By Subash Agarwal, Advocate
1. Introduction
A great Indian statesman and philosopher ‘Chanakya’, variously
described as a ‘Kingmaker’, ‘Ruthless administrator’ etc., courted controversy
when he said-
‘The ends justify the means’ and
‘The ruler should use any means to attain his goals. His actions
require no moral sanctions’.
But when it came to framing of tax laws and collection of taxes, he
made a very sober statement-
‘Ideally, governments should collect taxes like a honeybee, which
sucks just the right amount of honey from the flower so that both can survive’.
But the Government of India while framing the tax laws is
conveniently forgetting the later maxim and seems to be laying emphasis on the
former one.
2. Section 40(a)(ia)- A Draconian Provision
This provision was brought on the statute book by the Finance Act,
2004 w.e.f. A.Y.: 2005-2006. It entails 100 percent disallowance of certain
expenditures for the technical default of non-deduction of TDS or after
deduction, non-payment thereof to the government’s treasury on or before the
due date of filing of return of income.
The unsuspecting victims of the provision of section 40(a)(ia) are
small time traders and businessmen. For them, “Ignorance of law” is proving to
be too costly.
The ostensible reason given by the Government for bringing this
provision on the statute book, as stated in the Memorandum explaining the
provisions of the Finance Bill, 2004 is “to augment the compliance of the TDS
provisions”.
It is not understandable what was the need for bringing in such a draconian provision of law,
when as many as five provisions were
already existing in the Income-Tax Act for ensuring strict compliance of TDS
provisions viz.,-
(i) Section 201(1) : The
defaulter could be treated as the ‘assessee in default’ and TDS amount could be
recovered from him.
(ii) Section 201(1A) : Even
compensatory interest can be recovered from the TDS defaulter.
(iii) Section 221 : Penalty
upto the TDS amount may be imposed for the TDS defaulter being treated as an “assessee in default”.
(iv)Section 271C : Further
penalty upto the TDS amount for failure to deduct or pay TDS may be imposed.
(v) Section 276B : TDS
defaulter may suffer rigorous imprisonment upto seven years with fine for
failure to pay TDS to the government’s account.
3. ITAT Special bench Judgement in the case of Merilyn Shipping
& Transport – A judgement that saved thousands of assessees from closing
their shops.
The ITAT special Bench (Vishakapatnam) judgement in the case of M/s.
Merilyn Shipping & Transports vs. ACIT reported in 146 TTJ 1 (Vizag) ,brought smiles
on the face of tax litigants (read assessees), who were cowering in terror in
the face of unbearable burden of tax liability imposed invoking section
40(a)(ia). However, in passing this judgement, a dissenting note was struck by
Sri S.V. Mehrotra, Hon’ble Accountant Member, who chose to write a separate
order. Sri Mahavir Singh, Hon’ble Judicial member’s view went in favour of the assessee
with which Sri D. Manmohan, Hon’ble VP concurred. Thus, by a majority view, the
judgement was rendered in favour of the assessee.
The majority view was on the following lines-
(a) On a comparison of the proposed
provisions in the Finance (No. 2) Bill, 2004 (which referred to 'any amount payable to a resident or amount paid or credited to a contractor
') and the enacted provisions (where the words credited or paid were deleted),
would show that the change was not without purpose. The Legislative intent was
clear that only the outstanding amounts or provision for expense was sought to
be disallowed in event of default of TDS.
(b) Hon’ble Delhi High Court in the case of Kelvinator
has referred to changes made to provisions of section 147 of the Act. While
under the Direct Tax Laws (Amendment) Act, 1987 the Parliament deleted the
words 'reasons to believe' and replaced them with 'opinion', the original words
were re-introduced by the Amending Act in 1989 on receiving representations. In
the present case also the words 'credited or paid' were replaced with 'payable'
on receipt of representations from the professional bodies.
(c) Where language of law is clear,
substitution/addition/deletion of words has to be avoided. In the present case,
the intention of law is clear and the only word provided is 'payable'.
(d) Section 43B allows the payment only on
cash basis. Hence, the contention of the revenue that section 40( a )( ia
) would become inoperative in case of cash system of accounting was not
correct.
(e) As section 40( a )( ia )
refers only to the amounts payable, the disallowance would apply only to amount
payable. If the amount has already been paid, the disallowance would not apply.
(f) CBDT's Circular No. 5/2005 has made it
clear that the disallowance would apply only to outstanding amounts at the end
of the year. Reference was made to various TDS sections like 194A to 194K,
where TDS has to be deducted at the time of payment or credit, whichever is
earlier and also to section 194LA where TDS is deducted at the time of payment
of sum.
(g) Decision of the Madras High Court in Tube
Investments of India Ltd.'s case was concerned only with constitutional
validity of section 40( a )( ia ) and did not consider the
aspects of 'paid', 'credited' or 'payable'.
(h) Disallowance under section 40( a
)( ia ) was applicable only to amounts outstanding or provisions made on
the date of balance sheet on which there was a default in complying with TDS
provisions.
4. Andhra
Pradesh High Court’s interim stay / suspension-whether a show stopper?
4.1 The revenue recently filed
an application u/s 151 of Code of Civil Procedure (It is pertinent to note here
that Section 151 of CPC recognizes the inherent power of a Court to make such
orders as may be necessary for the ends of justice or to prevent abuse of the
process of the Court) before the Hon’ble High Court of Andhra Pradesh praying
that the operation of order passed by the ITAT, Vishakapatnam Bench in the case
of M/s. Merilyn Shipping & Transports may please be
suspended. A one line order has been passed stating –
“Interim suspension.
Notice”.
It is pertinent to
note here that the aforesaid petition was filed in the revenue’s appeal in I.T.
T.A. No. 384 of 2012 which was an appeal where M/s. Merilyn Shipping &
Transports was itself the respondent
4.2 Now, a question arises for
consideration is whether such an interim suspension / stay will destroy the
precedent value of the Special Bench Judgement, which was hitherto binding on
all the Benches of ITAT and lower authorities all over the country.
4.3 Before proceeding further, it is
important to analyse the significance of the term ‘suspension’ and ‘stay of
proceedings’. The Hon’ble High Court has used the term ‘suspension’ whereas
normally courts use the term ‘stay of proceedings’.
The Law Lexicon, edited by Hon’ble Justice Y.V. Chandrachud, Former
Chief Justice of Supreme Court of India has explained the term ‘staying
proceedings’ as under-
“The suspension of an action, Proceedings is stayed absolutely or
conditionally.”
It has also defined the term ‘suspend’ as under-
“Suspend is defined to mean to interrupt; to cause to cease for a
time; or stay and delay; to hinder the proceeding for a time.”
Thus, it can be seen that both the terms have been used
interchangeably in the two definitions and mean one and the same thing.
4.4 Hon’ble Supreme Court in the case Shree
Chamund Mopeds Ltd. vs. Church of South India Trust Association, Madras AIR
1992 SC 1439, 1444 has analysed the difference between “stay of
operation” of an order and “quashing” an order. It has held that ‘stay of
order’ of an appellate authority / court by a higher court means that the order
passed by the appellate authority / lower court still continues to exist in law
inspite of the ‘stay’ and its existence is not destroyed. But where the order
of the appellate / lower court is quashed and the matter is remanded back, it
means that the appeal disposed of by the said order of the appellate authority/lower
court would be restored and it can be said to be pending before the said
authority/lower court.
4.5 The Hon’ble Justice Bhaskar
Bhattacharya sitting in a division bench of the Calcutta High Court speaking
for the Bench, has very succinctly and clearly explained the position of law in
this regard in the case of Pijush Kanti Chowdhury vs. State of West
Bengal and Ors., 2007 (3) CHN * 178 as under-
“Therefore, the effect of
the order of stay in a pending appeal before the Apex Court does not amount to
'any declaration of law' but is only binding upon the parties to the said
proceedings and at the same time, such interim order does not destroy the
binding effect of the judgment of the High Court as a precedent because while
granting the interim order, the Apex Court had no occasion to lay down any
proposition of law inconsistent with the one declared by the High Court which
is impugned.”
5. CONCLUSION
From the above analysis, it is as clear as broad daylight that the
salutary impact of the special bench judgement in the case of M/s. Merilyn Shipping & Transports has
not been oblitered and the judgement continues to hold the field inspite of the
‘Interim Suspension’ of the same by the Hon’ble Andhra Pradesh High Court.
* means ‘Calcutta High Court Notes’: The
entire text can also be downloaded from www.indiakanoon.org
