S. 40(a)(ia) - Deduction of tax cannot be postponed till the last date of the accounting period by debiting the running account of the payee.

Hon`ble high court judgment reported in (2012) 6 TaxCorp (DT) 50407 (CALCUTTA) does not apply to a case where the assessee has failed to deduct the tax itself at source out of payments made to payee in accordance with the provisions of Chapter-XVII-B.

 

ITO vs Bhoomi Construction

Dated: 8^th Feb 2013

The assessee is a partnership firm engaged in the business of civil construction. It filed its return of income for the assessment year under appeal on 22-12-2006 returning total income at Rs.1,37,383/- as against which the total income of the assessee was assessed by the Assessing Officer at Rs. 59,10,645/- after disallowing a sum of Rs. 57,48,265/- u/s. 40(a)(ia) of the Income-tax Act.

The assessee claimed before the AO that tax amounting to Rs. 75,410/- was deducted by the assessee on 31.3.2006 by debiting the running account of M/s J.B. Construction and the same was deposited with the Government before the due date specified in sub-section (1) of section 139 and therefore the impugned payments were not hit by section 40(a)(ia). The AO did not accept the submissions and disallowed disallowing a sum of Rs. 57,48,265/- u/s. 40(a)(ia).

On appeal, before CIT(A) allowed the claim of the assessee following the judgment reported in (2012) 6 TaxCorp (DT) 50407 (CALCUTTA).

Whether Ld. CIT(A) has erred in deleting the addition under section 40(a)(ia) made by the Assessing Officer on account of tax not been deposited or paid during the previous year.

 

Revenue on appeal before ITAT, submitted that assessee have paid sum  of Rs.9,54,887/-; Rs.21,52,185/- + Rs.17,52,906/-; and Rs.8,88,287/- on 12-05-2005, 20-06-2005, and on 08-11-2005 respectively. The ld. D.R. submitted that a sum of Rs.75, 410/- has been shown in the chart as deducted on 31-03-2006 towards tax by debiting the account of M/s J.B. Construction. He contended that section 194C required the assessee to deduct tax at source out of amounts paid/credited in favour of M/s. J.B. Construction Co,  and not to deduct the tax by debiting the running account of the payee in its books. He further submitted that the amount deducted on 31-03-2006 was not deducted at source in as much as it was not deducted out of the amount paid by the assessee on 12-05-2005, 20-06-2005 and 08-11-2005 and hence the aforesaid sum shown as deduction on 31-03-2006 did not constitute deduction of tax at source out of amounts paid/credited to M/s. J.B. Construction Co. in terms of section 194C of the Income-tax Act. According to him, there was thus failure on the part of the assessee in complying with the provisions of section 194C and therefore its case was not covered by the judgment reported in (2012) 6 TaxCorp (DT) 50407 (CALCUTTA).

 

ITAT observed that payments were made by the assessee on the aforesaid dates to M/s J.B. Construction without deduction of tax at source. The case of the assessee however is that it has running account with M/s J.B. Construction and therefore it debited the said account by a sum of Rs.75,410/- on 31.3.2006 as representing deduction of tax and deposited the same with the Government before the due date specified in section 139(1) and therefore the AO was not justified in making the impugned disallowance under section 40(a)(ia).

The crucial question that arises for consideration is as to what constitutes deduction of tax at source u/s 194C read with section 40(a)(ia). Is it required to be deducted at source out of the amounts paid to a contractor/sub-contractor? Or, it is sufficient compliance with law if the running account of payee is debited by the deductor on the last date of the previous year without deducting the same from actual payments made by the assessee during the course of its accounting year.

Further ITAT observed that Section 40(a)(ia) applies only when “… tax is deductible at source under Chapter XVII-B and such tax has not been deducted ….”. The relevant question therefore is as to what is the import firstly of the phrase “deduction” of tax and secondly of such deduction being “at source”. “Deduct” means to take away or to subtract from the whole. “At source” means occurrence of an event that initiates a process. Therefore payment of any amount, on which tax is deductible at source, itself is the “source” at which tax should be deducted and it is after such deduction that the remaining amount should be paid to the payee. This position becomes quite clear on perusal of Chapter XVII-B of the Income-tax Act dealing with “Collection and Recovery of Tax – Deduction at Source”. “Deduction at source” means subtraction of the amount of tax from the whole amount payable by the assessee to the payee out of which tax is deductible. If tax is not so deducted out of the amount payable, it cannot be said to have been “deducted at source”. In other words, if tax is deducted at any other point of time than at the time when the amount exigible to deduction of tax at source is paid or is deducted out of any other sum than the sum out of which it is mandated to be deducted, such deduction of tax per se cannot be said to be at source. Source of deduction of tax statutorily emanates from payment. Deduction of tax at source, i.e., out of the amount payable in terms of section 194C read with section 40(a)(ia), is one thing and debiting the running account of the payee on the last date of the accounting period is altogether a different thing. Deduction of tax at source and its payment to the Government is a continuous source of revenue mobilisation throughout the year. The law mandates deduction of tax to be made at source, i.e., as and when amount is payable, and therefore deduction of tax cannot be postponed till the last date of the accounting period by debiting the running account of the payee. By no stretch of imagination, debiting the running account of a payee can be said to be deduction of tax at source as contemplated by section 194C read with section 40(a)(ia).