INCOME TAX APPELLATE TRIBUNAL - MUMBAI

I.T.A. No. 6449/Mum/2011, C.O. No. 157/Mum/2012 (assessment year 2008-09)

Shri B. R. Mittal, JM And Shri Sanjay Arora, AM,JJ.

Shri Sanjeev Jain For the Petitioner :
Shri C. N. Vaze For the Respondent :

ORDER

The order of the Bench was delivered by

Sanjay Arora, A. M.-This is an Appeal by the Revenue and the Cross Objection (C.O.) by the Assessee, arising out of the Order by the Commissioner of Income Tax (Appeals)-33, Mumbai ('CIT(A)' for short) dated 07.07.2011, partly allowing the assessee's appeal contesting its assessment u/s.143(3) of the Income Tax Act, 1961 ('the Act' hereinafter) dated 29.12.2010 for the assessment year (A.Y.) 2008-09.

2.1 It would be relevant, before we proceed to take up the issues raised by the rival parties, to recount the background facts of the case. The assessee, an individual, in the business of civil construction, under the trade name 'M/s. Raviraj Engineering Construction', filed his return of income for the year on 15.10.2009 at a net income of Rs. 22,20,491/-. The contract receipts were reflected at Rs. 290.06 lacs, and against which a net profit disclosed was at Rs. 23.20 lacs, which works to 8% of the former (gross receipt). The total of the assets as per the balance-sheet (as at the relevant year-end) was at Rs. 113.21 lacs. However, during the course of verification proceedings, commenced with the issue of notice u/s.143(2) on 25.09.2010, the assessee furnished re-audited accounts, and which were found to be at wide, unexplained variation with that submitted earlier. The gross receipts of the business stood reflected at Rs. 434.65 lacs, with a net profit of Rs. 27.02 lacs, and which work to 6.21%. The total of the assets as per the revised balance-sheet was at Rs. 252.59 lacs. The opening capital had been enhanced from Rs. 14,11,897/- earlier to Rs. 41,12,069/-. The assessee was show caused in respect of the said differences, as also for the declined profit rate, i.e., w.r.t. that disclosed earlier. The assessee explained that the decline was only apparent, and the profit rate in fact exhibits an increase, i.e., from 8.1% disclosed earlier to 8.85% at present, i.e., when reckoned prior to the charge for depreciation, furnishing the following figures:

The same did not, however, find acceptance by the Assessing Officer (A.O.), in whose view the profit rate of 8%, i.e., as disclosed earlier, was a reasonable estimate of the assessee's trading profit for the year, working the same to Rs. 34,77,198/-, i.e., with reference to the revised turnover. Secondly, the assessee had suo motu disallowed Rs. 73,05,232/- u/s.40(a)(ia) of the Act in respect of non-deduction of tax at source on account of payment made on various counts, viz. sub-contractors, labours charges, transport hiring charges, professional fees and accounting charges. The same was retained in assessment.

2.2 In appeal, the ld. CIT(A), upon considering the assessee's explanation, was of the view that the addition effected on the basis of and in view of the revised figures, filed suo motu by the assessee, could yet only be in respect of the comparable figures. Accordingly, only the increase in the amount of the opening capital as per the two sets of accounts, i.e., Rs. 27,00,172/- (Rs.41,12,069 - Rs. 14,11,897) was held by him as valid. With regard to the profit estimation, again, the assessee found favour with him. The assessee had admitted to the unexplained addition to its capital account. However, apart there-from, there was no basis for any further enhancement to the disclosed income. The addition on account of profit estimation was, accordingly, deleted. Aggrieved, the Revenue is in appeal, with the assessee, making a claim in respect of disallowance u/s.40(a)(ia) with reference to the decision in the case of Merilyn Shipping & Transports vs. Addl. CIT [2012] 136 ITD 23 (Vishk) (SB) [also 16 ITR (Trib) 1], per his C.O.

3. We have heard the parties, and perused the material on record and the case law cited.

3.1 The addition of Rs. 2,38,47,906/- by the A.O. i.e., the difference between the total of the assets per the revised balance-sheet (as at 31/3/2008) and the opening capital as on 01.04.2007 (as per the balance-sheet filed originally), is without basis. The assets, along with their nature and source, stand disclosed by the assessee per its revised balance-sheet, so that unless some further assets stand found or, in any case, the source of the investment reflected per the assessee's books found false or incorrect, no addition could be validly made. The ld. CIT(A) has rightly restricted the addition to the admitted increase in the opening capital, toward which no satisfactory explanation stands furnished by the assessee.

3.2 Again, there is no basis for not accepting the revised trading result. The same could only be unacceptable where the accounts are shown to exhibit some fundamental defect. Rather, as we observe, the only basis toward the same is the profit figure as per the original return, and which has been shown as being not unfavourable when the depreciation charge is also taken into account. The reference to the figures as per the original return cannot be the basis of addition; the same having been in fact denounced by the assessee himself as also considered unreliable by the Revenue. There is also no reference to any basis or other comparable data by the Revenue. Under the circumstances, we find no infirmity in the deletion of the addition made on account of estimation of income on trading account, and the same is accordingly confirmed.

4. Vide its cross objection, the assessee presses for the restriction of the disallowance u/s. 40(a)(ia) to Rs. 34,35,611/-, the amount claimed as outstanding for payment as at the year-end and, thus, payable as on 31/3/2008, placing reliance on the decision in the case of Merilyn Shipping & Transports (supra), reading the word 'payable' occurring in the provision to read or convey 'payable as at the end of the relevant previous year.' The same, we may firstly clarify, could be pressed in view of the claim being essentially legal, so that the same, where considered valid, could be confirmed for allowance subject to the sum under reference being verified for being and/or restricted to the amount outstanding as at the year-end.

4.1 We shall, before embarking on the case law; the assessee's case being based on the decision by the special bench of the Tribunal in Merilyn Shipping & Transports (supra), dwell on the provision, which reads as under:

'Amounts not deductible.
40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",--

(a) in the case of any assessee--
(i) ........
(ia) any interest, commission or brokerage, rent, royalty, fees for 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,--

(A) in a case where the tax was deductible and was so deducted during the last month of the previous year, on or before the due date specified in sub-section (1) of section 139; or
(B) in any other case, on or before the last day of the previous year:
Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted—

(A) during the last month of the previous year but paid after the said due date; or
(B) during any other month of the previous year but paid after the end of the said previous year,such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.
Explanation ........'
[emphasis, by underlining, ours]

A fair look at the provision makes it manifestly clear that any sum which is payable to specified persons against specified services on which tax is deductible at source during the previous year would, however, stand to be deducted in computing the income of the year only upon the deposit of the same, i.e., the tax deductible at source, by the specified date. The disallowance is not absolute, so that a deposit thereof beyond the specified date would entitle deduction of the principal sum in computing the income of the previous year in which tax is paid. There is no warrant in the language of the provision to limit the word 'payable' with reference to any particular date during the previous year, as, for example, the year-end. The tax deductibility at source could arise at any time during the year on account of a liability arising during the year, and which is so irrespective of whether payment in its respect is made or not. Accordingly, the deduction qua the said liability would be subject to deposit of the tax deductible at source in its respect by the specified date/s. This, in nutshell, is the provision.

The provision itself prescribes different time frames for the deposit of tax deductible at source so as to qualify the principal amount for deduction, i.e., separately for tax deductible during the last month of the year and that during the other part of the previous year, and which would make it abundantly clear that the provision contemplates deposit of tax deductible at source at any time during the year for the corresponding principal amount to qualify for deduction, which stands thus covered thereby. The different time frames for the deposit of TDS become meaningful when considered in the background and context of the fact that the statute itself provides different time periods for the deposit of tax deductible at source at different times during the year, i.e., during the year and as at the year-end. The provision would thus apply to an amount payable at any time during the year, and not only to that as at the year-end. The trigger point for the applicability of the provision, it would be noted, is the tax at source becoming deductible during the year. The same, it may be appreciated, would only be on the amount becoming 'payable' at any time during the year. There is, as such, no basis to suggest of the amount, since paid, though subject to tax deduction at source, and which has admittedly not been deducted, for being excluded from the ambit of the provision, which is unambiguously worded.

A payment would, in fact, not impact either the deductibility of the tax at source in its respect, which we have explained to be the starting point for the invocation of section, or the deduction of the amount (i.e., on which tax becomes deductible) in computing the business income u/s.28, and toward which the disallowance u/s.40(a)(ia) would apply. This is as it is only the amount payable that is relevant. We say so as where an amount is paid without it being payable, the same would only be in the nature of an advance. Accordingly, the same would not be admissible for deduction in the first place. The question of applicability or otherwise of section 40(a)(ia) would therefore not arise, which is applicable only to sums otherwise deductible. This would also at once clarify the use of the word 'payable' in the provision as against the words 'credited or paid' in the Finance Bill preceding it. That is, inasmuch as the payment without the amount paid being payable is of no consequence either as to its deductibility per se or as to its deductibility with reference to section 40(a)(ia), the word 'paid' stood omitted, with the word 'credited' being pari materia with the word 'payable'; the latter, rather, conveying it clearly to be a liability qua a deductible expense. This, to our mind, explains the rationale of the omission of the word 'paid' in the enactment, which though the courts, as we shall presently see, have held as not a relevant factor, particularly where the provision is unambiguous and clearly worded.

Lastly, it is to be borne in mind, as also emphasized by the hon'ble court in Tube Investments of India Ltd. vs. Asst. CIT (TDS) [2010] 325 ITR 610 (Mad), the effect of the disallowance u/s.40(a)(ia) is only that the assessee would stand to be allowed deduction in the year of payment of the corresponding TDS. The fact that the tax was deductible at source in respect of payments made during the year, and which stands not deposited, is admitted. Under the circumstances, we do not find any substance in the assessee's claim.

4.2 Our view, we are conscious, is not in consonance of the decision by the special bench of the tribunal in Merilyn Shipping & Transports (supra). However, the view of the special bench has not found acceptance by the hon'ble high courts, as in CIT vs. Crescent Export Syndicate [2013] 216 Taxmann 258 (Cal); CIT vs. Sikandarkhan N. Tunvar [2013] 357 ITR 312 (Guj); and Tube Investments of India Ltd. (supra). In fact, the order of the Special Bench in Merilyn Shipping & Transports (supra) has itself been stayed by the hon'ble high court of Andhra Pradesh.

The hon'ble Calcutta high court examined the scope of the provision at length in its elaborate judgment in Crescent Export Syndicate (supra), considering at length the decision in the case of Merilyn Shipping & Transports (supra). The tribunal, as explained by it, had correctly interpreted the provision when it held that in case of omission to deduct the tax even the genuine and admissible expenses are to be disallowed. However, having done that, it removed the rigor of the law by holding that the disallowance should be restricted to the money which is yet to be paid, i.e., as at the year-end. In doing so, it supplied casus omissus, which was not permissible, adverting to the decision in the case of Bhuwalka Steel Industries vs. Bombay Iron & Steel Labour Board [2010] 2 SCC 273. In the said case, as in the instant case, it was the language of the Act, as opposed to that of the Bill that was relevant, and is to be interpreted. That is, the language of the provision, as finally enacted, is unambiguously clear, so that the intention of the Legislature has to be gathered there-from. The hon'ble court in fact also compared the pre-amended and post-amended law with a view to ascertaining the mischief sought to the rectified or the object sought to be achieved by the amendment, discounting the argument that two reasonable views were possible, so that one favour to the assessee ought to be adopted. In fact, the provision, as interpreted by the tribunal, would make it otiose. That a provision may operate to be harsh, as it indeed was, was no reason to strike down or read down the provision, which is to be interpreted in terms of the intention and the will of the Legislature.

The same view stands expressed by the hon'ble Gujarat high court in Tunvar's case (supra), emphasizing on the strict rule of construction for interpretation of taxing statutes, relying on a number of decisions by the apex court. The provision, it held, was in fact amply clear. In plain terms it provided for disallowance of expenditure, incurred and otherwise eligible for deduction, on the ground that the tax required to be deducted at source was either not deducted or, if deducted, not deposited by the due date. The word 'payable' u/s. 40(a)(ia) is not defined, so that it would not include the amounts paid. However, there is nothing to restrict the word 'payable' to the sum/s outstanding as at the year-end, so that the provision would stand to be attracted where the principal sum was payable at any time during the year, also referring for the purpose to the decision in the case of CIT vs. Ashokbhai Chimanbhai [1965] 56 ITR 42 (SC), wherein the apex court had clarified on the accrual of profit. The tribunal, in its view, had committed an error in applying the principle of conscious omission. In fact, the interpretation suggested by it is sans any logic, and would bring in its wake irreconcilable and diverse consequences. The word 'payable' thus has to be read without any restriction, and would extend to any amount payable at any time during the year. As in the case of Crescent Export Syndicate (supra), it held that the tribunal fell in serious error in comparing the language used in the draft bill and that in the final enactment to assign a particular meaning to the statutory provision, also referring to and quoting from the decision in the case of Bhuwalka Steel Industries (supra). The tribunal, in its view, had committed an error in applying the principle of conscious omission (pg.329).

To the same effect is the observation of the hon'ble court in Tube Investments of India Ltd. (supra), upholding the vires of the provision, clearly stating that there is no ambiguity in the provision and, therefore, cannot be read down. The same was in fact heavily relied upon by the dissenting member in the case of Merilyn Shipping & Transports (supra), even as noted by the hon'ble court in Tunvar's case (supra).

We do observe that the hon'ble Allahabad high court in CIT vs. Vector Shipping Services [2013] 85 CCH 201 (All) (copy on record) has taken a different view, stating that the provision shall apply only to an amount payable as at the year-end. However, as shall be apparent from a reading of the said decision, the hon'ble court does not state the reason/s that inform its' decision. There is, in fact, no discussion of the provision, or of its interpretation, by it in the said decision, which, therefore, has to be read as rendered in the facts of the case; the hon'ble court alluding to various other reasons that prevailed with the lower authorities in accepting the assessee's contention/s. Further, the section has to be read in harmony and conjunction with other provisions, even as was sought to be emphasized in Crescent Export Syndicate (supra) (pg. 272) with reference to the decision in the case of A. S. Krishna vs. State of Madras AIR 1957 SC 295.

4.3 In view of the foregoing, we find no merit in the assessee's claim/s per its C.O.

5. In the result, the both the Revenue's appeal and the assessee's C.O. are dismissed.

The order pronounced in the open court on January 03, 2014.