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REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 5512 OF 2017

M/S. PALAM GAS SERVICE .....APPELLANT(S)

VERSUS

COMMISSIONER OF INCOME TAX .....RESPONDENT(S)

J U D G M E N T

A.K. SIKRI, J.

The  neat  question  which  arises  for  consideration  in  this

appeal  relates  to  the  interpretation  of  Section  40(a)(ia)  of  the

Income  Tax  Act,  1961  (hereinafter  referred  to  as  the  'Act').

Section  197C of  the  Act  has  also  some bearing  on  the  issue

involved.   

 2) Section  40  of  the  Act  enumerates  certain  situations  wherein

expenditure  incurred  by  the  assessee,  in  the  course  of  his

business,  will  not  be allowed to be deducted in computing the

income  chargeable  under  the  head  'Profits  and  Gains  from

Business  or  Profession'.  One  such  contingency  is  provided  in

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clause (ia) of sub-section (a) of Section 40. This provision reads

as under:

“S. 40 - Amounts not deductible:   

Notwithstanding anything to the contrary in Sections 30 to [38], the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”,—

xxx xxx xxx

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

Provided that where in respect of any such sum, tax has  been  deducted  in  any  subsequent  year  or  has been deducted in the previous year but  paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.

xxx xxx xxx”

3) As  per  clause  (ia),  certain  payments  made,  which  includes

amounts payable to a contractor or sub-contractor, would not be

allowed as expenditure in case the tax is deductible at source on

the said payment under Chapter XVIIB of the Act and such tax

has not  been deducted or, after  deduction,  has not  been paid

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during the previous year or  in  the subsequent  year  before the

expiry of the time prescribed under sub-section (1) of Section 200

of the Act.  In the instant case, certain payments were made by

the appellant assessee, in the Assessment Year 2006-2007 but

the tax at source was not deducted and deposited. We may point

out here itself that as per Section 194C of the Act, payments to

contractors and sub-contractors are subject to tax deduction at

source.  The Income Tax Department/Revenue has, therefore, not

allowed the  amounts  paid  to  the sub-contractors  as  deduction

while computing the income chargeable to tax at the hands of the

assessee in the said Assessment Year.

4) It  can  be  seen  that  Section  40(a)(ia)  uses  the  expression

'payable'  and  on  that  basis  the  question  which  is  raised  for

consideration is:

“Whether the provisions of Section 40(a)(ia) shall be attracted  when  the  amount  is  not  'payable'  to  a contractor  or  sub-contractor  but  has  been  actually paid?"

5) Some facts which will have bearing on the aforesaid issue need

to be mentioned at this stage:

The  appellant-assessee  is  engaged  in  the  business  of

purchase and sale of LPG cylinders under the name and style of

M/s.  Palam  Gas  Service  at  Palampur.   During  the  course  of

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assessment proceedings, it was noticed by the Assessing Officer

that the main contract of the assessee for carriage of LPG was

with  the  Indian  Oil  Corporation,  Baddi.   The  assessee  had

received the total freight payments from the IOC Baddi to the tune

of  Rs.32,04,140/-.   The  assessee  had,  in  turn,  got  the

transportation of LPG done through three persons, namely, Bimla

Devi,  Sanjay  Kumar  and  Ajay  to  whom  he  made  the  freight

payment amounting to Rs. 20,97,689/-.   The Assessing Officer

observed that  the assessee had made a sub-contract  with the

said three persons within the meaning of Section 194C of the Act

and, therefore,  he was liable to deduct tax at  source from the

payment of Rs. 20,97,689/-.  On account of his failure to do so

the  said  freight  expenses  were  disallowed  by  the  Assessing

Officer  as  per  the  provisions  of  Section  40(a)(ia)  of  the  Act.

Against the order of the Assessing Officer, the assessee preferred

an appeal  before  the  Commissioner  of  Income Tax  (Appeals),

Shimla who vide its order dated August 17, 2012 upheld the order

dated November 30,  2011.   The matter  thereafter  came up in

appeal before the Income Tax Appellate Tribunal (for short ‘ITAT’)

which too met with the same fate.

In further appeal to the High Court under Section 260A of

the Act, the outcome remained unchanged as the High Court of

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Himachal Pradesh also dismissed the appeal affirming the order

of the ITAT.

6) It may be pertinent to observe that the question raised now and

formulated above was specifically  raised before the authorities

below, including the High Court.

7) The question is, as noted above, when the word used in Section

40(a)(ia) is 'payable', whether this Section would cover only those

contingencies  where the amount  is  due  and still  payable  or  it

would also cover the situations where the amount is already paid

but  no advance tax was deducted thereupon.   This issue has

come up for hearing before various High Courts and there are

divergent views of the High Courts there upon.  In fact, most of

the High Courts have taken the view that the aforesaid provision

would cover even those cases where the amount stands paid.

This is the view of the Madras, Calcutta and Gujarat High Courts.

Contrary view is taken by the Allahabad High Court.  In a recent

judgment,  the  Punjab  & Haryana High  Court  took  note  of  the

judgments of the aforesaid High Courts and concurred with the

view taken by the Madras, Calcutta and Gujarat High Courts and

showed its reluctance to follow the view taken by the Allahabad

High Court.   

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8) In this scenario, we would like to first discuss the reasons given

by the High Courts in two sets of judgments, arriving at a contrary

conclusion. Before that, we would also like to reproduce relevant

portions of Section 194C and 200 of the Act as well as Rule 30(2)

of the Income Tax Rules, since they are also relevant to decide

the controversy.  These provisions make the following reading:

“194-C.  Payments to contractors.—(1)  Any person responsible  for  paying  any  sum  to  any  resident (hereafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and a specified person shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to— .……… ……. …… ………

200. Duty of person deducting tax.—(1) Any person deducting any sum in accordance with the foregoing provisions  of  this  chapter]  shall  pay  within  the prescribed time, the sum so deducted to the credit of the Central Government or as the Board directs.

(2)   Any  person  being  an  employer,  referred  to  in subsection (1-A) of Section 192 shall pay, within the prescribed time,  the tax  to  the credit  of  the Central Government or as the Board directs.

(3)   Any person deducting any sum on or  after  the 1st day of April, 2005 in accordance with the foregoing provisions of this chapter or, as the case may be, any person being an employer referred to in sub-section (1-A)  of  Section  192  shall,  after  paying  the  tax deducted  to  the  credit  of  the  Central  Government within  the prescribed time,  prepare such statements for such period as may be prescribed] and deliver or cause to  be  delivered  to  the prescribed income tax authority or the person authorised by such authority

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such  statement  in  such  form  and  verified  in  such manner and setting forth such particulars and within such time as may be prescribed.”

9) Rule  30(2)  of  the  Income Tax  Rules  which  stipulates  the time

prescribed for payment of the tax deducted to the credit of the

Central Government as required by Section 200(1) and relevant

portion thereof reads as under:

“Time  and  mode  of  payment  to  Government account  of  tax  deducted  at  source  or  tax  paid under sub-section (1A) of section 192.

30(1) All  sums  deducted  in  accordance  with  the provisions  of  Chapter  XVII-B  by  an  office  of  the Government shall be paid to the credit of the Central Government- .….. ………. …….. ……..

(2)  All  sums  deducted  in  accordance  with  the provisions of Chapter XVII-B by deductors other than an office of the Government shall be paid to the credit of the Central Government-

(a)  on or before 30th day of April where the income or amount is credited or paid in the month of March; and

(b) in any other case, on or before seven days from the end of the month in which- (i) the deduction is made; or (ii) income-tax is due under sub-section(1A) of

section 192.”

10) As per Section 194C, it  is  the statutory obligation of a person,

who is making payment to the sub-contractor, to deduct tax at

source  at  the  rates  specified  therein.   Plain  language  of  the

Section suggests that such a tax at source is to be deducted at

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the time of credit of such sum to the account of the contract or at

the time of payment thereof, whichever is earlier. Thus, tax has to

be deducted in both the contingencies, namely , when the amount

is credited to the account of the contractor or when the payment

is  actually  made.  Section  200  of  the  Act  imposes  further

obligation on the person deducting tax at source, to deposit the

same with the Central Government or as the Board directs, within

the prescribed time.  

A conjoint reading of these two Sections would suggest that

not only a person, who is paying to the contractor, is supposed to

deduct tax at source on the said payment whether credited in the

account or actual payment made, but also deposit that amount to

the credit of the Central Government within the stipulated time.

The time within which the payment is to be deposited with the

Central Government is mentioned in Rule 30(2) of the Rules.

11) The Punjab & Haryana High Court in  P.M.S. Diesels & Ors.  v.

Commissioner of Income Tax – 2, Jalandhar & Ors.,  (2015)

374 ITR 562, has held these provisions to be mandatory in nature

with the following observations:

“13.   The liability  to  deduct  tax  at  source under  the provisions  of  Chapter  XVII  is  mandatory.  A person responsible for paying any sum is also liable to deposit the  amount  in  the  Government  account.  All  the sections in Chapter XVII-B require a person to deduct

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the tax at  source at the rates specified therein.  The requirement in each of the sections is preceded by the word “shall”. The provisions are, therefore, mandatory. There  is  nothing  in  any  of  the  sections  that  would warrant  our  reading  the  word  “shall”  as  “may”.  The point of time at which the deduction is to be made also establishes  that  the  provisions  are  mandatory.  For instance,  under Section 194C, a person responsible for paying the sum is required to deduct the tax “at the time  of  credit  of  such  sum  to  the  account  of  the contractor or at the time of the payment thereof. ……”

12) While  holding  the  aforesaid  view, the  Punjab  & Haryana High

Court discussed the judgments of the Calcutta and Madras High

Courts, which had taken the same view, and concurred with the

same, which is clear from the following discussion contained in

the judgment of the Punjab & Haryana High Court:

“14.  A  Division  Bench  of  the  Calcutta  High  Court in Commissioner  of  Income  Tax v. Crescent  Export Syndicate, (2013) 216 Taxman 258 (Calcutta) held:-

“13.…………… ……………… ……………  

The  term ‘shall’  used  in  all  these  sections make  it  clear  that  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 to make the payment without making TDS. On the contrary, the intention of the legislature is  evident  from the fact  that timing of deduction of tax is earliest possible opportunity to recover tax, either at the time of  credit  in  the account  of  payee or  at  the time  of  payment  to  payee,  whichever  is earlier.”

15.  Ms. Dhugga invited our attention to a judgment of the  Division  Bench  of  Madras  High  Court  in Tube Investments of India Ltd. v. Assistant Commissioner of

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Income-Tax  (TDS), [2010]  325  ITR  610  (Mad).  The Division Bench referred to the statistics placed before it  by  the  Department  which  disclosed  that  TDS collection  had  augmented  the  revenue.  The  gross collection  of  advance  tax,  surcharge,  etc.  was  Rs. 2,75,857.70  crores  in  the  financial  year  2008-09  of which  the  TDS  component  alone  constituted  Rs. 1,30,470.80 crores. The Division Bench observed that introduction  of  Section  40(a)(ia)  had  achieved  the objective  of  augmenting  the  TDS  to  a  substantial extent. The Division Bench also observed that when the  provisions  and  procedures  relating  to  TDS  are scrupulously applied, it also ensured the identification of  the  payees  thereby  confirming  the  network  of assessees and that once the assessees are identified it would enable the tax collection machinery to bring within its fold all such persons who are liable to come within the network of tax payers. These objects also indicate the legislative intent that the requirement of deducting tax at source is mandatory.

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

13) The  aforesaid  interpretation  of  Sections  194C  conjointly  with

Section 200 and Rule 30(2) is unblemished and without any iota

of doubt.  We, thus, give our imprimatur to the view taken.  As

would  be  noticed  and  discussed in  little  detail  hereinafter,  the

Allahabad High Court, while interpreting Section 40(a)(ia), did not

deal with this aspect at all, even when it has a clear bearing while

considering the amplitude of the said provision.

14) In the aforesaid backdrop, let us now deal with the issue, namely,

the word 'payable' in Section 40(a)(ia) would mean only when the

amount  is  payable  and  not  when  it  is  actually  paid.

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Grammatically,  it  may  be  accepted  that  the  two  words,  i.e.

'payable'  and  'paid',  denote  different  meanings.  The  Punjab  &

Haryana High Court, in P.M.S. Diesels & Ors., referred to above,

rightly remarked that the word 'payable'  is, in fact, an antonym of

the word 'paid'.  At the same time, it took the view that it was not

significant to the interpretation of Section 40(a)(ia).  Discussing

this aspect further, the Punjab & Haryana High Court first dealt

with the contention of the assessee that Section 40(a)(ia) relates

only to those assessees who follow the mercantile system and

does not cover the cases where the assessees follow the cash

system. Those contention was rejected in the following manner:

“19. There is nothing that persuades us to accept this submission. The purpose of the section is to ensure the recovery of tax. We see no indication in the section that  this  object  was confined to  the recovery  of  tax from  a  particular  type  of  assessee  or  assessees following  a  particular  accounting  practice.  As  far  as this  provision  is  concerned,  it  appears  to  make  no difference  to  the  Government  as  to  the  accounting system followed by the assessees. The Government is interested in the recovery of taxes. If for some reason, the  Government  was  interested  in  ensuring  the recovery of taxes only from assessees following the mercantile  system,  we  would  have  expected  the provision to so stipulate clearly, if not expressly. It is not  suggested  that  assessees  following  the  cash system are not liable to deduct tax at source. It is not suggested that the provisions of Chapter XVII-B do not apply to assessees following the cash system. There is  nothing  in  Chapter  XVII-B  either  that  suggests otherwise.

20.  Our view is fortified by the Explanatory Note to Finance Bill (No. 2) of 2004. Sub-clause (ia) of clause

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(a) of Section 40 was introduced by the Finance Bill (No.  2)  of  2004  with  effect  from  01.04.2005.  The Explanatory Note to Finance Bill-2004 stated:-

“….. ….. ….. ….. .. With  a view to augment compliance of TDS provisions,  it  is  proposed  to  extend  the provisions of section 40(a)(i) to payments of interest,  commission or  brokerage,  fees for professional  services  or  fees  for  technical services  to  residents,  and  payments  to  a resident  contractor  or  sub-contractor  for carrying  out  any  work  (including  supply  of labour for carrying out any work), on which tax  has  not  been  deducted  or  after deduction,  has  not  been  paid  before  the expiry  of  the  time  prescribed  under sub-section(1)  of  section  200  and  in accordance  with  the  other  provisions  of Chapter XVII-B. ……”

21.   The  adherence  to  the  provisions  ensures  not merely  the  collection  of  tax  but  also  enables  the authorities to bring within their  fold all  such persons who  are  liable  to  come  within  the  network  of  tax payers. The intention was to ensure the collection of tax irrespective of the system of accounting followed by  the  assessees.  We  do  not  see  how  this  dual purpose  of  augmenting  the  compliance  of  Chapter XVII  and  bringing  within  the  Department's  fold  tax payers is served by confining the provisions of Section 40(a)(ia)  to  assessees  who  follow  the  mercantile system. Nor do we find anything that indicates that for some reason the legislature intended achieving these objectives only by confining the operation of Section 40(a)(ia)  to  assessees  who  follow  the  mercantile system.

22.  The same view was taken by a Division Bench of the Calcutta  High Court  in Commissioner  of  Income Tax v. Crescent  Export  Syndicate,  (supra).  It  was held:-

“12.3.  It  is  noticeable  that  Section  40(a)  is applicable  irrespective  of  the  method  of accounting  followed  by  an  assessee. Therefore,  by  using  the  term  ‘payable’

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legislature  included  the  entire  accrued liability. If assessee was following mercantile system  of  accounting,  then  the  moment amount was credited to the account of payee on accrual of liability, TDS was required to be made  but  if  assessee  was  following  cash system  of  accounting,  then  on  making payment TDS was to be made as the liability was  discharged  by  making  payment.  The TDS  provisions  are  applicable  both  in  the situation  of  actual  payment  as  well  of  the credit of the amount. It becomes very clear from the fact that the phrase, ‘on which tax is deductible at source under Chapter XVII-B’, was not there in the Bill but incorporated in the Act. This was not without any purpose.”

15) We approve the aforesaid view as well.  As a fortiorari, it follows

that  Section  40(a)(ia)  covers  not  only  those  cases  where  the

amount is payable but also when it is paid. In this behalf, one has

to keep in mind the purpose with which Section 40 was enacted

and that has already been noted above. We have also to keep in

mind the provisions of Sections 194C and 200.  Once it is found

that the aforesaid Sections mandate a person to deduct tax at

source not only on the amounts payable but also when the sums

are  actually  paid  to  the  contractor,  any  person  who  does  not

adhere to this statutory obligation has to suffer the consequences

which are stipulated in the Act itself.   Certain consequences of

failure to deduct tax at source from the payments made, where

tax was to be deducted at source or failure to pay the same to the

credit of the Central Government, are stipulated in Section 201 of

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the Act.  This Section provides that in that contingency, such a

person would be deemed to be an assessee in default in respect

of  such  tax.   While  stipulating  this  consequence,  Section  201

categorically states that the aforesaid Sections would be without

prejudice to any other  consequences which that  defaulter  may

incur.  Other consequences are provided under Section 40(a)(ia)

of  the  Act,  namely,  payments  made  by  such  a  person  to  a

contractor shall not be treated as deductible expenditure.  When

read in this context, it is clear that Section 40(a)(ia) deals with the

nature  of  default  and  the  consequences  thereof.   Default  is

relatable to Chapter XVIIB (in the instant case Sections 194C and

200, which provisions are in the aforesaid Chapter).  When the

entire scheme of obligation to deduct the tax at source and paying

it over to the Central Government is read holistically, it cannot be

held that the word 'payable' occurring in Section 40(a)(ia) refers to

only those cases where the amount is yet to be paid and does not

cover the cases where the amount is actually paid. If the provision

is interpreted in the manner suggested by the appellant herein,

then even when it is found that a person, like the appellant, has

violated the provisions of Chapter XVIIB (or specifically Sections

194C and 200 in the instant case), he would still  go scot free,

without suffering the consequences of such monetary default in

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spite of specific provisions laying down these consequences.  The

Punjab  &  Haryana  High  Court  has  exhaustively  interpreted

Section  40(a(ia)  keeping  in  mind  different  aspects.  We  would

again quote the following paragraphs from the said judgment, with

our complete approval thereto:

“26.  Further, the mere incurring of a liability does not require an assessee to deduct the tax at source even if such payments, if made, would require an assessee to deduct the tax at source. The liability to deduct tax at  source  under  Chapter  XVII-B  arises  only  upon payments being made or where so specified under the sections in Chapter XVII, the amount is credited to the account of  the payee. In other words, the liability to deduct  tax  at  source  arises  not  on  account  of  the assessee being liable to the payee but only upon the liability being discharged in the case of an assessee following the cash system and upon credit being given by an assessee following the mercantile system. This is clear from every section in Chapter XVII.

27.  Take for instance, the case of an assessee, who follows the cash system of accounting and where the assessee who though liable to pay the contractor, fails to  do  so for  any reason.  The assessee is  not  then liable to deduct tax at source. Take also the case of an assessee, who follows the mercantile system. Such an assessee  may  have  incurred  the  liability  to  pay amounts  to  a  party.  Such  an  assessee  is  also  not bound to deduct tax at source unless he credits such sums to the account  of  the party/payee,  such as,  a contractor.  This  is  clear  from Section  194C  set  out earlier. The liability to deduct tax at source, in the case of an assessee following the cash system, arises only when  the  payment  is  made  and  in  the  case  of  an assessee  following  the  mercantile  system,  when  he credits such sum to the account of the party entitled to receive the payment.

28.   The  government  has  nothing  to  do  with  the dispute between the assessee and the payee such as a  contractor.  The  provisions  of  the  Act  including

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Section 40 and the provisions of Chapter XVII do not entitle the tax authorities to adjudicate the liability of an  assessee  to  make  payment  to  the  payee/other contracting  party.  The  appellant's  submission,  if accepted,  would  require  an  adjudication  by  the  tax authorities as to the liability of the assessee to make payment. They would then be required to investigate all the records of an assessee to ascertain its liability to  third  parties.  This  could  in  many  cases  be  an extremely complicated task especially in the absence of the third party. The third party may not press the claim. The parties may settle the dispute, if any. This is an  exercise  not  even  remotely  required  or  even contemplated by the section.”

16) As mentioned above, the Punjab & Haryana High Court  found

support  from  the  judgments  of  the  Madras  and  Calcutta  High

Courts taking identical view and by extensively quoting from the

said judgments.

17) Insofar as judgment of the Allahabad High Court is concerned,

reading thereof would reflect that the High Court, after noticing

the  fact  that  since  the  amounts  had  already  been  paid,  it

straightaway  concluded,  without  any  discussion,  that  Section

40(a)(ia)  would  apply  only  when  the  amount  is  'payable'  and

dismissed the appeal of the Department stating that the question

of  law  framed  did  not  arise  for  consideration.   No  doubt,  the

Special Leave Petition thereagainst was dismissed by this Court

in limine.  However, that would not amount to confirming the view

of the Allahabad High Court (See  V.M. Salgaocar & Bros. (P)

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Ltd. v. Commissioner of Income Tax, (2000) 243 ITR 383 and

Supreme Court Employees Welfare Association  v.  Union of

India, (1989) 4 SCC 187.   

18) In view of the aforesaid discussion, we hold that the view taken

by the High Courts of Punjab & Haryana, Madras and Calcutta is

the correct view and the judgment of the Allahabad High Court in

CIT  v. Vector Shipping Services (P) Ltd.,  (2013) 357 ITR 642

did not decide the question of law correctly.  Thus, insofar as the

judgment of the Allahabad High Court is concerned, we overrule

the same. Consequences of the aforesaid discussion will  be to

answer  the  question  against  the  appellant/assessee  thereby

approving the view taken by the High Court.

19) The appeal is, accordingly, dismissed with costs.

.............................................J. (A.K. SIKRI)

.............................................J. (ASHOK BHUSHAN)

NEW DELHI; MAY 03, 2017.

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