ANZ GRINDLAYS BANK vs.DEPUTY COMMISSIONER OF INCOME TAX
AND ORS.
HIGH COURT OF DELHI
S. MURALIDHAR & VIBHU BAKHRU, JJ.
ITA 32/2004
Mar 1, 2016
(2016) 95 CCH 0056 DelHC
Legislation Referred to
Section 40(a)(iii), 260, 221, 276B, 192
Case pertains to
Asst. Year 1991-92
Decision in favour of:
Assessee
Business expenditure—Interest, commission, brokerage etc.
to a resident—Deduction of salaries paid to ex-patriate employees
overseas—Denial of deduction—Failure to deduct tax at source—During relevant
period ,Assessee was non-resident banking company and its principal place of
business was situated outside India—Assessee also carried on banking business
in India through its branches situated within country— During relevant period,
Assessee seconded some of its employees from overseas to its branches in India—Those
expatriate employees were employed for business carried on in India—Employees
received part of their remuneration by way of salaries and perquisites in India
which were duly reflected in Profit and Loss Account drawn up by Assessee in
respect of its Indian operations—Assessee also deducted tax at source on so
much of remuneration that was payable to expatriate employees in
India—Undisputedly, such TDS was deposited with Government—Assessee claimed
deduction u/s 40(a)(ia) for salaries paid to ex-patriate employees overseas—AO
denied deduction claimed by Assessee holding that Assessee failed to deduct tax
at source within prescribed time—CIT(A) rejected Assessee's claim for grant of
deduction u/s 40(a)(ia) by holding that such claim could not be made in
appellate proceedings—CIT(A) also observed that no deduction could be claimed
in view of Section 40(a)(iii)—Tribunal held that since no tax had been deducted
at source under Chapter XVII B within prescribed time, no deduction u/s
40(a)(iii) was permissible—Held, in absence of provision similar to proviso to
sub- clause (i) of clause (a) of Section 40 it could not be disentitled
Assessee to claim deduction even though it had complied with condition under
sub-clause (iii) of clause (a) of Section 40—Plain reading of proviso to
sub-clause (i) of clause (a) of Section 40 indicates that where Assessee had
not deducted or paid tax at source in terms of Chapter XVII B in respect of any
sum as specified under sub-clause (i) of clause (a) of Section 40, Assessee can,
nonetheless, claim deduction in year in which assessee deposited tax—This
benefit was not available to assessee in respect of payments chargeable under
head “Salaries” which fall within sub-clause (iii) of clause (a) of Section 40
and not sub-clause (i) of clause (a) of Section 40—Thus, assessee would not be
entitled to claim deduction on account of salaries if it failed to deduct or
pay amount under Chapter XVII B—Assessee lost its right to claim deduction for
period of six years , even though Assessee had paid TDS on expenses pertaining
to said period—If provision similar to proviso to Section 40(a)(i) was
applicable to Section 40(a)(iii) then Assessee would have been entitled to
claim entire expenses on account of salaries paid overseas pertaining to relevant
financial years 1984-85, as payment for tax for aforesaid years was paid on
20th July, 1994— However, absence of provision similar to that under sub-clause
(i) of clause (a) of Section 40 does not mean that Assessee would also be
disentitled to claim deduction on account of salaries in year to which such
expenses pertained even though Assessee subsequently discharged its obligation
to deposit tax and overcome rigor of sub- clause (iii) of clause (a) of Section
40—Tribunal proceeded on basis that if tax due on salaries paid overseas was
not deposited strictly within time prescribed under Chapter XVIIB, Section
40(a)(iii) would be applicable—Plain language of Section 40(a) (iii) does not
permit such interpretation—It was apparent that condition to deposit TDS within
prescribed time could be read into sub-clause (iii) of clause (a) of Section 40
as unlike language of item (B) of sub-clause (i) of clause (a) of Section 40
same had not been specifically enacted—Question of law was answered in favour
of Assessee and against Revenue—Assessee’s Appeal allowed
Held
Absence of a provision similar to the proviso to sub-
clause (i) of clause (a) of Section 40 of the Act cannot be read as to
disentitle an Assessee to claim a deduction even though it has complied with
the condition under sub-clause (iii) of clause (a) of Section 40 of the Act. A
plain reading of proviso to sub-clause (i) of clause (a) of Section 40 of the
Act indicates that where an Assessee has not deducted or paid the tax at source
in terms of Chapter XVII B in respect of any sum as specified under sub-clause
(i) of clause (a) of Section 40 of the Act, the Assessee can, nonetheless,
claim a deduction in the year in which the assessee deposits the tax. This
benefit is not available to an assessee in respect of payments chargeable under
the head “Salaries” which fall within sub-clause (iii) of clause (a) of Section
40 and not sub-clause (i) of clause (a) of Section 40 of the Act. Thus, an
assessee would not be entitled to claim deduction on account of salaries if it
fails to deduct or pay the amount under Chapter XVII B of the Act. In cases
where such assessee deposits the amount in a subsequent year, the Assessee
would still not be able to claim the deduction in the year in which such tax is
deposited; his claim for deduction can be considered only in respect of the
year to which such expense relates. Therefore, in cases where the assessments
stand concluded, the Assessee would lose the benefit of deduction for the
expenses incurred on account of its failure to have deposited the tax at
source. Thus, concededly, in the present case the Assessee has lost its right
to claim a deduction for a period of six years - AY 1985-86 to AY 1990-91- even
though the Assessee has paid the TDS on the expenses pertaining to said period.
(Para14)
If a provision similar to the proviso to Section 40(a)
(i) was applicable to Section 40(a) (iii) then the Assessee would have been
entitled to claim the entire expenses on account of salaries paid overseas
pertaining to financial years 1984-85 to 1993-94 in the financial year 1994-95
relevant to AY 1995-96 as the payment for the tax for the aforesaid years was
paid on 20th July, 1994. However, absence of a provision similar to that under
sub-clause (i) of clause (a) of Section 40 does not mean that the Assessee
would also be disentitled to claim deduction on account of salaries in the year
to which such expenses pertained even though the Assessee has subsequently
discharged its obligation to deposit the tax and has thus overcome the rigor of
sub- clause (iii) of clause (a) of Section 40 of the Act.
(Para 15)
The Tribunal has proceeded on the basis that if the tax
due on salaries paid overseas is not deposited strictly within the time
prescribed under Chapter XVII B of the Act, Section 40(a) (iii) would be
applicable. In our view, this added condition that the tax must be deducted and
paid within time, cannot be read in Section 40(a) (iii) of the Act. The plain
language of the Section 40(a) (iii) does not permit such interpretation. If the
parliament so desired, it would have specifically enacted so. This becomes
apparent when one reads the legislative amendments made to Section 40 of the
Act.
(Para16)
In view of the above, the question of law is answered in
the negative, that is, in favour of the Assessee and against the Revenue.
(Para22)
Conclusion
The condition to deposit TDS within the prescribed time
cannot be read into sub-clause (iii) of clause (a) of Section 40 of the Act as
unlike the language of item (B) of sub-clause (i) of clause (a) of Section 40
the same has not been specifically enacted.
In favour of
Assessee
Cases Referred to
Commissioner of Income Tax vs. Eli Lilly & Co.
(India) P. Ltd.: (2009) 312 ITR 225 (SC)
Additional Commissioner of Income Tax vs. Gurjargravures
P. Ltd: [1978] 111 ITR 1 (SC)
The Kedarnath Jute Mfg. Co. Ltd. vs. The Commissioner of
Income Tax, (Central), Calcutta: [1971] 82 ITR 363 (SC)
Counsel appeared:
Shashi N. Kapila with Pravesh Sharma and Sanjay Kumar for
the Appellant.: P. Roy Chaudhari, Senior Standing Counsel with Lakshmi Gurung,
Easha Kadian, Ishant Goswami and Rajesh Kumar for the Respondent
VIBHU BAKHRU, J.
1. The present appeal has been filed by Standard
Chartered Grindlays Bank Ltd., formerly known as 'ANZ Grindlays Bank Ltd.'
(hereafter the 'Assessee') under Section 260A of the Income Tax Act, 1961
(hereafter the 'Act') impugning an order dated 29th August, 2003 passed by the
Income Tax Appellate Tribunal (hereafter ‘the Tribunal’) in ITA No. 1442/Del of
1997. The said appeal, ITA 1442/Del of 1997, was preferred by the Assessee
against an order dated 14th January, 1997 passed by the Commissioner of Income
Tax (Appeals) [hereafter 'CIT(A)'] in Appeal No.164/96-97 which in turn was
preferred by the Assessee against the assessment order dated 25th March, 1994
passed in respect of Assessment Year (AY) 1991-92 .
2. The controversy involved in the present appeal relates
to the denial of deduction of expenses - by virtue of provision of Section
40(a)(iii) of the Act -for failure on the part of the Assessee to deduct and
deposit Tax Deducted at Source (TDS) within the prescribed time. This appeal
was admitted on 28th April, 2005 and two questions of law were framed. At the
hearing on 22nd December 2015, the Assessee did not press for one of the
questions as it was stated that it had since obtained relief in respect
thereof. Consequently only the following question of law arises for
consideration:
“Whether the Income Tax Appellate Tribunal was right in
law in holding that salaries paid to ex-patriate employees overseas on which
tax was paid in accordance with CBDT Circular dated 685 dated 17/20 June 94 and
Circular 686 dated 12.8.94, is not permissible as a deduction in computation of
taxable business income in view of the provisions of Section 40 (a)(iii) of the
Income Tax Act, 1961 read with Article 7 of the Indo- UK Double Taxation
Avoidance Treaty?"
3. The aforesaid question has to be considered in the
following context:
3.1 During the relevant period - financial years 1984-85
to 1993-94 - the Assessee was a non-resident banking company and its principal
place of business was situated outside India. The Assessee also carried on
banking business in India through its branches situated within the country.
During the relevant period, the Assessee seconded some of its employees from
overseas to its branches in India. These expatriate employees were employed for
the business carried on in India. They received a part of their remuneration by
way of salaries and perquisites in India which were duly reflected in the
Profit and Loss Account drawn up by the Assessee in respect of its Indian
operations. The Assessee also deducted tax at source on so much of the remuneration
that was payable to the aforementioned expatriate employees in India.
Undisputedly, such TDS was deposited with the Government.
3.2 In addition to the remuneration paid to the
aforementioned expatriate employees in India, the Assessee's head office
situated overseas also made certain payments to and/or for the benefit of such
expatriate employees. However, the Assessee did not account for such payments,
which were in the nature of salaries, allowances and perquisites, in its Profit
and Loss Account drawn up in respect of its business in India. The Assessee
neither claimed such payments as a deduction for the purposes of computing its
income chargeable to tax in India nor deducted any tax under Chapter XVII B of
the Act.
3.3 During the relevant period, some of the other
non-resident assessees, who had employed expatriate employees in India, had
also not deducted TDS on payments made to and/or for the benefit of such
employees abroad on an erroneous understanding that payments made abroad were
not subject to withholding tax in India. In order to clarify the position, the
Central Board of Direct Taxes (CBDT) issued a Circular i.e. Circular No. 685
dated 17/20th June, 1994. By the aforesaid Circular, the CBDT clarified that
all payments made and perquisites provided to employees overseas for services
rendered in India are taxable in India irrespective of the place where such
payments or perquisites have been made or provided. Accordingly, if the
employees have rendered services in India, the employers are liable to deduct
tax at source even in respect of payment of salary, allowances and perquisites
paid and/or provided to such employees overseas. The said circular also
indicated that in order to encourage immediate voluntary compliance, CBDT had
decided that penalty proceedings under Section 221 and 271C of the Act and
prosecution under Section 276B of the Act would not be initiated in cases where
the employers came forward and paid the entire amount of tax due under Section
192 of the Act along with interest before 31st July, 1994.
3.4 Pursuant to the aforesaid Circular (CBDT Circular
No.685 dated 17/20th June, 1994), the Assessee deposited a sum of
Rs.9,69,43,214/-, being the amount of TDS pertaining to the payments made
abroad to and/or for the benefit of the employees serving in India during the
financial years 1984-85 to 1993-94 and the interest due thereon, with the
Income Tax Authorities.
3.5 The tax and interest deposited by the Assessee was
duly verified and accepted by the income tax authorities and the concerned
Commissioner of Income Tax issued a communication on 11th November, 1994 duly
informing the Assessee that in view of the payments made, no penalty or
prosecution action would be initiated in respect of the payments made overseas
to and/or for the benefit of the expatriate employees.
3.6 The assessments for the six assessment years from AY
1985-86 to 1990-91 stood concluded as on 28th July, 1994 and, thus, the
Assessee could not claim any deduction on account of the payments made in
respect of the said years. However, the Assessee’s appeal in respect of AY
1991-92 was pending before CIT(A) and the Assessee sought to claim a deduction
of an amount of Rs.1,32,46,994/- in respect of payments made pertaining to the
financial year 1990-91. The CIT(A) rejected the Assessee's claim by holding
that such claim could not be made in appellate proceedings. He also observed
that no deduction could be claimed in view of Section 40(a)(iii) of the Act. He
doubted whether the entire tax due had been paid by the Assessee since the
amount of tax paid would also be includable as income of the employees and,
therefore, have the effect of increasing their income and consequently, the tax
payable thereon. He further observed that it was possible that the salaries paid
to the employees overseas were a part of the head "office expenses".
3.7 On appeal, the Tribunal permitted the Assessee to
urge the additional ground but rejected the same principally as falling foul of
Section 40(a)(iii) of the Act. The Tribunal observed that Section 40 of the Act
is a 'prohibitive' or 'disincentive' provision and, thus, had to be considered
strictly. It held that since no tax had been deducted at source under Chapter
XVII B of the Act within the prescribed time, no deduction under Section
40(a)(iii) was permissible. The Tribunal was of the view that a deduction would
be permissible only if the provisions of Chapter XVII B are strictly complied
with and TDS is deducted and paid within the prescribed time. It observed that
the CBDT Circular only gave immunity to the Assessee from penalty and
prosecution but did not remove the disincentive under Section 40 of the Act.
3.8 The Tribunal also referred to Section 40(a)(i) of the
Act which expressly provided that no deduction would be allowed in respect of
any interest, royalty, fees for technical services or other sum chargeable
under the Act which is payable outside India and in respect of which no tax has
been deducted and paid under Chapter XVII B of the Act. The Tribunal noted that
proviso to Section 40(a)(i) of the Act expressly provided that where tax in
relation to any sum mentioned in sub clause (i) of clause (a) of Section 40 of
the Act is paid or deducted in any subsequent year, the deduction would be
allowed in the previous year in which such tax was paid or deducted. The
Tribunal reasoned that since no such similar provision existed in respect of
sub clause (iii) of clause (a) of Section 40 of the Act, no deduction would be
permissible for payments which are chargeable under the head “Salaries” if tax
had not been paid or deducted under Chapter XVII B.
4. The question whether an assessee is liable to deduct
tax at source on the aforementioned payments made to and/or for benefit of its
employees seconded from its head office situated outside India, is no longer
res integra in view of the decision of the Supreme Court in Commissioner of
Income Tax v. Eli Lilly & Co. (India) P. Ltd.: (2009) 312 ITR 225 (SC). The
same is also not a subject matter of dispute in the present appeal.
5. It cannot be disputed that the Assessee has paid the
tax which it was required to withhold under the provisions of Section 192 of
the Act. Although before the CIT(A), the Revenue had sought to contend that the
amount paid to the employees has not been verified as it did not form a part of
the Profit and Loss Account submitted by the Assessee, however, the same is
without merit as the communication dated 11th November, 1994 issued by the
Commissioner of Income Tax (hereafter also referred to as “CIT”) duly indicates
that the Assessee had made a disclosure of the payments made outside India for
financial years 1984-85 to 1993-94 in respect of its expatriate employees and
further had provided "full details". The Commissioner of Income Tax
had also obtained a report from the lower authorities and the TDS payments made
were duly verified. The AO had also examined the exchange rates applied by the
Assessee while determining the amount of tax to be deposited. It is only after
duly verifying the relevant facts that the CIT had issued the communication
accepting that no action for penalty or prosecution would be initiated in
respect of the payments made to expatriate employees.
6. Undisputedly, the entire tax payable on the salaries
along with interest due thereon has been received by the Revenue. Even before
us, Mr P. Roy Chaudhari, learned Senior Standing Counsel for the Revenue did
not dispute that the Assessee had paid the requisite amount of tax.
7. Concededly, the powers of a CIT (A) are wide and in an
Appeal against an Assessment order, it may confirm, reduce, enhance or annul
the assessment. Thus, in cases where there is dispute as to the material facts
for entertaining a claim, the CIT (A) would be well within his powers to do so.
In the present case, the reliance placed by the CIT (A) on the decision of
Additional Commissioner of Income Tax v. Gurjargravures P. Ltd: [1978] 111 ITR
1 (SC) is mis-placed as in that case neither any claim was made before the AO
nor was there any material on record to support the claim. The Supreme Court
specifically noted the same and held that on the facts of that case, the
question referred to the High Court should have been answered in the negative.
In the present case, there is no dispute as to the material facts required for
allowing the deduction as claimed by the Assessee. The TDS paid on the expenses
claimed have been duly verified and the tax on the payments made which are
chargeable under the head ‘Salaries’ have been recovered by the Government. The
only reason for denying the claim is non-deposit of TDS within the prescribed
time. The TDS having been deposited, there is no impediment for Assessee to
claim the related expense.
8. In the aforesaid circumstances, the principal issue to
be addressed is whether the provisions of Section 40(a)(iii) disentitles an
assessee to claim a deduction on account of Salaries paid to its employees if
the tax is not paid within the specified time but is paid subsequently. Mr
Chaudhari, learned Senior Standing Counsel for the Revenue has contended that there
are twin requirements to be fulfilled; the first being that tax should have
been deducted under Chapter XVII B of the Act; and second being that tax should
have been paid. He argued that even if the tax is paid in subsequent years,
deduction on account of expenses could not be allowed because the second
condition which is deduction of tax at the time of payment of the amount as
required under Section 192 of the Act would not be fulfilled. According to him,
if the tax is not deducted and paid within the time prescribed for such
deduction or payment under the relevant provisions, an assessee would not be
entitled to claim that it had deducted or paid the tax under Chapter XVII B of
the Act. He also referred to the decision of the Supreme Court in Eli Lilly
& Co. (India) P. Ltd. (supra) in support of his contention that Section
40(a)(iii) was an integrated code and Section 40(a)(iii) would have to be read
in conjunction with Section 192 of the Act which required an employer
(assessee) to deduct and deposit the tax payable in respect of payments
chargeable under the head "Salaries".
9. Mr Chaudhari further supported the Tribunal’s view
that absence of proviso similar to that as under Section 40(a)(i) also
indicated that no deduction under Section 40(a)(iii) was allowable in case
where tax was not deducted or paid within the prescribed time under Chapter
XVII B of the Act.
10. In order to address the controversy, it is necessary
to refer to the provisions of sub-clauses (i) and (iii) of clause (a) of
Section 40 of the Act as in force during the relevant period and the same are
reproduced hereunder:
"40 Notwithstanding anything to the contrary in
sections 30 to 38, the following amounts shall not be deducted in computing the
income chargeable under the head "Profits and gains of business or
profession",—
(a) in the case of any assessee—
(i) any interest (not being interest on a loan issued for
public subscription before the 1st day of April, 1938), royalty, fees for
technical services or other sum chargeable under this Act, which is payable
outside India, on which tax has not been paid or deducted under Chapter XVII-B;
Provided that where in respect of any such sum, tax has
been deducted under Chapter XVII-B or paid in any subsequent year, such sum
shall be allowed as a deduction in computing the income of the previous year in
which such tax has been paid.
(iii) Any payment which is chargeable under the head
"Salaries" if it is payable outside India and if the tax has not been
paid thereon nor deducted therefrom under Chapter XVII B."
11. Section 40 of the Act begins with the non obstante
clause and, thus, expressly disentitles an assessee to claim deductions which
may otherwise be allowable under Sections 30 to 38 of the Act. Thus, even
though an amount is deductable in computing the income chargeable under the
head “profits and gains of business or profession”, the same would not be
deductable if it falls foul of any of the clauses of Section 40 of the Act. A
plain reading of Section 40(a)(iii) of the Act as was in force during the relevant
year indicates that no deduction would be allowable in respect of any payments
chargeable under the head “Salaries” if (a) the same are payable outside India
and (b) if tax has not been paid or deducted thereon under Chapter XVII B of
the Act. The said clause (iii) was substituted by virtue of the Finance Act,
2003 with effect from 1st April 2004. By virtue of the aforesaid amendment, the
rigor of sub clause (iii) of clause (a) of Section 40 of the Act now also
extends to any amount payable as salaries in India. Plainly, the principal
object of the aforesaid sub clause (iii) is to provide a further disincentive
for non-compliance of provisions of Section 192 of the Act.
12. The provisions of Section 192 fall within Chapter
XVII B of the Act which relates to collection and recovery of tax. Provisions
for deduction of tax at source are a part of the machinery provided for
collection of taxes payable by a payee (recipient of income) by directly
imposing upon the payer an obligation to withhold the tax due and deposit the
same with the Government. Such tax is deposited to the credit of the payee and
not the payer. In case of salaries, any person responsible for paying the
income chargeable under the head “Salaries” - who would inevitably be the
employer - is obliged to deduct the tax chargeable on the income of the
employee (payee) under the head “Salaries”. Thus, in the present case, the tax
deposited by the Assessee is clearly in discharge of its obligation under
Chapter XVII B of the Act. In this view, the contention advanced by Mr
Chaudhari that the condition that the Assessee has not deducted and deposited
the tax under Chapter XVII B of the Act, cannot be accepted. Indisputably, the
Assessee has deposited the requisite amount which it was required to deposit in
respect of amounts chargeable under the head “Salaries” that was payable to and
or for the benefit of employees outside India. The said tax is deposited to the
credit of such employees. Thus, for all intents and purposes the same is
considered as a part of their Salaries which has not been paid to them but has
been deposited directly with the Government.
13. It is also relevant to mention that Circular No. 685
dated 17/20th June, 1994, in compliance of which the Assessee had deposited the
amount of tax, was issued under Chapter XVII B of the Act; the said Circular
granted amnesty from penalties and prosecution to the assessees who complied
with their obligation to deposit TDS in terms of Section 192 of the Act for the
preceding years for which they had not done so, on or before 31st July, 1994.
The said circular clarified the position regarding the applicability of
provisions to withhold and deposit tax in respect of payments made abroad and
required the employers to immediately comply with the provisions of Section 192
of the Act. Such compliance was also incentivised by granting the amnesty as
aforesaid. In the circumstances, it can hardly be disputed that the tax
deposited by the Assessee was in discharge its obligations, albeit belatedly,
as imposed under Chapter XVII B of the Act. That being so, the Assessee had
also overcome the rigor of sub-clause (iii) of clause (a) of Section 40 of the
Act as the necessary condition for applicability of the said provision, that
is, non-deduction and payment of TDS under Chapter XVII B of the Act, no longer
held good. Having complied with the said obligation, the Assessee could not be
denied the deduction which was otherwise allowable under Section 37 of the Act.
14. In our view, an absence of a provision similar to the
proviso to sub- clause (i) of clause (a) of Section 40 of the Act cannot be
read as to disentitle an Assessee to claim a deduction even though it has
complied with the condition under sub-clause (iii) of clause (a) of Section 40
of the Act. A plain reading of proviso to sub-clause (i) of clause (a) of
Section 40 of the Act indicates that where an Assessee has not deducted or paid
the tax at source in terms of Chapter XVII B in respect of any sum as specified
under sub-clause (i) of clause (a) of Section 40 of the Act, the Assessee can,
nonetheless, claim a deduction in the year in which the assessee deposits the
tax. This benefit is not available to an assessee in respect of payments
chargeable under the head “Salaries” which fall within sub-clause (iii) of
clause (a) of Section 40 and not sub-clause (i) of clause (a) of Section 40 of
the Act. Thus, an assessee would not be entitled to claim deduction on account
of salaries if it fails to deduct or pay the amount under Chapter XVII B of the
Act. In cases where such assessee deposits the amount in a subsequent year, the
Assessee would still not be able to claim the deduction in the year in which
such tax is deposited; his claim for deduction can be considered only in
respect of the year to which such expense relates. Therefore, in cases where
the assessments stand concluded, the Assessee would lose the benefit of
deduction for the expenses incurred on account of its failure to have deposited
the tax at source. Thus, concededly, in the present case the Assessee has lost
its right to claim a deduction for a period of six years - AY 1985-86 to AY
1990-91- even though the Assessee has paid the TDS on the expenses pertaining
to said period.
15. If a provision similar to the proviso to Section
40(a) (i) was applicable to Section 40(a) (iii) then the Assessee would have
been entitled to claim the entire expenses on account of salaries paid overseas
pertaining to financial years 1984-85 to 1993-94 in the financial year 1994-95
relevant to AY 1995-96 as the payment for the tax for the aforesaid years was
paid on 20th July, 1994. However, absence of a provision similar to that under
sub-clause (i) of clause (a) of Section 40 does not mean that the Assessee
would also be disentitled to claim deduction on account of salaries in the year
to which such expenses pertained even though the Assessee has subsequently
discharged its obligation to deposit the tax and has thus overcome the rigor of
sub- clause (iii) of clause (a) of Section 40 of the Act.
16. The Tribunal has proceeded on the basis that if the
tax due on salaries paid overseas is not deposited strictly within the time
prescribed under Chapter XVII B of the Act, Section 40(a) (iii) would be
applicable. In our view, this added condition that the tax must be deducted and
paid within time, cannot be read in Section 40(a) (iii) of the Act. The plain
language of the Section 40(a) (iii) does not permit such interpretation. If the
parliament so desired, it would have specifically enacted so. This becomes
apparent when one reads the legislative amendments made to Section 40 of the
Act.
17. Sub-clause (i) and sub-clause (iii) of clause (a) of
Section 40 were substituted by Finance Act, 2003 w.e.f. 1st April, 2004. The
said sub- clauses as substituted read as under:-
“(i) any interest (not being interest on a loan issued
for public subscription before the 1st day of April, 1938), royalty, fees for
technical services or other sum chargeable under this Act which is payable,--
(A) Outside India: or
(B) In India to a non-resident, not being a company or to
a foreign company, 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 other provisions of Chapter XVII-B:
Provided that where in respect of any such sum, tax has
been deducted under Chapter XVII-B or paid in any subsequent year, such sum
shall be allowed as a deduction in computing the income of the previous year in
which such tax has been paid.
Explanation.---For the purposes of this sub-clause,--
(A) “royalty” shall have the same meaning as in
Explanation 2 to clause (vi) of sub-section (1) of section 9;
(B) “fees for technical services” shall have the same
meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9;”
xxxx xxxx xxxx
“(iii) any payment which is chargeable under the head
“Salaries”, if it is payable—
(A) Outside India; or
(B) To a non-resident,
and if the tax has not been paid thereon nor deducted
therefrom under Chapter XVII-B;”
(underlining for emphasis)
18. It is at once seen that where the legislature wanted
to make payment of tax within a specified time a necessary pre-condition, it
had expressly indicated so. The Parliament has expressly enacted that deduction
in respect of payments made under sub-clause (i) of clause (a) of Section 40 of
the Act would not be available where such payments were made in India to a
non-resident in respect of which tax had not been paid “before the expiry of
time prescribed under sub Section (i) of Section 200”. However, no such
condition for depositing the tax paid within a prescribed time was introduced
in sub clause (iii) of clause (a) of Section 40 of the Act.
19. It is also relevant to note that sub-clause (i) of
clause (a) of Section 40 was further substituted by sub-clauses (i), (ia) and
(ib) by virtue of Finance Act (No.2) w.e.f. 1st April, 2005. However, the
pre-condition for depositing the tax within the time prescribed under Section
(i) of Section 200 was retained in sub-clause (i) and (ia). Thereafter, by
virtue of Finance Act (No.2), 2014, sub clause (i) was further amended and the
principal condition of depositing tax in respect of payments made in India was
amended and instead of the pre-condition of depositing the tax within the time
prescribed under Section 200 (i) of the Act, it was now stipulated that the tax
be deposited “on or before the due date specified in sub section (i) of Section
139”.
20. With effect from 1st April, 2015, sub-clause (i) of
clause (a) of Section 40 reads as under:
"40. Notwithstanding anything to the contrary in
sections 30 to [38], the following amounts shall not be deducted in computing
the income chargeable under the head "Profits and gains of business or
profession",---
(a) in the case of assessee--
[(i) any interest (not being interest on a loan issued
for public subscription before the 1st day of April, 1938), royalty, fees for
technical services or other sum chargeable under this Act, which is payable,---
(A) outside India; or
(B) in India to a non-resident, not being a company or to
a foreign company, 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 [on
or before the due date specified in sub-section (1) of section 139]:
[Provided that where in respect of any such sum, tax has
been deducted in any subsequent year, or has been deducted during the previous
year but paid after the due date specified in sub-section (1) of section 139,
such sum shall be allowed as a deduction in computing the income of the
previous year in which such tax has been paid.]
Explanation.--For the purposes of this sub-clause,--
(A)"royalty" shall have the same meaning as in
Explanation 2 to clause (vi) of sub-section (1) of
section 9;
(B)"fees for technical services "shall have the
same meaning as in Explanation 2 to clause (vii) of sub- section (1) of section
9;"
It is apparent from the above that the condition to
deposit TDS within the prescribed time cannot be read into sub-clause (iii) of
clause (a) of Section 40 of the Act as-unlike the language of item (B) of
sub-clause (i) of clause (a) of Section 40-the same has not been specifically
enacted.
21. We are also unable to agree with Mr. Chaudhari’s
contention that no deduction can be claimed by the Assessee as the salaries
were not reflected in the profit and loss account. The controversy whether an
Assessee can claim deduction on an expense which is not reflected in its profit
and loss account for the relevant period has been authoritatively settled by
the Supreme Court in its decision in The Kedarnath Jute Mfg. Co. Ltd. v. The
Commissioner of Income Tax, (Central), Calcutta: [1971] 82 ITR 363 (SC) wherein
the Court held as under:-
"We are wholly unable to appreciate the suggestion
that if an assessee under some misapprehension or mistake fails to make an
entry in the books of account and although under the law, a deduction must be
allowed by the Income Tax Officer, the assessee will lose the right of claiming
or will be debarred from being allowed that deduction. Whether the assessee is
entitled to a particular deduction or not will depend on the provision of law
relating thereto and not on the view which the assessee might take of his
rights nor can the existence or absence of entries in the books of account be
decisive or conclusive in the matter."
22. In view of the above, the question of law is answered
in the negative, that is, in favour of the Assessee and against the Revenue.
23. The appeal is allowed. In the circumstances, the parties
are left to bear their own costs.
*****
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