Prelude

Recently, the Honorable Supreme Court (‘SC’) in the case of Palam Gas Services  [TS-170-SC-2017] upheld Section 40a (ia) disallowance for TDS (Tax Deducted at Source) default on freight payments. The case related to the interpretation of Section 40a(ia) of the Income Tax Act, wherein the question raised was whether the provisions of Section 40a(ia) would be attracted when the amount is not “payable” to a contractor or sub-contractor but has actually been paid, given the fact that the word contained in the Section is only “payable”.  It was held by the SC that Section 40a (ia) would cover not only cases where the amounts are payable but also when they are paid, considering the purpose for which the Section was originally introduced.

It’s imperative to note that a contrary view was taken by the Allahabad High Court in the case of CIT vs Vector Shipping Services (P) Ltd. [TS-352-HC-2013(ALL)], where it was held that for disallowances under Section 40a(ia) amounts should be payable by the end of the year, not those which were already paid. The SC dismissed the Special Leave Petition (‘SLP’) made by the Revenue, in limine (non-speaking order) [TS-401-SC-2014].

The question now arises as to whether the SC’s judgement in Palam Gas Service has settled the long pending issue on TDS disallowance or do we have two conflicting SC judgments on the same issue, i.e.  Vector Shipping SLP dismissal by SC favoring the assessee vis-à-vis to the latest SC judgement in Palam Gas Service which is against the assessee.  If the latter scenario holds water, then which judgment has binding validity by virtue of Doctrine of Precedent? We will try to find a solution for the questions that have arisen with the recent SC judgment.

Vector Shipping SLP dismissal by the SC - Whether a binding precedent?

We would determine whether the SC’s dismissal of the SLP filed by the revenue against the Allahabad High Court’s judgement in Vector Shipping has any binding validity as a precedent. It is worth mentioning here that the Doctrine of Precedent is a common law doctrine where the judges are required to decide the cases based on the judgements that have been already decided by the courts placed higher in the hierarchy of courts.  In this context one would refer to Article 141 of the Indian Constitution which states that “The law declared by the Supreme Court shall be binding on all courts within the territory of India”. Article 141 appears to give a sacrosanct value to the law declared by the SC.

Hence the moot issue in the context of Vector Shipping will be as to whether the dismissal of a SLP in limine (non-speaking order) by the SC will be treated as a valid proposition of law laid down by the SC? In other words whether the Allahabad’s HC judgement will be merged with the SC’s SLP verdict by applying the Doctrine of Merger theory.

Doctrine of Merger

Under this principle, the merger referred to is similar to the word merger used in common parlance, wherein pursuant to a merger between two entities, one entity ceases to exist and the other entity continues in existence. Drawing similar analogy under legal principle, the order of the inferior court gets merged with the order of the superior court; thereby the order of the inferior court ceases to exist to that extent the superior court order touches upon the issue pertaining to the inferior court order. The doctrine of merger is neither a doctrine of constitutional law nor a doctrine statutorily recognised. It is a common law doctrine founded on principles of propriety in the hierarchy of justice delivery system.  Income tax is no alien to the merger principle, as they are present under Sections 147, 154 and Section 264, wherein partial merger and total merger concepts are enshrined.

Therefore in the current context, the question arises whether by virtue of doctrine of merger the dismissal of a SLP in limine by the SC in Vector Shipping means the Allahabad HC’s judgement gets merged with the SC’s SLP order?

The Constitution of India under Article 136 vests the Supreme Court of India with a special power to grant special leave, to appeal against any judgment or order or decree in any matter or cause, passed or made by any Court/tribunal in the territory of India. The exercise of jurisdiction conferred on this Court by Article 136 of the Constitution consists of two steps:

(i)                  granting special leave to appeal; and

(ii)                hearing the appeal.

A petition for leave to appeal to the Supreme Court may be dismissed by a non-speaking order or by a speaking order. Interesting jurisprudence on scope of Article 136 of the Constitution was determined in the case of Kunhayammed vs. State of Kerala [TS-5031-SC-2000-O] wherein the SC considered certain key legal positions as follows:

• While hearing the petition for special leave to appeal, the Court is called upon to see whether the petitioner should be granted such leave or not. While hearing such petition, the Court is not exercising its appellate jurisdiction; it is merely exercising its discretionary jurisdiction to grant or not to grant leave to appeal. The petitioner is still outside the gate of entry though aspiring to enter the appellate arena of Supreme Court. Whether he enters or not would depend on the fate of his petition for special leave;

• If the petition seeking grant of leave to appeal is dismissed, it is an expression of opinion by the Court that a case for invoking appellate jurisdiction of the Court was not made out;

• If leave to appeal is granted the appellate jurisdiction of the Court stands invoked; the gate for entry in appellate arena is opened. The petitioner is in and the respondent may also be called upon to face him, though in an appropriate case, in spite of having granted leave to appeal, the court may dismiss the appeal without noticing the respondent.

Dismissal of SLP, whether res-judicata?

Further the SC in Kunhayammed (supra) also determined key principles, relating to the doctrine of merger and the effect of dismissing a special leave petition by either a speaking or non- speaking order:

The Court observed that “If it is a non-speaking order, i.e., it does not assign reasons for dismissing the special leave petition, it would neither attract the doctrine of merger so as to stand substituted in place of the order put in issue before it nor would it be a declaration of law by the Supreme Court under article 141 of the Constitution for there is no law which has been declared. If the order of dismissal be supported by reasons, then also the doctrine of merger would not be attracted because the jurisdiction exercised is not an appellate jurisdiction but merely a discretionary jurisdiction refusing to grant leave to appeal Still the reasons stated by the Court would attract applicability of article 141, if there is a law declared by the Supreme Court which obviously would be binding on all the Courts and Tribunals in India and certainly the parties thereto. “

Therefore the SC has clearly held that principles of res-judicata, doctrine of merger will not be applicable for SLP’s dismissed in limine.  Further similar views were upheld in the following cases as well:

• In M/s. Rup Diamonds and others Vs. Union of India and others AIR 1989 SC 674, the law declared by this Court is that it cannot be said that the mere rejection of special leave petition could, by itself, be construed as the imprimatur of this Court on the correctness of the decision sought to be appealed against.

• In Supreme Court Employees Welfare Association Vs. Union of India and Others 1989 (4) SCC 187 and Yogendra Narayan Chowdhury and Others Vs. Union of India and Others 1996 (7) SCC 1, both decisions by two-Judges Benches, this Court has held that a non-speaking order of dismissal of a special leave petition cannot lead to assumption that it had necessarily decided by implication the correctness of the decision under challenge.

• In V.M. Salgaocar & Bros. P. Ltd. [TS-5022-SC-2000-O] has held that “We are clear in our mind that an order dismissing a special leave petition, more so when it is by a non-speaking order, does not result in merger of the order impugned into the order of the Supreme Court.”

Therefore based on the above views it can be clearly inferred that when a SLP is dismissed by a non-speaking order i.e. without assigning any reasons for the dismissal, then it would neither attract the doctrine of merger nor it would be a declaration of law by the SC under Article 141 of the Constitution.

Epilogue

Based on the above analyses, it can be inferred that Vector Shipping SLP dismissal by the SC would not have any binding precedential validity. It may also be observed from the SC judgement in Palam Gas, wherein the SC had mentioned on the non -applicability of doctrine of merger and res judicata principles for the SLP order dismissal in Vector Shipping. 

Therefore, one may need to be aware of the following possible scenarios that may be envisaged as an aftermath of the SC judgement in Palam Gas Service, which has gone in favor of the revenue:

• Assessee has succeeded at the Income Tax Appellate Tribunal relying Vector Shipping.  Department has not contended on the same by not pressing an appeal, further assuming that the time to appeal for the same is also expired. In this context, is it possible for the Department to file a miscellaneous application before the ITAT citing the SC verdict in Palam Gas Service?

• Extending the above scenario, the assessee figures out through an application made under the Right to Information Act, that the Commissioner has not exercised the appeal owing to Vector Shipping and this reason is also expressed in the official document through a noting. Will this specific reason have any impact? Alternatively there is no explicit reason mentioned in the noting, will that provide a window for the Department to press an appeal belatedly.

• Alternatively whether rectification of the order can be invoked under Section 254 of the Act by the Assessing officer on the ITAT order?

• Similar scenario to the above, instead of Department filing the MP with ITAT, Can the Department file an appeal before the High Court?

• Whether Assessing Officer can reopen the case under Section 147, where the matter came to a conclusion during assessment proceeding following Vector Shipping principle?

• Whether the Commissioner can invoke revisionary proceedings under Section 263 of the Act?

To conclude, since the SC’s judgement in Palam Gas Service lays down the ratio decidendi for its judgement, it appears to be more elaborate and accurate. Therefore as of now it appears that the saga pertaining to ‘paid vs payable’ is resolved, thanks to SC verdict in Palam Gas Service.  But what is interesting to note here that the SC has adopted a purposive interpretation while laying out its proposition in Palam Gas Service. On the contrary, the Vector Shipping has adopted a literal interpretation while laying out its proposition. Therefore there arises a conflict, in this regard one may note that the SC in Pradip J Mehta [TS-34-SC-2008-O] has held that when two interpretations are possible, then it would be appropriate the adopt the interpretation in favor of the taxpayer.  Therefore one may say that the current saga has definitely not reached finality and considering the dynamism with which the Indian judicial process is evolving, it won’t be a surprise to see a different coordinate bench possibly arriving at a different view deviating from Palam Gas Service.