. .. .. With view to augment compliance of TDS provisions, it is proposed to extend provisions of section 40(a)(i) to payments of interest, commission or brokerage, fees for professional services or fees for technical services to residents, and payments to resident contractor or sub-contractor for carrying out any work (including supply of labour for carrying out any work), on which tax has not been deducted or after deduction, has not been paid before expiry of time prescribed under sub-section(1) of section 200 and in accordance with other provisions of Chapter XVII-B. 21. adherence to provisions ensures not merely collection of tax but also enables authorities to bring within their fold all such persons who are liable to come within network of tax payers. intention was to ensure collection of tax irrespective of system of accounting followed by assessees. We do not see how this dual purpose of augmenting compliance of Chapter XVII and bringing within Department's fold tax payers is served by confining provisions of Section 40(a)(ia) to assessees who follow mercantile system. Nor do we find anything that indicates that for some reason legislature intended achieving these objectives only by confining operation of Section 40(a)(ia) to assessees who follow mercantile system. 22. same view was taken by Division Bench of Calcutta High Court in Commissioner of Income Tax v. Crescent Export Syndicate, (supra). It was held:- 12.3. It is noticeable that Section 40(a) is applicable irrespective of method of accounting followed by assessee. Therefore, by using term payable Civil Appeal No. 5512 of 2017 Page 12 of 18 legislature included entire accrued liability. If assessee was following mercantile system of accounting, then moment amount was credited to account of payee on accrual of liability, TDS was required to be made but if assessee was following cash system of accounting, then on making payment TDS was to be made as liability was discharged by making payment. TDS provisions are applicable both in situation of actual payment as well of credit of amount. It becomes very clear from fact that phrase, on which tax is deductible at source under Chapter XVII-B , was not there in Bill but incorporated in Act. This was not without any purpose. 15) We approve aforesaid view as well. As fortiorari, it follows that Section 40(a)(ia) covers not only those cases where amount is payable but also when it is paid. In this behalf, one has to keep in mind purpose with which Section 40 was enacted and that has already been noted above. We have also to keep in mind provisions of Sections 194C and 200. Once it is found that aforesaid Sections mandate person to deduct tax at source not only on amounts payable but also when sums are actually paid to contractor, any person who does not adhere to this statutory obligation has to suffer consequences which are stipulated in Act itself. Certain consequences of failure to deduct tax at source from payments made, where tax was to be deducted at source or failure to pay same to credit of Central Government, are stipulated in Section 201 of Civil Appeal No. 5512 of 2017 Page 13 of 18 Act. This Section provides that in that contingency, such person would be deemed to be assessee in default in respect of such tax. While stipulating this consequence, Section 201 categorically states that aforesaid Sections would be without prejudice to any other consequences which that defaulter may incur. Other consequences are provided under Section 40(a)(ia) of Act, namely, payments made by such person to contractor shall not be treated as deductible expenditure. When read in this context, it is clear that Section 40(a)(ia) deals with nature of default and consequences thereof. Default is relatable to Chapter XVIIB (in instant case Sections 194C and 200, which provisions are in aforesaid Chapter). When entire scheme of obligation to deduct tax at source and paying it over to Central Government is read holistically, it cannot be held that word 'payable' occurring in Section 40(a)(ia) refers to only those cases where amount is yet to be paid and does not cover cases where amount is actually paid. If provision is interpreted in manner suggested by appellant herein, then even when it is found that person, like appellant, has violated provisions of Chapter XVIIB (or specifically Sections 194C and 200 in instant case), he would still go scot free, without suffering consequences of such monetary default in Civil Appeal No. 5512 of 2017 Page 14 of 18 spite of specific provisions laying down these consequences. Punjab & Haryana High Court has exhaustively interpreted Section 40(a(ia) keeping in mind different aspects. We would again quote following paragraphs from said judgment, with our complete approval thereto: 26. Further, mere incurring of liability does not require assessee to deduct tax at source even if such payments, if made, would require assessee to deduct tax at source. liability to deduct tax at source under Chapter XVII-B arises only upon payments being made or where so specified under sections in Chapter XVII, amount is credited to account of payee. In other words, liability to deduct tax at source arises not on account of assessee being liable to payee but only upon liability being discharged in case of assessee following cash system and upon credit being given by assessee following mercantile system. This is clear from every section in Chapter XVII. 27. Take for instance, case of assessee, who follows cash system of accounting and where assessee who though liable to pay contractor, fails to do so for any reason. assessee is not then liable to deduct tax at source. Take also case of assessee, who follows mercantile system. Such assessee may have incurred liability to pay amounts to party. Such assessee is also not bound to deduct tax at source unless he credits such sums to account of party/payee, such as, contractor. This is clear from Section 194C set out earlier. liability to deduct tax at source, in case of assessee following cash system, arises only when payment is made and in case of assessee following mercantile system, when he credits such sum to account of party entitled to receive payment. 28. government has nothing to do with dispute between assessee and payee such as contractor. provisions of Act including Civil Appeal No. 5512 of 2017 Page 15 of 18 Section 40 and provisions of Chapter XVII do not entitle tax authorities to adjudicate liability of assessee to make payment to payee/other contracting party. appellant's submission, if accepted, would require adjudication by tax authorities as to liability of assessee to make payment. They would then be required to investigate all records of assessee to ascertain its liability to third parties. This could in many cases be extremely complicated task especially in absence of third party. third party may not press claim. parties may settle dispute, if any. This is exercise not even remotely required or even contemplated by section. 16) As mentioned above, Punjab & Haryana High Court found support from judgments of Madras and Calcutta High Courts taking identical view and by extensively quoting from said judgments. 17) Insofar as judgment of Allahabad High Court is concerned, reading thereof would reflect that High Court, after noticing fact that since amounts had already been paid, it straightaway concluded, without any discussion, that Section 40(a)(ia) would apply only when amount is 'payable' and dismissed appeal of Department stating that question of law framed did not arise for consideration. No doubt, Special Leave Petition thereagainst was dismissed by this Court in limine. However, that would not amount to confirming view of Allahabad High Court (See V.M. Salgaocar & Bros. (P) Civil Appeal No. 5512 of 2017 Page 16 of 18 Ltd. v. Commissioner of Income Tax, (2000) 243 ITR 383 and Supreme Court Employees Welfare Association v. Union of India, (1989) 4 SCC 187. 18) In view of aforesaid discussion, we hold that view taken by High Courts of Punjab & Haryana, Madras and Calcutta is correct view and judgment of Allahabad High Court in CIT v. Vector Shipping Services (P) Ltd., (2013) 357 ITR 642 did not decide question of law correctly. Thus, insofar as judgment of Allahabad High Court is concerned, we overrule same. Consequences of aforesaid discussion will be to answer question against appellant/assessee thereby approving view taken by High Court. 19) appeal is, accordingly, dismissed with costs. .........J. (A.K. SIKRI) .........J. (ASHOK BHUSHAN) NEW DELHI; MAY 03, 2017. Civil Appeal No. 5512 of 2017 Page 17 of 18 ITEM NO.1A COURT NO.8 SECTION IIIA (For judgment) SUPREME COURT OF INDIA RECORD OF PROCEEDINGS Civil Appeal No. 5512/2017 M/S. PALAM GAS SERVICE Appellant(s) VERSUS COMMISSIONER OF INCOME TAX Respondent(s) Date : 03/05/2017 This appeal was called on for pronouncement of judgment today. For Appellant(s) Mr. Raj Kumar Mehta, Adv. Ms. Himanshi Andley, Adv. For Respondent(s) Mrs. Anil Katiyar, Adv. Hon'ble Mr. Justice A. K. Sikri pronounced judgment of Bench comprising His Lordship and Hon'ble Mr. Justice Ashok Bhushan. appeal is dismissed in terms of signed reportable judgment. (Nidhi Ahuja) (Mala Kumari Sharma) Court Master Court Master [Signed reportable judgment is placed on file.] Civil Appeal No. 5512 of 2017 Page 18 of 18 Palam Gas Service v. Commissioner of Income-tax