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Disallowance under Section 40(a)(ia) of the Income Tax Act is related to the amount already paid: SC



SHREE CHOUDHARY TRANSPORT COMPANY Vs. INCOME TAX OFFICER CIVIL APPEAL No. 7865 OF 2009, 29th July, 2020.

The bench comprising of Hon’ble Justice A.M. Khanwilkar and Hon’ble Justice Dinesh Maheshwari dismissed the appeal against the order passed in Income Tax Appeal by the High Court of Judicature for Rajasthan.

The questions for determination before the Hon’ble Court are

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

  2. As to whether disallowance under Section 40(a)(ia) of the Act is confined/limited to the amount “payable” and not to the amount “already paid”; and whether the decision of this Court in Palam Gas Service v. Commissioner of Income-Tax: (2017) 394 ITR 300 requires reconsideration?

  3. As to whether sub-clause (ia) of Section 40(a) of the Act, as inserted by the Finance (No. 2) Act, 2004 with effect from 01.04.2005, is applicable only from the financial year 2005-2006 and, hence, is not applicable to the present case relating to the financial year 2004-2005; and, at any rate, whole of the rigour of this provision cannot be applied to the present case?

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

The Court answered the first issue as

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

Therefore, the Court affirmed the applicability of Section 194C to the present case.

Regarding the second issue, the Court stated that;

In the overall scheme of the provisions relating to collection and recovery of tax, it is evident that the object of legislature in introduction of the provisions like sub-clause (ia) of clause (a) of Section 40 had been to ensure strict and punctual compliance of the requirement of deducting tax at source. In other words, the consequences, as provided therein, had the underlying objective of ensuring compliance of the requirements of TDS. It is also noteworthy that in the proviso added to clause (ia) of Section 40(a) of the Act, it was provided that where in respect of the sum referable to TDS requirement, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid in any subsequent year after the expiry of the time prescribed in Section 200(1), such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.

The Court also referred to various case laws J.K. Synthetics Limited v. Commercial Taxes Officer: (1994) 4 SCC 276; Commissioner of Income-Tax v. Hardarshan Singh: (2013) 350 ITR 427, Institute of Chartered Accountants of India v. Price Waterhouse: (1997) 93 Taxman 588, Palam Gas Service v. Commissioner of Income-Tax : (2017) 394 ITR 300 etc.

The suggestion on behalf of the appellant about the likely prejudice because of disallowance deserves to be rejected for three major reasons. In the first place, it is clear from the provisions dealing 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 the Act, that the said provisions are intended to enforce due compliance of the requirement of other provisions of the Act and to ensure proper collection of tax as also transparency in dealings of the parties. The necessity of disallowance comes into operation only when default of the nature specified in the provisions takes place. Looking to the object of these provisions, the suggestions about prejudice or hardship carry no meaning at all. Secondly, as noticed, by way of the proviso as originally inserted and its amendments in the years 2008 and 2010, requisite relief to a bonafide tax payer who had collected TDS but could not deposit within time before submission of the return was also provided; and as regards the amendment of 2010, this Court ruled it to be retrospective in operation. The proviso so amended, obviously, safeguarded the interest of a bonafide assessee who had made the deduction as required and had paid the same to the revenue. Thirdly, as noticed, the appellant had shown total payments in Truck Freight Account at Rs. 1,37,71,206/- and total receipts from the company at Rs. 1,43,90,632/-. What has been disallowed is that amount of Rs. 57,11,625/- on which the appellant failed to deduct the tax at source and not the entire amount received from the company or paid to the truck operators/owners. Viewed from any angle, we do not find any case of prejudice or legal grievance with the appellant.

Hence, the Court dismissed the appeal with costs.

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CIVIL APPEAL No. 7865 OF 2009
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