Whether disallowance u/s 40(a)(ia) for non-deduction of tax at source can be made even when the expenditure is not debited to profit and loss account?

PRINCIPAL COMMISSIONER OF INCOME TAX-4, KOLKATA Versus M/S. LINDE INDIA LIMITED
ITAT/338/2016 IA No.GA/2/2016 (Old No.GA/2607/2016)
KOLKATA HIGH COURT

QUESTION

Whether disallowance u/s 40(a)(ia) for non-deduction of tax at source can be made even when the expenditure is not debited to profit and loss account?

BRIEF FACTS

1. The assessee company is engaged in the business of manufacture and sale of various industrial and mechanical gases, cryogenic and non-cryogenic plants and vessels.

2. A show cause notice was issued to the assessee alleging that tax was not deducted at source in terms of the provisions of Section 40(a)(ia) of the Act in respect of the advances lying on 31-03-2007 for import of capital goods.

3. In the reply to the show cause notice, the assessee contended that the said advances was made towards import of capital goods on FOB basis at foreign sea ports, leading to transfer of title to the goods outside India and hence there is no income chargeable to tax in India and therefore the provisions of Section 195 of the Act are not attracted.

4. It was also contended that such advances to suppliers have also not been charged to Profit and loss Account for the relevant assessment year.

5. The Assessing Officer completed the assessment under Section 143(3) of the Act by passing an order dated December 30, 2010. While completing the assessment, the Assessing Officer made disallowances aggregating to Rs.128,48,02,479/- under Section 40(a)(ia) of the Act. The Assessing Officer also enhanced the long term capital gain on sale of Chennai land by invoking the provisions of Section 50C of the Act.

6. The order under Section 143(3) dated December 30, 2010 was rectified by the Assessing Officer on January 27, 2011 under the provisions of Section 154 of the said Act and the total income was revised at Rs.172,19,20,000/-.

7. In the order passed under Section 143(3)/154 dated 27.01.2011 the disallowance under Section 40(a)(ia) was restricted to the extent of Rs.72,89,71,972/-.

8. The Assessee Company preferred an appeal before the Commissioner of Income Tax (A)-XII, Kolkata challenging the order dated December 30, 2010 passed under Section 143(3) of the said Act. The first appellate authority by an order dated March 30, 2011 allowed the said appeal in part. By the said order the first appellate authority held that the Assessing Officer was not justified in making the disallowance of Rs.72,89,71,972/- and directed deletion of the amount disallowed by the Assessing Officer on such account. With regard to the enhancement of long term capital gain by the Assessing Officer, the first Appellate Authority directed the Assessing Officer to recompute the long term capital gain by adopting the fair market value as determined by the District Valuation Officer (for short "DVO") and not as per the value determined by the Stamp Valuation Authorities.

9. Both the assessee and the revenue challenged the order dated March 30, 2011 passed by the first appellate authority by preferring separate appeals being ITA No. 806/Kol/2011 and ITA No. 872/Kol/2011 respectively.

10. The learned Tribunal by an order dated February 17, 2016 allowed the appeal of the assessee in part and dismissed the appeal of the revenue. The learned Tribunal was pleased to hold that no disallowance could be made under Sections 40(a)(i)/ 40(a)(ia) of the Act. On the issue of capital gains the learned Tribunal directed Assessing Officer to rework the capital gains by adopting Rs. 861 per square feet being guideline value in the same manner in which the learned DVO had carried out the valuation.

11. Being aggrieved against the order dated March 30, 2011 passed by the Tribunal as aforesaid, the Revenue preferred this appeal under Section 260A of the Act.

ARGUMENT OF REVENUE

12. The revenue suggested the following substantial questions of law in this appeal:-

" (a) Whether on the facts and in the circumstances of the case the Learned Income Tax Appellate Tribunal, "B" Bench Kolkata erred in law as well as on facts in upholding the order of CIT Appeal in Holding that provision of Section 5, Section 9, Section 195 of the Income Tax Act, 1961 that withholding of tax from payment made by the Assessee to the Foreign Company, Offshore, is not attracted under Section 195 of the Income Tax Act, 1961, whereas the technical services extended by the said Foreign Company was having sufficient territorial and economic nexus with India as there was commonness of Interest between the Assessee and Foreign Company and therefore, payment of composite contract price including the cost of Technical Contract Service was covered under Section 9(1) (vii) of the Income Tax Act, 1961 and the Assessee company was liable to deduct tax on all payments made to the Foreign Company including advances in the light of provision of Section 196 of the Income Tax Act, 1961?

(b) Whether on the facts and in the circumstances of the case the Learned Income Tax Appellate Tribunal, "B" Bench Kolkata is a competent authority to judge the Valuation of Department of Valuation Officer who is an expert in the area of valuation of assets and without giving any opportunity for revaluation of assets?

(c) Whether on the facts and in the circumstances of the case the Learned Income Tax Appellate Tribunal, "B" Bench Kolkata was justified to hold its jurisdiction of for revaluation of assets against the valuation adopted by the DVO in view of the fact that the Assessee company neither raised any objection against reference of valuation of Capital Assets by the DVO nor disputed the value adopted by Stamp Duty Authority before nor challenge the valuation made by the DVO before any Appellate Authority? "

ARGUMENT OF ASSESSEE

13. The learned advocate placed reliance upon the decision of the Punjab and Haryana High court in the case of Commissioner of Income-Tax vs. Mark Auto Industries Ltd. reported at (2013) 358 ITR 43 (P&H) and a decision of the Karnataka High court in the case of Principal Commissioner of Income-Tax and anr. vs. Tally Solutions Pvt. Ltd. reported at (2021) 430 ITR 527 (Karn) and contended that the provisions contained in Section 40(a)(ia) cannot be invoked if the assessee had not claimed deduction for the amount paid. He further contended that the learned Tribunal after taking into consideration various factors returned a factual finding that it was not correct on the part of the DVO to add towards 15% frontage on both sides of the rate in order to arrive at the total rate of Rs. 990 per square feet which need not be interfered with by this court in an appeal under Section 260(A) of the Act.

OBSERVATIONS AND DECISIONS OF COURT

14. Section 29 of the Act provides that the income chargeable to income tax under the head profits and gains of business and profession shall be computed in accordance with the provisions contained in Sections 30 to 43 B of the Act.

15. Section 40 starts with a non obstante clause. It provides that certain amounts which are otherwise allowable as deductions under Sections 30 to 38 of the Income Tax Act shall not be deducted in computing the income charging under the head profits and gains of business or profession unless tax has been deducted at source or after deduction has not been paid within the due date for filing the return of income in case tax is deductible at source on such amount.

16. The object behind incorporation of non obstante clause in a section is to give the enacting part of such section an overriding effect either over all provisions of the Act or upon some provisions in case of conflict between statutory provisions. The object behind incorporation of the non obstante clause in the beginning of section 40 of the Act is to give it an overriding effect over Section 30 to 38 of the Act in case of any conflict.

17. The effect of the non obstante clause in Section 40 of the Income Tax Act is to restrict the operation of Section 30 to 38 in cases where the conditions mentioned in Section 40 are not complied with. In other words, the amounts mentioned under Section 40, on which tax is deductible at source, shall not be deducted unless tax is deducted at source or after deduction has not been paid within the stipulated time frame.

18. The interpretation of the word "deducted" assumes significance in order to decide the applicability of Section 40 of the Income Tax Act.

19. The Oxford Advanced Learner’s Dictionary defines the word "deduct" which when used as a verb shall mean to take away money, points etc. from a total amount. The synonym of deduct is subtract.

20. The word "deduction" has been defined in the said dictionary to mean the process of taking an amount of money away from a total. An amount can be deducted in computing the business or professional income by taking away the said amount from the total profits and gains of such business and profession. While computing the income chargeable to tax under the head profits and gains of business or profession an amount may be deducted from the profits and gains of business and profession in order to take away the said amount from the total chargeable amount under the said head.

21. While preparing the profit and loss account of a business or profession an amount can be deducted from the professional and/or business income by debiting the profit and loss account prepared in connection with such profession or business with such amount. Such amount may also be deducted while computing the profits and gains of business or profession for the purpose of arriving at the business or professional income chargeable to tax.

22. Therefore, if the disputed amount is neither debited from the profit and loss account of the business or profession nor has been deducted while computing the profits and gains of business or profession, Section 40 of the Income Tax Act do not come into.

23. Therefore, if an assessee has paid any amount on account of fees for technical services outside India or in India to a non-resident but has not debited such amount to the profit and loss account and has also not been claimed as deduction in computing the income chargeable under the head profits and gains of business or profession, this Court is of the considered view that, no disallowance in respect thereof can be made by invoking the provisions of Section 40a(ia) of the Act.

DECISION OF THE COURT

24. . It is not in dispute that during the course of assessment proceedings the assessee company has filed complete details of work in progress and also filed the party wise details. The first appellate authority specifically held that the payment of Rs.84, 40,14,000/- which is a part of capital advance and appearing in the capital work in progress includes a sum of Rs.72, 33, 40, 648/- made to Linde AG and there was a payment of Rs.56, 31 324/- to the said German Company which was appearing under the head loans and advance.

The sum of Rs.72, 33, 40, 648/- was part of the capital work in progress and not charged to profit and loss account and the sum of Rs.56, 38, 324/- was shown in the balance sheet under the head loans and advance and such amount was also not charged to the profit and loss account.

The first appellate authority further observed that the total payment aggregating to Rs.72, 89, 71, 972/- has not been charged to the profit and loss account Page 11 of 13 which has been disallowed by the assessing officer by invoking the provisions of Section 40(a)(ia) of the act.

The first appellate authority held that since the aforesaid amount has not been debited in the profit and loss account and has also not been claimed as expenditure while computing the total taxable income under the head income from business or profession, the assessing officer was not justified in making the disallowance of Rs.72, 89, 71, 972/- and accordingly directed deletion of the said disallowance. The learned Tribunal affirmed the said finding of the first appellate authority.

25. The first appellate authority and the Tribunal rightly interpreted the provisions of Section 40 of the said Act.

26. On the issue of long term capital gain, the learned Tribunal did not interfere with the guideline value rate determined by the DVO and directed the Assessing Officer to rework the capital gains by adopting the said guideline value in the same manner in which the DVO had carried out the valuation.

27. The Tribunal being the final fact finding authority was justified in scrutinising the materials on record and to arrive at a finding in respect thereof. Since the said finding is entirely factual no substantial question of law arises therefrom.

28. For the reasons as aforesaid this court is of the considered view that no substantial question of law is involved in this appeal, the instant appeal being ITAT No. 338 of 2016 stands dismissed without, however, any order as to costs. The application being GA 2 of 2016 also stands disposed of accordingly.

CONCLUSION: while reading provisions of Section 40(a)(ia) we find that any interest, commission or brokerage, rent, royalty, fees for professional services, fees for technical services, any amount payable to a resident contractor shall not be allowed as a deduction in the previous year in which the expenses are incurred, while computing the income chargeable under the head ‘Profit and gains of business or profession. It means that extant section is applicable only in case where expenditure on which TDS has not been deducted claimed as deduction from Profit & Loss of the Company. In case expenditure was not debited or not claimed as deducted from the profit /loss account the provisions of Section 40(a)(ia) are not applicable.

FOOTNOTES

DISALLOWANCE OF BUSINESS EXPENDITURE ON ACCOUNT OF NON-DEDUCTION OF TAX ON PAYMENT TO RESIDENT-PAYEE [SEC. 40(A)(IA)]

Any interest, commission or brokerage, rent, royalty, fees for professional services, fees for technical services, any amount payable to a resident contractor shall not be allowed as a deduction in the previous year in which the expenses are incurred, while computing the income chargeable under the head ‘Profit and gains of business or profession’,

if in respect of such expenses:-

a). Tax has not been deducted, or
b). After deduction has not been paid on or before the due date mentioned under Sec.139 (1).

However, where in respect of any such sum,-

a). Tax has been deducted in any subsequent year, or
b). Has been deducted during the previous year but paid after the due date specified under Sec. 139(1), such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.

TDS ON INCOME OF NON-RESIDENT (SEC. 195)

Any person responsible for paying to non-resident, not being a company, or to a foreign company, any interest or any sum chargeable under this Act (Other than salary) shall at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force.

THE MEANING OF THE WORD ‘INTEREST’ is very wide and would include interest on unpaid purchase price payable in any manner which would include any means of irrevocable letter of credit.

Interest is not part of purchase price and is assessable as interest. Failure to deduct tax on such interest payable outside India shall not entitle the assessee to claim deduction of interest.

SEC. 2(28A) DEFINING "INTEREST" does not include the discounting charges on discounting of Bills of Exchange

EXAMPLE: X Company discounted its export sales bills with a company in Singapore and received a payment net of discounting charges. The Assessing Officer disallowed such expenses under Sec. 40(a)(i), for not deducting tax at source under Sec. 195. As the discounting charges cannot be analogous to interest expenses, the obligation to deduct tax under Sec. 195 would not arise and the X Company cannot be denied deduction of such expenses.

SEC. 40(A)(IA) OF THE INCOME TAX ACT,1961 emphasis on that expenditure covered under mentioned TDS sections paid to resident and debited Profit & Loss Account will not be allowed as deduction while computing the income under the head "Profit and Gains of Business or Profession", if :-

a) Tax has not been deducted at source,
b) Tax deducted at source and the same is not remitted, or
c) If expenditure is debited and tax deducted at source during the previous year, tax is not remitted within the time-limits mentioned in section 200 such expenditure will be allowed as deduction in the year of remittance of the tax.

THE FOLLOWING PAYMENTS ARE COVERED UNDER SECTION 40(A)(IA)

a) Interest U/s 194A
b) Commission or brokerage U/s 194H
c) Professional or Technical Fee U/s 194J and
d) Contractors & Sub Contractors U/s 194C

The provisions of the above mentioned TDS sections require that tax has to be deducted at source when amount is paid or credited to the account of the Payee, whichever is earlier.

When the amount is credited to suspense account or any account, by whatever name called, then it is treated as amount credited to the account of the payee and tax has to be deducted at source. Hence, tax has to be deducted at source even on provisions made in the books of account to which TDS provisions are applicable.