(2020) 426 ITR 289 (SC)
Amounts not deductible in certain circumstances
It applies to both. The provision covers sums on which tax was deductible and was not deducted, whether or not they remain outstanding at the close of the year.
Does the disallowance for failure to withhold tax apply only to amounts remaining payable at the year end, or also to amounts already paid during the year?
The appellant was a transport contractor which had undertaken to transport cement for a manufacturer. It engaged individual truck operators to perform the carriage and made payments to them during the year without deducting tax at source. The Assessing Officer disallowed the payments for failure to withhold. The appellant contended that it had not entered into any sub-contract with the truck operators, that the payments were made during the year and nothing remained payable at the year end, and that the disallowance provision applied only to amounts outstanding on the last day of the year.
The disallowance was upheld through the appellate stages and by the Rajasthan High Court. A conflict existed among the High Courts on the paid-versus-payable question, the Allahabad and Gujarat High Courts having taken the wider view and a Special Bench of the Tribunal having earlier taken the narrower one. The Supreme Court settled the question.
For the assessee
The provision uses the word 'payable', which denotes an amount outstanding and not yet discharged. Amounts already paid during the year are not payable at the year end and fall outside the disallowance. Separately, there was no sub-contract with the truck operators, who were engaged on an ad hoc basis, so no withholding obligation arose at all.
For the Revenue
The provision is directed at securing compliance with the withholding obligations. Reading it as confined to amounts outstanding at the year end would allow a taxpayer who failed to withhold to escape disallowance simply by settling the dues before the year closed, which would defeat its purpose entirely.
The Court held that the disallowance applies to both paid and payable amounts. It reasoned that the provision is intended to enforce the withholding obligations, and that a construction confining it to sums outstanding at the year end would produce an irrational result: a taxpayer who failed to deduct but paid the amount before the year closed would escape, while one who failed to deduct and left the amount outstanding would be penalised, though the default in each case is identical. The purpose being to secure deduction, the disallowance must attach to the failure to deduct rather than to the accident of when payment was made. On the facts, the Court also held that the arrangement with the truck operators amounted to a sub-contract for the carriage the appellant had undertaken, so the withholding obligation clearly arose. It further confirmed that the later amendment moderating the disallowance to a proportion of the sum operates prospectively and did not assist the appellant for the year in question.
Settled a long-running conflict among the High Courts. The disallowance is carried into Section 35 of the IT Act 2025, and the paid-versus-payable argument is no longer available. The sub-contract finding is also useful in the transport, logistics and construction sectors, where work is routinely passed on to smaller operators.