AMIT BAJAJ ADVOCATE

D. Manmohan, Vice-President (MZ) - I have gone through the orders passed by the learned Accountant Member, Shri S.V. Mehrotra as well as the learned Judicial Member, Shri Mahavir Singh. I am not able to persuade myself to agree with the view taken by Shri S.V. Mehrotra, Accountant Member. I have gone through the detailed reasons given by Shri Mahavir Singh while coming to the conclusion that the word 'payable' used in section 40(a)(ia) of the Income Tax Act, 1961 has to be given its natural meaning and, going by strict interpretation, I am of the firm view that section 40(a)(ia) of the Act is applicable only to expenditure which is payable as on 31st March of every year and cannot be invoked to disallow the amounts which are already been paid during the previous year, without deducting tax at source. I therefore agree with the view taken by Shri Mahavir Singh, JM and answer the question accordingly. The matter may now be placed before the Division Bench for passing appropriate orders, in the above listed case in the light of the majority view of the Members consisting of the Special Bench.

Mahavir Singh, Judicial Member - I have gone through proposed order of Ld A.M., Brother Shri S.V.Mehrotra and could not persuade myself to the conclusion arrived at by my Brother. So, I am writing my own order on the basis of arguments of both the sides and material placed before us. As regards to arguments narrated by Ld Brother Shri Mehrotra, I have no difference because he has beautifully narrated every argument of both the sides.

First, I have perused the question referred to the Special Bench by Hon'ble President, which is as under:

2. Section 40(a)(ia) of the Act was introduced in the Income-tax Act, 1961 by the Finance Act, 2004 w.e.f. 1st April, 2005 with a view to augment the revenue through the mechanism of tax deduction at source. This provision was brought on statute to disallow the claim of even genuine and admissible expenses of the assessee under the head "Income from Business & Profession" in case the assessee does not deduct TDS on such expenses. The default in deduction of TDS would result in disallowance of expenditure on which such TDS was deductible. Let us see the provision as brought out in the Act, which is as under:

Now, I have to look at how this provision was proposed in the Finance Bill 2004 and compared it with what was finally enacted after the assent of the President. The comparative provision is as under:

From the above comparison between the proposed and enacted provision, I find that the Legislature has replaced the word "amounts credited or paid" with the word "payable" in the final enactment. As argued by ld. Counsel for assessee as well as for the Interveners, a question arises as to why the Legislature dropped the words "credited" and "paid" under section 40(a)(ia) as proposed in the Finance Bill, 2004. The ld. Counsel argued that the word "paid" was not incorporated because Legislature knew it that if amount is already paid, IDS cannot be deducted. According to ld. Counsel, as per Rule 30 of Income Tax Rules, 1962 (hereinafter referred to as 'the Rules'), which, inter alia, deals with time and mode of payment of Tax deducted at source, he pointed that Rule 30 of the Rules prior to its substitution by the Income-tax (Sixth Amendment) Rules, 2010 with retrospective effect from 1st April, 2010 allowed two months period of time for depositing of TDS, if the amount is deducted with reference to this Rule. According to the ld. Counsel, the words "paid" and "payable" have different connotations and accordingly, different time periods have been prescribed for depositing of TDS. According to ld. Counsel, the provision of section 43 deals with definition of certain terms relating to income from profits and gains of business or profession and pointed out that sub-section (2) defines the term "paid" as under:

According to ld. Counsel, though the word "paid" has been defined but the word "payable" has not been defined in the Act and he referred to the dictionary meaning of the word "payable". ld. Counsel, Shri S. Subramanian in the case of Merilyn Shipping & Transports, Visakhapatnam has filed written submission and at page 6, para 2.2 has given the term "payable" as per the dictionary meaning which is as under:

To support this, ld. Counsel for the assessee relied on the decision of the Hon'ble Bombay High Court in the case of Abdul Gaffar A.Nadiadwala v ACIT & Ors. [2004] 267 ITR 488(Bom) wherein held that The Income-tax Act does not define the words 'goods' or merchandised but it well-settled that in the absence of there being anything contrary to the context the language of its statute should be interpreted according to the plain dictionary meaning of the terms used therein.

3. Further, the ld. Counsel relied on the decision of the Hon'ble Supreme Court in the case of Smt Tarulata Shyam & Ors. v CIT [1977] 108 ITR 345 (SC) wherein it is held that, "it is a fundamental rule of taxation that where there is no scope for importing into the statute words which are not there, such importation would be not to construe, but to amend, the statute. Even if there is any casus omisus the defect can be remedied by the legislation alone and not by judicial interpretation. Ld. Counsel also relied on the decision of Hon'ble Supreme Court in the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC), wherein it is held that if the court finds that the language of the taxing provision is ambiguous or capable of more meanings than one, then the court has to adopt that interpretation which favours the assessee, more particularly so where the provision relates to imposition of a penalty. Ld. Counsel in this context here argued that the provisions of section 40(a)(ia) of the Act are penal in nature because it disallows even the genuine and admissible claims of expenses under the head "Income from Business & Profession" if the assessee does not deduct TDS on such expense.

4. Further, the ld. Counsel also referred to the decision of the Hon'ble Supreme Court, as regards to cardinal principle of interpretation whereby literal rule of interpretation should be followed, in the case of Raghunath Rai Bareja and Others v. Punjab National Bank and Others (135 Company cases 163) wherein it is observed as under:

The provision of section 40(a)(ia) of the Act clearly uses the term "payable" and not "paid". Hence, if the literal construction of this word is taken, then no word can be substituted in place of the said word "payable" nor can any new word be supplied in the provision. The language of the provision has thrown open two terms "paid" and "payable" for judicial interpretation. We have gone through the meaning of terms "payable" and "paid" as defined in various judicial dictionaries and the definitions are reproduced above in para 3 of this order.

5. In respect to this, Revenue argued that the interpretation of the word "payable", if restricted to payable, will throw up an anomalous situation. As per ld CIT-DR, if the disallowance under section 40(a)(ia) of the Act is restricted to amounts payable then it in the subsequent year such provision is actually paid off without deducting TDS or depositing the same the revenue would lose its right to disallow such expenses. According to ld CIT- DR, this would render the provision of section 40(a)(ia) of the Act otiose and its avowed objective of augmenting revenue through the compliance of TDS provision would fall flat. Another argument taken by ld CIT-DR was that section 40(a)(ia) of the Act would fail where assessee is maintaining books of account on cash system and according to ld CIT-DR, this is because there would be no amount claimed as expenses from outstanding or from payable amount. For this, ld CIT-DR referred that the provision of section 43B of the Act will be of no consequence.

6. No doubt the dispute before us is whether the term "payable" in section 40(a)(ia) of the Act refers to entire payment on which the TDS was required to be made in terms of various provisions referred to in this section contained in chapter XVII-B or it refers only to amount payable with reference to those sections, which, as per the assessee, remain outstanding as on 31st March of every year. The contention that a particular amount is covered under chapter XVII-B and therefore TDS was required to be made from that amount but the amount has also been paid without TDS, therefore, disallowance to this extent should not be made under section 40(a)(ia) of the Act. The provision of section 40(a)(ia) of the Act was introduced in order to ensure compliance of TDS but assigned the term "payable" in the provision of section 40(a)(ia) of the Act. On a comparison between the proposed and enacted provision, the only conclusion, which can be reached, is that Legislature consistently replaced the words "amount credited" or "paid" with the word "payable" in the final enactment and such change was not done without any purpose. It is a basic presumption that an enactment was brought in by the Legislature is well-thought of and properly worded in order to give meaning to its intent by changing the words from "credited" or "paid" to "payable". The legislative intent has been made clear that only the outstanding amount or the provision for expense liable for TDS is sought to be disallowed in the event there is a default of TDS. This proposition is also explained by Hon'ble Supreme Court in the case of CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561 (SC), wherein it is held "Our view gets support from the changes made to section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words "reason to believe" but also inserted the word "opinion". However, on receipt of representations from the companies against omission of the words "reason to believe", Parliament reintroduced the said expression and deleted the word "opinion " on the ground that it would vest arbitrary powers in the AO. " And further Hon'ble Supreme Court quoted the relevant portion of circular no.549 dated October 31, 1989 (1990) 182 ITR (St.) 1, 29), which reads as under:

From the above, I am of the view that similar is the situation here that after receiving representations from professional bodies (copy of which is filed before us also), the Legislature in this provision replaced the word from "credited" or "paid" to "payable". I am of the view that where the language is clear, the intention of the Legislature is to be gathered from the language used. What is to be borne in mind is as to what has been said in the statute as also what has not been said. A construction which requires, for its support, addition or substitution of words or which results in rejection of words, has to be avoided, unless it is covered by the rule of exception, including that of necessity. In the present provision of section 40(a)(ia) of the Act there is no such exception and the only word provided by Legislature is "payable".

7. The Revenue's argument does not have any merit that payment of earlier years outstanding expenses cannot be allowed in subsequent year unless specifically provided in the Statute. Proviso to section 40(a)(ia) of the Act lays down that earlier year's provision can be allowed in subsequent years only if TDS is deducted and deposited. Hence, revenue's fear is unfounded and the provision of section 40(a)(ia) of the Act covers the situation. Another argument of the revenue as regards to maintaining of books of account from cash and no amount claimed as expense being outstanding or payable, when the assessee itself has not claimed expense which is outstanding, there could be no reason to disallow the same. The Income-tax Act already has a precedence in section 43B of the Act which allows expense only on payment basis and therefore, the argument of the revenue, that section 40(a)(ia) of the Act would become otiose in cash system of accounting, was without any basis.

8. I have no dispute about the Rule of interpretation, wherein referred the decision of England in the case of Inland Revenue Commissioner v Hinchy [1960] A.C. 748 at page 767; [1960] 1 All E.R. 505 (512) Lord Reid observed as under:

Further, it was observed as under:

But in the present case, the only word put in the provision of section 40(a)(ia) of the Act is "payable" and not "paid" or "credited", rather Legislature consciously replaced the word "amounts credited or paid" with the word "payable" in the final enactment and such change was done with a purpose. I am of the view that presumption that enactment brought in by the Legislature is well-thought off and properly worded in order to give meaning to its intent. The Legislature by consciously replacing the words from "credited" or "paid" to "payable", the intent has been made clear that only the outstanding amount or the provision for expenses are liable for TDS are to be disallowed in the event there is default in not following the TDS provisions under chapter XVII-B of the Act. No doubt the object of section 40(a)(ia) of the Act is to ensure that the TDS provision as provided in chapter XVII-B is implemented without any default. As per section 40(a)(ia) of the Act any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services "payable" on which tax is not deducted or the tax is deducted but the same is not paid within the time allowed such amount shall be disallowed while computing the income. The sub-section speaks of the amount "payable" on which the tax is not deducted and therefore it should apply only if any amount is "payable", but if the amount is already paid the provisions of this section should not apply. The crucial word is "payable." The question arises "whether payable means payable at the end of the year or payable at any time during the year though paid during the year itself? If one looks into the TDS Provisions from section 194A to 194 K, it will be apparent that as per the language of those sections, tax is to be deducted at the time the amount is paid or at the time when the amount is credited, i.e. when the liability is admitted and it becomes payable. Therefore wherever the payment is covered by aforesaid sections whether paid or credited, tax has to be deducted. Section 194 L and 194LA may also be looked into which says that tax has to be deducted only at the time of payment. The language in these sections therefore shows that the legislature has used different language in different sections. It is trite law that each and every word of the section has its own meaning and while drafting section 40(a)(ia) of the Act, the legislature was conscious of the fact that there may a case where the amount is paid and there may be a case where the amount is payable and have used appropriate words so that the language may be clear and clear meaning may be given. One may look into the language contained in Finance Bill, 2004 wherein this provision was introduced. In the finance bill both the words paid and payable were used (2004) 268 ITR (Statute) 40. However the word paid was subsequently dropped which shows that 40(a)(ia) was meant to be applicable only if the amounts covered therein was "payable" at the end of the year. Reference may be made, for the scope and effect of section 40(a)(ia) as clarified by CBDT in Circular No. 5 of 2005, date 15th July, 2005 to show that the intention to introduce this provision was brought to curb bogus payments by creating bogus liability.

9. I find that Hon'ble Supreme Court in the case of Vegetable Products Ltd. (supra) have interpreted the word payable as the amount "payable" after deducting the amount paid at the time of imposing penalty. Further, the Hon'ble Gujarat High Court in the case of CIT v Upnishad Investment (P) Ltd & Ors [2003] 260 ITR 532 (Guj.) may also be referred wherein the word payable has been interpreted by Hon'ble Gujarat High Court as the amount due or outstanding as under:

10. Section 40(a)(ia) of the Act, creates a legal fiction by virtue of which even the genuine and admissible expenses claimed by an assessee under the head "Income from Business and Profession" if the assessee does not deduct TDS on such expenses are disallowed. Section 40(a)(ia) of the Act has been enacted for the purposes of augment of tax through the mechanism of TDS and was in furtherance to the said objective. This is a deeming provision. How to interpret the deeming provision or what is the meaning of word "deem". As verb transitive, the word 'deem' means to treat something as if (i) it is really something else, or (ii) it has qualities that it does not have. 'Deem' is a useful word when it is necessary to establish a legal fiction either positively by 'deeming' something to be something it is not or negatively by 'deeming' something not to be something which it is. Legal fiction is an assumption that something is true even though it may be untrue. Such an assumption is especially made in judicially reasoning to alter how a legal rule operates. When the law creates a legal fiction such fiction should be carried to its logical end. There should be no hesitation in giving full effect to it. The proposition that legal fiction must be carried to its logical conclusion does not, however, mean that it should be carried to an illogical length. By catena of decisions, three rules are fairly well settled for interpreting a provision creating a legal fiction. They are as under:

It means that legal fiction cannot be extended any further and has to be limited to the area for which it is created. Hon'ble Andhra Pradesh High Court in the case of Addl. CIT v. J Durgamma P. [1987] 167 ITR 776 (AP) held that it is not possible to extend the fiction beyond the field legitimately intended by the statute. The Hon'ble court was dealing with the provisions of sec. 171(1) of the IT Act in the context of which it was held that joint family shall be deemed to continue for the limited purpose of assessing cases of joint families which have been hitherto assessed as such. It is not possible to extend that fiction to other cases. Similar view was taken by the Hon'ble Kerla High Court in CIT v. Kar Valves Ltd. [1987] 168 ITR 416 (Ker.) wherein it is held that legal fiction is limited to the purpose for which they are created and could not be extended beyond that legitimate frame, Hon'ble Kerala High Court was dealing with the case where assessee sought to take advantage of sec. 41(2) of the Act by submitting that if liabilities are not liquidated and outstanding are not collected, then business could be deemed to continue. Hon'ble Allahabad High Court in the case of Controller of estate Duty v. Krishna Kumar Devi [1988] 173 ITR 561 (All) held that in interpreting the legal fiction the court should ascertain the purpose for which it was created and after doing so assume all facts which are logical to give effect to the fiction. Further, Hon'ble Supreme Court in CIT v Mother India Refrigeration Pvt. Ltd. [1985] 155 ITR 711 (SC) held that legal fictions are created only for some definite purpose and they must be limited to that purpose and should not be extended beyond that legitimate field. In CIT v. Bharani Pictures [1981] 129 ITR 244 (Mad.) it is held that legal fictions are for a definite purpose and are limited to the purpose for which they are created and should not be extended beyond its legitimate field. The statutory fiction introduced in one enactment cannot be incorporated in another enactment. The point that legal fiction cannot be extended to a new field was highlighted by Hon'ble Madras High Court in CIT v Rajam T.S [1988] 125 ITR 207(Mad.) wherein it is held that section 41(2) of the Act creates a legal fiction under which the balancing charge is treated as business income chargeable to tax but when this amount is distributed to shareholders then it would not become deemed dividend and it would be only a capital receipt and not distribution of accumulated profits. Thus, a legal fiction was invoked in the hands of the assessee company and was not extended in the hands of the shareholders. In the present case, section 40(a)(ia) of the Act creates a legal fiction for the amounts outstanding or remains payable i.e. at the end of every year as on 31^st March and it cannot be extended for taxing the amounts already paid. In fact, section 201 of the Act itself take care of tax to be collected in the hands of the payee and other TDS provisions under chapter XVIIB of the Act. No further legal fiction from elsewhere in the statute can be borrowed to extend the field of section 40(a)(ia) of the Act. This fiction cannot be extended any farther and, therefore, cannot be invoked by Assessing Officer to disallow the genuine and reasonable expenditure on the amounts of expenditure already paid.

11. As regards to argument of revenue regarding challenge to the constitution of this provision before Hon'ble Madras High Court in the case of Tube Investments of India v. ACIT [2009] 325 ITR 610 wherein the court rejected the said challenge and upheld the validity of section 40(a)(ia) of the Act and the competence of the Legislature in enacting such a provision on the ground that this provision has been introduced in order to augment tax through the mechanism of TDS and the provisions of section 40(a)(ia) of the Act is in furtherance to the said objective. Further, Hon'ble Allahabad High Court also declared the provisions of section 40(a)(ia) as constitutionally valid in the case of Dey's Medical (U.P.) (P) Ltd. v. Union of India & Ors. [2009] 316 ITR 445. It is not in doubt that Hon'ble Madras High Court and Hon'ble Allahabad High Court has held the constitutional validity of this provision but it is also true that specific issue regarding "paid", "credited" or "payable" has not been considered and even it was not argued. Hence, these judgments will in no way affect this issue.

12. In view of the above judicial pronouncements of Hon'ble Supreme Court and Hon'ble High Courts, materials placed before us, arguments made by both the sides and in view of the provisions of section 40(a)(ia) of the Act, on comparison between the proposed and enacted provision, the only conclusion which I can reach is that the Legislature consciously replaced the words "amounts credited or paid" with the word "payable" in the final enactment. By changing the words from "credited" or "paid" to "payable", the legislative intent has been made clear that only outstanding amounts or the provisions for expenses liable for TDS under chapter XVII-B of the Act is sought to be disallowed in the event there is a default in following the obligations casted upon the assessee under chapter XVII-B of the Act. I agree with the arguments made by ld. Counsel for the assessee and other Counsels for the Interveners that while interpreting the word "payable" in this provision, the word of a statute must be understood in its natural, ordinary or popular sense and construed according to its grammatical meaning. According to me, such construction would not lead to absurdity because there is nothing in this context or in the object of this statute to suggest to the contrary. It is a cardinal principle of interpretation that the words of a statute must be prima facie given their ordinary meaning, when the words of the statute are clear, plain and unambiguous then the courts are bound to give effect to that meaning. The literal rule of interpretation really means that there should be no interpretation of the statute, rather in other words, we should read the statute as it is without doing any violence to the language. In the present dispute before us, the word "payable" used in section 40(a)(ia) of the Act is to be assigned strict interpretation, in view of the object of Legislation, which is intended from the replacement of the words in the proposed and enacted provision from the words "amount credited or paid" to "payable". Hence, in my view, my answer to the question referred by Hon'ble President to the Special Bench is as under:

The provisions of section 40(a)(ia) of the Act are applicable only to the amounts of expenditure which are payable as on the date 31st March of every year and it cannot be invoked to disallow which had been actually paid during the previous year, without deduction of TDS.

S. V. Mehrotra, Accountant Member - This appeal filed by the assessee is against the order of Id. Commissioner of Income-tax (Appeals)-I. Visakhapatnam dated 03.07.2008 for the assessment year 2005-06.

2. When the matter came up before the ld. Members of the Visakhapatnam Bench on 08.03.2010, the assessee relied on the order of Tribunal dated 23.10.2009 of ITAT, Hyderabad 'A' Bench. Hyderabad in the case of M/s. Teja Constructions, Hyderabad in I.T.A. No. 308/Hyd./2009 relating to the assessment year 2005-06. After hearing ld. D.R., the Bench could not agree with the decision rendered by the ITAT Hyderabad 'A' Bench and, therefore, referred the matter to the Hon'ble President to constitute a Special Bench. Hon'ble President constituted the Special Bench to decide the following question:-

3. Brief facts of the case are that the assessee, a partnership firm, in the relevant assessment year, derived income from business of ship containers transport and handling. customs clearing and as forwarding agents. It filed its return of income for assessment year 2005-06 declaring total income of Rs. 15,24,710/- on 29.03.2006. In the course of assessment proceedings, the Assessing Officer noticed that the assessee had claimed certain expenditure in Profit & Loss A/c, i.e. brokerage expenses of Rs. 38,75,000/- and commission Rs. 2,43,253/-without deducting TDS on payment of these amounts as required under section 40(a)(ia) of the Income Tax Act. The Assessing Officer intimated the defaults. In response assessee's representative accepted his failure for non-deduction of TDS at the time of making payment and agreed for the disallowance. Accordingly, Assessing Officer disallowed brokerage of Rs. 38,75,000/- and commission of Rs. 2,43,253/-. Before ld. CIT(Appeals), it was submitted that at the time of assessment, the assessee was under bona fide belief that the provisions of section 40(a)(ia) of the Act were applicable for both the amounts 'paid' as well as 'payable'. However, on careful reading of the said provision and after going through the expert opinion, it was found that the said provisions were applicable for the amounts 'payable' only. It was, thus, submitted that since in the assessee's case the outstanding brokerage and commission as on 31.03.2005 was only Rs. 1,78,025/-, disallowance should have been restricted to only Rs. 1,78,025/-. Ld. CIT(Appeals) rejected the assessee's contention, inter alia, observing that taking the spirit of TDS provision into account and section 40(a)(ia) being directly related to such TDS provision, a harmonious construction of the word 'payable' leads to the inevitable conclusion that the said word also includes the 'paid' amount. Hence, the assessee's argument in this regard was not acceptable and the Assessing Officer was correct in disallowing the entire payments claimed towards brokerage and commission. Being aggrieved, the assessee is in appeal before us.

As noted earlier, Hon'ble President has constituted this Special Bench to decide the question noted above in para 2.

Following are the Interveners in the matter Intervener No. 1 - M/s. Blue Marine Logistics Pvt. Ltd., Chennai, for which Shri B. Ramakrishnan, C.A. appeared, Intervener No. 2 - Rajamahendri Shipping & Oil Field Services Ltd. for which Shri Gun Hari, C.A. appeared, and Intervener No. 3 - Srinivasa Rao for which Shri Y. Suryachandra Rao, C.A. appeared, C.A.

4. Ld. counsel for the assessee, Shri S. Subramanyam submitted that Finance (No. 2) Bill, 2004 sought to amend section 40 of the Income Tax Act by inserting sub-clause in clause (a) w.e.f. 1st April, 2005 as under :-

4.1 Ld. counsel for the assessee further referred to Notes on Clause 11 of Notes on clauses to Finance (No. 2) Bill, 2004, which reads as under :-

With reference to aforementioned amendment to section 40 of the Act, ld. counsel for the assessee pointed out that the said amendment used words 'payable' as well as 'paid' or 'credited'. However, when parliament gave final approval to the Bill, the word 'paid' or 'credited¹ was omitted and only word 'payable' remained in section 40(a)(ia) of the Act, which would be evident from section 40(a)(ia), which reads as under :-.

4.2 Ld. counsel submitted that in the back drop of above, the question arises as to why the legislature dropped 'credited' and 'paid' under section 40(a)(ia). He submitted that 'paid' was not incorporated because legislature knew that if amount is already paid, TDS cannot be made. Ld. counsel submitted that section 201 takes care of a situation where assessee fails to deduct tax. He further pointed out that proviso to section 40(a)(ia) gives leverage in respect of 'payable' amount to assessee to pay the amount after making TDS and avail deduction in subsequent year. Ld. counsel referred to Rule 30 of Income Tax Rules, which, inter alia, deals with time and mode of payment of tax deducted at source. He pointed out that Rule 30 prior to its substitution by the Income Tax (Sixth Amendment) Rules, 2010 with retrospective effect from 1st April, 2010 allowed two months period of time for depositing of TDS if the amount is credited by a person to the account of the payee and one week time in any other case. The said Rule reads as under :-

With reference to this Rule, ld. counsel submitted that the words 'paid' and 'payable' have different connotations and, accordingly, different time periods have been prescribed for depositing of TDS. Ld. counsel further referred to section 43, which deals with definition of certain terms relating to income from profits and gains of business or profession and pointed out that sub-section (2) defines the term 'paid' as under :-

Ld. counsel submitted that though word 'paid' has been defined, but the word 'payable' has not been defined in the Act. Ld. counsel for the assessee referred to page 6 at para 2.2 of written submissions, wherein the term 'payable' as per dictionary meaning has been mentioned. The submissions are as under :-

4.3 Ld. counsel referred to the decision of the Hon'ble Bombay High Court in the case of Abdul Gafar A. Nadiadwala v. ACIT & Others reported in 267 ITR 488, wherein the Hon'ble Bombay High Court at paid 511 has observed as under :-

It is thus clear that the court can always take aid of the dictionaries".

Thus, ld. counsel submitted that keeping in view the conflicting views, dictionary meaning of the word 'payable' should be given preference. Ld. counsel further submitted that taxing provisions must receive strict construction as held by the Hon'ble Supreme Court in the case of CWT v. Kripashankar Dayashanker Worah reported in [1971] 81 ITR 763 (SC) and in the case of Federation of Andhra Pradesh Chamber of Commerce and Industry and Others v. State of Andhra Pradesh & Others reported in 247 ITR at page 36 (SC). He further referred to the decision of the Hon'ble Apex Court in the case of Smt. Tarulatha Shyam & Others v. CIT reported in (1977) 108 ITR 345 (SC), wherein it has been held that "it is a fundamental rule of taxation that where there is no scope for importing into the statute words which are not there, such importation would be not to construe, but to amend, the statute. Even if there is any casus omisus the defect can be remedied by the legislation alone and not by judicial interpretation". He submitted that the term 'payable' admits only of one meaning and the construction in different way is unwarranted. He referred to page 9 of paper book containing various case laws and pointed out that in the case of Teja Constructions v. ACIT, Hon'ble ITAT, Hyderabad Bench has held that the term 'payable' means the amount outstanding on the date of balance-sheet and does not include the paid amount.

4.4 Ld. counsel also relied on the decisions of the Hon'ble Supreme Court in the case of Union of India & Others v. Onkar S. Kanwar & Others reported in 258 ITR 761 (SC) and in the case of CIT v. Vegetable Products Limited reported in 88 ITR 192 (SC). He also submitted that section 40(a)(ia) did not cover rent, royalty and the same had been inserted by Taxation Laws (Amendment) Act, 2006 with retrospective effect from 1st April, 2006. He further submitted that if prior to amendment, rent and royalty amounts were paid or were credited to the account of payee, then no TDS was required to be made. He, therefore, submitted that TDS provisions are to be separately looked into and they cannot be examined along with section 40(a)(ia) of the Act. He submitted that in following decisions of Tribunal the word 'payable' has been interpreted and it has been held that amount paid without TDS does not cover within the ambit of section 40(a)(ia) of the Act :-

Ld. counsel further referring to the decision in the case of Jaipur Vidyut Vitran Nigam Limited submitted that section 40(a)(ia), otherwise being a legal fiction, needs to be construed strictly in view of the decision of the Hon'ble Supreme Court in the case of CIT -vs.- Mother India Refrigeration Industries (P) Ltd. (1985) 155 ITR 711 (SC).

5. On behalf of Intervener M/s. Blue Marine Logistics Pvt. Ltd., Chennai, Shri B. Ramakrishnan, C.A. advanced similar contentions as advanced in the main appeal and further submitted that the words 'paid' and 'payable' are distinct and two different words having 'separate' meaning of their 'own' and, therefore, cannot be used interchangeably. He submitted that two events take place in the case of payments covered by TDS provision - first is TDS and second is payment Both events either simultaneously take place or payment can be made later on. He submitted that separate consequences have been provided in the Act for both the events separately. Like section 200 deals with duty of person deducting tax. Section 201 prescribes consequences of failure to deduct or pay. Section 271C prescribes penalty for failure to deduct tax at source and section 276B prescribes failure to pay tax to the credit of Central Government under Chapter XII-D or XVII-B. He pointed out that merely because there is a failure to deduct tax, no transaction can take place. The assessee submitted that both the events have to be separately considered and one does not depend upon other. Ld. counsel further pointed out that TDS provisions have classified the expenses under two categories; (i) first category is of those expenses, where tax is to be deducted at source when amount is 'credited' to party account. Second category of expenses is when tax deducted at the time of payment like salary, compensation paid on land acquisition. He further referred to Rule 30 and pointed out that it does not contain all the sections of TDS provision.

He submitted that Income Tax Act did not provide third category of expenses, i.e. payment of deductible amount 'paid' without deducting of tax at source. He submitted that on careful scrutiny of Rule 30, it brings forth the distinct treatment given to nature of expenses belonging to either first category or second category as enumerated above. For the first category, extended time limit is given (however, Government deductors do not have this benefit of extended time limit) and for this two situations have been provided, i.e. credit at the time when annual accounts are made and credit at any other time of the previous year. For the second category, only one time limit is provided using the words "one week from the last day of the month in which the deduction is made", while the governing provision of this category refer to "before making payment' or 'at the time of payment thereof. Thus, for the second category of expense, Rule did not provide for a situation of payments made without deduction of tax at source. He submitted that all the expenses referred to in section 40(a)(ia) are the expenses of 1st category. The notable omission being section 1941 was rectified immediately within one year. He has made his arguments as under :-

Ld. counsel for the assessee submitted that some of the provisions will become redundant if 'payable' is held to be including 'paid'. He clarified that when estimation of profit is made, the disallowance cannot be made. Ld. counsel further submitted that income tax charges on income and not on expenditure, therefore, expenses cannot be denied if they have been incurred for the purposes of business. In this regard, he referred to the decision of the Hon'ble Supreme Court in the case of CIT v. C.P. Sarathy Mudaliar [1972] 83 ITR 170 (SC) and also the decision of the Hon'ble Supreme Court in the case of CIT v. Prem Bhai Parekh & Others [1970] 77 ITR 27 (SC) for the proposition that section 16(3) creating artificial income must be strictly construed. He, therefore, submitted that since on account of disallowance being made under section 40(a)(ia), expenditure actually incurred by assessee is converted into artificial income, therefore, this section should be strictly construed.

6. On behalf of second Intervener Rajamahendri Shipping & Oil Field Services Ltd., Shri Gun Hari, C.A. appeared and referred to the decision of the Hon'ble Madras High Court in the case of CIT v. TVS Lean Logistics Ltd. [2007] 293 ITR 432 (Mad.) contained at page 56 of the paper book, wherein Hon'ble Madras High Court has observed that where the words of a statute are absolutely clear and unambiguous, rule of literal construction has to be followed, even if literal interpretation results in hardship or inconvenience. Court cannot enlarge the scope of legislation when the language of the provision is plain and unambiguous. It cannot add or subtract words in a statute or read something into it which is not there even if there is a defect or any omission in the words used in the legislation.

He, therefore, submitted that the word 'payable' is to be strictly construed and cannot include the term 'paid' within its ambit. He further referred to page 67 of the paper book, wherein the decision of the Hon'ble Supreme Court in the case of Raghunath Rai Bareja and Others v. Punjab National Bank and Others [135 Com Cas 163] is contained, in which it has been observed as under :-

He referred to section 191 of the Income Tax Act as per which where income-tax has not been deducted in accordance with the provisions of Chapter-XVII, then income-tax shall be payable by the assessee (payee) directly. He submitted that primary object of TDS, the power to recover the tax refer referred to in section 202 is that deduction is only one mode of recovery, which is without prejudice to any other mode of recovery. He further referred to section 205, where tax is deductible at the source under the foregoing provisions of this Chapter, the assessee shall not be called upon to pay the tax himself to the extent to which tax has been deducted from that income.

With reference to these provisions, ld. counsel submitted that once tax has been paid by the payee as per the provisions of section 191, the disallowance is called for under section 40(a)(ia) of the Act.

7. On behalf of Third Intervener - Srinivasa Rao, Shri Y. Suryachandra Rao, C.A. appeared and adopted earlier submissions made by the ld. counsel for the assessee and interveners.

8. Learned Departmental Representative submitted that section 40(a)(ia) covers the disallowance in respect of all payments made whether paid without TDS or payable on which TDS has not been deducted. Ld. DR submitted that the intention of legislature is very clear that if a particular payment is covered by the provisions contained under Chapter XVII relating to TDS, then the assessee's claim would be disallowed under section 40(a)(ia) of the Act. Learned Departmental Representative submitted that in sections from 192 to 194LB all TDS provisions are contained under Chapter XVII, which includes section 194C also and, therefore, legislative intention is same for all the sections. Ld. DR referred to the following case laws which are in favour of revenue.

He also referred to following case laws which have decided the issue in favour of revenue :-

He further referred to the decision of the Hon'ble Madras High Court in the case of Tube Investment of India Ltd. reported in 325 ITR 610 (Mad.), wherein the Hon'ble Madras High Court has upheld the constitutional validity of section 40(a)(ia) of the Act. Ld. DR further submitted that liability for TDS is a continuous liability and, therefore, it cannot be segregated between 'paid' and 'payable' amounts.

9. In regard to arguments with reference to Rule 30, ld. DR submitted that the said Rule only prescribes the procedure for remittance of TDS amount and that cannot override the Act. Ld. DR further submitted that section 40(a)(ia) has been incorporated in the Act so that TDS provisions are strictly followed and, therefore, the word 'payable' used in section is to be assigned strict interpretation keeping in view the object of legislation. He further submitted that similar provisions contained in section 40(a)(i) relating to foreign payments are being implemented without any difficulty for the last forty years then why not the provisions of section 40(a)(ia) be also implemented effectively.

10. Ld. counsel for the assessee in rejoinder submitted that proviso becomes inoperable in case of paid amount. He further submitted that the decision of the Hon'ble Madras High Court in the case of Tube Investment of India Ltd. (supra) is not on this issue and, therefore, is not relevant. In this regard, he relied on the decision of the Hon'ble Delhi High Court in the case of Lachman Dass Bhatia Hingwala (P.) Ltd. v. ACIT reported in [2011] 330 ITR 243 (Delhi) (FB), wherein it has been held as under :-

11. We have considered the submissions of both the parties and have perused the records of the case. The dispute before us is whether the term 'payable' in section 40(a)(ia) refers to entire payment on which TDS was required to be made in terms of various sections referred to in this section contained in Chapter XVII-B or it refers only to amounts payable with reference to those sections which, as per assessee, remain outstanding as on 31^st March.

The first argument of ld. counsel for the assessee is based on the intention of legislature. In this regard reference is made to the Bill, introduced in Parliament and final clause inserted in the Statute. The submission is that though in the Bill phrase 'paid' or 'credited' was there but the same was dropped and in the finally inserted clause (ia) only word 'payable' was retained. The contention is that this itself shows the intention of legislature that the payments covered under Chapter XVII-B as referred to in section 40(a)(ia) paid without making TDS are not contemplated under section 40(a)(ia) of the Act.

12. Before considering the argument of ld. counsel, we may refer to a discussion on the subject by R.W.M, Dias in his book on Jurisprudence. It is well settled Rule of interpretation that when confronted with the task of interpreting a statute, the accepted formula is that the judges seek to ascertain the 'intention of the legislature'. The problem becomes apparent when one investigates whose intention it is that is thought to be relevant. Certainly it cannot be that is incorporated in the bill presented before Parliament but the statute which is passed by Parliament. He observes that in the case of Inland Revenue Commissioner v. Hinchy [1960] A.C. 748 at page 767; [1960] 1 All. E.R. 505 (512) Lord Reid observed as under :-

An Act is the product of compromise and the interplay of many factors, the result of all this being expressed in a set form of words. It is further observed as under:-

Therefore, the intention of legislature is to be examined keeping in view the overall purpose for which a particular section has been incorporated in the Act. While it is generally true that cases in which the meaning is plain present small difficulty, it does sometimes happen that the meaning is plain, but the application of it to the particular case yields so extravagant a result as to cause one to hesitate. It might even raise doubts as to whether Parliament did 'intend' so strange a result.

12.1. The contention is that though a particular amount is covered by the Chapter XVII-B and, therefore, TDS was required to be made from that amount but since the amount has been paid without TDS, therefore, disallowance to this extent should not be made under section 40(a)(ia) of the Act. The contention is that consequences of non-deduction are contemplated under Chapter XVII itself and, therefore, further disallowance contemplated under section 40(a)(ia) for non-deduction of tax did not contemplate the amounts, which were paid without TDS. A close scrutiny for insertion of section 40(a)(ia) reveals that section 40(a)(ia) was inserted in order to ensure a scrupulous adherence to the TDS provision. The object of section 40(a)(ia) is to ensure that one of the modes of recovery as provided in Chapter XVII-B is scrupulously implemented without any default. Therefore, if narrow interpretation is assigned to the term 'payable', as contended by the ld counsel for the assessee, then the very object of incorporation of section 40(a)(ia) would be frustrated. If we accept the assessee's contention then an amount contemplated under Chapter XVII-B will have to be segregated into two parts -one part which has been paid within the financial year itself without complying with the provisions of TDS will escape the rigour of section 40(a)(ia), but balance amount which is payable at the end of the year would only be covered by section 40(a)(ia). We hesitate to subscribe to such a view because legislature never intended so strange a result.

12.2. The question for consideration is as to why the words 'credited' or 'paid' contemplated in the Bill were dropped while incorporating section 40(a)(ia). All the amounts whether 'credited' or 'paid' come within the ambit of term 'payable' and, therefore, the two terms, viz. 'credited' or 'paid' were only superfluous and, therefore, were dropped in the section 40(a)(ia) inserted in the Act. In the provisions relating to TDS, the relevance of these terms was with reference to timing of deduction but while making disallowance under section 40(a)(ia), these terms had no relevance and, therefore, legislature dropped these two terms, viz. 'paid' or 'credited' before insertion of section 40(a)(ia) in the statute.

12.3. It is noticeable that section 40(a) is applicable irrespective of the method of accounting followed by an assessee. Therefore, by using the term 'payable' legislature included the entire accrued liability. If assessee was following mercantile system of accounting, then the moment amount was credited to the account of payee on accrual of liability, TDS was required to be made but if assessee was following cash system of accounting, then on making payment TDS was to be made as the liability was discharged by making payment The TDS provisions are applicable both in the situation of actual payment as well of the credit of the amount. It becomes very clear from the fact that the phrase, 'on which tax is deductible at source under Chapter XVII-B', was not there in the Bill but incorporated in the Act. This was not without any purpose.

12.4 In our considered opinion, there is no ambiguity in the section and term 'payable' cannot be ascribed narrow interpretation as contended by assessee. Had the intentions of the legislature were to disallow only items outstanding as on 31^st March, then the term 'payable' would have been qualified by the phrase as outstanding on 31^st March. However, no such qualification is there in the section and, therefore, the same cannot be read into the section as contended by the assessee.

13. Section 40(a)(ia) is to be interpreted harmoniously with the TDS provision as its operation solely depends on the provisions contained under Chapter XVII-B. It contemplates one of the consequences of non-deduction of tax and, therefore, has to be interpreted in the light of mandatory provisions contained under Chapter XVII-B. It would be appropriate to reproduce section 40(a)(ia), which reads as under :-

Section 40 is contained in Chapter IV deals with computation of business income and lists out various amounts which are not deductible notwithstanding anything to the contrary in sections 30 to 38. This implies that even if a particular amount is allowable under sections 30 to 38 still, if it does not comply the provisions contained in section 40, then the same cannot be allowed.

Therefore, if aforementioned conditions are not fulfilled then deduction would not be allowed.

However, proviso to this section further gives leverage to assessee to deduct tax in subsequent year or pay tax deducted during the previous year after the due date specified in section 139(1). In such a situation, deduction would be allowed in the year in which such tax has been deducted. The explanation to this section defines various amounts contemplated in this section. The relevant sections in Chapter XVII-B are re-produced hereunder :-

193. The person responsible for paying [to a resident] any income [by way of interest on securities] shall, [at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier], deduct income-tax [***] at the rates in force on the amount of the interest payable.:

194C. [(1) Any person responsible for paying any sum to any resident (hereinafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and—

shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to—

of such sum as income-tax on income comprised therein.

194-H :- Any person, not being an individual or a Hindu undivided family, who is responsible for paying, on or after the 1st day of June, 2001, to a resident, any income by way of commission (not being insurance commission referred to in section 194D) or brokerage, shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of [ten] per cent :

194-I. Any person, not being an individual or a Hindu undivided family, who is responsible for paying to [a resident] any income by way of rent, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, [deduct income-tax thereon at the rate of—

Fees for professional or technical services

Section 194-J :-

(1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any sum by way of—

shall, at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to [ten] per cent of such sum as income-tax on income comprised therein :

Explanation.—For the purposes of this section,—

If we examine the aforementioned sections, we find that identical considerations permeate through all the aforementioned sections which are as under :-

The term 'shall' used in all these sections makes it clear that these are mandatory provisions and applicable to the entire sum contemplated under the respective sections. These sections do not give any leverage to the assessee to make the payment without making TDS. On the contrary, the intention of the legislature is evident from the fact that timing of deduction of tax is earliest possible opportunity to recover tax, either at the time of credit in the account of payee or at the time of payment to payee, whichever is earlier.

When we examine section 40(a)(ia) in the backdrop of these sections, we find that it refers to the amount 'payable' 'on which tax was deductible at source under Chapter XVII-B'. Applying the principles of eujesdem generis, it can easily be inferred that term 'payable' in section 40(a)(ia) has to be interpreted in the light of sum referred to in various sections contained in Chapter XVII-B noted above, on which tax was deductible and, therefore, the term 'payable' in section 40(a)(ia) refers to entire amount on which tax was required to be deducted. Keeping in view the principles of harmonious construction, the term 'payable' in section 40(a)(ia) cannot be read separately from the provisions relating to TDS as pleaded on behalf of assessee. In our opinion, ld. CIT (Appeals) has rightly observed that taking the spirit of TDS provision into account and section 40(a)(ia) being directly related to such TDS provision, a harmonious construction of the word 'payable' leads to inevitable conclusion that the said word also includes the 'paid' amount.

14. Ld. Counsel has relied on the dictionary meaning of term 'payable' which, in our opinion, cannot be resorted to in view of discussion in foregoing paras. The context in which term 'payable' has been used in section 40(a)(ia) is to be taken into consideration. The context is various sections of Chapter XVII-B.

15. The next argument of ld. counsel is based on the definition of term 'paid' as contemplated under section 43(2) which reads as under :-

16. A bare reading of the above provision would make it very clear that the term 'paid' does not only mean actual payment but if the liability has been incurred according to the method of accounting followed by the assessee, then the same also comes within the purview of term 'paid'. If the assessee is following mercantile system of accounting then as soon as the liability accrues in its favour, the same is accounted for by crediting the amount of payee. Thus, it is evident that the emphasis is on liability to pay and not on actual payment. If we accept the contention of assessee, then section 40(a)(ia) would become otiose and the section will not be attracted where payment is made though without deducting tax at source. Ld. counsel has referred to the various decisions and in the case of Jaipur Vidyut Vitaran Nigam Limited (supra), the Tribunal had relied on the definition of section 43(2) but the import of phrase 'incurred in accordance with the method of accounting followed' was not considered. Therefore, the finding that by implication the word 'payable' does not include 'paid' cannot be accepted.

17. The next argument of ld. counsel for the assessee is based on Rule 30, which contemplates time and mode of payment to Government account of tax deducted at source. In our opinion, this Rule merely contemplates the procedure of depositing the TDS amount and merely because different time limits are prescribed, it would not follow that different considerations would apply while considering the term 'payable' under section 40(a)(ia) of the Act. Ld. Counsel has also referred to section 234B dealing with levy of interest to demonstrate that actual payment and payable amount are to be separately dealt with. However, these procedural sections cannot override the substantive provision of the Act.

Tribunal in the case of Jaipur Vidyut Vitaran Nigam Limited (supra) has also observed that section 40(a)(ia) being a legal fiction needs to be construed strictly. There is no quarrel with this proposition but at the same time we have to take into consideration the context in which a particular word is used and the overall purpose sought to be achieved by inserting a section in the Act.

18. One more argument of assessee is that if the amount has already paid, then the assessee will not be able to in a position to deduct and pay tax, because, under such circumstances, as per the provisions of section 191, the liability for payment of tax is to be discharged by payee. In the first place, the argument seems to be quite convincing because the assessee would be deprived of genuine expenditure and the payee will pay the tax on its income. Further, the proviso to section 40(a)(ia) does not make any provision in regard to this contingency. This may be a case of casus omisus but the Court cannot fill this gap. Hon'ble Allahabad High Court in the case of Dey's Medicals (UP) (P) Ltd. v. Union of India & Others [216 CTR 83(Alld.) observed as under :-

19. Ld. CIT, DR has strongly relied on the decision of the Hon'ble Madras High Court in the case of Tube Investments of India Ltd. & Anr. v. ACIT & Others. The contention of ld. counsel for the assessee is that this decision was rendered in the context of constitutional validity of the provisions of section 40(a)(ia) and, therefore, in view of the decision of Hon'ble Delhi High Court in the case of Lachman Dass Bhatia Hingwala (P) Ltd. (supra), the said decision is not relevant. It is true that this decision has been rendered in the context of examining of constitutional validity of the provisions of section 40(a)(ia) of the Act but in course of examining the constitutional validity, Hon'ble Madras High Court has extensively considered the import of section 40(a)(ia) and, therefore, in our opinion, this decision has strong bearing on the present issue.

20. Hon'ble Madras High Court has noticed various contentions of assessee. We re-produce some contentions, which have direct bearing on the present issue :-

In the backdrop of these submissions, Hon'ble Madras High Court upheld the constitutional validity of the provisions of section 40(a)(ia) and made various observations:-

Hon'ble Madras High Court, inter alia, observed at para 69 of its judgment as under :-

Hon'ble Madras High Court, inter alia, observed in para 83 of its judgment as under :-

Thus, impliedly Hon'ble Madras High Court, has, inter alia, held that the provisions of section 40(a)(ia) will be applicable with respect to entire expenditure. It is true that specific issue regarding 'paid', 'credited' and 'payable' has not been considered but from the judgment it is evident that if assessee's contention is accepted then the very object of incorporation of section 40(a)(ia) would be frustrated.

21. In view of above discussion, we answer the question as under:-

The provisions of section 40(a)(ia) of the Income Tax Act, 1961, are applicable not only to the amount which is shown as payable on the date of balance-sheet, but it is applicable to such expenditure, which become payable at any time during the relevant previous year and was actually paid within the previous year. In the result the question is decided in favour of revenue and against the assessee.

While parting, we place our deep appreciation for the assistance rendered by both the sides in deciding the question.