SHREE CHOUDHARY TRANSPORT COMPANY versus INCOME TAX OFFICER on 29 July 2020

[2020] 8 S.C.R. 165

SHREE CHOUDHARY TRANSPORT COMPANY

v.

INCOME TAX OFFICER

(Civil Appeal No. 7865 of 2009)

JULY 29, 2020

[A. M. KHANWILKAR AND DINESH MAHESHWARI, JJ.]

Income Tax Act, 1961:

ss. 40(a)(ia) and 194C – Applicability of – Scope – Deductionof tax at Source – For the assessment year 2005-2006 – Failure byassessee, while making payment to the truck operators engaged byassessee for the purpose of its contract for transportation of goods– Deduction claimed by assessee on account of such payment –Revenue disallowed deduction of payments made to the Truckoperators exceeding Rs. 20,000/- without TDS in terms of s. 40(a)(ia)– Appellate Authority held that assessee’s case was squarely coveredby the provisions of s. 194C and in view of mandatory provisions ofs. 40(a)(ia), the payments in question cannot be allowed as deductionwhile computing the total income of the assessee – Appellate Tribunalas also High Court affirmed the findings of the Authorities – Appealto Supreme Court – Held: The contract of assessee with consignorcompany for transport of goods could not have been accomplishedwithout a contract with the truck operator – Thus the truck operatorsanswered the description of ‘sub-contractor’ for the purpose of s.194(2) – Thus, in assessee’s case s. 194C was applicable and henceit was obliged to deduct tax at source – The disallowance u/s.40(a)(ia) is not limited to the amount outstanding i.e. ‘payable’, itequally applies to the amount already incurred and paid by theassessee – Sub-clause (ia) of s. 40(a) has been consciously madeapplicable by legislature effective from 01.04.2005 and hence wouldbe applicable for the assessment year in question i.e. 2005-2006 –The payments in question have rightly been disallowed fromdeduction while computing the total income of assessee.

Dismissing the appeal, the Court

HELD: 1. The nature of contract entered into by theappellant with the consignor company makes it clear that the

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Aappellant was to transport the goods (cement) of the consignorcompany; and in order to execute this contract, the appellanthired the transport vehicles, namely, the trucks from differentoperators/owners. The appellant received freight charges fromthe consignor company, who indeed deducted tax at source whileBmaking such payment to the appellant. Thereafter, the appellantpaid the charges to the persons whose vehicles were hired forthe purpose of the said work of transportation of goods.Indisputably, it was the responsibility of the appellant-assesseeto transport the goods (cement) of the company; and how toaccomplish this task of transportation was a matter exclusivelyCwithin the domain of the appellant. Hence, hiring the services oftruck operators/owners for this purpose could have only beenunder a contract between the appellant and the said truckoperators/owners. Whether such a contract was reduced intowriting or not carries hardly any relevance. In the given scenarioand set up, the said truck operators/owners answered to theDdescription of “sub-contractor” for carrying out the whole or partof the work undertaken by the contractor (i.e., the appellant) forthe purpose of Section 194C(2) of the Income Tax Act, 1961.Thus, the provisions of Section 194C were applicable and theassessee-appellant was under obligation to deduct the tax atEsource in relation to the payments made by it for hiring thevehicles for the purpose of its business of transportation of goods.[Paras 15.1 and 20][197-G-H][198-A-C; 220-D-E]

Palam Gas Service v. Commissioner of Income-Tax(2017) 394 ITR 300 – relied on.FCommissioner of Income-Tax v. Hardarshan Singh(2013) 350 ITR 427 – distinguished.

2.1 Disallowance under Section 40(a)(ia) of the Act is notlimited only to the amount outstanding and this provision equallyapplies in relation to the expenses that had already been incurredGand paid by the assessee. Section 194C is placed in Chapter XVIIof the Act on the subject “Collection and Recovery of Tax”; andspecific provisions are made in the Act to ensure that therequirements of Section 194C are met and complied with, whilealso providing for the consequences of default. Section 200Hspecifically provides for the duties of the person deducting tax to deposit and submit the statement to that effect. Theconsequences of failure to deduct or pay the tax are then providedin Section 201 of the Act which puts such defaulting person in thecategory of “the assessee in default in respect of the tax” apartfrom other consequences which he or it may incur. [Para 16][200-D-F]

2.2. Section 40(a)(ia) provides for the consequences ofdefault in the case where tax is deductible at source on anyinterest, commission, brokerage or fees but had not been sodeducted, or had not been paid after deduction (during theprevious year or in the subsequent year before expiry of theprescribed time) in the manner that the amount of such interest,commission, brokerage or fees shall not be deducted in computingthe income chargeable under “profits and gains of business orprofession”. In other words, it shall be computed as income ofthe assessee because of his default in not deducting the tax atsource. In the overall scheme of the provisions relating tocollection and recovery of tax, it is evident that the object oflegislature in introduction of the provisions like sub-clause (ia)of clause (a) of Section 40 had been to ensure strict and punctualcompliance of the requirement of deducting tax at source. In theproviso added to clause (ia) of Section 40(a) of the Act, it wasprovided that where in respect of the sum referable to TDSrequirement, tax has been deducted in any subsequent year, orhas been deducted during the previous year but paid in anysubsequent year after the expiry of the time prescribed in Section200(1), such sum shall be allowed as a deduction in computingthe income of the previous year in which such tax has been paid.[Paras 16.1 and 16.2][200-F-H; 201-A-C]

Commissioner of Income-Tax v. Calcutta ExportCompany: (2018) 404 ITR 654 – relied on.

2.3 The term “payable” has been used in Section 40(a)(ia)of the Act only to indicate the type or nature of the payments bythe assessees to the payees referred therein. In other words,the expression “payable” is descriptive of the payments whichattract the liability for deducting tax at source and it has not beenused in the provision in question to specify any particular class ofdefault on the basis as to whether payment has been made or A

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Anot. It is not correct to say that the expression “payable” shouldbe read in contradistinction to the expression “paid”. Referenceto the definition of the term “paid” in Section 43(2) of the Act isof no assistance to the appellant. [Para 16.11][209-G-H]

*Palam Gas Service v. Commissioner of Income-Tax :B(2017) 394 ITR 300 – relied on.

J.K. Synthetics Limited v. Commercial Taxes Officer:(1994) 4 SCC 276 – distinguished.

P.M.S. Diesels and Ors. v. Commissioner of Income-Tax:(2015) 374 ITR 562 – approved.

CP.M.S. Diesels and Ors. v. Commissioner of Income-Tax:(2015) 374 ITR 562; Commissioner of Income-Tax,Kolkata-XI v. Crescent Export Syndicate: (2013) 216Taxman 258; Institute of Chartered Accountants ofIndia v. Price Waterhouse (1997) 93 Taxman 588 –Dreferred to.

Issues

2.4 There is no substance in the plea that the decision in*Palam Gas Service case requires reconsideration. The decisionof Co-ordinate Bench in Palam Gas Service case on the corequestion of law is equally binding on this Bench and could beEdoubted only if the view, as taken, is shown to be not in conformitywith any binding decision of the Larger Bench or any statutoryprovisions or any other reason of the like nature. The Court findsnone. [Para 16.8][206-F-H]

2.5 It is not correct that scope of Section 40(a)(ia) of theFAct cannot be decided on the basis of Section 194C. Section40(a)(ia) is not a stand-alone provision but provides one of thoseadditional consequences as indicated in Section 201 of the Actfor default by a person in compliance of the requirements of theprovisions contained in Part B of Chapter XVII of the Act. Thescheme of these provisions makes it clear that the default inGcompliance of the requirements of the provisions contained inPart B of Chapter XVII of the Act (that carries Sections 194C,200 and 201) leads, inter alia, to the consequence of Section40(a)(ia) of the Act. Hence, the contours of Section 40(a)(ia) of H

the Act could be aptly defined only with reference to therequirements of the provisions contained in Part B of ChapterXVII of the Act, including Sections 194C, 200 and 201. When theobligation of Section 194C of the Act is the foundation of theconsequence provided by Section 40(a)(ia) of the Act, referenceto the former is inevitable in interpretation of the latter.[Para 16.10][207-D-F]

3.1. In income tax matters, the law to be applied is that inforce in the assessment year in question, unless stated otherwiseby express intendment or by necessary implication. As perSection 4 of the Act of 1961, the charge of income tax is withreference to any assessment year, at such rate or rates as providedin any central enactment for the purpose, in respect of the totalincome of the previous year of any person. The expression“previous year” is defined in Section 3 of the Act to mean ‘thefinancial year immediately preceding the assessment year’; andthe expression “assessment year” is defined in clause (9) ofSection 2 of the Act to mean ‘the period of twelve monthscommencing on the 1[st] day of April every year’. Sub-clause (ia)was inserted to clause (a) of Section 40 of the Act with effect from01.04.2005 by Finance (No.2) Act, 2004. The provision in question,having come into effect from 01.04.2005, would apply from andfor the assessment year 2005-2006 and would be applicable forthe assessment in question. The legislature consciously madethe said sub-clause (ia) of Section 40(a) of the Act effective from01.04.2005, meaning thereby that the same was to be applicablefrom and for the assessment year 2005-2006; and neither therehad been express intendment nor any implication that it wouldapply only from the financial year 2005-2006. [Paras 17.4, 17.1and 17.6][210-B-D; 208-D]

3.2. The requirement of deducting tax at source was alreadyexisting as per Section 194C of the Act and it was the boundenduty of the appellant to make such deduction of TDS and to makeover the same to the revenue. Section 201 was also in existencewhich made it clear that default in making deduction in accordancewith the provisions of the Act would make the appellant “anassessee in default”. The appellant cannot suggest that even ifthe obligation of TDS on the payments made by him was existing A

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Aby virtue of Section 194C(2), he would have honoured such anobligation only if being aware of the drastic consequence of defaultthat such payment shall not be deducted for the purpose of drawingup the assessment. [Para 17.7][211-H; 212-A-B]

3.3. By the amendment in question, clause (ia) was addedBto Section 40(a) of the Act with a proviso to the effect that where,in respect of the sum referable to TDS requirement, tax has beendeducted in any subsequent year, or has been deducted duringthe previous year but paid in any subsequent year after expiry ofthe time prescribed in Section 200(1), such sum shall be allowedas a deduction in computing the income of the previous year inCwhich such tax has been paid. The proviso effectively took careof the case of any bonafide assessee who would earnestly complywith the requirement of deducting the tax at source. Therelaxation by way of the proviso/s to Section 40(a)(ia) of the Acthad further been modulated by way of various subsequentDamendments to further mitigate the hardships of bonafideassessees. [Para 17.7.1][212-C-E]

3.4 If sub-clause (ia) of Section 40(a) of the Act is heldapplicable only from the financial year 2005-2006, the result wouldbe that this provision would apply only from the assessment yearE2006-2007. Such a result is neither envisaged nor could becountenanced. Hence, the contention that sub-clause (ia), ofclause (a) of Section 40 of the Act would apply only from thefinancial year 2005-2006 and cannot apply to the present casepertaining to the financial year 2004-2005 stands rejected.[Para 17.8][212-F-G]F

3.5 It is also not correct that disallowance cannot be appliedto the payments already made prior to 10.09.2004, the date onwhich the Finance (No.2) Act, 2004 received the assent of thePresident of India. The said date of assent of the President ofIndia to Finance (No.2) Act, 2004 is not the date of applicabilityGof the provision in question, for the specific date having beenprovided as 01.04.2005. Of course, the said date relates to theassessment year commencing from 01.04.2005 (i.e., assessmentyear 2005-2006). [Para 18][212-G-H; 213-A-B]

3.6Even if it be assumed that the requirements of Section40(a)(ia) became known on 10.09.2004, the appellant could havetaken all the requisite steps to make deductions or, in any case,to make payment of the TDS amount to the revenue during thesame financial year or even in the subsequent year, as per therelaxation available in the proviso to Section 40(a)(ia) of the Actbut, the appellant simply avoided his obligation and attempted tosuggest that it had no liability to deduct the tax at source at all.Such an approach of the appellant, when standing at conflict withlaw, the consequence of disallowance under Section 40(a)(ia) ofthe Act remains inevitable. [Para 18.1][213-B-C]

3.7 The appellant is not correct in saying that theamendment by way of Finance (No.2) Act, 2014, wherebydisallowance under Section 40(a)(ia) has been limited to 30% ofthe sum payable, deserves to be held retrospective in operation.The amendment was specifically made applicable w.e.f. 01.04.2015and clearly represents the will of the legislature as to what is tobe deducted or what percentage of deduction is not to be allowedfor a particular eventuality, from the assessment year 2015-2016.[Paras 19 and 19.2][213-D; 216-E]

Commissioner of Income-Tax v. Calcutta ExportCompany (2018) 404 ITR 654 – distinguished.

3.8 The assessee-appellant was either labouring under themistaken impression that he was not required to deduct TDS orunder the mistaken belief that the methodology of splitting a singlepayment into parts below Rs. 20,000/- would provide him escapefrom the rigour of the provisions of the Act providing fordisallowance. In either event, the appellant had not been a bonafideassessee who had made the deduction and deposited itsubsequently. Obviously, the appellant could not have derivedthe benefits that were otherwise available by the curativeamendments of 2008 and 2010. Having defaulted at every stage,the attempt on the part of assessee-appellant to seek some succorin the amendment of Section 40(a)(ia) of the Act by the Finance(No.2) Act, 2014 could only be rejected as entirely baseless,rather preposterous. [Para 19.6][220-A-C]

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AKarimtharuvi Tea Estate Ltd. v. State of Kerala (1966)60 ITR 262 – followed.

Commissioner of Income-Tax, West Bengal v. IsthmianSteamship Lines (1951) 20 ITR 572 – relied on.

PIU Ghosh v. Deputy Commissioner of Income-Tax &BOrs. (2016) 386 ITR 322 – not approved.

4. The payments in question have rightly been disallowedfrom deduction while computing the total income of the assessee-appellant. The Court does not find any case of prejudice or legalgrievance with the appellant. In the first place, it is clear fromCthe provisions dealing with disallowance of deductions in part Dof Chapter IV of the Act, particularly those contained in Sections40(a)(ia) and 40A(3) of the Act, that the said provisions areintended to enforce due compliance of the requirement of otherprovisions of the Act and to ensure proper collection of tax asDalso transparency in dealings of the parties. The necessity ofdisallowance comes into operation only when default of the naturespecified in the provisions takes place. Looking to the object ofthese provisions, the suggestions about prejudice or hardshipcarry no meaning at all. Secondly, by way of the proviso as originallyinserted and its amendments in the years 2008 and 2010, requisiteErelief to a bonafide tax payer who had collected TDS but couldnot deposit within time before submission of the return was alsoprovided; and as regards the amendment of 2010, this Court ruledit to be retrospective in operation. The proviso so amended,obviously, safeguarded the interest of a bonafide assessee whoFhad made the deduction as required and had paid the same to therevenue. The appellant having failed to avail the benefit of suchrelaxation too, cannot now raise a grievance of alleged hardship.Thirdly, the appellant had shown total payments in Truck FreightAccount at Rs. 1,37,71,206/- and total receipts from the companyat Rs. 1,43,90,632/-. What has been disallowed is that amount ofGRs. 57,11,625/- on which the appellant failed to deduct the tax atsource and not the entire amount received from the company orpaid to the truck operators/owners. [Para 21][221-A-E]

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SHREE CHOUDHARY TRANSPORT COMPANY v. INCOMETAX OFFICER

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CIVIL APPELLATE JURISDICTION: Civil Appeal No. 7865of 2009.

From the Judgment and Order dated 15.05.2009 of the RajasthanHigh Court at Jodhpur in D.B. Income Tax Appeal No. 164 of 2008.

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Vikramjit Banerjee, ASG, V. Shekhar, Sr. Adv., Puneet Jain, H.D.Thanvi, Rishi Matoliya, Ms. Christi Jain, Shashank Shekhar,Ms. Sheetal Rajput, Sarad Kumar Singhania, Ms. Praveena Gautam,Ms. Purnima Bhat Kak, Ms. Siddhartha Sinha, Abhishek Mahajan,Mrs. Anil Katiyar, B. V. Balaram Das Advs. for the appearing parties.

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AThe Judgment of the Court was delivered by DINESH MAHESHWARI, J.

Preliminary

1. By way of this appeal, the assessee-appellant has called inBquestion the order dated 15.05.2009 passed in Income Tax Appeal No.164 of 2008 whereby, the High Court of Judicature for Rajasthan atJodhpur has summarily dismissed the appeal against the orderdated29.08.2008 passed in ITA No. 117/JU/2008 by the Income Tax AppellateTribunal, Jodhpur Bench at Jodhpur; and thereby, the High Court hasupheld the computation of total income of the assessee-appellant for theCassessment year 2005-2006 with disallowance of payments to the tuneof Rs. 57,11,625/-, essentially in terms of Section 40(a)(ia) of the IncomeTax Act, 1961[1],for failure of the assessee-appellant to deduct the requisitetax at source[2].

2. We may take note of the relevant factual and backgroundDaspects of the case while keeping in view the root point calling fordetermination in this appeal, that is,as to whether the payments in questionhave rightly been disallowed from deduction in computation of total incomeof the appellant?

Relevant factual and background aspects; the impugnedEorder of assessment

3. In a brief outline of the relevant factual aspects, it could benoticed that the assessee-appellant, a partnership firm, had entered intocontract with M/s Aditya Cement Limited, Shambupura, DistrictChittorgarh[3] for transporting cement to various places in India. As theFappellant was not having the transport vehicles of its own, it had engagedthe services of other transporters for the purpose.The cement marketingdivision of M/s Aditya Cement Limited, namely, M/s Grasim IndustriesLimited,effected payments towards transportation charges to the appellantafter due deduction of TDS, as shown in Form No. 16A issued by theGcompany.

4. On 28.10.2005, the assessee-appellant filed its return for theassessment year 2005-2006, showing total income at Rs. 2,89,633/- in 1 Hereinafter referred to as ‘the Act of 1961’ or simply ‘the Act’.

2 ‘Tax deducted at source’ being referred as ‘TDS’

3 Hereinafter also referred to as “the consignor company” or “the company’’.

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the financial year 2004-2005 arising out of the business of ‘transportcontract’.

5. In the course of assessment proceedings, the Assessing Officer[4]examined the dispatch register maintained by the appellant for the period01.04.2004 to 31.03.2005, containing all particulars as regards the truckshired, date of hire, biltyand challan numbers, freight and commissioncharges, net amount payable, the dates on which the payments weremade, and the destination of each truck etc. The contents of the registeralso indicated that each truck was sent only to one destination under onechallan/bilty;and if one truck was hired again, it was sent to the same orother destination/trip as per separate challan/bilty. The commissioncharged by the appellant from the truck operators/owners ranged fromRs. 100/- to Rs. 250/-per trip.

5.1. On verifying the contents of record placed before him, theAO observed that while making payment to the truck operators/owners,the appellant had not deducted tax at source even if the net paymentexceeded Rs. 20,000/-. Following this, a notice dated 05.11.2007 wasissued to the appellant, requiring the details of amount paidto the truckoperators/owners, TDS thereupon, and date of depositing the same inthe Government account. In reply, by its letters dated 12.11.2007 and15.11.2007, the appellant contended, inter alia, that the trucks hiredwere belonging to different operators/owners who were not the sub-contractors or contractors; that they came from different parts of Indiaand mostly required cash payment for diesel and other running expenses;thatthe appellant had no liability to deduct tax at source because it hadnot made payments exceeding Rs. 20,000/- in a single transaction; andthat the provisions of Section 40(a)(ia) were not applicable to the appellant.

5.2. While drawing up the assessment order dated 22.11.2007,the AO observed that the payments to different truck operators/ownerswere made directly by the appellant firm and not the consignor company;that the appellant firm was responsible for transportation of goods of thecompany as per the contract for which, the appellant received paymentfrom the company after tax being deducted at source therefrom. TheAO also observed that the appellant firm paid freight charges to thetruck operators/owners from the income so earned; and the remainingamount was shown as commission. Looking to the nature of dealings ofthe parties, the AO observed that there existed a contract between the4 ‘AO’ for short AB

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Aappellant and the truck operators/owners in respect of each challan/biltyfor transportation. The AO also referred to the Circular bearing No. 715dated 08.08.1995 issued by the Central Board of Direct Taxes[5], to observethat each goods receipt could be considered a separate contract. Whilefurther observing that a contract may be written or oral, the AO heldthat when the truck operators/owners in the case at hand were not to beBconsidered as contractors, they were undoubtedly the sub-contractorsof the appellant. The AO also pointed out that despite sufficientopportunity being given, a copy of the agreement of the appellant firmwith the company for providing transportation services was not furnished.

5.3. Having perused the material placed before him, the AO heldCon the appellant’s responsibility for deducting tax at source while makingpayment to the truck operators/owners where such payment exceededRs. 20,000/- on a single bilty/challan or goods receipt in the followingwords:- “The dispatch register of the assessee firm as well as the cashDbook clearly establish beyond doubt that payment to the truckoperators was made by the assessee firm. In other words, theassessee firm was the person responsible for deducting the tax atsource therefrom within the meaning of Section 194C of the Act.Since the goods were transported by trucks and every truckEtransported goods under a separate bilty and challan to a particulardestination, there was a contract or sub-contract between theassessee firm and the truck operator as per the provisions ofSection 194C of the Act and Board’s circular supra, and theassessee should have deducted tax at source while making paymentto the truck operators as per the provisions of Section 194C(3) ofFthe Act where the amount of any sum credited or paid or likely tobe credited or paid to the account of, or to the contractor or sub-contractor exceeded twenty thousand rupees.

From the facts and circumstances of the case discussed aboveGthe final position emerging is that in view of the provisions ofSection 194C of the Act the assessee was liable to deduct tax atsource while making payment to truck owners/operators wheresuch payment exceeded Rs. 20,000/- on the basis of single bilty/challan or GR.”H5 ‘CBDT’ for short

5.4. After examining the details contained in the dispatch register,cash book and payment vouchers, the AO found that tax was not deductedat source by the appellant while making payment to the truck operator/owner, even though the payment under a single goods receipt (challan/bilty) exceeded the sum of Rs. 20,000/-. Thereupon, the assessee-appellant was called upon to explain as to why deduction claimed onaccount of such payment from the income be not disallowed in terms ofSection 40(a)(ia) of the Act. In the order of assessment, the AO tooknote of and dealt with various submissions made on behalf of theassessee-appellant in this regard as follows:- “Since the assessee failed to deduct the tax at source while makingpayment to truck owners/ operators exceeding Rs. 20,000/-, theassessee was asked to explain as to why deduction claimed onaccount of such payments from the income be not disallowedwithin the meaning of Section 40(a)(ia) of the Act. The learnedcounsel of the assessee firm stated that there was no paymentexceeding Rs. 20,000/-. In this regard he furnished photocopy ofextract of cash book and also payment vouchers which indicatethat each payment exceeding Rs. 20,000/- was shown in the cashbook in two parts though paid on the same date and the assesseemade two separate vouchers for such payment just to give animpression that payment to truck owners/ operators was notexceeding Rs. 20,000/-. In this regard it is pertinent to mentionthat merely by showing payment of one challan/ bilty in twopieces the assessee cannot absolve itself of the provisionsof the Section 40(a)(ia) inasmuch as Section 194C(3)(i) clearlyspeaks of – “the amount of any sum credited or paid or likely tobe credited or paid to the account of, or to, the Contractor or sub-contractor, if such sum does not exceed twenty thousand rupees”.The learned counsel further submitted that the receipts of theassessee firm are full vouched and verifiable and subject to TDSand the payments to truck owners/ operators are made by theassessee firm from such receipts and as such there as no needfor further TDS. He further stated that the assessee firm preparesbills for claiming payments from the company on the basis offreight charges payable to various truck owners/ operators andwhen the payment is received on the basis of such bills, furtherpayment is made to the truck owners/ operators and nominalcommission is retained by the assessee and, therefore, the payment A

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Amade to the truck owners/ operators was out of the purview ofSection 194C of the Act. He further stated that it is not practicalto deduct tax at source while making payment to a truck owner/operator because no truck owner accepts payment after TDS.This argument put forth on behalf of the assessee firm is notacceptable inasmuch as Section 194C(1) clearly says that - “AnyBperson responsible for paying any sum to any resident…….” Sincethe assessee firm was responsible for making payment tothe truck owners operators, it was mandatory on the partof the assessee to deduct tax at source while making suchpayment. Further there is no direct nexus between theCCompany and the truck owners/operators and thus it cannotbe said that the assessee firm was a mediator between thecompany and the truck owners/ operators…...”

5.5. In view of the above, the AO proceeded to disallow theDdeduction of payments made to the truck operators/owners exceedingRs. 20,000/- without TDS, which in total amounted to Rs. 57,11,625/-;and added the same back to the total income of the assessee-appellant.The AO also disallowed a lump sum of Rs. 20,000/- from various expensesdebited to the Profit and Loss Account and finalised the assessment,Eaccordingly, as under:- “Therefore, considering the provisions of Section 194C, Section40(a)(ia) and Board’s Circular No. 715, dated 08.8.1995, thepayment made to the truck owners/operators, exceeding to Rs.20,000/- without deducting tax at source is disallowed and addedback to the total income of the assessee firm which works out toFRs. 57,11,625/-, supra. The assessee has shown total paymentsin Truck Freight Account at Rs. 1,37,71,206/- and total receiptsfrom the company at Rs. 1,43,90,632/-.

The assessee has shown commission income of Rs. 6,23,300/- onGwhich net profit of Rs. 2,89,694/- has been shown giving N.P.rate of 46.47% as against N.P. rate of 50.91% declared in theimmediate preceding year on commission income of Rs. 6,00,450/-. The N.P. rate declared this year is on the lower side. Consideringthe nature of various expenses debited to the Profit and LossAccount like Staff Welfare Expenses, Telephone Expenses,HTravelling expenses, Motor Cycle Repairs etc. where involvement of personal element cannot be ruled out, a lump sum disallowanceof Rs. 20,000/- is made to the declared income.”

Before the Commissioner of Income Tax (Appeals), Jodhpur

6. Aggrieved by the order so passed by the Assessing Officer, theassessee-appellant preferred an appeal before the Commissioner ofIncome Tax (Appeals)[6], being Appeal No. 183 of 2007-08, that wasconsidered and dismissed on 15.01.2008.

6.1. The CIT(A) re-examined the record and rejected thecontentions of the appellant that it had only received commission incomeand was not liable to deduct tax at source on payments made to thetruck owners while observing as under:- “On careful consideration of the material facts, it is observed thatthe appellant entered into a contract for transportation of goods(cement) with M/s Aditiya Cement Limited in order to honour thecontract, the appellant hired various trucks all through out theyear for the purpose of transportation of cement. The appellantreceived freight charges from M/s Aditiya Cement Limited onwhich tax was deducted. The appellant paid freight charges toindividual truck owners, after transportation of goods. There wasno nexus between the truck owners/operators andM/s Aditiya Cement Limited. How the appellant transportedthe goods (cement) was the exclusive domain of theappellant firm. Under such circumstances, the gross freightreceived by the appellant from M/s Aditiya Cement Limitedrepresents gross income of the appellant firm. Since theappellant made payments to various truck owners/operators. Such payments represent expenditure. It maybe mentioned here that the payments to the truck owners/operators were made only after the goods were transported bythem satisfactorily at the given destinations. In other words, thereexisted a contract or a sub-contract between the appellant firmand the transporters. Under such circumstances, the appellantwas required to deduct tax at source on the payments made totruck drivers/ owners within the meaning of provisions of Section40(a)(ia) read with Section 194C of the Act. Under nocircumstances, it can be said that the appellant only received 6 ‘CIT(A)’ for short A

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[2020] 8 S.C.R.

Acommission income and therefore provisions of Section 194C arenot applicable.”

6.2. In regard to the contention that the appellant was not requiredto deduct tax at source when no payment exceeded Rs. 20,000/-, theBCIT(A) found that the appellant had, for its convenience and to avoidthe rigour of Section 40A(3) of the Act, chose to split the payments intotwo parts but the entries of such split payments were availableconsecutively in the cash book. Thus, while not accepting suchmethodology, the CIT(A) observed that even in the split payments, itCwas required of the appellant to deduct tax at the time of making finalpayment. The relevant observation of the CIT(A)read as under:- “The facts have been gone through and it is observed that theappellant made payments in a manner according to which individualpayment to the truck owner(s) did not exceed Rs. 20,000/-. InDother words, the payment was splitted into two parts. However,the total amount paid to the truck owner(s) for individual contractexceeded Rs. 20,000/-. For instance, cashbook dated 31-1-2005of the appellant shows payments of Rs. 14,750/- and Rs. 10,510/- to Truck No.RJ14-G-5599 for transport of cement from thepremises of the Cement Company to Bhatinda. The sameEcashbook page also shows payments of Rs. 14,750/- and Rs. 9,431/- to Truck No.RJ23-G-3041 for transport of cement. It is theargument that since the individual payment did not exceed Rs.20,000/-, the provisions of Section 194C are not applicable. Oncareful consideration of the material facts, it is observed thatFboth the entries are consecutive in the cashbook and,therefore, it is observed that the appellant, for itsconvenience and to avoid rigors of the provisions of Section40A(3), splitted the payments into two parts. Had thepayments been really made in two parts, both the entries shouldnot have been consecutive. It is also not understood as to why theGtruck owners after completing the contract, would accept theamount in two parts and why they would come to the office of theappellant twice for seeking payments. The theory of makingpayments in two parts is merely a story, which is capableneither on facts nor on practicability. It is also surprising to note that in none of the case the appellant made fully payment toany truck owner all through out the year exceeding Rs.20,000/.”

6.3. The CIT(A) also examined in detail the question as to whethertransport contracts were subject to deduction of tax at source and, withreference to clause (c) of Explanation (iii) of Section 194C of the Actas also to CBDT Circular Nos. 558 dated 28.03.1990 and 681 dated08.03.1994, held that the provisions of Section 194C of the Act wereapplicable to the contracts for transportation of goods; and the appellantwas required to deduct tax at source if the gross credited or paid orlikely to be credited or paid exceeded the limit of Rs. 20,000/-. Havingfound that the appellant’s case was squarely covered within the provisionsof Section 194C of the Act, the CIT(A) held that in view of the mandatoryprovisions of Section 40(a)(ia) of the Act, the payments in question cannotbe allowed as deduction while computing total income. Thus, the CIT(A)proceeded to dismiss the appeal while holding, inter alia, as under:- “It is, therefore, clear that the appellant’s case was squarelycovered within the provisions of the Section 194C and, therefore,it was required to deduct tax at sources while making paymentsto the truck owners.

Statutes

Provisions of Section 40(a)(ia) clearly provide that if any amountpayable to a contractor or subcontractor for carrying out any workon which tax is deductible at source under Chapter XVII-B andsuch tax has not been deducted or, after deduction, has not beenpaid during the previous year, or in the subsequent year beforethe expiry of the time prescribed under sub-section (1) of Section200, such sum shall not be allowed as a deduction while computingthe total income. As can be seen, the provisions are mandatorilyto be complied with in the case a default and the question ofexistence of any reasonable cause has got no meaning.

In the light of the entire discussion as above, I hold that theappellant was required by the provisions of the Act to deduct taxon freight payments totalling to Rs.57,11,625/-. Since the appellantfailed to deduct tax at source the sum of Rs.57,11,625/- was rightlydisallowed by the Ld. AO. The Ld. AO rightly invoked theprovisions of Section 40(a)(ia) of the Act. Therefore, on the givenfacts as also in law, the ground of appeal fails.”

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ABefore the Income Tax Appellate Tribunal, Jodhpur Bench

7. Aggrieved again, the appellant approached the Income TaxAppellate Tribunal, Jodhpur Bench[7] in further appeal, being ITA No.117/JU/2008. This appeal was considered and dismissed by ITAT byway of its order dated 29.08.2008.B

7.1. The ITAT pointed out that by an application dated 16.07.2008,the appellant sought permission to produce additional evidence i.e., theagreement dated 01.04.2003 executed between itself and M/s GrasimIndustries Limited, and as the Department had no-objection, the samewas admitted as additional evidence by the order dated 17.07.2008but,Canother application for admission of evidence in shape of affidavit ofpartner of the appellant firm,was objected to by the Department andwas rejected.

7.2. The ITAT found that the agreement in questionwas on principalto principal basis whereby, the appellant was awarded the work ofDtransporting cement from Shambupura but, as the appellant did not ownany trucks, it had engaged the services of other truck operators/ownersfor transporting the cement; and such a transaction was a separatecontract between the appellant and the truck operator/owner. The ITAT,therefore, endorsed the findings of AO and CIT(A) in the followingwords:-E

“13.The perusal of agreement on record reveals that the assesseewas awarded a works contract by M/s. Grasim Industries Limited,a cement marketing division of M/s. Aditya Cement Ltd. Thisagreement was on principal to principal basis whereby the appellantwas awarded the cement transportation work and in terms ofFagreement the scope of work was to include placement of trucksfor cement transportation from their plant at Shambupura onregular basis in the state of Rajasthan. In case the assessee failedto provide trucks as per contractual obligation, the company wasfree to hire trucks from market at prevailing prices and the amountGof expenses incurred if any was to be debited to the assessee’saccount terming him to be a transporter. The assessee merelyacted as an independent contractor while carrying on the aforesaidwork contract awarded to it by M/s. Grasim Industries Limited.Admittedly, the appellant did not own trucks of its own for carrying H7 ‘ITAT’ for short

out such transportation contract and has engaged the services ofother truck owners/operators for lifting goods from the premisesof M/s Grasim Industries Limited and transporting the same tovarious sites in Rajasthan. Goods receipt [GR]/bilty were preparedand the same was to be taken as a contract between the appellantand such truck owners/operators. A clarification to this effectgiven vide Board Circular No. 715 dated 8.8.1995 has been broughton record by the Revenue and strongly relied upon by the assessingauthority as well so as to consider the goods carried under particulargoods/receipt/bilty as a separate contract. The assignment of suchcontract by the appellant to the truck operators/owners was rightlytaken as a sub contract for carrying out the job awarded to theassessee by M /s. Grasim Industries Limited. Provisions of Section194C were duly attracted to such payments which have beenmade/credited or was likely to be paid on account of obligationunder each goods receipt/bilty. The assessing authority has foundthat the payments made and credited with respect to each ofsuch contracts involving aggregate payment of Rs. 20,000/- on aparticular day amounted to Rs. 57,11,625/-. In the light of clearprovisions contained in Section 194C of the Act and having regardto the fact that both the amounts actually paid or credited or likelyto be paid on account of each contract exceeded Rs. 20,000/- ona single day. Section 194C has rightly found applicable. We,therefore, do not find any wrong committed by the ld. CIT(A) inholding that the assessee has committed default in makingdeduction with respect to payments aggregating to Rs. 57,11,625/- without deduction of tax at source.”

7.3. The ITAT also negated the argument that by the time ofissuance of Circular No. 5 dated 15.07.2005, the time for payment oftax at source had expired and that Section 40(a)(ia) would only beapplicable from the assessment year 2006-2007 and not from theassessment year 2005-2006. The ITAT also referred to the proviso toSection 40(a)(ia) of the Act and pointed out that thereunder, the assesseewas eligible to get deduction of such expenditure in a subsequent year inwhich TDS was actually paid to the Government. The ITAT observed inregard to these two aspects concerning applicability of the provision inquestion as also the effect of proviso thereto, in the following passage:- ABC

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A“15. The assessee’s counsel also raised a plea that Circular No. 5was issued only on 15-7-2005 by which date the time for paymentof tax at source has also expired and as such it was contendedthat the provisions as contained in Section 40(a)(ia) of the Actwould be applicable not from A.Y. 2005-06 but from 2006-07.We,however, do not subscribe to the view so canvassed by theBassessee. The Finance (No.2) Act 2004 has brought anamendment in Section 40 of the Act making it applicable w.e.f.01/04/2004 (sic)[8]. Since this amendment came before closeof the financial year ended on 31/03/2005 in the statutebooks, the assessee cannot be held to be ignorant of itsCliability to deduct tax at source. The subsequent board circularissued is merely clarificatory. The amendment in Section 40 ofthe Act does not take away the right of the assessee to claimdeduction for such expenses for all times to come. It only mandatesthat the deduction shall not be allowed in the relevant year inwhich there was liability to deduct and pay tax at source but theDsame has not been paid before the expiry of the time prescribedunder sub-section (1) of Section 200 of the act. It also hadproviso clause whereby the assessee was eligible to getdeduction of such expenditure in a subsequent year in whichsuch tax deducted at source has actually been paid. TheEplea raised by the assessee, therefore, does not support the claim.”

7.4. The ITAT further rejected the contention that the amount ofexpenditure was not charged to the Profit and Loss Account and onlycommission was shown as income. The ITAT observed that mereFreflection in two different account books would not qualify for distinctand different treatment since both freight paid and freight charged partakethe same character. The ITAT, accordingly, dismissed the appeal.

Before the High Court

G8. Aggrieved yet again, the appellant approached the High Courtin D.B. Income Tax Appeal No. 164 of 2008 against the order passed by 8 The extraction is from the typed copy of the order of ITAT, placed on record asAnnexure P-5 (at page 84 of the paper book) but there is obvious typographical erroron this date “01.04.2004” because the amendment of Section 40 of the Act of 1961 bythe Finance (No.2) Act, 2004 was made applicable with effect from “01.04.2005“. TheHeffect and implication of the relevant date is examined in Question No. 3 infra.

ITAT. However, the appeal so filed was dismissed summarily by theHigh Court,by its short order dated 15.05.2009 that reads as under:- “In our view, on the language of Section 194C(2), and the factthat the good received were sent through truck owners by theappellant, and there was no privity of direct contract between thetruck owners and the cement factory. According to the contractbetween the appellant and the cement factory, it was the appellant’sresponsibility to transport the cement, and for that the appellanthired the services of the truck owners, obviously as sub-contractors. In that view of the matter, we do not find any error inthe impugned order of the Tribunal. The appeal is, therefore,dismissed summarily.”

9. Thus, the net result of the proceedings aforesaid had been thattheconsistent views of the AO, CIT(A) and ITAT, that deduction, of thepayments made to the truck operators/owners, cannot be allowed whilecomputing the total income of the assessee-appellant, came to be affirmedby the High Court.

Rival Submissions

Appellant

10. Assailing the order so passed by the High Court in summarydismissal of the appeal as also the views expressed in the assessmentand appellate orders, learned counsel for the assessee-appellant has urgedbefore us multiple contentions on the scope and applicability of Section194C of the Act as also Section 40(a)(ia) thereof and has argued thatthese provisions could not have been applied to the case at hand.

10.1. Learned counsel for the appellant has strenuously arguedthat the provisions of Section 194C of the Act of 1961, particularly sub-section (2) thereof,were not applicable to the present case for there wasno oral or written contract of the appellant with the truck operators/owners, whose vehicles were engaged to execute the work oftransportation of the goods. It has been contended that the liability underSection 194C(2) would have arisen only if payments were made to “sub-contractor” and that too “in pursuance of a contract” for the purpose of“carrying whole or any part of work undertaken by the contractor”. Thelearned counsel for the appellant would argue that when there had notbeen any specific contract between the appellant and the truck owners,whose vehicles were hired by the appellant on freelance and need basis, AB

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Athe ingredients of Section 194C(2) were not satisfied and the obligationof deducting tax at source could not have been fastened on the appellant.

10.1.1. The learned counsel has supported his contentions againstthe applicability of Section 194C of the Act to the present case withreference to the decision of Delhi High Court in the case ofBCommissioner of Income-Tax v. Hardarshan Singh: (2013) 350ITR 427 wherein it was held that when the assessee merely acted asfacilitator or intermediary in the process of transportation of goods, hehad no liability to deduct TDS under Section 194C of the Act.

10.2. The main plank of the submissions of learned counsel forCthe appellant has been that disallowance under Section 40(a)(ia) of theAct is confined to the expenses that are booked during the year butremain payable or outstanding and not the expenses that had alreadybeen paid. The learned counsel has referred to the decision of this Courtin the case of J.K. Synthetics Limited v. Commercial Taxes Officer:(1994) 4 SCC 276; and the definition of the term “paid” in SectionD43(2) of the Act to submit that the two expressions “payable” and “paid”are of entirely different connotations. The learned counsel haspainstakingly referred to the contents of the Bill introducing the Finance(No.2) Act of 2004 where the expressions”credited or paid”were usedbut in the provision as enacted, the expression “payable” has occurred.EAccording to the learned counsel, if the legislature intended to disallowthe deduction towards the payments made and incurred, it would haveused the expression “paid”, which term has been specifically defined forthe purposes of Sections 28 to 41 of the Act but the use of expression“payable” makes it clear that the coverage of the provision is restrictedand in any case, itis not applicable over the amount already paid. TheFlearned counsel has also attempted to draw support to his contentionswith reference to the contents of the proviso to Section 40(a)(ia) of theAct with the submissions that the meaning and scope of the main provisionis accentuated by the scope of proviso wherein, the expression “paid” isused while giving out the circumstances when a deduction, not allowedGunder the main provision, could be claimed in the subsequent year.

10.2.1. Taking this line of argument further, learned counsel wouldcontend that the scope of Section 40(a)(ia) of the Act cannot be decidedon the basis of the scope of Section 194C of the Act. Learned counselwould submit that Section 201 of the Act provides for consequence ofHnon-deduction of TDS either at the time of payment or booking, whichever is earlier; and thus, the said provision would apply to both the situationswhere the expenses amount has been “paid” or is “payable”. However,according to the learned counsel, the additional consequence of defaultas provided in Section 40(a)(ia) of the Actwould come into operationonly if the alleged default strictly falls within the language of this provision,which is limited to the amount “payable”. Learned counsel would submitthat the scope of Section 40(a)(ia) of the Act cannot be expanded beyondits language merely because as per Section 194C, the liability to deducttax is at the time of “credit of such amount to the account of a contractor”or at the time of “payment” whichever is earlier. With reference to thedecision of this Court in the case of Institute of Chartered Accountantsof India v. Price Waterhouse: (1997) 93 Taxman 588, the learnedcounsel has argued that when the words are clear and there is no obscurity,the intention of legislature has to be inferred only from the words used inthe provision.

10.2.2. Thus, learned counsel for the appellant has strenuouslyargued that Section 40(a)(ia) of the Act remains limited in its scope anddoes not apply to the amount already “paid”. However, being aware ofthe position that the substratum of such contentions does not stand inconformity with the view already taken by this Court in the case ofPalam Gas Service v. Commissioner of Income-Tax : (2017)394ITR 300, the learned counsel has made elaborate submissions that thesaid decision in Palam Gas Service requires reconsideration. Accordingto the learned counsel, such reconsideration isnecessitated because ofthe factorsthat: (a) the taxing provision for disallowance has to be strictlyconstrued as per the language used and there is no scope for adoptingthe so-called purposive construction; (b) the change of words used inthe Bill “credited or paid” to the word “payable” has been ignored; (c)the effect of proviso making it clear that the intent of the main provisionisonly to disallow the outstanding or payable amounts has not beenconsidered; and (d) the Court has widened the scope of consequencesprovided under Section 40(a)(ia) of the Act based on the scope of Sections194C and 201 of the Act, although such an approach is impermissiblewhile interpreting a provision in the taxing statute.

10.3. Learned counsel for the appellant has argued in thealternative that the said sub-clause (ia), having been inserted to clause(a) of Section 40 of the Act with effect from 01.04.2005 by the Finance(No.2) Act, 2004, would apply only from the financial year 2005-2006

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Aand hence, cannot apply to the present case pertaining to the financialyear 2004-2005. In support, the learned counsel has referred to andrelied upon the decision of Calcutta High Court in the case of PIU Ghoshv. Deputy Commissioner of Income-Tax & Ors.: (2016) 386 ITR322. Supplemental to these contentions, the learned counsel has alsoargued that, in any case, the Finance (No.2) Act, 2004 received theBassent of the President of India on 10.09.2004 and hence, the rigour ofsub-clause (ia) of Section 40(a) of the Act cannot be applied in relationto the payments already made before 10.09.2004, the date of introductionof this provision.

10.3.1. In yet another alternative, learned counsel for the appellantChas referred to the amendment made to Section 40(a)(ia) of the Act bythe Finance (No.2) Act, 2014,restricting and limiting the extent ofdisallowance to 30% of the expenditure and has submitted that the saidamendment, being curative in nature and having been introduced toameliorate the hardships faced by the assessees, deserves to be appliedDretrospectively and from the date of introduction of sub-clause (ia) toSection 40(a)of the Act. The learned counsel has developed this argumentby relying on the decision in Commissioner of Income-Tax v. CalcuttaExport Company: (2018) 404 ITR 654, wherein this Court has heldthe remedial amendment of Section 40(a)(ia) of the Act by the FinanceAct, 2010 to be retrospective in nature and applicable from the date ofEinsertion of the said provision.

10.4. Learned counsel for the appellant has lastly submitted thatthe result of applying the provisions in question to the entire paymentpractically leads to a highly incongruous position thatwhole of the receiptfrom company is treated as the income of the appellantand taxedFaccordingly, but without due provision towards necessary expenses.According to the learned counsel, in such contracts, the annual incomeof the transport contractor like the appellant cannot be, and is not, to theextent of about Rs. 57 lakhs, as sought to be taxed in the present matter.

Respondent

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11. Per contra, the learned counsel for respondent-revenue hasduly supported the orders impugned, essentially with reference to thereasonings therein and also with reference to the decision of this Courtin Palam Gas Service (supra).

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11.1. Learned counsel for the revenue has, in the first place,contended with reference to the decided cases that the concurrentfindings of fact recorded by the authorities and ITAT, as affirmed by theHigh Court call for no interference for no case of apparent perversitybeing made out.

11.2. Learned counsel has further submitted that the appellantadmittedly carried out the work of transportation by hiring the trucksand made payments to the operators/owners while issuing an invoice/bilty/challan for every such hiring, which constituted a separate contract/sub-contract. According to the learned counsel, in such dealings, theappellant was required to deduct tax at source in terms of Section 194Cof the Act when making payment to any truck operator/owner in thesum exceeding Rs. 20,000/-; and the appellant having failed to do so, theprovisions of Section 40(a)(ia) have rightly been invoked.

11.3. Learned counsel for the revenue hasmade elaboratereference to the decision of this Court in the case of Palam Gas Service(supra) and has submitted that the principal contention on the part of theappellant, that the expression “payable”, as occurring in Section 40(a)(ia)of the Act, refers only to those cases where the amount is yet to be paidand does not cover the cases where the amount is actually paid, hasbeen duly considered and specifically rejected by this Court; and thesaid decision squarely covers the present matter. The learned counselhas argued that in the case of Palam Gas Service (supra), this Courthaving holistically examined the scheme of the provisions in question,there is no scope for reconsideration of the said decision; and this appealdeserves to be dismissed for the question sought to be raised as regardinterpretation of Section 40(a)(ia) of the Act being no more res integra.

11.4. Learned counsel for the revenue has further contended thatthe amendment to Section 40(a) of the Act with insertion of sub-clause(ia) by the Finance (No. 2) Act, 2004 with effect from 01.04.2005 directlyapplies to the assessment year 2005-2006; and for the appellant havingfailed to deduct tax at source from the payment made to the sub-contractors for the work of transportation, deduction of such paymenthas rightly been disallowed.

11.5. The learned counsel has also argued that the proviso toSection 40(a)(ia) of the Act, as inserted by the Finance Act, 2014, doesnot apply to the case at hand pertaining to the assessment year 2005- A

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A2006 and hence, the argument for curative benefit with reference to thesaid proviso does not hold the ground.

Questions for determination

12. Having regard to the submissions made by the learned counselfor the parties and the observations occurring in the orders impugned,Bthe principal questions arising for determination in this appeal could bestated as follows:-

1. As to whether Section 194C of the Act does not apply to thepresent case?

C2. As to whether disallowance under Section 40(a)(ia) of the Actis confined/limited to the amount “payable” and not to the amount“already paid”; and whether the decision of this Court in PalamGas Service v. Commissioner of Income-Tax: (2017) 394 ITR300 requires reconsideration?

3. As to whether sub-clause (ia) of Section 40(a) of the Act, asinserted by the Finance (No. 2) Act, 2004 with effect from01.04.2005, is applicable only from the financial year 2005-2006and, hence, is not applicable to the present case relating to thefinancial year 2004-2005; and, at any rate, whole of the rigour ofthis provision cannot be applied to the present case?

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4. As to whether the payments in question have rightly beendisallowed from deduction while computing the total income ofthe assessee-appellant?

Relevant Provisions

F13. For determination of the questions aforesaid, we need to closelylook at the statutory provisions in the Act of 1961 which have materialbearing on this case.

13.1. It is noticed that elaborate provisions have been made inChapter XVII of the Act of 1961 for “Collection and Recovery of Tax”Gand Part B thereof carries the provisions concerning “Deduction atSource”. Sections 194C, 200 and 201, which have come in reference inthe present matter, are contained in this part and the same, as existing atthe relevant point of time pertaining to the assessment year 2005-2006,may be usefully noticed.

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13.1.1. The liability against the appellant has basically arisenbecause of its alleged non-compliance of the requirements of Section194C of the Act. At the relevant point of time,this provision readas under:- “194C. Payments to contractors and sub-contractors.-(1) Any person responsible for paying any sum to any resident(hereafter in this section referred to as the contractor) for carryingout any work (including supply of labour for carrying out any work)in pursuance of a contract between the contractor and- (a) the Central Government or any State Government; or (b) any local authority; or

(c) any corporation established by or under a Central, State orProvincial Act; or (d) any company; or (e) any co-operative society; or (f) any authority, constituted in India by or under any law, engagedeither for the purpose of dealing with and satisfying the needfor housing accommodation or for the purpose of planning,development or improvement of cities, towns and villages, orfor both; or (g) any society registered under the Societies Registration Act,1860 (21 of 1860) or under any law corresponding to that Actin force in any part of India; or (h) any trust; or

(i) any University established or incorporated by or under aCentral, State or Provincial Act and an institution declared tobe a University under section 3 of the University GrantsCommission Act, 1956 (3 of 1956); or (j) any firm, shall, at the time of credit of such sum to the account of thecontractor or at the time of payment thereof in cash or by issue ofa cheque or draft or by any other mode, whichever is earlier,deduct an amount equal to-

(i) one per centin case of advertising,

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A(ii) in any other case two per cent,

of such sum as income-tax on income comprised therein.

(2) Any person (being a contractor and not being an individual ora Hindu undivided family) responsible for paying any sum to anyresident (hereafter in this section referred to as the sub-contractor)in pursuance of a contract with the sub-contractor for carryingout, or for the supply of labour for carrying out, the whole or anypart of the work undertaken by the contractor or for supplyingwhether wholly or partly any labour which the contractor hasundertaken to supply shall, at the time of credit of such sum to theaccount of the sub-contractor or at the time of payment thereof incash or by issue of a cheque or draft or by any other mode,whichever is earlier, deduct an amount equal to one per cent ofsuch sum as income-tax on income comprised therein:

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Provided that an individual or a Hindu undivided family, whosetotal sales, gross receipts or turnover from the business orprofession carried on by him exceed the monetary limits specifiedunder clause (a) or clause (b) of section 44AB during the financialyear immediately preceding the financial year in which such sumis credited or paid to the account of the sub-contractor, shall beliable to deduct income-tax under this sub-section.

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Explanation I.- For the purposes of sub-section (2), the expression“contractor” shall also include a contractor who is carrying outany work (including supply of labour for carrying out any work) inpursuance of a contract between the contractor and theGovernment of a foreign State or a foreign enterprise or anyassociation or body established outside India.

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Explanation II. -For the purposes of this section, where any sumreferred to in sub-section (1) or sub-section (2) is credited to anyaccount, whether called “Suspense account” or by any other name,in the books of account of the person liable to pay such income,such crediting shall be deemed to be credit of such income to theaccount of the payee and the provisions of this section shall applyaccordingly.

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Explanation III. – For the purposes of this section, the expression“Work” shall also include- H

(a) advertising;

(b) broadcasting and telecasting including production ofprogrammes for such broadcasting or telecasting;

(c) carriage of goods and passengers by any mode of transportother than by railways; (d) catering.

(3) No deduction shall be made under sub-section (1) or sub-section (2) from-

(i) the amount of any sum credited or paid or likely to be creditedor paid to the account of, or to, the contractor or sub-contractor, ifsuch sum does not exceed twenty thousand rupees:

Provided that where the aggregate of the amounts of such sumscredited or paid or likely to be credited or paid during the financialyear exceeds fifty thousand rupees, the person responsible forpaying such sums referred to in sub-section (1) or, as the casemay be, sub-section (2) shall be liable to deduct income-tax underthis section; or

(ii) any sum credited or paid before the 1[st] day of June, 1972; or

(iii) any sum credited or paid before the 1[st] day of June, 1973, inpursuance of a contract between the contractor and a co-operativesociety or in pursuance of a contract between such contractorand the sub-contractor in relation to any work (including supply oflabour for carrying out any work) undertaken by the contractorfor the co-operative society.”

13.1.2. Sections 200 and 201 of the Act, respectively dealing withthe duty of the person deducting tax and consequences on failure todeduct or pay, as applicable at the relevant time,could also be reproducedas under:- “200. Duty of person deducting tax.

(1) Any person deducting any sum in accordance with the foregoingprovisions of this Chapter[9], shall pay within the prescribed time,the sum so deducted to the credit of the Central Government or as the Board directs.

9 The words “the foregoing provisions of this Chapter” were substituted for the previousexpressions carrying various provisions of the Act, by the Finance (No. 2) Act, 2004,w.e.f. 01.10.2004.

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(2) Any person being an employer, referred to in sub-section (1A)of section 192 shall pay, within the prescribed time, the tax to thecredit of the Central Government or as the Board directs.[10]

(3) Any person deducting any sum on or after the 1[st] day of April,2005 in accordance with the foregoing provisions of this ChapterBor, as the case may be, any person being an employer referred toin sub-section (1A) of section 192 shall, after paying the taxdeducted to the credit of the Central Government within theprescribed time, prepare quarterly statements for the period endingon the 30[th] June, the 30[th] September, the 31[st] December and the31[st] March in each financial year and deliver or cause to beCdelivered to the prescribed income-tax authority or the personauthorised by such authority such statement in such form andverified in such manner and setting forth such particulars andwithin such time as may be prescribed.[11]

201. Consequences of failure to deduct or pay.

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(1) If any such person referred to in section 200 and in the casesreferred to in section 194, the principal officer and the companyof which he is the principal officer does not deduct the whole orany part of the tax or after deducting fails to pay the tax as requiredby or under this Act, he or it shall, without prejudice to any otherEconsequences which he or it may incur, be deemed to be anassessee in default in respect of the tax:

Providedthat no penalty shall be charged under section 221 fromsuch person, principal officer or company unless the AssessingOfficer is satisfied that such person or principal officer or company,Fas the case may be, has without good and sufficient reasons failedto deduct and pay the tax.

(1A) Without prejudice to the provisions of sub-section (1), if anysuch person, principal officer or company as is referred to in thatsub-section does not deduct the whole or any part of the tax orGafter deducting fails to pay the tax as required by or under thisAct, he or it shall be liable to pay simple interest at twelveper centper annum on the amount of such tax from the date on which 10 Sub-section (2) was inserted by the Finance Act, 2002.H11 Sub-section (3) was inserted by the Finance (No.2) Act, 2004, w.e.f. 01.04.2005

such tax was deductible to the date on which such tax is actuallypaid.

(2) Where the tax has not been paid as aforesaid after it is deducted,the amount of the tax together with the amount of simple interestthereon referred to in sub-section (1A) shall be a charge upon allthe assets of the person, or the company, as the case may be,referred to in sub-section (1).”

13.2. Chapter IV of the Act of 1961 deals with the subject“Computation of Total Income” and Section 40 occurs in Part D thereof,carrying the provisions relating to the “Profits and Gains of Businessor Profession”. Even when Sections 30 to 38 provide for variousallowances and deductions in computation of the income from profitsand gains of business or profession, Section 40 specifically ordains thatcertain amounts shall not be deducted, notwithstanding anything to thecontrary contained in the said Sections 30 to 38 of the Act. In the presentmatter, we are concerned with the provisions contained in sub-clause(ia) of clause (a) of Section 40of the Act, which was inserted by theFinance (No. 2) Act, 2004 with effect from 01.04.2005. Hence, theextraction hereunder is essentially of the provision that could be read asSection 40(a)(ia) of the Act after insertion by the Finance (No. 2) Act,2004: -

“40. Amounts not deductible. -Notwithstanding anything to thecontrary in sections 30 to 38, the following amounts shall not bededucted in computing the income chargeable under the head“Profits and gains of business or profession”,- (a) in the case of any assessee-

(ia) any interest, commission or brokerage, fees for professionalservices or fees for technical services payable to a resident, oramounts payable to a contractor or sub-contractor, being resident,for carrying out any work (including supply of labour for carryingout any work), on which tax is deductible at source under ChapterXVII-B and such tax has not been deducted or, after deduction,has not been paid during the previous year, or in the subsequentyear before the expiry of the time prescribed under sub-section(1) of section 200:

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AProvided that where in respect of any such sum, tax has beendeducted in any subsequent year or, has been deducted in theprevious year but paid in any subsequent year after the expiry ofthe time prescribed under sub-section (1) of section 200, suchsum shall be allowed as a deduction in computing the income ofthe previous year in which such tax has been paid.BExplanation.-For the purposes of this sub-clause,-

(i) “commission or brokerage” shall have the same meaningas in clause (i) of the Explanation to section 194H;

(ii) “fees for technical services” shall have the same meaningCas in Explanation 2 to clause (vii) of sub-section (1) ofsection 9;

(iii) “professional services” shall have the same meaning as inclause (a) of the Explanation to section 194J;

(iv) “work” shall have the same meaning as in Explanation IIIto section 194C; D

*********”[12]

13.3. Section 43 in the very same Part D of Chapter IV of theAct of 1961 defines various terms relevant to the income from profitsEand gains of business or profession; and clause (2) thereof, carrying thedefinition of the expression “paid”, having been referred in the presentmatter, could also be usefully reproduced as under:- “43.Definitions of certain terms relevant to income from profits and gains of business or profession. -In sections 28 toF41 and in thissection, unless the context otherwise requires-

(2) “paid” means actually paid or incurred according to the methodof accounting upon the basis of which the profits or gains arecomputed under the head “Profits and gains of business orGprofession”; ***

******”

12 We may usefully indicate that Section 40(a)(ia) of the Act has undergone severalamendments from time to time and in one segment of arguments, the amendments asmade in the years 2010 and 2014, have been referred on behalf of the appellant. We shallHrefer to the relevant contents of this provision after such amendments while dealingwith that part of arguments at the appropriate juncture hereafter later.

13.4. For their relevance in relation to another segment ofarguments, we may also take note of the meaning assigned to theexpression “assessment year” in clause (9) of Section 2; and to theexpression “previous year” in Section 3 of the Act of 1961 as follows: - “2. Definitions.-In this Act, unless the context otherwiserequires,- ******

***

(9) “assessment year” means the period of twelve monthscommencing on the 1[st] day of April every year; *********”

“3. “Previous year” defined.- For the purposes of this Act,“previous year” means the financial year immediately precedingthe assessment year:

*********”

14. We may now take up the questions involved in this matter adseriatim.

Question No.1

15. In order to maintain that the appellant was under no obligationto make any deduction of tax at source, it has been argued that therewas no oral or written contract of the appellant with the truck operators/owners, whose vehicles were engaged to execute the work oftransportation of the goodsonly on freelance and need basis. Thesubmission has been that the question of TDS under Section 194C(2)would have arisen only if the payment was made to a “sub-contractor”and that too,in pursuance of a contract for the purpose of “carryingwhole or any part of work undertaken by the contractor”. In our view,the submissions so made remain entirely baseless.

15.1. The nature of contract entered into by the appellant with theconsignor company makes it clear that the appellant was to transportthe goods (cement) of the consignor company; and in order to executethis contract, the appellant hired the transport vehicles, namely, the trucksfrom different operators/owners. The appellant received freight chargesfrom the consignor company, who indeed deducted tax at source whilemaking such payment to the appellant. Thereafter, the appellant paid thecharges to the persons whose vehicles were hired for the purpose of the A

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Asaid work of transportation of goods. Thus, the goods in question weretransported through the trucks employed by the appellant but, there wasno privity of contract between the truck operators/owners and the saidconsignor company. Indisputably, it was the responsibility of the appellantto transport the goods (cement) of the company; and how to accomplishthis task of transportation was a matter exclusively within the domain ofBthe appellant. Hence, hiring the services of truck operators/owners forthis purposecould have only been under a contract between the appellantand the said truck operators/owners. Whether such a contract wasreduced into writing or not carries hardly any relevance. In the givenscenario and set up, the said truck operators/owners answered to theCdescription of “sub-contractor” for carrying out the whole or part of thework undertaken by the contractor (i.e., the appellant) for the purposeof Section 194C(2) of the Act.

15.2. The suggestions on behalf of the appellant that the said truckoperators/owners were not bound to supply the trucks as per the needDof the appellant nor the freight payable to them was pre-determined, inour view, carry no meaning at all. Needless to observe that if a particulartruck was not engaged, there existed no contract but, when any truckgot engaged for the purpose of execution of the work undertaken by theappellant and freight charges were payable to its operator/owner uponexecution of the work, i.e., transportation of the goods, all the essentialsEof making of a contract existed; and, as aforesaid, the said truck operator/owner became a sub-contractor for the purpose of the work in question.The AO, CIT(A) and the ITAT have concurrently decided this issueagainst the appellant with reference to the facts of the case, particularlyafter appreciating the nature of contract of the appellant with the consignor Fcompany as also the nature of dealing of the appellant, while holding thatthe truck operators/owners were engaged by the appellant as sub-contractors. The same findings have been endorsed by the High Courtin its short order dismissing the appeal of the appellant. We are unable tofind anything of error or infirmity in these findings.

G15.3. The decision of Delhi High Court in the case of HardarshanSingh (supra), in our view, has no application whatsoever to the facts ofthe present case. The assessee therein, who was in the business oftransporting goods, had four trucks of his own and was also acting as acommission agent by arranging for transportation through othertransporters. As regards the income of assessee relatable to transportationH

through other transporters, it was found that the assessee had merelyacted as a facilitator or as an intermediary between the two parties (i.e.,the consignor company and the transporter) and had no privity of contractwith either of such parties inasmuch as he only collected freight chargesfrom the clients who intended to transport their goods through othertransporters; and the amount thus collected from the clients was paid tothose transporters by the assessee while deducting his commission.Looking to the nature of such dealings, the said assessee was held to be“not the person responsible” for making payments in terms of Section194C of the Act and hence, having no obligation to deduct tax at source.In contradistinction to the said case of Hardarshan Singh, the appellantof the present case was not acting as a facilitator or intermediary betweenthe consignor company and the truck operators/owners because thosetwo parties had no privity of contract between them. The contract of thecompany, for transportation of its goods, had only been with the appellantand it was the appellant who hired the services of the trucks. The paymentmade by the appellant to such a truck operator/owner was clearly apayment made to a sub-contractor.

15.4. Though the decision of this Court in the case of PalamGas Service (supra) essentially relates to the interpretation of Section40(a)(ia) of the Act and while the relevant aspects concerning the saidprovision shall be examined in the next question but, for the presentpurpose, the facts of that case could be usefully noticed, for being akinto the facts of the present case and being of apposite illustration. Therein,the assessee was engaged in the business of purchase and sale of LPGcylinders whose main contract for carriage of LPG cylinders was withIndian Oil Corporation, Baddi wherefor, the assessee received freightpayments from the principal.The assessee got the transportation of LPGdone through three persons to whom he made the freight payments. TheAssessing Officer held that the assessee had entered into a sub-contractwith the said three persons within the meaning of Section 194C of theAct. Such findings of AO were concurrently upheld upto the High Courtand, after interpretation of Section 40(a)(ia), this Court also approvedthe decision of the High Court while dismissing the appeal with costs.Learned counsel for the appellant has made an attempt to distinguish thenature of contract in Palam Gas Service by suggesting that therein, theassessee’s sub-contractors were specific and identified persons withwhom the assessee had entered into contract whereas the presentappellant was free to hire the service of any truck operator/owner and, AB

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Ain fact, the appellant hired the trucks only on need basis. In our view,such an attempt of differentiation is totally baseless and futile. Whetherthe appellant had specific and identified trucks on its rolls or had beenpicking them up on freelance basis, the legal effect on the status ofparties had been the same that once a particular truck was engaged bythe appellant on hire charges for carrying out the part of work undertakenBby it (i.e., transportation of the goods of the company), the operator/owner of that truck became the sub-contractor and all the requirementsof Section 194C came into operation.

15.5. Thus, we have no hesitation in affirming the concurrentfindings in regard to the applicability of Section 194C to the presentCcase. Question No.1 is, therefore, answered in the negative; against theassessee-appellant and in favour of the revenue.

Question No.2.

16. While taking up the question of interpretation of SectionD40(a)(ia), it may be usefully noticed that Section 194C is placed in ChapterXVII of the Act on the subject “Collection and Recovery of Tax”; andspecific provisions are made in the Act to ensure that the requirementsof Section 194C are met and complied with, while also providing for theconsequences of default. As noticed, Section 200 specifically providesfor the duties of the person deducting tax to deposit and submit theEstatement to that effect. The consequences of failure to deduct or paythe tax are then provided in Section 201 of the Act which, as noticed,puts such defaulting person in the category of “the assessee in default inrespect of the tax” apart from other consequences which he or it mayincur. The aspect relevant for the present purpose is that Section 40 ofFthe Act, and particularly the provision contained in sub-clause (ia) ofclause (a) thereof, indeed provides for one of such consequences.

16.1. Section 40(a)(ia) provides for the consequences of defaultin the case where tax is deductible at source on any interest, commission,brokerage or fees but had not been so deducted, or had not been paidGafter deduction (during the previous year or in the subsequent year beforeexpiry of the prescribed time) in the manner that the amount of suchinterest, commission, brokerage or fees shall not be deducted in computingthe income chargeable under “profits and gains of business or profession”.In other words, it shall be computed as income of the assessee becauseof his default in not deducting the tax at source.H

16.2. In the overall scheme of the provisions relating to collectionand recovery of tax, it is evident that the object of legislature in introductionof the provisions like sub-clause (ia) of clause (a) of Section 40 hadbeen to ensure strict and punctual compliance of the requirement ofdeducting tax at source. In other words, the consequences, as providedtherein, had the underlying objective of ensuring compliance of therequirements of TDS. It is also noteworthy that in the proviso added toclause (ia) of Section 40(a) of the Act, it was provided that where inrespect of the sum referable to TDS requirement, tax has been deductedin any subsequent year, or has been deducted during the previous yearbut paid in any subsequent year after the expiry of the time prescribed inSection 200(1), such sum shall be allowed as a deduction in computingthe income of the previous year in which such tax has been paid.

16.3. The purpose and coverage of this provision as alsoprotection therein have been tersely explained by this Court in the caseof Calcutta Export Company (supra), which has been cited by learnedcounsel for the appellant in support of another limb of submissions whichwe shall be dealing with in the next question. For the present purpose,we may notice the relevant observations of this Court in Calcutta ExportCompany as regards Section 40(a)(ia) of the Act as follows (at p. 662of ITR):-

“16. The purpose is very much clear from the above referredexplanation by the Memorandum that it came with a purpose toensure tax compliance. The fact that the intention of the Legislaturewas not to punish the assessee is further reflected from a barereading of the provisions of section 40(a)(ia) of the Income-taxAct. It only results in shifting of the year in which the expenditurecan be claimed as deduction. In a case where the tax deducted atsource was duly deposited with the Government within theprescribed time, the said amount can be claimed as a deductionfrom the income in the previous year in which the TDS wasdeducted. However, when the amount deducted in the form ofTDS was deposited with the Government after the expiry of periodallowed for such deposit then the deductions can be claimed forsuch deposited TDS amount only in the previous year in whichsuch payment was made to the Government.”

16.4. Taking up the question as to whether disallowance underSection 40(a)(ia) of the Act is confined to the amount “payable” and not AB

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Ato the amount “already paid”, we find that these aspects of interpretationdo not require much dilation in view of the ratio of the decision of thisCourt in the case of Palam Gas Service (supra).

16.5. In fact, the decision in Palam Gas Service(supra) is a directanswer to all the contentions urged on behalf of the appellant in theBpresent case. In that case, this Court approved the views of Punjab andHaryana High Court in the case of P.M.S. Diesels and Ors. v.Commissioner of Income-Tax: (2015) 374 ITR 562as regardsmandatory nature of the provisions relating to the liability to deduct taxat source in the following words (at pp. 306-308 of ITR):- C“11.The Punjab & Haryana High Court in P.M.S. Diesels v. CIT[2015] 374 ITR 562 (P&H), has held these provisions to bemandatory in nature with the following observations:

“The liability to deduct tax at source under the provisions ofChapter XVII is mandatory. A person responsible for payingDany sum is also liable to deposit the amount in the Governmentaccount. All the sections in Chapter XVII-B require a personto deduct the tax at source at the rates specified therein. Therequirement in each of the sections is preceded by the word‘shall’. The provisions are, therefore, mandatory. There isnothing in any of the sections that would warrant our readingEthe word ‘shall’ as ‘may’. The point of time at which thededuction is to be made also establishes that the provisions aremandatory. For instance, under section 194C, a personresponsible for paying the sum is required to deduct the tax “atthe time of credit of such sum to the account of the contractorFor at the time of the payment thereof. ......’”

12. While holding the aforesaid view, the Punjab and HaryanaHigh Court discussed the judgments of the Calcutta and MadrasHigh Courts, which had taken the same view, and concurred withthe same, which is clear from the following discussion containedGin the judgment of the Punjab and Haryana High Court:

“A Division Bench of the Calcutta High Court in CIT v. CrescentExport Syndicate[2013] 216 Taxman 258 (Cal) held :

‘13. …

‘The term “shall” used in all these sections make it clearHthat these are mandatory provisions and applicable to the

entire sum contemplated under the respective sections.These sections do not give any leverage to the assessee tomake the payment without making TDS. On the contrary,the intention of the Legislature is evident from the fact thattiming of deduction of tax is earliest possible opportunity torecover tax, either at the time of credit in the account ofpayee or at the time of payment to payee, whichever isearlier.’

Ms.Dhugga invited our attention to a judgment of the DivisionBench of the Madras High Court in Tube Investments of IndiaLtd. v. Asst. CIT (TDS) [2010] 325 ITR 610 (Mad). The DivisionBench referred to the statistics placed before it by theDepartment which disclosed that TDS collection hadaugmented the revenue. The gross collection of advance tax,surcharge, etc. was Rs 2,75,857.70 crores in the financial year2008-09 of which the TDS component alone constituted Rs1,30,470.80 crores. The Division Bench observed thatintroduction of section 40(a)(ia) had achieved the objective ofaugmenting the TDS to a substantial extent. The Division Benchalso observed that when the provisions and procedures relatingto TDS are scrupulously applied, it also ensured theidentification of the payees thereby confirming the network ofassessees and that once the assessees are identified it wouldenable the tax collection machinery to bring within its fold allsuch persons who are liable to come within the network oftaxpayers. These objects also indicate the legislative intent thatthe requirement of deducting tax at source is mandatory.

The liability to deduct tax at source is, therefore, mandatory.”

13. The aforesaid interpretation of sections 194C conjointlywith section 200 and rule 30(2) is unblemished and withoutany iota of doubt. We, thus, give our imprimatur to the viewtaken…...”

16.5.1. Having said that deducting tax at source is obligatory, thisCourt proceeded to deal with the issue as to whether the word ‘payable’in Section 40(a)(ia) would cover only those cases where the amount ispayable and not where it has actually been paid. This Court took note of A

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Athe exhaustive interpretation of various aspects related with this issueby the Punjab and Haryana High Court in the case of P.M.S. Diesels(supra) as also by the Calcutta High Court in the case of Commissionerof Income-Tax, Kolkata-XI v. Crescent Export Syndicate: (2013)216 Taxman 258; and while approving the same, this Court held, asregards implication and connotation of the expression “payable” used inBthis provision, as follows (at p. 310 of ITR):-

“15. We approve the aforesaid view as well. As a fortiori, itfollows that section 40(a)(ia) covers not only those caseswhere the amount is payable but also when it is paid. In thisbehalf, one has to keep in mind the purpose with which section 40Cwas enacted and that has already been noted above. We havealso to keep in mind the provisions of sections 194C and 200.Once it is found that the aforesaid sections mandate a person todeduct tax at source not only on the amounts payable but alsowhen the sums are actually paid to the contractor, any personDwho does not adhere to this statutory obligation has to sufferthe consequences which are stipulated in the Act itself. Certainconsequences of failure to deduct tax at source from the paymentsmade, where tax was to be deducted at source or failure to paythe same to the credit of the Central Government, are stipulatedin section 201 of the Act. This section provides that in thatEcontingency, such a person would be deemed to be an assessee indefault in respect of such tax. While stipulating this consequence,section 201 categorically states that the aforesaid sections wouldbe without prejudice to any other consequences which thatdefaulter may incur. Other consequences are provided underFsection 40(a)(ia) of the Act, namely, payments made by such aperson to a contractor shall not be treated as deductibleexpenditure. When read in this context, it is clear that section40(a)(ia) deals with the nature of default and the consequencesthereof. Default is relatable to Chapter XVII-B (in the instantcase sections 194C and 200, which provisions are in the aforesaidGChapter). When the entire scheme of obligation to deductthe tax at source and paying it over to the CentralGovernment is read holistically, it cannot be held that theword “payable” occurring in section 40(a)(ia) refers to onlythose cases where the amount is yet to be paid and doesHnot cover the cases where the amount is actually paid. If the provision is interpreted in the manner suggested by the appellantherein, then even when it is found that a person, like the appellant,has violated the provisions of Chapter XVII-B (or specificallysections 194C and 200 in the instant case), he would still go scot-free, without suffering the consequences of such monetary defaultin spite of specific provisions laying down these consequences…...”

16.6. We may profitably observe that in the case of P.M.S.Diesels (supra), the Punjab and Haryana High Court had extensivelydealt with myriad features of Section 40(a)(ia) of the Act, including theterm “payable” used therein as also the proviso thereto; and expoundedon the entire gamut of this provision while making reference to Finance(No. 2) Bill of 2004 introducing the provision and while also drawingsupport from the views expressed by Calcutta High Court in the case ofCrescent Export Syndicate (supra). As regards the interpretation ofthe term “payable”, it was observed in P.M.S. Diesels as under(at pp.574-575 of ITR):- “21. Section 40(a)(ia), therefore, applies not merely to assesseesfollowing the mercantile system but also to assessees followingthe cash system.

If this view is correct and indeed we must proceed on the footingthat it is, it goes a long way in indicating the fallacy in the appellant’smain contention, namely, if the payments have already been madeby the assessee to the payee/contracting party, the provisions ofsection 40(a)(ia) would not be attracted even if the tax is notdeducted and/or paid over to the Government account.

22. Section 40(a)(ia) refers to the nature of the default and theconsequence of the default. The default is a failure to deduct thetax at source under Chapter XVII-B or after deduction the failureto pay over the same to the Government account. The term“payable” only indicates the type or nature of the paymentsby the assessees to the persons/payees referred to insection 40(a)(ia), such as, contractors. It is not in respect ofevery payment to a payee referred to in Chapter XVII-B that anassessee is bound to deduct tax. There may be payments topersons referred to in Chapter XVII-B, which do not attract theprovisions of Chapter XVII-B. The consequences under section A

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A40(a)(ia) would only operate on account of failure to deduct taxwhere the tax is liable to be deducted under the provisions of theAct and in particular Chapter XVII-B thereof. It is in that sensethat the term “payable” has been used. The term “payable”is descriptive of the payments which attract the liability todeduct tax at source. It does not categorize defaults on theBbasis of when the payments are made to the payees of suchamounts which attract the liability to deduct tax at source.”

16.7. We find the above-extracted observations andCreasonings,which have already been approved by this Court in PalamGas Service (supra), to be precisely in accord with the scheme andpurpose of Section 40(a)(ia) of the Act; and are in complete answer tothe contentions urged by the learned counsel for the appellant.It is exfacie evident that the term “payable” has been used in Section 40(a)(ia)of the Act only to indicate the type or nature of the payments by theDassessees to the payees referred therein. In other words, the expression“payable” is descriptive of the payments which attract the liability fordeducting tax at source and it has not been used in the provision inquestion to specify any particular class of default on the basis as towhether payment has been made or not. The semantical suggestion byEthe learned counsel for the appellant, that this expression “payable” beread in contradistinction to the expression “paid”,sans merit and couldonly be rejected.In a nutshell, while respectfully following Palam GasService (supra), we could only iterate our approval to the interpretationby the Punjab and Haryana High Court in P.M.S. Diesels (supra).F16.8. Faced with the position that declaration of law in PalamGas Service (supra) practically covers this matter, learned counsel forthe appellant has endeavoured to submit that the decision in Palam GasService, requires reconsideration for the reason that certain aspects oflaw have not been considered thereinand correct principles ofinterpretation have not been applied. We are unable to find substance inGany of these contentions.The decision of Co-ordinate Bench in PalamGas Service (supra) on the core question of law is equally binding onthis Bench and could be doubted only if the view, as taken, is shown tobe not in conformity with any binding decision of the Larger Bench orany statutory provisions or any other reason of the like nature. We findHnone. In fact, a close look at the decision of P.M.S. Diesels (supra), which has been totally approved by this Court in Palam Gas Service,makes it clear that therein, every aspect of the matter, from a widerange of angles, was examined by the Punjab and Haryana High Courtwhile drawing support from the decisions of other High Courts, particularlythat of the Calcutta High Court in the case of Crescent Export Syndicate(supra).

16.9. We are in respectful agreement with the observations inPalam Gas Service that the enunciations in P.M.S. Diesels had beenof correct interpretation of the provisions contained in Section 40(a)(ia)of the Act. The decision in Palam Gas Service covers the entire matterand the said decision, in our view, does not require anyreconsideration.That being the position, the contention urged on behalfof the appellant that disallowance under Section 40(a)(ia) does not relateto the amount already paid stands rejected.

16.10. Another contention in regard to Section 40(a)(ia) of theAct, that its scope cannot be decided on the basis of Section 194C, hasonly been noted to be rejected. The interplay of these provisions is notfar to seek where Section 40(a)(ia) is not a stand-alone provision butprovides one of those additional consequences as indicated in Section201 of the Act for default by a person in compliance of the requirementsof the provisions contained in Part B of Chapter XVII of the Act. Thescheme of these provisions makes it clear that the default in complianceof the requirements of the provisions contained in Part B of ChapterXVII of the Act (that carries Sections 194C, 200 and 201) leads, interalia, to the consequence of Section 40(a)(ia) of the Act. Hence,thecontours of Section 40(a)(ia) of the Act could be aptly defined only withreference to the requirements of the provisions contained in Part B ofChapter XVII of the Act, including Sections 194C, 200 and 201. Puttingit differently, when the obligation of Section 194C of the Act is thefoundation of the consequence provided by Section 40(a)(ia) of the Act,reference to the former is inevitable in interpretation of the latter.

16.11. In view of the above, reference to the definition of the term“paid” in Section 43(2) of the Act is of no assistance to the appellant.Similarly, the observations in the case of J.K. Synthetics (supra), asregards the difference in connotation of the expressions “payable” and“paid”, in the context of liability to pay interest on the tax payable underthe Rajasthan Sales Tax Act, 1954, has no co-relation whatsoever to thepresent case. Further, when it is found that the process of interpretation A

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Aof Section 40(a)(ia) of the Act in P.M.S. Diesels (supra), as approvedby this Court in Palam Gas Service (supra), had been with dueapplication of the relevant principles, reference to the decision in thecase of Institute of Chartered Accountants of India (supra), on thegeneral principles of interpretation, does not advance the case of theappellant in any manner.B16.12.In view of the above, Question No.2 is also answered inthe negative; against the assessee-appellant and in favour of the revenue.

Question No.3

17. Quite conscious of the position that the decision of this CourtCin Palam Gas Service (supra) practically covers the substance of presentmatter against the assessee, learned counsel for the assessee-appellanthas made a few alternative attempts to argue against the disallowancein question.

17.1. The learned counsel would submit that the said sub-clauseD(ia), having been inserted to clause (a) of Section 40 of the Act witheffect from 01.04.2005 by Finance (No.2) Act, 2004, would apply onlyfrom the financial year 2005-2006 and hence, cannot apply to the presentcase pertaining to the financial year 2004-2005. The learned counsel, ofcourse, drew support to this contention from the decision of CalcuttaEHigh Court in the case of PIU Ghosh (supra).

17.1.1. Before proceeding further, it appears apposite to observe,as indicated in paragraph 7.3 hereinbefore, that in the copy of orderpassed by ITAT in this case, there is obvious typographical error on thedate of coming into force of the amendment toSection 40 of the Act of1961 by the Finance (No.2) Act, 2004 inasmuch as the said amendmentFwas made applicable with effect from 01.04.2005 and not 01.04.2004,as appearing the copy of the order of ITAT. However, this error is not ofmaterial bearing because the amendment in question was applicable fromand for the assessment year 2005-2006, for the reasons occurring infra.

17.2. Reverting to the contentions urged in this case, there is noGdoubt that in PIU Ghosh (supra), the Calcutta High Court, indeed, tookthe view which the learned counsel for the appellant has canvassedbefore us. The Calcutta High Court observed that the said Finance (No.2)Act, 2004 got presidential assent on 10.09.2004 and it was provided thatthe provision in question shall stand inserted with effect from 01.04.2005.HAccording to the Calcutta High Court, the assessee could not have foreseen prior to 10.09.2004 that any amount paid to a contractor withoutdeducting tax at source was likely to become not deductible in computationof income under Section 40 and that the legislature, being conscious ofthe likely predicament, provided that the provision shall become operativefrom 01.04.2005. The High Court further proceeded to observe that anyother interpretation would amount to punishing the assessee for no faultof his. The High Court further observed that Section 11 of the saidFinance Act, inserting sub-clause (ia), did not provide that the same wasto become effective from the assessment year 2005-2006. We mayusefully reproduce the opinion of the Calcutta High Court in the case ofPIU Ghosh, as under (at p. 326 of ITR):- “9. Admittedly, the Finance Act, 2004 got presidential assent onSeptember 10, 2004. The assessee could not have foreseen priorto September 10, 2004 that any amount paid to a contractor withoutdeducting tax at source was likely to become not deductible undersection 40. It is difficult to assume that the Legislature was notaware or did not foresee the aforesaid predicament. TheLegislature therefore provided that the Act shall become operativeon April 1, 2005. Any other interpretation shall amount to “punishingthe assessee for no fault of his” following the judgment in thecase of Hindustan Electro Graphites Ltd. (supra).

10. On top of that, section 4 relied upon by Mr. Agarwal merelyprovides for an enactment as regards rate of tax to be charged inany particular assessment year which has no application to thecase before us. Section 11 of the Finance (No. 2) Act, 2004 bywhich sub-clause (ia) was added to section 40(a) of the Income-tax Act does not provide that the same was to become effectivefrom the assessment year 2005-06. It merely says it shall becomeeffective on April 1, 2005 which for reasons already discussedshould mean to refer to the financial year. There is, as such, noscope for any ambiguity nor is there any scope for confusion…...”

17.3. Learned counsel for the appellant has submitted that therevenue has accepted the said decision and has not filed any appealagainst the same. It appears, however, that the amount of deduction inthe said case was only a sum of Rs. 4,30,386/- and obviously, the net taxeffect in that case, decided on 12.07.2016, was on the lower side. In anycase, the said decision cannot be treated as final declaration of law onthe subject merely because the same has not been appealed against.

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AHaving examined the law applicable, with respect, we find it difficult toapprove the above-quoted opinion of the Calcutta High Court, particularlywhen it does not appear standing in conformity with the scheme ofassessment of income tax under the Act of 1961 and where the HighCourt seems to have not noticed the proviso to clause (ia) of Section40(a) of the Act forming the part of the amendment in question.B

17.4. It needs hardly any detailed discussion thatin income taxmatters, the law to be applied is that in force in the assessment year inquestion, unless stated otherwise by express intendment or by necessaryimplication. As per Section 4 of the Act of 1961, the charge of incometax is with reference to any assessment year, at such rate or rates asCprovided in any central enactment for the purpose, in respect of the totalincome of the previous year of any person. The expression “previousyear” is defined in Section 3 of the Act to mean ‘the financial yearimmediately preceding the assessment year’; and the expression“assessment year” is defined in clause (9) of Section 2 of the Act toDmean ‘the period of twelve months commencing on the 1[st] day ofApril every year’.

17.5. In the case of Commissioner of Income-Tax, WestBengal v. Isthmian Steamship Lines: (1951) 20 ITR 572, a 3-JudgeBench of this Court exposited on the fundamental principle that‘in income-Etax matters the law to be applied is the law in force in the assessmentyear unless otherwise stated or implied.’ This decision and variousother decisions were considered by the Constitution Bench of this Courtin the case of Karimtharuvi Tea Estate Ltd. v. State of Kerala: (1966)60 ITR 262 and the principles were laid down in the following terms(atpp. 264-266 of ITR):-F

“Now, it is well-settled that the Income-tax Act, as it standsamended on the first day of April of any financial year mustapply to the assessments of that year. Any amendments inthe Act which come into force after the first day of April ofa financial year, would not apply to the assessment for thatGyear, even if the assessment is actually made after theamendments come into force.

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The High Court has, however relied upon a decision of this courtin Commissioner of Income-tax v. Isthmian Steamship Lines,Hwhere it was held as follows :

“It will be observed that we are here concerned with two datumlines : (1) the 1st of April, 1940, when the Act came into force,and (2) the 1st of April, 1939, which is the date mentioned inthe amended proviso. The first question to be answered iswhether these dates are to apply to the accounting year or theyear of assessment. They must be held to apply to theassessment year, because in income-tax matters the law to beapplied is the law in force in the assessment year unlessotherwise stated or implied. The first datum line thereforeaffected only the assessment year of 1940-41, because theamendment did not come into force till the 1st of April 1940.That means that the old law applied to every assessment yearup to and including the assessment year 1939-40.”

This decision is authority for the proposition that thoughthe subject of the charge is the income of the previous year,the law to be applied is that in force in the assessment year,unless otherwise stated or implied. The facts of the saiddecision are different and distinguishable and the High Court wasclearly in error in applying that decision to the facts of the presentcase.”

17.6. We need not multiply on the case law on the subject as theprinciples aforesaid remainsettled and unquestionable. Applying theseprinciples to the case at hand, we are clearly of the view thatthe provisionin question, having come into effect from 01.04.2005, would apply fromand for the assessment year 2005-2006 andwould be applicable for theassessment in question. Putting it differently, the legislature consciouslymade the said sub-clause (ia) of Section 40(a) of the Act effective from01.04.2005, meaning thereby that the same was to be applicable fromand for the assessment year 2005-2006; and neither there had beenexpress intendment nor any implication that it would apply only from thefinancial year 2005-2006.

17.7. The observations of Calcutta High Court in the case of PIUGhosh (supra) as regards the likely prejudice to an assessee in relationto the financial year 2004-2005, in our view, do not relate to any legalgrievance or legal prejudice. The requirement of deducting tax at sourcewas already existing as per Section 194C of the Act and it was thebounden duty of the appellant to make such deduction of TDS and to AB

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Amake over the same to the revenue. Section 201 was also in existencewhich made it clear that default in making deduction in accordance withthe provisions of the Act would make the appellant “an assessee indefault”. The appellant cannot suggest that even if the obligation of TDSon the payments made by him was existing by virtue of Section 194C(2),he would have honoured such an obligation only if being aware of theBdrastic consequence of default that such payment shall not be deductedfor the purpose of drawing up the assessment.

17.7.1. Apart from the above, significant it is to notice that by theamendment in question, clause (ia) was added to Section 40(a) of theAct with a proviso to the effect that where, in respect of the sum referableCto TDS requirement, tax has been deducted in any subsequent year, orhas been deducted during the previous year but paid in any subsequentyear after expiry of the time prescribed in Section 200(1),such sum shallbe allowed as a deduction in computing the income of the previous yearin which such tax has been paid. The proviso effectively took care ofDthe case of any bonafide assessee who would earnestly comply with therequirement of deducting the tax at source. It is evident that the saidproviso has totally escaped the attention of Calcutta High Court in thecase of PIU Ghosh (supra). In fact, the relaxation by way of the proviso/s to Section 40(a)(ia) of the Act had further been modulated by way ofvarious subsequent amendments to further mitigate the hardships ofEbonafide assessees, as noticed hereafter later. Suffice it to observe forthe present purpose that the said decision in PIU Ghosh cannot beregarded as correct on law.

17.8. In fact, if the contention of learned counsel for the appellantread with the proposition in PIU Ghosh (supra) is accepted and the saidFsub-clause (ia) of Section 40(a) of the Act is held applicable only fromthe financial year 2005-2006, the result would be that this provision wouldapply only from the assessment year 2006-2007. Such a result is neitherenvisaged nor could be countenanced. Hence, the contention that sub-clause (ia),of clause (a) of Section 40 of the Act would apply only fromGthe financial year 2005-2006 and cannot apply to the present casepertaining to the financial year 2004-2005 stands rejected.

18. The supplemental submission that in any case, disallowancecannot be applied to the payments already made prior to 10.09.2004, thedate on which the Finance (No.2) Act, 2004 received the assent of theHPresident of India, remains equally baseless. The said date of assent of the President of India to Finance (No.2) Act, 2004 is not the date ofapplicability of the provision in question, for the specific date havingbeen provided as 01.04.2005. Of course, the said date relates to theassessment year commencing from 01.04.2005 (i.e., assessment year2005-2006).

18.1. Even if it be assumed, going by the suggestions of theappellant, that the requirements of Section 40(a)(ia) became known on10.09.2004, the appellant could have taken all the requisite steps to makedeductions or, in any case, to make payment of the TDS amount to therevenue during the same financial year or even in the subsequent year,as per the relaxation available in the proviso to Section 40(a)(ia) of theAct but, the appellant simply avoided his obligation and attempted tosuggest that it had no liability to deduct the tax at source at all.Such anapproach of the appellant, when standing at conflict with law, theconsequence of disallowance under Section 40(a)(ia) of the Act remainsinevitable.

19. In yet another alternative attempt, learned counsel for theappellant has argued that by way of Finance (No.2) Act, 2014,disallowance under Section 40(a)(ia) has been limited to 30% of thesum payable and the said amendment deserves to be held retrospectivein operation. This line of argument has beengrafted with reference tothe decision in Calcutta Export Company (supra) wherein, anotheramendment of Section 40(a)(ia) by the Finance Act of 2010 was held bythis Court to be retrospective in operation. The submission so made isnot only baseless but is bereft of any logic. Neither the amendmentmade by the Finance (No.2) Act, 2014 could be stretched anterior thedate of its substitution so as to reach the assessment year 2005-2006 northe said decision in Calcutta Export Company has any correlation withthe case at hand or with the amendment made by the Finance (No.2)Act of 2014.

19.1. By the amendment brought about in the year 2014, thelegislature reduced the extent of disallowance under Section 40(a)(ia)of the Actand limited it to 30% of the sum payable. On the other hand,by the Finance Act of 2010, which was considered in the case of CalcuttaExport Company (supra), the proviso to Section 40(a)(ia) of the Actwas amended so as to provide relief to a bonafide assessee who couldnot make deposit of deducted tax within prescribed time. In fact, evenbefore the year 2010, the said proviso was amended by the Finance Act A

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A2008 and that amendment of the year 2008 was provided retrospectiveoperation by the legislature itself. For ready reference, we may reproducein juxtaposition the main part of Section 40(a)(ia) of the Actas it wouldread after the amendments of 2008, 2010 and 2014 respectively, asunder[13]:- B(i) After the amendment by Finance Act, 2008

“40. Amounts not deductible. -Notwithstanding anything to thecontrary in sections 30 to 38, the following amounts shall not bededucted in computing the income chargeable under the head“Profits and gains of business or profession”,-C(a) in the case of any assessee-*********

(ia) any interest, commission or brokerage, rent, royalty[14], feesfor professional services or fees for technical services payableDto a resident, or amounts payable to a contractor or sub-contractor,being resident, for carrying out any work (including supply of labourfor carrying out any work), on which tax is deductible at sourceunder 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 deductedEduring the last month of the previous year, on or before the duedate specified in sub-section (1) of section 139; or (B) in any other case, on or before the last day of the previousyear:

FProvided that where in respect of any such sum, tax has beendeducted in any subsequent year or, has been deducted –

(A) during the last month of the previous year but paid after thesaid due date; or (B) during any other month of the previous year but paid after theGend of the said previous year, H

13 The Explanation part of the provision is omitted, for being not relevant for thepresent purpose.

14 The expressions “rent, royalty” were inserted in the year 2006.

such sum shall be allowed as a deduction in computing the incomeof the previous year in which such tax has been paid.

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(ii) After the amendment by Finance Act, 2010

“40. Amounts not deductible. -Notwithstanding anything to thecontrary in sections 30 to 38, the following amounts shall not bededucted in computing the income chargeable under the head“Profits and gains of business or profession”,- (a) in the case of any assessee-

(ia) any interest, commission or brokerage, rent, royalty,fees forprofessional services or fees for technical services payable to aresident, or amounts payable to a contractor or sub-contractor,being resident, for carrying out any work (including supply of labourfor carrying out any work), on which tax is deductible at sourceunder Chapter XVII-B and such tax has not been deducted or,after deduction, has not been paid on or before the due datespecified in sub-section (1) of section 139:

Provided that where in respect of any such sum, tax has beendeducted in any subsequent year, or has been deducted during theprevious year but paid after the due date specified in sub-section(1) of section 139, such sum shall be allowed as a deduction incomputing the income of the previous year in which such tax hasbeen paid:

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(iii) After the amendment by Finance (No.2) Act, 2014

“40. Amounts not deductible. -Notwithstanding anything to thecontrary in sections 30 to 38, the following amounts shall not bededucted in computing the income chargeable under the head“Profits and gains of business or profession”,- (a) in the case of any assessee- ***

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A(ia) thirty per cent. of any sum payable to a resident, on which taxis deductible at source under Chapter XVII-B and such tax hasnot been deducted or, after deduction, has not been paid on orbefore the due date specified in sub-section (1) of section 139:

Provided that where in respect of any such sum, tax has beenBdeducted in any subsequent year, or has been deducted during theprevious year but paid after the due date specified in sub-section(1) of section 139, thirty per cent. of such sum shall be allowed asa deduction in computing the income of the previous year in whichsuch tax has been paid[15]:

CProvided further that where an assessee fails to deduct the wholeor any part of the tax in accordance with the provisions of ChapterXVII-B on any such sum but is not deemed to be an assessee indefault under the first proviso to sub-section (1) of section 201,then, for the purpose of this sub-clause, it shall be deemed thatthe assessee has deducted and paid the tax on such sum on theDdate of furnishing of return of income by the resident payee referredto in the said proviso.[16]

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19.2. The aforesaid amendment by the Finance (No.2) Act ofE2014 was specifically made applicable w.e.f. 01.04.2015 and clearlyrepresents the will of the legislature as to what is to be deducted or whatpercentage of deduction is not to be allowed for a particular eventuality,from the assessment year 2015-2016.

19.3. On the other hand, in the case of Calcutta Export Company(supra), this Court noticed the aforesaid two amendments to SectionF40(a)(ia) of the Act by the Finance Act, 2008 and by the Finance Act,2010, which were intended to deal with procedural hardship likely to befaced by the bonafide tax payer, who had deducted tax at source butcould not make deposit within the prescribed time so as to claim deduction.In paragraph 17 of judgment in Calcutta Export Company, this CourtGtook note of the case of genuine hardship, particularly of the assesseeswho had deducted tax at source in the last month of previous year; andobserved in paragraph 18 that the said amendment of the year 2008 was 15 This proviso was substituted in the year 2008 and again in the year 2010; and then,was amended by the Finance (No. 2) Act, 2014.H16 This proviso was inserted by Act No. 23 of 2012.

brought about with a view to mitigate such hardship. After reproducingthe said amendment of the year 2008 and after noticing its retrospectiveoperation, this Court delved into the position obtaining after 2008, wherestill remained one class of assessees who could not claim deduction forthe TDS amount in the previous year in which the tax was deducted andwho could claim benefit of such deduction in the next year only; and,after finding that the amendment of the year 2010 was intended to remedythis position, held that the said amendment, being curative in nature, isrequired to be given retrospective operation that is, from the date ofinsertion of Section 40(a)(ia).

19.4. Learned counsel for the appellant has only referred to theconcluding part of the decision in Calcutta Export Company but, alook at the entire synthesis by this Court, of the reasons for theamendments of 2008 and 2010, makes it clear as to why this Court heldthat the amendment of the year 2010 would be retrospective inoperation.We may usefully reproduce the relevant discussion andexposition of this Court in Calcutta Export Company as under:-(at pp.663-666 of ITR):- “19. The above amendments made by the Finance Act, 2008 thusprovided that no disallowance under section 40(a)(ia) of the Income-tax Act shall be made in respect of the expenditure incurred in themonth of March if the tax deducted at source on such expenditurehas been paid before the due date of filing of the return. It isimportant to mention here that the amendment was givenretrospective operation from the date of April 1,2005, i.e., fromthe very date of substitution of the provision.

20. Therefore, the assesses were, after the said amendment in2008, classified in two categories namely: one, those who havededucted that tax during the last month of the previous year andtwo, those who have deducted the tax in the remaining elevenmonths of the previous year. It was provided that in the case ofassessees falling under the first category, no disallowance undersection 40(a)(ia) of the Income-tax Act shall be made if the taxdeducted by them during the last month of the previous year hasbeen paid on or before the last day of filing of return in accordancewith the provisions of section 139(1) of the Income-tax Act forthe said previous year. In case, the assessees are falling underthe second category, no disallowance under section 40(a)(ia) of AB

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Income-tax Act where the tax was deducted before the last monthof the previous year and the same was credited to the Governmentbefore the expiry of the previous year. The net effect is that theassessee could not claim deduction for the TDS amount in theprevious year in which the tax was deducted and the benefit ofsuch deductions can be claimed in the next year only.

21. The amendment though has addressed the concerns of theassesses falling in the first category but with regard to the casefalling in the second category, it was still resulting into unintendedconsequences and causing grave and genuine hardships to theassesses who had substantially complied with the relevant TDSprovisions by deducting the tax at source and by paying the sameto the credit of the Government before the due date of filing oftheir returns under section 139(1) of the Income-tax Act. Thedisability to claim deductions on account of such lately creditedsum of TDS in assessment of the previous year in which it wasdeducted, was detrimental to the small traders who may not be ina position to bear the burden of such disallowance in the presentassessment year.

22. In order to remedy this position and to remove hardships whichwere being caused to the assessees belonging to such secondcategory, amendments have been made in the provisions of section40(a) (ia) by the Finance Act, 2010.

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24. Thus, the Finance Act, 2010 further relaxed the rigors of section40(a)(ia) of the Income-tax Act to provide that all TDS madeduring the previous year can be deposited with the Governmentby the due date of filing the return of income. The idea was toallow additional time to the deductors to deposit the TDS so made.However, the Memorandum Explaining the Provisions of theFinance Bill, 2010 expressly mentioned as follows: “Thisamendment is proposed to take effect retrospectively from April1, 2010 and will, accordingly, apply in relation to the assessmentyear 2010-11 and subsequent years.”

25. The controversy surrounding the above amendment waswhether the amendment being curative in nature should be applied retrospectively, i.e., from the date of insertion of the provisions ofsection 40(a)(ia) or to be applicable from the date of enforcement.

27. A proviso which is inserted to remedy unintended consequencesand to make the provision workable, a proviso which supplies anobvious omission in the section, is required to be read into thesection to give the section a reasonable interpretation and requiresto be treated as retrospective in operation so that a reasonableinterpretation can be given to the section as a whole.

28. The purpose of the amendment made by the Finance Act,2010 is to solve the anomalies that the insertion of section 40(a)(ia)was causing to the bona fide tax payer. The amendment, even ifnot given operation retrospectively, may not materially be ofconsequence to the Revenue when the tax rates are stable anduniform or in cases of big assessees having substantial turnoverand equally huge expenses and necessary cushion to absorb theeffect. However, marginal and medium taxpayers, who work atlow gross product rate and when expenditure which becomes thesubject matter of an order under section 40(a)(ia) is substantial,can suffer severe adverse consequences if the amendment madein 2010 is not given retrospective operation, i.e., from the date ofsubstitution of the provision. Transferring or shifting expenses toa subsequent year, in such cases, will not wipe out the adverseeffect and the financial stress. Such could not be the intention ofthe Legislature. Hence, the amendment made by the Finance Act,2010 being curative in nature is required to be given retrospectiveoperation, i.e., from the date of insertion of the said provision.”

19.5. A bare look at the extraction aforesaid makes it clear thatwhat this Court has held as regards “retrospective operation” is that theamendment of the year 2010,being curative in nature, would be applicablefrom the date of insertion of the provision in question i.e., sub-clause (ia)of Section 40(a) of the Act. This being the position, it is difficult to findany substance in the argument that the principles adopted by this Courtin the case of Calcutta ExportCompany (supra) dealing with curativeamendment, relating more to the procedural aspects concerning depositof the deducted TDS, be applied to the amendment of the substantiveprovision by the Finance (No.2) Act, 2014.

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A19.6. We may in the passing observe that the assessee-appellantwas either labouring under the mistaken impression that he was notrequired to deduct TDS or under the mistaken belief that the methodologyof splitting a single payment into parts below Rs. 20,000/- would providehim escape from the rigour of the provisions of the Act providing fordisallowance. In either event, the appellant had not been a bonafideBassessee who had made the deduction and deposited it subsequently.Obviously, the appellant could not have derived the benefits that wereotherwise available by the curative amendments of 2008 and 2010. Havingdefaulted at every stage, the attempt on the part of assessee-appellantto seek some succor in the amendment of Section 40(a)(ia) of the ActCby the Finance (No.2) Act, 2014 could only be rejected as entirelybaseless, rather preposterous.

19.7. Hence, Question No.3 is also answered in the negative,i.e., against the assessee-appellant and in favour of the revenue.

Question No. 4D

20. Before finally answering the root question in the matter as towhether the payments in question have rightly been disallowed fromdeduction, we may usefully summarisethe answers to Question Nos. 1to 3 thatthe provisions of Section 194C were indeed applicable and theassessee-appellant was under obligation to deduct the tax at source inErelation to the payments made by it for hiring the vehicles for the purposeof its business of transportation of goods; that disallowance under Section40(a)(ia) of the Act is not limited only to the amount outstanding and thisprovision equally applies in relation to the expenses that had alreadybeen incurred and paid by the assessee; that disallowance under SectionF40(a)(ia) of the Act of 961 as introduced by the Finance (No.2) Act,2004 with effect from 01.04.2005 is applicable to the case at hand relatingto the assessment year 2005-2006; and that the benefit of amendmentmade in the year 2014 to the provision in question is not available to theappellant in the present case. These answers practically conclude thematter but we have formulated Question No. 4 essentially to deal withGthe last limb of submissions regarding the prejudice likely to be sufferedby the appellant.

21. The suggestion on behalf of the appellant about the likelyprejudice because of disallowance deserves to be rejected for threemajor reasons.In the first place, it is clear fromthe provisions dealingH

with disallowance of deductions in part D of Chapter IV of the Act,particularly those contained in Sections 40(a)(ia) and 40A(3)[17] of theAct, that the said provisions are intended to enforce due compliance ofthe requirement of other provisions of the Act and to ensure propercollection of tax as also transparency in dealings of the parties. Thenecessity of disallowance comes into operation only when default of thenature specified in the provisions takes place. Looking to the object ofthese provisions, the suggestions about prejudice or hardship carry nomeaning at all. Secondly, as noticed, by way of the proviso as originallyinserted and its amendments in the years 2008 and 2010, requisite reliefto a bonafide tax payer who had collected TDS but could not depositwithin time before submission of the return was also provided; and asregards the amendment of 2010, this Court ruled it to be retrospective inoperation. The proviso so amended, obviously, safeguarded the interestof a bonafide assessee who had made the deduction as required and hadpaid the same to the revenue. The appellant having failed to avail thebenefit of such relaxation too, cannot now raise a grievance of allegedhardship. Thirdly, as noticed, the appellant had shown total payments inTruck Freight Account at Rs. 1,37,71,206/- and total receipts from thecompany at Rs. 1,43,90,632/-. What has been disallowed is that amountof Rs. 57,11,625/- on which the appellant failed to deduct the tax atsourceand not the entire amount received from the company or paid tothe truck operators/owners. Viewed from any angle, we do not find anycase of prejudice or legal grievance with the appellant.

21.1. Hence, answer to Question No. 4 is clearly in the affirmativei.e., against the appellant and in favour of the revenue that the paymentsin question have rightly been disallowed from deduction while computingthe total income of the assessee-appellant.

Conclusion

22. For what has been discussed hereinabove, this appeal failsand is, therefore, dismissed with costs.

Kalpana K. Tripathy

Appeal dismissed.

17 Section 40A(3) envisaged at the relevant time that twenty percent of the expenditureexceeding twenty thousand rupees, of which payment was made otherwise than by acrossed cheque or bank draft, shall not be allowed as a deduction.

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