06 July 2010
COMMISSIONER OF INCOME TAX vs. CHENNAI PROPERTIES & INVESTMENT LTD. HIGH COURT OF MADRAS R. Jayasimha Babu & N.V. Balasubramanian, JJ. Tax Case No. 468 of 1986 20th April, 1998 (1999) 239 ITR 435 (MAD) : (1999) 105 TAXMAN 346 (MAD) Legislation referred to Sections 201(1A), 37, Case pertains to Asst. Year 1981-82 Decision in favour of Revenue
Business expenditure—Interest paid on agricultural loans—Interest under s. 201(1A)— Interest paid for period of delay takes colour from the nature of principal amount required to be paid but not paid within time—Principal amount here would be income-tax and interest is payable for failure to pay the tax deducted at source—The fact that income-tax required to be remitted was not income-tax payable by assessee but on behalf of another does not in any manner after the character of payment—Income-tax is not allowable as business expenditure—Amount not deducted and remitted has the character of tax—Therefore, interest paid under s. 201(1A) cannot assume the character of business expenditure and is not allowable as deduction.
Conclusion Interest paid under s. 201(1A) cannot assume the character of business expenditure and is not allowable as deduction as the liability to pay interest is directly related to the failure to deduct or remit the tax deducted at source.
09 July 2010
With due respect to Hon'ble Madras High Court, I would like to distinguish the said decision.
Section 40(a)(ii) is reproduced hereunder for ready reference :
"any sum paid on account of any rate or tax levied98 on the profits or gains of any business or profession98 or assessed at a proportion of, or otherwise on the basis of, any such profits or gains"
The words "profits or gains of any business or profession" which are employed in section 40(a)(ii) can, in the context, have reference only to profits or gains as determined u/s 28/29 and connot cover the net profits or gains arrived at or determined in a manner other than that provided by section 28/29"
From the above landmark decision, it can be said that tax deduction tax at source is not the income-tax which is required to be paid on income chargeable to tax u/s 28, but is the tax to be deducted on payment being made to other party.
More so over, Full Bench of Supreme Court in the case of Harshad Shantilal Mehta vs. Custodian reported in 231 ITR 871 has observed that under the Income-tax Act, 1961 the definition of tax u/s 2(43) does not include penalty or interest and that the concepts of tax, penalty and interest are different concepts under the Act.
Summing up, having regard to the definition, objective and above two authorities, I am of the view that interest on late payment of tax deduction at source is allowable expenditure u/s 37 of the Act and is not disallowable u/s 40(a)(ii) of the Act.
Apart from this, I would also like to make reliance on recent decision of Bombay High Court in the case of Arthur Anderson & Co. reported in 190 Taxman 279, wherein Shri Soli E. Dastur had argued that interest payable u/s 220(2) is not disallowable u/s 40(a)(ii) of the Act and Hon'ble High Court has after following Full Bench Supreme Court decision of Harshad (Supra) has held in favour of the assessee.
Hence, the same analogy can also be applied over present query.
09 July 2010
Harshad Mehta's case is not relevant to direct taxes. The case related to transaction in securities. However i do agree on the part that tax does not include penalty and interest.
Further i am not able to find the judgement of Arthur & Anderson as stated by u. So it would be beneficial if you could qoute or reproduce the relevant paras of the judgements.
Furthermore none of the judgements as specified by you above have a direct application in the above query whereas the one of the Madras has been delivered directly on the issue under consideration. If we have a direct case law then we refer the same and if there is no direct case then we proceed for cases which are similar to one in the query and can bee applied in the query out here.
10 July 2010
A. Its Full Bench decision of Supreme Court and their observation on s.2(43) on Income Tax Act, 1961 is binding on all the courts of India. Even Bomaby High Court has followed the same observation in the case of Artur (supra). Relevant para of the said decision is reproduced hereunder for ready reference :
"9. Apart from the fact that there has been no failure on the part of the assessee to make a full and true disclosure of all material facts, it will be necessary to advert to the decision of the Supreme Court in Harshad Shantilal Mehta v. Custodian [1998] 231 ITR 8711. The Supreme Court, in the course of its judgment observed that under the Income-tax Act, 1961 the definition of tax under section 2(43) does not include penalty or interest and that the concepts of tax, penalty and interest are different concepts under the Act. Justice Sujata Manohar speaking for a Bench of three Learned Judges of the Supreme Court observed thus : “We are concerned in the present case with penalty and interest under the Income-tax Act. Tax, penalty and interest are different concepts under the Income-tax Act. The definition of “tax” under section 2(43) does not include penalty or interest. Similarly, under section 156, it is provided that when any tax, interest, penalty, fine or any of other sum is payable in consequence of any order passed under this Act, the Assessing Officer shall serve upon the assessee a notice of demand as prescribed. The provisions for imposition of penalty and interest are distinct from the provisions for imposition of tax.” 10. The decision of the Supreme Court was delivered in an appeal which arose out of the Special Court (Trial of Offences Relating to Transaction in Securities) Act, 1992. The interpretation which has been placed on the provisions of section 2(43) and the observations of the Supreme Court noted earlier, however, bind this Court as regards the ground on which the reopening of the assessment has been sought in this case."
I hope perusal of above para would give you answer that the said decision of SC is binding on high courts so far as observation in respect of S.2(43) is concerned.
B. So far as applicability of Jaipuria Samla Amalgamated Collieries Ltd is concerned,I will put it in this way. S.40(a)(ii) provides that ratio can be drawn in the context that S.40(a)(ii) provides that any sum paid on account of any rate or tax levied98 on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains would be disallowed. Now here ratio of the aforesaid decision can be drawn that the words "profits or gains of any business or profession" which are employed in section 40(a)(ii) can, in the context, have reference only to profits or gains as determined u/s 28/29 and connot cover the net profits or gains arrived at or determined in a manner other than that provided by section 28/29.
C. Now coming to the point of binding precedence. I would like to refer a well drafted Third Member (Shri R.V.Eeaswer) in the case of Kanel Oil reported in 126 TTJ 158. Para 8 of the Third Member order is reproduced hereunder :
"8. The other exception is where the judgment of the non-jurisdictional High Court,though the only judgment on the point, has been rendered without having been informed about certain statutory provisions that are directly relevant. A judgment rendered without noticing a previous binding precedent or a relevant statutory rule is considered to have been rendered 'per incuriam'. It is even said that such a judgment need not be given effect to by a lower court"
In the case of Madras High Court, unfortunately no one has referred to the provisions of S.2(43) nor the binding SC decision has been referred and followed. Therefore, even if it is the only decision on the issue, same may not be followed.
D.In nut shell, the point of discussion is that what kind of tax is required to be disallowed; tax which is required to be paid on own income of the assessee or the tax which is required to be deducted by the assessee, which is nothing but the obligation of the assessee to deduct tax on payment being made to other assessee. And interest on late payment of TDS is in compensatory nature.
E.Hence, I am of the view that tax deduction tax at source can never be considered for 40(a)(ii) and once if TDS cannot be considered, certainly interest on late payment of TDS can be considered for disallowance u/s 40(a)(ii) of the Act.
Disclaimer : This is my personal opinion. Different view may also be taken by the Higher Authority.
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