By Subash Agarwal, Advocate
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.”
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