“THE LAW ON TDS”

Anumita Sarkar

SECTION-194C “THE LAW ON TDS”

As famously said by Albert Einstein, “The hardest thing in the world to understand is the income tax”, the provision of TDS is “the source of income for purposes of the income tax” & one of the most controversial & litigated provision is Sec-194C incorporated under Chapter-XVII-B of the Income Tax Act, 1961.

 

 INTRODUCTION OF SECTION 194C:

Section 194C was introduced in the Income Tax Act, 1961 w.e.f. 1st April 1972.

In a very short span of time, soon after its introduction in the Act, Central Board of Direct Taxes promptly came up with Circular No. 86 dated 29-5-1972, Circular No. 93 dated 26-9-1972 and Circular No. 108 dated 20-3-1973 throwing light on the interpretation & application of the provision in a given case.

The Amendments to the provision sec-194C were made from time to time and as on today the law reads,

 that TDS has to be made at a prescribed rate by any person/Contractor who is responsible for making payment of any sum to any resident for carrying out any work (including supply of labour) in pursuance of a contract between the contractor and any “Specified Person”

 that TDS has to be made @1% in case of individuals & in case of Hindu Undivided Family and any other case it is @2%;

 that TDS has to be made by the contractor in pursuance of a contract with the sub-contractor for carrying out any work or for supply of labour for carrying out such work (whether whole or any part of the work) either by way of cash or by way of cheque or draft, or any other mode;

 that No Tax is required to be deducted where sum credited or paid or likely to be credited or paid does not exceed Rs.30000/-. However, if the aggregate of such sums credited or paid or likely to be credited or paid in the financial year exceeds Rs.75,000/-, TDS is required to be made;

The expression “Contractor” shall include a contractor who is carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the Government of a foreign State/ foreign enterprise/ any association or body established outside India.

For the purpose of the applicability of the provision, the term “work” includes –

 

 Advertising;

 Broadcasting and telecasting including production of programmes for such broadcasting or telecasting;

 Carriage of goods and passengers by any mode of transport other than by railways;

 Catering;

 Manufacturing or supplying a product according to the requirement or specification of a customer by using the material purchased from such customer,

 

However, it does not include manufacturing or supplying a product according to the requirement or specification given by a customer using the material purchased from a person, other than such customer.

 

HISTORY OF THE PROVISION OF SEC-194C

CIRCULAR NO. 86 DATED 29.05.1972 CLARIFIED

 distinction between a “work contract” and a “contract for sale” It was clarified that the “contracts for construction” and “the contract and erection or installation of plant and machinery” are in the nature of contracts for work and labour;

 that where materials are supplied by one person and the fabrication work is done by a contractor the contract is that of a works contract;

 that the Contracts for rendering professional services by lawyers, physicians, surgeons, engineers, accountants, architects, consultants, etc. CANNOT be regarded as contract “for carrying out any work” and, accordingly, no deduction of income tax shall be made from payments relating to such contracts.

 

 CIRCULAR NO. 93 DATED 26.09.1972 CLARIFIED

 that a transport contract cannot ordinarily be regarded as “contract for carrying out any work” and, as such, no deduction is required to be made from the payments made under contract;

 EXCEPTION, that in the case of Composite Contract involving transport as well as loading and unloading charges, the entire contract is regarded as “works contract”.

 Note: w.e.f. 01.07.1995 a new explanation was inserted which includes the carriage of goods and passengers by any mode other than railways within the meaning of “carrying of work”.

 

REVIEW OF THE ABOVE CIRCULARS & REFERENCE MADE BY HON’BLE SUPREME COURT IN THE CASE OF

“Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435”

Guidelines pronounced & in pursuant to the same Central Board of Direct Taxes clarify the applicability of the provisions of section 194C: —

 

(A) The Provision of sec-194C would be applicable:

 to all types of contracts for carrying out any work including, transport contracts, service contracts, advertisement contracts, broadcast¬ing contracts, telecasting contracts, labour contracts, material contracts and works contracts;

 

 to contracts for the construction, repair, renovation or alteration of buildings or dams or laying of roads or airfields or railway lines or erection or installation of plant and machinery are in the nature of contracts for work and labour, income-tax will have to be deducted from payments made in respect of such contracts;

 

 to contracts granted for processing of goods supplied by Government or any other specified person, where the ownership of such goods remains at all times with the Gov¬ernment or such person, will also fall within the purview of this section.

 

 to payments made to persons who arrange advertisement, broadcast¬ing, telecasting, etc;

 

 to payments made for hiring or renting of equipments, etc;

 

 to payments made to banks for discounting bills collecting/receiving payments through cheques/drafts, opening and nego¬tiating Letters of Credit and transactions in negotiable instru-ments;

 

 not only to written contracts but also oral contracts;

 

 to “Service contracts” since the term ‘service’ means doing any work as explained above.

 

(B) The provisions of this section would not cover “Contracts for Sale of Goods”:

 

 Where the contractor undertakes to supply any article or thing fabricated according to the specifications given by Government or any other specified person and the property in such article or thing passes to the Government or such person only after such article or thing is delivered, the contract will be a contract for sale and therefore outside the purview of this section.

 

 CIRCULAR NO. 681 DATED 08.03.1994

With the issuance Circular No. 681 dated 08.03.1994, Central Board of Direct Taxes decided to withdrew both the Circular no. 86 and 93.

In circular no. 681 CBDT has clearly prescribed that, the provisions of section 194C would not cover contracts for sale of goods. It has further stated that, where a contractor undertakes to supply any article or thing fabricated according to the specifications given by the Government or any other specified person, and the property in such article or thing passes to the Govern¬ment or such person only after such article or thing is deliv¬ered, the contract will be a contract for sale and as such would be out¬side the purview of this section.

 State of Himachal Pradesh vs. Associated Hostels of India Ltd. [1972] 29 STC 474

In the above-captioned case, Hon’ble Supreme Court has laid down few principles as guidelines, to be followed-

 where the principal objective of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, contract is of work and labor;

 whether or not the work and labor bestowed end in anything that can properly become the subject of sale; neither the ownership of the materials nor the value of skill and labor as compared with the value of the materials is conclusive & it has to be determined in the light of the facts and circumstances of a particular case to find out that, whether the contract is, in substance, one of work and labor, or one for the sale of a chattel;

 

 where the intention is not to sell the article but to improve the land or the chattel & the material is furnished for work to be done the contract will that be of work and labor;

 

In case of any controversy regarding issue as to whether a particular contract would be a work contract or contract for sale the above guidelines prescribed by the Supreme Court were followed.

 

Subsequently, CBDT came up with another Circular namely CIRCULAR NO. 715 DATED 3-8-1995 clarifying several queries and bringing various types of contracts in the ambit of section 194C. The following nature of contracts were included-

 

 Payments made to clearing and forwarding agents;

 Payments to couriers;

 Payments to transporters; and

 Supply of printed material

 

Therefore, the controversy of the interpretation and determination of the nature of contract has continued and till today the issue is a subject-matter of litigation at various stages.

 

CONTROVERSY

 

WORK CONTRACT VS. CONTRACT OF SALE

the difference between the two expressions & a broader interpretation made by Hon’ble Judicial & Quasi- judicial authorities while adjudicating the controversy of determining whether a contract is a “contract for sale” or “work contract”

Section 194C provides that, any person responsible for paying any sum to any resident for carrying out any work has an obligation to deduct tax at source on such payment. The crux of the litigation is as to whether the supply of products by third parties constituted ‘work’ for the purpose of section 194C. The amendment made to the Explanation II of section 194C by the Finance Act 2009 provided an inclusive list of activities that would be considered as ‘work’.

In language of a layman, a contract for sale can be distinguished from a contract of work.

The issue as to whether a particular agreement falls within one or the other category depends upon, –

 

 the object and intent of the parties which is evidenced by the terms of the contract;

 the circumstances in which it was entered into and;

 the custom of the trade

 

If a contract involves the sale of movable property it would constitute a contract for sale. On the other hand, if the contract primarily involves carrying on of work involving labour and service and the use of materials is incidental to the execution of the work, the contract would constitute a contract of work and labour.

 

The most relevant circumstance from a clear distinction can be made is, whether the article which has to be delivered has an identifiable existence prior to its delivery to the purchaser upon the payment of a price.

 

When the title to the property vests with the purchaser upon delivery that is an important indicator suggesting that the contract is that of a contract for sale and not a contract for work.

 

The Controversy started with the pronouncement of authoritative decision in the case of State of Himachal Pradesh v. Associated Hotels of India Ltd. by Hon’ble the Supreme Court of India.

 

Subsequent, to the above judicial pronouncement, several matters have been adjudicated and controversies as to how the “contract for work” and “contract for sale” could be distinguished were resolved in the light of the facts and circumstances of each case.

 

 

Some of the important decisions are mentioned as here under: –

 

 BDA Ltd. Vs ITO [2006] 281 ITR 99 (BOM)- In this case the assessee had distillery, wherein it has purchased materials that is required for bottling and marketing the foreign made Indian liquor inclusive of the printing and packing of material. M/s. Mudranika, another establishment was also supplying the printed labels, which was required to be rapped on the bottles to the assessee. The assessing officer held that, the payment made to M/s. Mudranika, the supplier of the printed material from whom the printed labels were purchased were in pursuance of a contract and thus liable to deduct tax at source u/s. 194C of the Act. The Hon’ble High Court observed that the assessee has issued purchase order in favour of M/s. Mudranika for the supply of printed labels as per the specification provided and the assessee did not supply the raw material. In the light of the above, Hon’ble Bombay High Court held that the supply of printed labels by M/s. Mudranika to the assessee was “contract for sale” & it could not be deemed as “works contract”.

 

 Glenmark Pharmaceuticals Ltd. v ITO (TDS), Hon’ble ITAT has observed that, the goods were manufactured by the manufacturers in their own establishments in accordance with the specifications given by the assessee. The raw material cost and other expenses were also incurred by themselves. The manufacturers also paid the excise duty when the goods were sold & the sales tax was paid. When the goods were sold to the assessee the property in them passed over to the assessee. Therefore, Hon’ble ITAT held that the agreements of the assessee with the manufacturers cannot be termed as ‘works contract’ and no TDS u/s. 194C has to be made.

 

 Commissioner of Income Tax vs. Deputy Chief Accounts Officer, it was held that, the fact that the goods manufactured were according to the requirement of the customer did not mean or imply that any work carried out on behalf of that customer. Accordingly, held that the purchase of particular printed packing material by the respondent was a contract for sale and outside the purview of Section 194C of the Act.

 

LANDMARK JUDGMENT

 

KONE ELEVATORS (INDIA) LTD. 2005(181) ELT 156(SC)

 Explains the difference “Contract of Sale” vis-a-vis “Works Contract”

 

CONTRACT OF SALE CONTRACT OF WORK

the main object is the transfer of property and delivery of possession of the property the main object in a “contract for work” is not the transfer of the property but it is one for work and labour

if is it by transfer at the time of delivery of the finished article as a chattel it is a “sale” by accession during the procession of work on fusion to the movable property of the customer the contract is “works-contract”

 

The most crucial TEST that shall be applied is to study and interpret the essence of the contract and the reality of the transaction as a whole.

 

CONTROVERSY

COMPOSITE / INDIVISIBLE CONTRACT VS. DIVISIBLE/ SEPARATE AGREEMENT

A major un-ending controversy pertaining to “Turn- key projects” largely revolving around generation of windmill projects comprising of supply, erection & installation for the Generation of Wind-mill

 

Recently, I have worked on a Income Tax appeal matter, where our client/assessee has been treated as an “assessee-in-default” and interest were charged u/s. 201 (1A) for non-deduction of TDS read with Sec-194C of the I.T. Act, 1961. The Revenue was of the opinion that assessee ought to have deducted TDS on the supply of material portion & that upon wrong interpretation of facts & materials put on record has treated the separate agreements (one for supply of supply of materials i.e. spare parts & Wind Turbine Generator) & another for (work comprising of supervision, erection & installation) as one and Indivisible or Composite Contract.

The necessary VAT was paid on the sale of generator and supply of materials delivered as chattel to the assessee. The two contracts were separate and divisible which is apparent from the materials submitted on record.

The Turn-key projects and issue of TDS u/s. 194C is still lingering before several judicial authorities, at several stage and it is pertinent to mention that, this particular issue may indeed never have one final verdict, as each case although by facts and circumstances may look similar, still the facts, circumstances and evidences found upon study of records may only be the main decisive factor of determining the fate of each case.

I would like to state some outstanding pronouncements passed by Judicial & quasi-judicial bodies related to the above issue:

When the parties entered into a consolidated contract with a spilt of consideration towards material & other of labour one cannot be termed as an indivisible works contract. Therefore, no tax is required to be deducted on the payment towards supply portion of the contract.

 

There are certain essential attributes, which are necessarily to be followed in order to come to a conclusion, that whether the contract is of Composite in nature or purely divisible one. These essentials are as follows: –

 

 The obligations under the contract are distinct ones;

 The supply obligation is distinct and separate from the service obligation

 

Hence, it is pertinent to mention that, in some cases assessee while entering into contract of work or even service, both the parties may enter into separate agreements, one of work and service, and other of sale and purchase of materials. Under such circumstances, the transactions would not be one and indivisible, but would fall into two separate agreements, one for work or service and the other of sale.

 

Hon’ble Supreme Court in the case of ITO vs. Sriram Bearings Ltd. (1987) 224 ITR 724 (SC) has held that, where the two parts of a contract, which are interdependent, cannot be treated as one, when the consideration and the services are distinct.

Again Hon’ble Hyderabad ITAT Bench in the case of Power Grid Corpn. Of India Ltd. vs. Assistant Commissioner of Income Tax [2007] 108 ITD 340 (Hyd) has held that, where the title in goods has passed to the assessee before the commencement of work and the assessee has treated the goods as his property before issuing the same for erection; contract of supply shall be treated as contract of sale.

In the recent past, Hon’ble ITAT, Bangalore Bench in the case of Karnataka Power Transmission Corporation vs. Asst. CIT has held that, when an assessee is under no obligation to deduct tax on supply portion, the assessee’s case would not fall within the ambit of the provisions of Sec-201 (1) of the I.T. Act, and thus, the assessee could not be treated as an “assessee in default”.

Judgment passed by Hon’ble High Court of Madras in the case of State of Tamil Nadu vs. Titanium Equipment and Anode Manufacturing Corporation Ltd. in (1998) 110 STC 43 (Madras) is also utterly necessary to mention. In this case there was a contract for design, engineer, manufacture, supply and supervision of installation and commissioning. The Hon’ble Tribunal held that the contract is indivisible. Hon’ble Madras High Court reversed the decision of the Tribunal and held that the contract was clearly a divisible contract, i.e. one for the supply of the titanium anodes and another for supervision and installation and undertaking recoating maintenance. The price payable for the supply of material was distinct from the consideration payable for the supervision of installation and commissioning and for recoating maintenance. The parties themselves has no doubt as to the nature of the arrangement they has entered into and had specifically provided for the payment of the excise duty, sales tax and all other statutory levies by the buyer.

 

Likewise, Hon’ble Supreme Court has also taken a reversed view in many cases, where the contracts entered into by parties were not divisible and therefore the same was treated as a “composite and an indivisible contract”. I would like to mention couple of such decisions, which are as under.

 

In the case of Vanguard Rolling Shutters & Steel Work vs. Commissioner of Sales Tax [1977] 39 STC 372 (SC) and Ram Singh and Sons Engineering Works vs. Commissioner of Sales Tax AIR 1979 SC 545, it was held upon perusal that, the price charged by the contractor from the customer was in a lump sum and did not show a break up of the materials used or fabricated or the cost of services or labour separately. Hence, the same was held to be as “composite contract”.

 

It is also pertinent to state a very important judicial pronouncement passed by the Hon’ble Supreme Court in the case of Hindustan Shipyard Ltd. vs. State of Andhra Pradesh, where it was clarified that, –

 

“ it is not the bulk of the material used in the construction alone but the relative importance of the materials qua the work, skill and labour of the payee which also has to be seen, but it is a relevant parameter.”

Therefore, single evidence would not be sufficient to treat an assessee as “assessee-in-default” for non-deduction of TDS U/s. 194C & the entirety of the facts and circumstances of any given case has to be taken into consideration in order to reach at a proper & applicable verdict.

POSITION OF A SUB – CONTRACTOR U/S. 194C

No TDS u/s. 194C in absence of contract between Contractor & sub-contractor

Sub-section (2) of section 194C of the Income-tax Act, 1961 lays down that, any person (being a contractor and not being an individual or a Hindu undivided family), responsible for paying any sum to any resident (hereafter in this section referred to as the sub-contractor) in pursuance of a contract with the sub-contractor for carrying out, or for the supply of labour for carrying out, the whole or any part of the work undertaken by the contractor or for supplying whether wholly or partly any labour which the contractor has undertaken to supply shall, at the time of credit of such sum to the account of the subcontractor 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 one per cent of such sum as income-tax on income comprised therein.

Hence, in terms of the provisions of section 194C (2) as clarified by the Board vide Circular No. 715 dated 8-8-1995, conditions that are to be satisfied are:

(i) that the assessee should be a contractor,

(ii) that the assessee should enter into a contract with a sub-contractor,

(iii) that the sub-contractor should carry out any part of the work undertaken by the contractor and;

(iv) that the payment should be made for the work done.

 

Also interesting enough to mention that, the provisions of section 194C as substituted by the Finance Act 2 of 2009 w.e.f. 1-10-2009 has not made any distinction between a payment made to a contractor or sub-contractor and that all payments made for carrying out any work in pursuance to a contract are covered within the section 194C (1) of the Act

 

For the purpose of the section the expression ‘work’ comprises of the following:

(a) Advertising (b) broadcasting and telecasting including production of programmes for such broadcasting or telecasting (c) carriage of goods or passengers by any mode of transport other than by railways (d) catering and (e) manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer, but does not include   manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer.

Work that is not covered under this provision is: manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer.

Consequently, due to non-deduction of TDS, an assessee has to face challenges at several stages of litigation on account of disallowance u/s. 40 (a) (ia). The proof of existence of a ‘contract’ in the form of concrete evidence, either by the assessee or by the Revenue is disputed.

In the case of ITO V Rama Nand & Co (163 ITR 702), High Court of Himachal Pradesh has defined the expression “sub-contractor”. It stated,

“a sub-contractor would mean any person who enters into a contract with the contractor for carrying out, or for the supply of labour for carrying out, the whole or part of the work undertaken by the contractor under a contract with any of the authorities named above or for supply whether wholly or partly any labour which the contractor has undertaken to supply in terms of his contract with any of the aforesaid authorities.”

 

The Hon’ble Supreme Court in Birla Cement Works v, CBDT [2001] 248 ITR 216 has laid down the conditions precedent for attracting the provisions of section 194C, which are as follows,

 

(i) there must be a contract between the person responsible for making payment to contractor,

(ii) the contract must be for carrying out of any work,

(iii) the work is to be carried through the contractor,

(iv) the consideration for the contract should exceed Rs.10,000/-, i.e., the amount fixed by section 194C and

(v) that the payment is made to the contractor for the work carried out by him.

The above principles were discussed in the case of Safiuddin, Kolkata vs. Assessee. The controversy in the case was regarding the payments made for disbursement of labour charges to labour-heads and applicability of sec -194C. Revenue claimed that there was no necessity for the existence of a written contract and that an oral contract was equally valid. Although, there was no direct evidence on record to conclusively hold that there was any written contract or even oral contract agreement between the parties.

Therefore, in the light of the principles laid down by the Hon’ble Supreme Court in the case Birla Cement, Hon’ble ITAT, Kolkata restored the matter back to A.O. to decide the issue for determination of existence of any contract between the assessee and the labour-heads.

Likewise, several judgments were passed in the light of the said principles and to name few of them,

 

 ACIT vs. Shiva Construction

 ITO vs. Rama Nand and Co.

 CIT vs. Esskay Construction Co.

 M/s. Samanwaya Vs. ACIT

 S.S. Construction, Kolkata vs. Department of Income Tax

 

SECTION – 194C VS. 194I

Whether expression “carriage of goods and passengers by any mode of transport” finds place in section 194C or section 194-I of the Income Tax Act?

Section 194I of the Income Tax Act, 1961 is required to deduct Tax at source at the time of payment of any income by way of rent i.e. @10% for the use of any machinery or plant or equipment.

On the other hand Section 194C says that, TDS is to be made @2% for carrying out any work which includes carriage of goods and passengers by any mode of transport other than by railways.

Generally, all types of machinery, plant and equipment are given on hire and therefore gets covered u/s. 194I. However, hiring of transport vehicles in order to carry out work i.e. carriage of goods and passengers get specifically covered u/s. 194C.

Loudly, provision of sec-194C (2) clause (c) of Explanation III is subject to TDS provision on account of Transport vehicles that are used for carriage of goods and passengers.

As per rules of interpretation, a very well-established principle says, “a specific provision prevails over general provisions”. Section 194C contains specific provision for deduction of tax in transport contracts, whereas Sec. 1941 comprises of general provision for deduction of tax on rent on account of hiring of plants, machineries etc.

Number of cases had gone through litigation over the period of years. The issue not only revolved around the applicability of either of the provisions, but whether provisions of sec-194C would get attracted in case of carrying out work for transport of any goods or passengers from one place to another or not.

As discussed earlier it may be worth mentioning that, presence of contract is the dominant object for the purpose of section -194C (2).

In the case of Dy. CIT vs. Satish Aggarwal & Co. (2009) 27 DTR 34 (Asr.), the assessee hired trucks for a fixed period upon payment of hire charges, utilized in the business of civil construction. There was no agreement for carrying out any work or to transport any goods or passengers from one place to another.

 

 

As hiring of trucks for the purpose of using those in business did not amount to contract for carrying out any work as contemplated in section 194C.

It was held that, in absence of a contract, the provision of section 194C did not get attract and hence no disallowance under section 40(a) (ia) can be made.

CIRCULAR NO. 715 DATED 8-8-1995

Clarifications provided on sec -194C in consonance to the amendments brought by Finance Act, 1995

The Finance Act, 1995, has enlarged the scope of TDS by making various amendments to the provisions of the Income Tax Act. Number of queries was raised at various associations/professional bodies regarding the scope and application of tax deduction at source.

 

In order to provide with right clarifications in a question & answer form, Circular No. 715 dated 08-08-1995 were issued by CBDT, thereby clearing the following doubts:

 

“Question 1: What would be the scope of an advertising contract for the purpose of section 194C of the Act?

Answer: The term ‘advertising’ has not been defined in the Act. During the course of the consideration of the Finance Bill, 1995, the Finance Minister clarified on the Floor of the House that the amended provisions of tax deduction at source would apply when a client makes payment to an advertising agency and not when advertising agency makes payment to the media, which includes both print and electronic media. The deduction is required to be made at the rate of 1 per cent. It was further clarified that when an advertising agency makes payments to their models, artists, photographers, etc., the tax shall be deducted at the rate of 5 per cent as applicable to fees for professional and technical services under section 194J of the Act.

 

Question 2: Whether the advertising agency would deduct tax at source out of payments made to the media?

Answer: No. The position has been clarified in the answer to question No. 1 above.

 

Question 3: At what rate is tax to be deducted if the advertising agencies give a consolidated bill including charges for artwork and other related jobs as well as payments made by them to media?

Answer: The deduction will have to be made under section 194C at the rate of 1 per cent. The advertising agencies shall have to deduct tax at source at the rate of 5 per cent under section 194J while making payments to artists, actors, models, etc. If payments are made for production of programmes for the purpose of broadcasting and telecasting, these payments will be subjected to TDS @ 2 per cent.

Even if the production of such programmes is for the purpose of preparing advertisement material, not for immediate advertising, the payment will be subject to TDS at the rate of 2 per cent.

 

Question 4: Where the tax is required to be deducted at source on payments made directly to the print media/ Doordarshan for release of advertisements?

Answer: The payments made directly to print and electronic media would be covered under section 194C as these are in the nature of payments for purposes of advertising. Deduction will have to be made at the rate of 1 per cent. It may, however, be clarified that the payments made directly to Doordarshan may not be subjected to TDS as Doordarshan, being a Government agency, is not liable to income-tax.

 

Question 5: Whether a contract for putting up a hoarding would be covered under section 194C or 194-I of the Act?

Answer: The contract for putting up a hoarding is in the nature of advertising contract and provisions of section 194C would be applicable. It may, however, be clarified that if a person has taken a particular space on rent and thereafter sub lets the same fully or in part for putting up a hoarding, he would be liable to TDS under section 194-I and not under section 194C of the Act.

 

Question 6: Whether payment under a contract for carriage of goods or passengers by any mode of transport would include payment made to a travel agent for purchase of a ticket or payment made to a clearing and forwarding agent for carriage of goods?

Answer: The payments made to a travel agent or an airline for purchase of a ticket for travel would not be subjected to tax deduction at source as the privity of the contract is between the individual passenger and the airline/travel agent, notwithstanding the fact that the payment is made by an entity mentioned in section 194C(1). The provision of section 194C shall, however, apply when a plane or a bus or any other mode of transport is chartered by one of the entities mentioned in section 194C of the Act. As regards payments made to clearing and forwarding agent for carriage of goods, the same shall be subjected to tax deduction at source under section 194C of the Act.

 

Question 7: Whether a travel agent/clearing and forwarding agent would be required to deduct tax at source from the sum payable by the agent to an airline or other carrier of goods or passengers?

Answer: The travel agent, issuing tickets on behalf of the airlines for travel of individual passengers, would not be required to deduct tax at source as he acts on behalf of the airlines. The position of clearing and forwarding agents is different. They act as independent contractors. Any payment made to them would, hence, be liable for deduction of tax at source. They would also be liable to deduct tax at source while making payments to a carrier of goods.

 

Question 8: Whether section 194C would be attracted in respect of payments made to couriers for carrying documents, letters, etc.?

Answer: The carriage of documents, letters, etc., is in the nature of carriage of goods and, therefore, provisions of section 194C would be attracted in respect of payments made to the couriers.

 

Question 9: In case of payments to transporters, can each GR be said to be a separate contract, even though payments for several GRs are made under one bill?

Answer: Normally, each GR can be said to be a separate contract, if the goods are transported at one time. But if the goods are transported continuously in pursuance of a contract for a specific period or quantity, each GR will not be a separate contract and all GRs relating to that period or quantity will be aggregated for the purpose of the TDS.

 

Question 10: Whether there is any obligation to deduct tax at source out of payment of freight when the goods are received on “freight to pay” basis?

Answer: Yes. The provisions of tax deduction at source are applicable irrespective of the actual payment.

 

Question 11: Whether a contract for catering would include serving food in a restaurant/sale of eatables?

Answer: TDS is not required to be made when payment is made for serving food in a restaurant in the normal course of running of the restaurant/cafe.

 

Question 12: Whether payment to a recruitment agency can be covered by section 194C?

Answer: Provisions of section 194C apply to a contract for carrying out any work including supply of labour for carrying out any work. Payments to recruitment agencies are in the nature of payments for services rendered. Accordingly, provisions of section 194C shall not apply. The payment will, however, be subject to TDS under section 194J of the Act.

 

Question 13: Whether section 194C would cover payments made by a company to a share registrar?

Answer: In view of answer to the earlier question, such payments will not be liable for tax deduction at source under section 194C. But these will be liable to tax deduction at source under section 194J.

 

Question 14: Whether FD commission and brokerage can be covered under section 194C?

Answer: No

 

 Question 15: Whether section 194C would apply in respect of supply of printed material as per prescribed specifications?

Answer: Yes.

 

Question 16: Whether tax is required to be deducted at source under section 194C or 194J on payment of commission to external parties for procuring orders for the company’s product?

Answer: Rendering of services for procurement of orders is not covered under the provisions of section 194C. However, rendering of such services may involve payment of fees for professional or technical services, in which case tax may be deductible under the provisions of section 194J.

 

Question 17: Whether advertisement contracts are covered under section 194C only to the extent of payment of commission to the person who arranges release of advertisement, etc., or whether deduction is to be made on the gross amount including bill of media?

Answer: Tax is to be deducted at the rate of 1 per cent of the gross amount of the bill.

 

Question 18: Whether deduction of tax is required to be made under section 194C for sponsorship of debates, seminars and other functions held in colleges, schools and associations with a view to earn publicity through display of banners, etc., put up by the organizers?

Answer: The agreement of sponsorship is, in essence, an agreement for carrying out a work of advertisement. Therefore, provisions of section 194C shall apply.

 

Question 19: Whether deduction of tax is required to be made on payments for cost of advertisement issued in the souvenirs brought out by various organizations?

Answer: Yes.

 

DEBATE ON APPLICABILITY OF TDS ON REIMBURSEMENT OF EXPENDITURE

Where the expenses are claimed through separate statements, TDS on reimbursement of actual expenses is not required

 

 

The term “Reimbursement” has not been defined in the Income Tax Act and hence the meaning has to be understood in terms of dictionary meaning.

Black’s Law Dictionary defines “reimburse” as to pay back, to restore or to repay which is expended.

 

Question 30 of CBDT Circular No 795 dated 08.08.1995 clarifies an issue as to whether the deduction of tax at source under sections 194C and 194J has to be made out of the gross amount of the bill including reimbursements or excluding reimbursement for actual expenses.

 

In view of the above query, it was explicitly clarified that,

 

“Sections 194C and 194J refer to “any sum paid”. Obviously, reimbursements cannot be deducted out of the bill amount for the purpose of tax deduction at source.”

Where a single bill has been raised for professional fee & also inclusive of the reimbursement of actual expenditure, then in such a case TDS has to be made on the entire gross amount/bill. However, TDS on reimbursement of expenses is not required to be made when separate bills are raised.

The view has been supported in the case of ITO v. Dr. Willmar Schwabe (2005) 3 SOT 71.

Although circular No. 715 dated 8-8-1995 lays down that, TDS should be on the entire payment i.e. inclusive of the reimbursement of expenses, ITAT on the other hand has held that, where a separate bill is being raised for reimbursement of expenses provisions of TDS does not attract.

The view has been taken by way of many judicial decisions and to name few are:

 

 Mitra Logistic Pvt. Ltd. V. ITO, ITAT, Kolkata;

 DCIT vs. Lazard India Pvt. Ltd., ITAT, Mumbai;

 ITO V. M/s Planet Herbs Life Science Pvt. Ltd., ITAT, Delhi;

 Income Tax Officer vs. Travels & Shopping (P) Ltd

Therefore in my view, it is worth mentioning that, where the amounts are reimbursed and are clearly identifiable, duly supported with concrete evidence of payment & thereof separately charged, there shall be no requirement of TDS on such amount paid fully supported by the above judicial pronouncements.

 

CONCLUSION &REMARKS

an attempt to understand the complex issues simplified by way of the above analysis of issues   Section 194C as discussed above has been prone to prolonged litigation since its very inception. Hence, the issues pertaining to interpretation of the statute, amendments & clarifications by CBDT have completely left various assessees’ and tax representatives stuck in litigation. Lots of queries were raised by the taxpayers & tax consultants, seeking for necessary clarifications on the provision.

I have tried to discuss the topic at length so as to help the enthusiastic readers to get a precise idea of the judicial controversies involved in the provision of sec-194C of the Income Tax Act, 1961.

Amendments, Clarifications, controversies & Litigation of issues related to Section- 40 (a) (ia) of the Income Tax Act, 1961

ANUMITA SARKAR

Controversies evolving out of each amendment to section 40 (a) (ia) seem to have come to an end, thereby giving some sigh of relief to the assessees & their Tax Representatives, till the time it receives it’s final verdict from the highest judicial authority i.e. Supreme Court of India

IDEOLOGIES OF TAXATION:

Law of Taxation and changes incorporated by CBDT (Central Board of Direct Taxes) every year has turned out to be more complex and controversial for each passing years. It is a charging statute and levy of tax is separate on each of the individuals and the levy is governed by the Income Tax Act, 1961. The strategy of Taxation can be broadly classified upon considerations like raising revenue/funds, put a check upon consumption and use of articles. The main source of earning of revenue is by way of application of TDS provisions which is laid down by the statute in Chapter-XVII “COLLECTION & RECOVERY OF TAX”.

 

 LEGISTATIVE HISTORY OF THE PROVISIONS OF SECTION – 40 (a) (ia):

Sec- 40 is placed in Chapter- IV D. – Profits and gains of business or profession consists of sec-28 to sec- 44DA, dealing with the “Amounts not deductible” while computing the income under this head. For ready reference, sec- 40 is produced herein, –

“Amounts not deductible

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,—

(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 during the previous year, or in the Page 3 of 26subsequent year before the expiry of the time prescribed under sub-section (1) of section 200 :

Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of section 200, 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 subsection (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;

The statute clearly states that Section 40 deals with certain amounts, which will not qualify for deduction in computing the income chargeable to tax. Subsequent insertion of New Sub-Clause (ia) to Section 40 (a) by Finance (No. 2) Act, 2004 w.e.f. 01.04.2005 i.e. from A.Y. 2005-06 was made with a sole objective i.e. to ensure effective compliance with the provisions of TDS (Tax deduction at source).

What the statute reads:

Sec- 40 (a) (ia) reads,-

(ia) any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), 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.”

Finance (No.2) Act, 2004 states that sec- 40 (a)(ia) would cover, –

 any payment made to a resident for any interest covered by Sections 193 and 194A;

 commission or brokerage covered by Section 194H;

 fees for professional or technical services covered by Section 194J and;

 payments to contractors or sub contractors covered by Section 194C (specified expenditure)

on which tax has not been deducted, or having been deducted, has not been paid any time during the previous year or in the subsequent year or before expiry of the time limit prescribed u/s 200(1), shall not qualify for deduction in computation of income chargeable to tax under the head “Profits & gains of business or profession”.

 

It has also provided that, if tax is deducted in any subsequent year, or has been deducted in the previous year but paid in the subsequent year after the expiry of the time limit prescribed u/s. 200(1), then such sum will be allowed as deduction in computing the income of the previous year in which the tax has been paid.

As regards payments to a non resident or a foreign company, the existing Section 40(a)(i) (upto A. Y. 2004-05) provides for disallowances in respect of any interest, royalty, fees for technical services or other sums chargeable under the Act, which are payable outside India or in India to any non resident or to a foreign company, where either tax is not deducted at source or, having deducted the tax, payment is not made before the expiry of time prescribed u/s 200(1).

 

OBJECTIVE BEHIND INCORPORATION OF SUB- CLAUSE (ia) to SECTION- 40 (a) (ia)

To bring harmony in between the treatments of payments to a non-resident/ foreign company with that of payments to a resident, Section 40(a)(i) is amended retrospectively w.e.f. A. Y. 2005-06. It has been provided that if the tax is deducted and paid within the same previous year, even if the payment is beyond the time prescribed u/s 200(1), the deduction will be allowed in the previous year. Similarly, if tax is deducted in the previous year, and payment is made in the subsequent year before the expiry of time prescribed u/s 200(1), the deduction will be allowed in the previous year. But, if the tax is deducted in the previous year, but paid in the subsequent year beyond the time limit prescribed u/s 200(1), then the sum would be allowable in the subsequent year.

 

AMENDMENTS TO SEC- 40 (a) (ia):

First Amendment to the provisions of sub-clause (ia) of clause (a) of section 40 of the Income-tax Act was brought in by the Finance Act, 2008.

As per the provisions of sub-clause (ia) of clause (a) of section 40, any interest, commission, brokerage, fees for professional services, fees for technical service payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work, rent and royalty on which tax is deductible at source and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of section 200 shall not be allowed as deduction. However, the sum is allowed as a deduction in the year of actual payment of the TDS.

To mitigate any hardship caused by the above provisions of section 40 while maintaining TDS discipline, the Act has amended provisions of sub-clause (ia) of clause (a) of section 40.

This amendment allows an additional time (till due date of filing of return of income) for deposit of TDS pertaining to deductions made for the month of March so that disallowance under sub-clause (ia) of clause (a) of section 40 is not attracted in such cases.

Fore example, if the last date for filing the return of income in case of a taxpayer (deductor) is 30th September, he would get an additional time of six months (i.e. from April to September) for depositing the tax deducted at source on an expenditure incurred or payment made in the month of March so as to escape disallowance under sub-clause (ia) of clause (a) of section 40.

The amendment brought in by this Finance Act, 2008 has been made applicable with retrospective effect from 1st April 2005 and shall accordingly apply to assessment year 2005-06 and subsequent to the said assessment year.

Thereafter, another amendment to sec- 40 (a) (ia) was brought in by the Finance Act, 2010 which was made applicable with retrospective effect, but from the 1st April 2010 i.e. in relation to the A.Y. 2010-11 and subsequent years.

The provision so amended, reads as under –

“(ia) any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), 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.”

To discourage the practice of delaying the deposit of tax after deduction, a significant change was incorporated vide this amendment of Finance Act, 2010 i.e. the rate of interest for non-payment of tax after deduction has been increased from the present one percent (1%) to one-half percent (1 ½ %) for every month or part of month as per provisions of section- 201 (1A) of the Act.

This amendment has been made applicable w.e.f. 1st July 2010.

DIFFERENCE IN CHANGES BROUGHT IN SEC- 40 (a) (ia) by FINANCE ACT, 2008 & FINANCE ACT, 2010

As per Finance Act, 2008, causing disallowance on the basis of the period of the previous year during which tax was deductible. These two categories of disallowances: –

 includes the cases in which tax was deductible and was so deducted during the last month of the previous year but there was failure to pay such tax on or before the due date specified in sub-section (1) of section 139;

 includes cases where it requires deposit of tax before the close of the previous year upto 31st March in case of deduction during the first eleven months i.e. a pre-condition for the grant of deduction in the year of incurring expenditure has been eased by extending such time up to the date u/s. 139 (1) of the Act.

The position with reference to first category of cases was left untouched by the Finance Act, 2010, however, in case of the second portion, the only change that has been made by Finance Act, 2010 is that, the assessee deducting tax either in the last month of the previous year or first eleven months of the previous year shall be entitled to deduction of the expenditure incurred during the year, if the tax so deducted at source is paid on or before the due date u/s 139(1).

 

UNRESOLVED ISSUE RESOLVED BY FINANCE ACT 2012

Recently, Finance Act, 2012 has made some significant amendment in section- 40 (a) (ia), which may have definitely given some sigh of relief to the Tax Practitioners.

The objective behind the amendment brought in by the Finance Act, 2012, is to rationalize the provisions relating to TDS.

The Issue towards Short-Deduction of Tax seems to have eased out the situation.

The amendment to section- 40 (a) (ia) reads that, disallowance of business expenses payable to resident payee due to non-deduction of TDS will not be made if the payer is not considered as an “assessee in default” under first provision  to section 201(1) of the Income Tax Act.

The first proviso to section 201(1) states that, if a payer who fails to deduct TDS from the amount paid to a resident or on the amount credited to the account of a resident shall not be deemed to be an “assessee in default”, if such resident: (conditions)

(a) has furnished his return of income under section 139;

(b) has taken into account such sum for computing income in such return of income;

(c) has paid tax due on the income declared by him in such return of income and;

(d) if the tax payer furnishes a certificate to this effect from an accountant in such form as may be prescribed.

In such a case, it shall be deemed that the payer has deducted and paid the tax on the date of furnishing of return of income by the resident payee.

To obtain the benefit of amendment to section 40(a)(ia), the payer should not be an “assessee in default” as mentioned in proposed first proviso to section 201(1) and all the above conditions need to be fulfilled in order to avoid disallowance of expenses.

The amendment is effective from assessment year 2013-14.

CONSTITUIONAL VALIDITY OF THE SECTION- 40 (a)(ia) CHALLENGED BEFORE HIGH COURT

The challenge of the constitutionality of the said provision was raised before the Hon’ble Madras High Court in the case of Tube Investments of India v. Asstt. CIT [2009] 325 ITR 610, although the petition was rejected by the High Court. The petition is based on a very interesting ground wherein it was contended that, the effect of disallowance of the whole of expenditure under Section 40(a)(ia) for deduction of tax but when not paid as provided under the relevant rules, could be draconic and so harsh that it had to be held to be highly arbitrary and unreasonable and in violation of Article 14.

Looking at the practical aspect of the contention, it is pertinent to mention that, disallowance u/s. 40 (a)(ia) even if is made for the default committed in complying with the Tds provisions, the punishment is harsh in respect of the disallowing the entire expenditure that has actually being incurred during the previous year.

Hon’ble High Court of Madras has clarified by stating that,

“in the event of a reasonable doubt about the applicability of Chapter XVII-B, Section 40(a)(ia) cannot be invoked, would be stretching our jurisdiction beyond the permissible limit which cannot be done. In as much as we have reached a conclusion that the object sought to be achieved while enacting Section 40(a)(ia) was for augmenting the provision of TDS, with which object we do not find any impermissibility or lack of constitutionality and hence there is no scope for applying the doctrine of Reading Down to the said provision.”

Another issue that the petitioner had contended before Hon’ble High Court in this case was regarding the issue & controversy of “DOUBLE TAXATION”.

 

LANDMARK JUDGMENT BY HON’BLE SUPREME COURT IN HINDUSTAN COCA COLA BEVERAGE P. LTD. VS. COMMISSIONER OF INCOME TAX

The Apex Court held that, –

“the rigor of Section 40(a)(ia) is relaxed and thereby whatever tax liability created due to disallowance can be retrieved and thereby in the ultimate process, the collection of tax will be only that of the payee. It is a misnomer to call the process created under Section 40(a)(ia) as one resulting in Double Taxation.

Circular No.275/201/95- IT (B) dated 29.01.1997 issued by the CBDT, which specifically declares “no demand visualized under Section 201(1) of the Income Tax Act should be enforced after the tax deductor has satisfied the officer-in-charge of TDS, that taxes due have been paid by the deductee-assessee.

However, this will not alter the liability to charge interest under Section 201(1A) of the Act till the date of payment of taxes by the deductee-assessee or the liability for penalty under Section 271C of the Income Tax Act.” It was in the above stated legal position that decision came to be rendered by the Hon’ble Supreme Court.”

Hon’ble High Court strongly quoted in the case of Tube Investments of India v. Asstt. CIT that, the said decision has been rendered in the light of Sections 201(1) and 201(1A) could not have been made applied to a situation where Section 40(a)(ia) gets attracted, as both the provisions stands in different footing under different sets of circumstances.

 

CONTROVERSY & INTERPRETATION OF THE EXPRESSION ‘PAID’ & ‘PAYABLE’ IMLPLIED IN SECTION- 40 (a) (ia)

Section 40(a)(ia) creates a legal anomaly by virtue of which even the genuine and admissible expenses claimed by an assessee and when an assessee does not deduct TDS on such expenses the same are disallowed.

It was enacted for the purposes of augment of tax through the strict compliance of TDS provision in the light of furtherance to the said objective.

The issue that revolves around is in respect to the interpretation of the expression ‘paid’ & ‘payable’ implied in the section- 40 (a) (ia). The question is whether sec- 40 (a) (ia) would get attracted in the case when the amount is already being paid although the tax is not deducted or is not deposited after such deduction or not?

Several judicial Authorities have passed its decisions on this issue and ultimately Income Tax Appellate Tribunal Special Bench, Vishakhapatnam in the case M/s. Merilyn Shipping & Transports vs. ACIT has settled the issue by considering the majority view stating that, sec- 40 (a) (ia) of the Act is applicable only to such expenditures which are payable as on 31st March of every year and cannot be invoked to disallow the amounts which have already been paid during the previous year, without deducting tax at source.

 

AMENDMENT BY FINANCE ACT, 2010

WHETHER PROSPECTIVE OR RETROSPECTIVE ?

The amendment that has been brought by Finance Act, 2010 in the sec- 40 (a) (ia) states that, the due date of depositing the TDS for all the payments has been made as per Section 139(1) of the Act, i.e. before the due date for filing of the returns.

The question as to whether the Amendment by the Finance Act, 2010 shall be applicable with prospective or retrospective effect or not i.e. from 1.4.2005 came up for consideration before the Mumbai Special Bench Income Tax Appellate Tribunal in the case of Bharati Shipyard Ltd.

 

It was held that, the amendment made by the Finance Act, 2010 with a retrospective effect from assessment year 2010- 2011 cannot be held to be retrospective from assessment year 2005-2006.

The Special Bench held that the amendment brought in by the Finance Act, 2010 to section 40(a)(ia) w.e.f. 01.04.2010 is not remedial or curative in nature.

Finally, the matter came up before Hon’ble High Court Kolkata in the case of Commissioner of Income Tax vs. Virgin Creations, wherein it was held that, when a provision is inserted with an objective to make the provision workable, the same is required to be treated with retrospective operation.

Subsequently, Hon’ble ITAT Kolkata, Mumbai & Vizag Bench have taken similar views in several cases and thereby have provided a big sigh of relief to the assessee’s as well as to their Tax Representatives.

 

PERSONAL OBSERVATION & REMARKS:

 

The judicial decisions are based on the finding of the correct facts and circumstances supported by law. The issue of whether Sec- 40 (a) (ia) would be applicable with retrospective effect i.e. from A.Y. 2005-06 (inception of the provision) or not, has indeed made me confused.

Although for the time being the issue has been resolved by Calcutta High Court in the case of Commissioner of Income Tax vs. Virgin Creations, however, after careful observation of the Judgment passed by Hon’ble High Court, it is necessary to state the finding & observation of Hon’ble HC, –

 

“It is argued by Mr. Nizamuddin that this court needs to take decision as to whether section 40(A) (ia) is having retrospective operation or not.

 

The learned Tribunal on fact found that the assessee had deducted tax at source from the paid charges between the period April 1, 2005 and April 28, 2006 and the same were paid by the assessee in July and August 2006, i.e. well before the due date of filing of the return of income for the year under consideration. This factual position was undisputed.

 

Moreover, the Supreme Court, as has been recorded by the learned Tribunal, in the case of Allied Motors Pvt. Ltd. and also in the case of Alom Extrusions Ltd., has already decided that the aforesaid provision has retrospective application. Again, in the case reported in 82 ITR 570, the Supreme Court held that the provision, which has inserted the remedy to make the provision workable, requires to be treated with retrospective operation so that reasonable deduction can be given to the section as well.

 

In view of the authoritative pronouncement of the Supreme Court, this court cannot decide otherwise.”

Now, it is pertinent to state briefly the issue, which was adjudicated & decided in the case of Allied Motors Pvt. Ltd. (P) Ltd. vs. Commissioner of Income Tax by Hon’ble Supreme Court of India.

 

This is as follows: –

“The following question has been referred to us under Section 256(1): –

“Whether on the facts and in the circumstances of the case, the sales-tax collected by the assessee

and paid after the end of the relevant previous year but within the time allowed under the relevant sales-tax law is to be Income-Tax Act, 1961 while computing the business income of the said previous year “?

In this case, the deduction that was claimed by the assessee was disallowed by the Income-tax Officer under Section 43B of the Income-tax Act, 1961 which was inserted in the statute with effect from 1.4.1984.

Again in the case of Commissioner of Income Tax vs. Alom Extrusions Limited, the controversy, which was adjudicated and decided by Hon’ble Supreme Court of India was that, –

“whether omission [deletion] of the second proviso to Section 43-B of the Income Tax Act, 1961, by the Finance Act, 2003, operated with effect from 1st April, 2004, or whether it operated retrospectively with effect from 1st April, 1988?”

 

After careful observation of the judgment passed by Hon’ble High Court of Kolkata in the case of Virgin Creations read with the afore-mentioned Supreme Court judgments, it shall not be out of place to mention that, section- 40 (a) (ia) has indeed not been adjudicated by the Hon’ble Apex Court. The judgment that was passed by Hon’ble High Court that states, “has already decided that the aforesaid provision has retrospective application” is erroneous and is apparent from record, which require some serious review.