Income Tax Taxation

Interpretation of the word ‘Deductible or Collectible’ to Determine Advance Tax Liability

In a recent case of Director of Income Tax, New Delhi Vs. M/s. Mitsubishi Corporation, the Supreme Court (SC) ruled that for years prior to the fiscal year 2012-13, the taxpayer is entitled to reduce the amount of income tax that would be deductible or collectible at source (TDS or TCS) when calculating the advance tax liability, despite the fact that the taxpayer received the full amount without any deduction. As a result, the Supreme Court ruled that in such instances, interest obligation for a shortfall in advance tax payment (due to the inability of the tax deductor to deduct tax) would not emerge.

Facts of the case

The taxpayer is a non-resident firm formed in Japan that does business in India. Through its liaison offices in India, it engages in trading activities in carbon crude oil, LPG, ferrous goods, industrial machinery, mineral, non-ferrous metal and products, textiles, vehicles, and so on.

During Assessment Years (AY) 1998-99 to 2004-05, the tax officer, after rejecting the taxpayer’s contentions, calculated the income attributable to the taxpayer’s Indian operations and, as a result, levied interest for the shortfall in payment of advance tax. In relation to the imposition of interest on shortfall in the payment of advance tax, the taxpayer lodged an appeal with the Commissioner of Income-tax (Appeals) [CIT(A)]. The CIT(A) determined that the taxpayer must pay advance tax even though no TDS was deducted by the payer. As a result, it determined that interest would be applicable in the current situation.

Following that, the Income Tax Appellate Tribunal (ITAT)^[1] ruled in favour of the taxpayer, citing the Special Bench decision in the matter of Motorola Inc as well as earlier High Court (HC) decisions. The tax department brought the case to the High Court. The High Court addressed the legal question of whether the charge of interest for a shortfall in TDS payment is required and leviable automatically. It also addressed the question of “when a payer fails to deduct TDS in a transaction and transfers the full consideration inclusive of TDS to the payee/assessee, can the payee assessee deduct the amount thus received from the advance tax payable by it?”

The High Court cited many High Court precedents to find that TDS should be disregarded/excluded when calculating the advance tax liability. Furthermore, the High Court stated that a taxpayer cannot be penalized for a failure on the side of the tax deductor. The tax department has thereafter taken the matter before the Supreme Court (SC).

Contentions of the tax department

The contentions made by the income tax department before the Supreme Court were as follows:

• The responsibility to pay advance tax is distinct from the requirement of the deductor to deduct TDS.
• Interest is levied to reimburse the government for the delay in the recovery of taxes.
• When there are two options for tax collection, one from the taxpayer and one from the tax deductor, the tax department’s decision cannot be limited.
• It was claimed that the provisions concerned with interest computation (under the Income Tax Act) are stand-alone provisions. As a result, the language employed in laws dealing with advance tax computation cannot be incorporated into sections dealing with interest computation.
• The Revenue submitted that the term ‘deductible’ would refer to the TDS that was actually deducted or collected and that the Payee/Assessee would be entitled to deduct TDS from the Advance tax only after the payer had transferred the proceeds of the transaction to the Payee/Assessee after deducting the TDS.
• Acting on this assumption, the Revenue claimed interest from the assessee under Section 234B of the Act for short payment of advance tax.

Contentions of the assessee

The contentions of the taxpayer before the Supreme Court were as follows:

• The taxpayer contended that the rules governing the manner of computing interest under the Income Tax Act cannot be interpreted in isolation from the provisions governing the computation of advance tax liability.
• Aside from the cases cited by the HC, the taxpayer relied on the Supreme Court’s decision in the matter of Ian Peter Morris. TDS and direct payment of tax, it was contended, are two distinct mechanisms of tax recovery under the Act. As a result, the taxpayer cannot be penalized for the failure of the tax deductor to comply.
• It was asserted that a prospective obligation to pay advance tax and a consequent failure to do so should be proved in order to draw interest liability. These prerequisites have not been met in this instance.
• The Assessee contended that the term “deductible” must be construed literally, and hence whether or not the TDS was actually deducted by the payer was immaterial. In any situation, the Payee/Assessee would be allowed to deduct such sum from the advance tax liability of the assessee.
• The Assessee further claimed that under Section 201 of the Income Tax Act of 1961, the Revenue might pursue the Payer for failure to deduct TDS, and hence the Payee should not be obliged to pay any interest under Section 234B of the Income Tax Act.

The observations of the Supreme Court and its decision

The Supreme Court said that the issue, in this case, rests around the meaning of the word ‘deductible or collectible at Source.’

Under the earlier clauses of section 209 of the Income Tax Act, the amount of advance tax liability is determined by subtracting the amount of income tax that would be deductible or collectible during the fiscal year from income tax on estimated income. Hence, in the case where the taxpayer receives or pays any amount (on which the tax was deductible or collectible) without the actual deduction or collection of tax, it has been ruled by the court that he is not liable to pay the advance tax to the extent the tax is deductible from such amount.

And so as to make a taxpayer liable for payment of advance tax in relation to income which has been received or paid without the actual deduction or collection of tax, the Income Tax Act was amended to change the abovementioned section to provide that if an assessee has obtained any income without deduction or collection of tax, then he will be liable to pay the advance tax in respect of such income.

The Supreme Court took notice of the amendment made by the Finance Act of 2012. According to the said amendment, a taxpayer who receives any income without TDS or TCS is required to pay advance tax liability on such income as well. The modification went into effect on April 1, 2012, and it applied to situations of advance tax payment in the fiscal year 2012-13 and subsequent.

In this situation, all of the years are previous to the aforementioned amendment. Thus, relying on an earlier judgement, the Supreme Court emphasized that in dealing with construction issues, future legislation may be referred to for correct interpretation when the earlier Act is vague or ambiguous or readily capable of more than one meaning. As a result, the Supreme Court ruled that if the income tax department’s interpretation is adopted and accepted in this case, the amendment made by the Finance Act 2012 will be rendered worthless.

The Supreme Court also rejected the argument of the tax department that provisions dealing with interest computation must be read in isolation, holding that while the definition of ‘assessed tax’ refers to tax deducted or collected at source, the pre-conditions for attracting interest must necessarily be met.

The Supreme Court decided that the taxpayer could not be held liable for a default in the payment of advance tax owing to the fact that, previous to the fiscal year 2012-13, the amount of income tax that is deductible or collectible at source may be deducted by the taxpayer when calculating the advance tax liability.

Conclusion

This judgement gives much-needed clarity on the computation of interest obligation on a shortfall in advance tax payments, where the whole amount of income was chargeable for TDS. Given the revisions made by the Finance Act of 2012, this case may not be useful for FY 2012-13 onwards, but it will go a long way towards resolving ongoing disputes pertaining to years prior to FY 2012-13.

Read our article:A Brief on Advance Tax Payment, Liability and its related Rules