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2021-10-25
Recently, the SC in Mitsubishi Corporation hearing a batch of appeals filed before it, held that for chargeability of interest u/s 234B prior to FY 2013-14, the amount of income-tax deductible or collectible at source can be reduced while computing the advance tax liability.
Ashwath Pai and Sudeep Das (Chartered Accountant) in their article discuss the implications of the SC ruling and highlight that in the light of amended provisions of Section 209, the ruling is a relief to many, and will settle a long battle fought between the taxpayers and the Revenue. They briefly capture the arguments advanced by the Revenue and the Taxpayers and the various judicial precedents relied thereon. Apart from granting relief to taxpayers presently litigating the issue at lower levels, another interesting takeaway from the ruling is the principle reiterated by the SC that while interpreting any provisions of the Income-tax Act, subsequent legislations/ amendments to the provisions can be considered, in case the earlier provisions were ambiguous or led to multiple interpretations.
Interest u/s 234B - Mitsubishi Corporation Ruling – Way Forward!
India is emerging as one of the most attractive destinations for various companies to set up a presence. With its rank in the ease of doing business index improving consistently every passing year, it becomes pertinent to ensure that regulatorily provisions that burden companies are reviewed and eased appropriately. Presently in India, companies are required to pay quarterly advance tax on their estimated annual income. Failure to pay advance tax, or short payment of advance tax leads to interest implications, which becomes an additional compliance cost.
Further, as per extant laws, companies can reduce the total withholding tax credit available with them while calculating advance tax payable. Prior to the amendment carried out in 2012, companies were also allowed to reduce the amount of tax that was statutorily required to be withheld, even if no actual withholding was undertaken by the payer. This scenario changed with the insertion of a proviso in Section 209 of the Income-tax Act, 1961 (ITA) which stated that, if payment was made without actual withholding of appropriate taxes, the benefit of deduction cannot be claimed at the time of calculating advance tax to be paid. This amendment largely affected companies who had income chargeable at special rates under the ITA/ Tax Treaty and whose total tax liability would be deducted at the time of payment (by the payer) by way of withholding taxes.
This led to a two-fold setback for many companies – not only were they now required to pay advance tax due to non-availability of TDS credit, but were also liable to pay interest under Section 234B and Section 234C of the ITA in case of non-payment of advance taxes. In light of such amendments, the ruling of the Hon’ble Supreme Court (SC) comes as a relief to many, as it finally settles a long battle fought between the taxpayers and the Revenue. However, it is pertinent to note that the below case law offers relief only to cases prior to the 2012 amendment.
Brief facts of Hon’ble SC ruling
With regard to chargeability of interest under Section 234B of the ITA, the SC in a recent judgement[1] has held that the amount of income-tax, which is deductible or collectible at source can be reduced by the assessee while calculating advance tax (prior to the amendment brought by Finance Act, 2012).
Under the erstwhile provisions of Section 209 of the ITA, advance tax payable was computed by reducing the amount of income-tax, which would be deductible or collectible during the financial year from income-tax on estimated income. This led to an interpretation that while calculating the amount of advance-tax payable by taxpayers, apart from tax already deducted, tax that was statutorily required to be deducted under the relevant provisions of the ITA could also be reduced from the estimated tax liability – irrespective of the fact that no actual withholding was undertaken by payer of such income.
However, a plain reading of Section 234B of the ITA suggested that only taxes which were actually deducted or collected, as the case maybe, could be reduced while calculating assessed tax (to compute interest).
This lack of uniformity between the two Sections led to a difference in interpretations by taxpayers and the Revenue – which gave rise to a long legal battle, wherein the High Courts of various jurisdictions have given their opinion on the said matter. However, the case has reached its finality based on the verdict of the SC (as supra).
What transpired in the judgement?
An appeal was filed by the Revenue against the favorable order delivered by the Delhi High Court. The contentions of the department have been summarized below:
• Irrespective of the obligation of the payer to withhold tax at source, there exists an obligation on the assessee to pay advance tax on the estimated income earned;
• Further, when there are two modes of recovery of tax with the Revenue, i.e., one from the assessee and other from the payer who had an obligation to deduct tax, the choice of the Revenue regarding the mode of recovery could not be restricted;
• It was also contended that Section 234B of the ITA is a standalone section, being a complete code in itself, and accordingly, the words used in Section 209 of the ITA cannot be imported into Section 234B of the ITA.
On the other hand, the counsel for assessee relied on several case laws including the Supreme Court ruling in the case of Ian Peter Morris[2], the Uttarakhand High Court ruling in the case of Sedco Forex International[3] and the Bombay High Court ruling in the case of NGC Network Asia LLC[4].
The contentions of the Taxpayer based on the above rulings has been summarized as below:
• Deduction of tax at source and payment of advance tax are two different mechanisms of tax recovery available with the Revenue. The Taxpayer cannot be penalized for default on the part of the payer who fails to withhold appropriate taxes;
• There are provisions under the ITA, which enable the Revenue to initiate proceedings against the payer for recovery of taxes, along with the penal and interest components. Accordingly, it would lead to double recovery on the part of the Revenue, if it demands payment of interest under Section 234B as well as Section 201 of the ITA;
• The provisions of Section 209 and Section 234B of the ITA cannot be read in isolation and must instead be read in conjunction to arrive at a harmonious interpretation.
Further, it was argued that in order for the provisions of Section 234B of the ITA to be attracted, twin conditions needed to be satisfied i.e., there must be a liability to pay advance tax as per Section 209 of the ITA, and the failure to pay the appropriate amount of advance tax as per Section 234B of the ITA. In the case of the assessee, since advance tax was not required to be paid as per Section 209(1)(d) of the ITA, the twin conditions were not satisfied.
Post consideration of the arguments put forth by both parties, the SC observed that if the arguments of the Revenue is accepted, the amendment made to Section 209(1)(d) of the ITA by insertion of the proviso would be meaningless and an exercise in futility. In order to give the intended effect of the amendment, for all assessments prior to FY 2012-13, the assessee must be allowed to reduce the amount of income-tax which would be deductible or collectible, in computation of its advance tax liability, notwithstanding the fact that the assessee has received the full amount without deduction.
Further, it was also held that Section 209 of the ITA, which relates to the computation of advance tax payable by the assessee cannot be ignored while construing the contents of Section 234B of the ITA which relates to default in payment of advance tax.
What’s next?
In view of the Supreme Court judgement, taxpayers who are presently litigating this issue of applicability of interest under Section 234B of the ITA at lower appellate levels could attain relief. It is worthwhile to note that since the Supreme Court ruling is binding on lower appellate authorities[5], disregarding the principles laid down in the said judgement may tantamount to a mistake apparent on record as laid down in Section 154 of the ITA. Therefore, taxpayers who have not gone on appeal against adverse orders of the Assessing Officer/ CIT(A)/ Tax Tribunal, or where time-limit for filing appeal has elapsed would now have the opportunity to possibly file rectification applications under Section 154 or Section 254(2) of the ITA. Further, this principle has also been upheld in various judgements[6].
Another interesting takeaway from this ruling is the principle reiterated by the Supreme Court viz., while interpreting any Section of the ITA – it would be helpful to consider any subsequent legislations/ amendments that have been brought out in the said Section, in case the earlier provisions were ambiguous or led to multiple interpretations[7]. Taxpayers may rely on this ratio decidendi for other such issues that are pending litigation, wherein a subsequent amendment has brought further clarity to help interpret the existing provisions.
(CA Radhika Subramani and Joel Jacob contributed to this article)
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[3] [TS-5761-HC-2003(Uttaranchal)-O]
[4] [TS-5112-HC-2009(Gujarat)-O]
[5] Kamlakshi Finance Corpn. Ltd. [(1991) 55 ELT 433] [SC]
[6] [TS-5095-HC-1998(Punjab & Haryana)-O]
[7] State of Bihar v. S.K. Roy – Criminal Appeal No. 158 of 1965
