The author expresses dismay over the fact that though a Special Bench was constituted to resolve an important controversy, the controversy is far from over. Worse, there appears to be no quick resolution in sight in view of the conflicting High Court judgements on the issue. Author pleads for the adoption of a quick dispute resolution process to deal with such issues.
We are all aware of the voyage of Merlyin Ship M/s. Merilyn Shipping & Transports vs. ACIT (ITAT Visakhapatnam Special Bench)- who is sailing in “the sea” of applicability of provision of sec 40 a(ia) of the I.T ACT, 1961 on paid or payable.
Sec 40a(ia) of the I.T Act, 1961 states that if TDS is not deducted, as applicable on the expenses claimed by the assessee then the benefit of deduction of the expenses for computation of the income from business & profession will not be allowed.
whenever controversy arises about an interpretation of the ambiguity of law then why don’t we have a system wherein reputed/leaned representatives of law/legal fraternity/judicial members can sit together and reach a specific consensus? Why don’t we have a mechanism wherein instead of going through the litigation process individually, wasting time, energy & money of all the parties involved, an interpretation can be done collectively?
The text of sec 40a(ia) is 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
The whole controversy is evolving around the word payable used in the aforesaid section. There are plethora of decisions both in favour and against the interpretation that the amount would be disallowed only if it is “payable” and not paid. Which school of thought is correct is a different scenario. But the whole voyage do raises questions which require introspection in our prevalent system of taxation and judicial working.
The most hot cake case on the issue is that of M/s. Merilyn Shipping & Transports vs. ACIT (ITAT Visakhapatnam Special Bench). A decision which every tax practitioner/judicial member might be knowing. In the case (supra)The Judicial Member was of the view that the disallowance u/s sec 40a(ia) would be applicable only on the amount payable and the accountant member was of the view that it would be attracted also on the expenses paid. Therefore a special bench was constituted and finally the third member also had the same view that the expenses would be disallowed only if there are payable. But the matter did not rest there and many ice-burgs came in form of various judicial pronouncements which were against the said decision , the most prominent being of the Hon’ble Calcutta High Court in CIT vs. Crescent Export Syndicate. Since, then various different tides are coming in the sea some wiping off Merlyin and some Crescent. The order of the Special Bench has since been put under interim suspension by the Andhra Pradesh High Court.
The CBDT has issued Circular No: 10/DV/2013 dated 16/12/2013 giving the ‘Departmental View‘ on the controversial issue upon the applicability of section 40(a)(ia) of the Income-tax Act, 1961 on the word “paid” or “payable” and has stated that sec 40a(ia) will include the expenses paid within its ambit but in areas where jurisdictional High Court has taken a different view then the law as laid by the concerned jurisdictional High Court will be prevalent. The relevant excerpt of the circular is as under:-
“4. After careful examination of the issue, the Board is of the considered view that the provision of section 40(a) (ia) of the Act would cover not only the amounts which arc payable as on 31st March of a previous year but also amounts which are payable at any time during the year. The statutory provisions are amply clear and in the context of section 40(a) (ia) of the Act the term ‘payable’ would include ‘amounts which are paid during the previous year”.
5.Where any High Court decides an issue contrary to the ‘Departmental View’, the `Departmental View’ thereon shall not be operative in the area falling in the jurisdiction of the relevant High Court. However, the CCIT concerned should immediately bring the judgement to the notice of the CTC. The CTC shall examine the said judgement on priority to decide as to whether filing of SLP to the Supreme Court will be adequate response for the time being or some legislative amendment is called for.”
It is also pertinent to mention that Circulars are only binding on the department and not on assessee or on judicial authorities.
Hon’ble Allahabad High Court has in the decision of CIT Vs Vector Shipping accepted the judgment of Merlyin Shipping(supra) and the department SLP has also been dismissed against the same, though it was dismissed on a different ground, by a cryptic order.
The whole voyage of the “ship” brings before us the beneath, the sea elements which are crucial for us to ponder upon:-
First, Income Tax Act is a central act. The provisions of the Income Tax Act, as stated in section 1 of the Act, which reads as under
“(1) This Act may be called the Income-tax Act, 1961.
(2) It extends to the whole of India.
are equally applicable to the whole country. Then How can there be disparity in the applicability of law between the states of the country? How can a person living in one state i.e Uttar Pradesh will bear no disallowance of expenses because he is travelling on Vector shipping and in West Bengal “The Crescent” will hit you, resulting in not only the disallowance of expenses but also initiation of penalty proceedings. The provisions of the law has to be applied equally on all irrespective of the state in which the person resides. Ironically, people in many other states are still standing at the bay in the dark night for their jurisdictional High Court have not acted as the light house on this impugned issue as yet.
Secondly, the Merlyin shipping judgement (supra) is a very erudite verdict. All aspects were thoroughly vetted by the Hon’ble members and when there was a difference in opinion was a special bench constituted. The Hon’ble Vice president had also gone through all the arguments and then had given his verdict. In the other Hon’ble High courts/Tribunals decisions, weather in favour or against not a single different argument has been put across by the counter parts counsel. A special bench is created to resolve issues when there is conflict in the interpretation of the law between the members of the bench. When after due consideration of all the arguments a majority decision has been reached then shouldn’t its over-ruling be also be done by Special/Full High Court Bench? Why then do we have a special bench, if its decision has not to be followed?. Decision of the Special/Full High Court Bench could if still not been acceptable then it can be referred to the Hon’ble Supreme Court.
Thirdly, whenever controversy arises about an interpretation of the ambiguity of law then why don’t we have a system wherein reputed/leaned representatives of law/legal fraternity/judicial members can sit together and reach a specific consensus? Why don’t we have a mechanism wherein instead of going through the litigation process individually, wasting time, energy & money of all the parties involved, an interpretation can be done collectively?
Without my favoring a school of thought or the judgement of Merlyin Shipping (supra) even I am also curiously waiting for the journey of the ship to be ended. A ship which has been sailing in the sea from many years has shown us many under the sea, potholes and ice-berg of the prevalent judicial system which needs cleaning up from all of us.
Let us all wait and watch the fate of the ship that “does it sinks or reaches the shore?”