SC Overruled the decision of the Allahabad High Court in CIT v. Vector Shipping Services (P) Ltd.

In Palam Gas Service v. CIT, the two-judge bench of the Supreme Cout has categorically held that the word ’payable’ used in Section 40(a) (ia) of the Income Tax Act, would also cover the situations where the amount is already paid, but no advance tax was deducted thereupon.

The assessee, in the instant case, made freight payment without deducting tax at source. the AO, disallowed the expenditure by invoking Section 40 (a) (ia) of the Income Tax Act. The appeals filed against the said order was dismissed by the appellate authorities and the High Court.

Before the High Court, the assesse contended that Section 40(a)(ia) would cover only those contingencies where the amount is due and still payable.

The bench noticed the decisions of the Madras and Calcutta High Courts and the recent Punjab & Haryana High Court wherein these Courts had taken a view that the aforesaid provision would cover even those cases where the amount stands paid. A different view had been taken by the Allahabad High Court in CIT v. Vector Shipping Services (P) Ltd, and held that Section 40(a) (ia) would apply only when the amount is ’payable’.

After perusing the relevant provisions of the Act, the two-judge bench comprising of Justice A.K Sikri and Justice Ashok Bhushan observed that a conjoint reading of Sections 194C and 200 of the Income Tax Act would show 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.

"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."

"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."

Dismissing the appeal, the bench observed that Section 40(a)(ia) of the Income Tax Act deals with the nature of default and the consequences."When the entire scheme of obligation to deduct the etax 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 spite of specific provisions laying down these consequences."

Concurring with the findings of the Madras, Calcutta and the Punjab & Haryana High Courts, the bench over ruled the Allahabad High Court decision.

Read the full text of the Judgment below.

 06 May 2017, 02:01 PM