Section
40(a)(ia) of the act was introduced in the Income Tax Act, 1961 by the Finance
(No 2) Act, 2004 w.e.f. 01.04.2005 with the view to augment the revenue through
the mechanism of tax deduction at source. This provision was bought so as to
disallow the expenses on which TDS is not deducted but the same carries a
debatable point now. The point is whether disallowance of non deduction of TDS
shall be of amount payable at the end of the year or of all sums paid or
payable during the year.
Section
40(a)(ia) of the act reads as under:
“any
interest, commission or brokerage, rent, royalty, fees for professional
services of fees for technical services payable
to a resident, or amounts payable
to a contractor or subcontractor, being resident, for carrying out any work
(including supply of labour for carrying out any work), on which tax is
deductible at source under chapter XV1I-B and such tax has not been deducted
or, after deduction, has not been paid on or before the due date specified in
sub-section (1) of section 139….”
A
plain reading of the above paragraph clearly says that disallowance will be of
the amount payable at the end of the year if TDS is not deducted on the payable
amount and no disallowance shall be made of amount paid or payable during the
year even if TDS was not deducted.
To
have more clarity, let us go through few cases:
1.
Merilyn
Shipping & Transport vs Addl. CIT – Special Bench
The assessee being a partnership firm, in the relevant
assessment year, derived income from business of ship containers transport and
handling, customs clearing and forwarding agents. It filed its return of income
for A.Y. 2005-06 declaring total income of Rs. 15,24,710. The assessee had
claimed brokerage expenses of Rs/ 38,75,000 and commission of Rs. 2,43,253 on
which TDS was not deducted. AO disallowed the same and assessee also accepted
the same. The Special Bench of ITAT, Vishakhapatnam, held that the provisions
of section 40(a)(ia) of the act would apply only to the amount which remained payable at the
end of the relevant financial year and could not be invoked to disallow the
amount which had actually been paid during the previous year without tax
deduction at source. The order of the Special Bench has since been put under
interim suspension by the Andra Pradesh High court.
2.
CIT
vs Crescent Export Syndicate & Ors – Calcutta High Court
In this case, the Calcutta High Court held that the key words
used in the section 40(a)(ia) are “on which tax is deductible at source under
Chapter XVII-B’. If the question is: “which expenses are sought to be
disallowed?”, the answer is bound to be disallowance of all sums paid or payable during the
year.
3.
CIT vs Sikandarkhan N Tunvar – Gujrat High
Court
It was held that section 40(a)(ia) would cover not only to the
amounts which are payable as on 31st March of a particular year but
also which are payable at any time
during the year. Therefore, in this case both of the amounts is covered under
section 40(a)(ia) and both the amounts are disallowed i.e. paid or payable
during the year or at the end of the year if TDS is not deducted.
4.
CIT vs
Vector Shipping Services (P) ltd – Allahabad High Court
It was held that section 40(a)(ia) was brought on statute to
disallow the claim of even genuine and admissible expenses of the assessee
under the head ‘Income from Business and Profession’ in case the assessee under
the hear ‘Income from Business and Profession’ in case the assessee does not
deduct TDS on the expenses. The default in the assessee does not deduct TDS on
such expenses. The default in deduction of TDS would result in disallowance of
expenditure on which TDS was deductible. In this case, high court has affirmed
the decision of the Special bench in Merilyn Shipping that for disallowance
under section 40(a)(ia) of the act, the amount should be payable and not which has been paid during the year.
5.
ACIT, Mumbai vs Rishti Stock and Shares pvt Ltd
– ITAT, Mumbai
In this case, ITAT examined various case laws of different
High Court and concluded that section 40(a)(ia) covers all the amounts payable at the end of the year
along with the amounts paid
during the year.
Therefore, it can be seen that
it is a debatable point as to which amount should be disallowed in case of non
deduction of TDS. To bring clarity on the subject, CBDT bought out a circular
(circular No 10/DV/2013 dt. 16.12.2012). This circular says that both the
amount i.e. paid or payable
during the year is covered under the purview of section 40(a)(ia). But, where
any High Court has decided an issue contrary to the ‘Departmental View’, the
‘Departmental View’ thereon shall not be operative in the area falling in the
jurisdiction of the relevant High Court. However, the CCIT concerned should
immediately bring the judgment to the notice of CTC.
CIRCULAR No 10/DV/2013 (Departmental
View)
F. No. 279/Misc./M-61/2012-ITJ (Vol.-II)
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
New Delhi, the December 16th 2013
Subject: Circular on Section 40(a)(ia) of the Income Tax
Act, 1961-reg.
1.
It has been brought to the notice of the
Board that there are conflicting interpretations by judicial
authorities regarding the applicability of the provisions of section 40(a)(ia)
of the Income-tax Act, 1961 (`the Act’) with regard to the amount not
deductible in computing the income chargeable under the head ‘Profits
and gains of business or profession”.
2.
Section 40(a)(ia) of the Act reads as under:
“ any interest, commission or brokerage, rent, royalty,
fees for professional services or fees for technical services payable
to a resident, or amounts payable to a contractor or
sub contractor, being resident, for carrying out any work (including
supply of labour for carrying out any work), on which tax is deductible at
source under Chapter XVII-B and such tax has not been deducted or, after
deduction, has not been paid on or before the due date specified in sub-section
(1) of section 139…’:
3.
In the case of Merilyn
Shipping & Transports v. Addl. CIT, it was held by Special Bench
of ITAT, Vishakhapatnam, that the provisions of section 40(a)(ia) of the Act
would apply only to the amount which remained payable at the end of the
relevant financial year and could not be invoked to disallow the amount which
had actually been paid during the previous year without deduction of tax at
source. The order of the Special Bench has since been put under interim
suspension by the Andhra Pradesh High Court.
a. The
Hon’ble Calcutta High Court and Hon’ble Gujarat High Court in the
case of Commissioner
of Income-tax, Kolkata-XI v. Crescent Exports Syndicate and Commissioner
of Income-tax-IV v. Sikandarkhan N Tunvar respectively, have
held that section 40(a)(ia) of the Act would cover not only the amounts which
are payable at the end of the previous year but also which are payable at any
time during the year.
b. The
Hon’ble High Courts have further held that the intention of the legislation was
to disallow certain types of expense, subject to provisions of Chapter XVII-B,
which are payable at any time during the year but no tax was deducted at source
or if deducted was not paid within the stipulated time. There is no such
condition that amount should remain payable at the end of the year.
c. The
Hon’ble Allahabad High Court in CIT v. Vector
Shipping Service (P) Ltd. has affirmed the decision of the Special
Bench in Merilyn Shipping that for disallowance under section 40(a) (ia) of the
Act, the amount should be payable and not which has been paid during the year.
However, the decisions of the Hon’ble Gujarat and Calcutta High Courts (supra)
were not brought to the attention of the Hon’ble Allahabad High Court.
d. In the
case of ACIT, Circle 4(2), Mumbai v. Rishti Stock and Shares Pvt.
Ltd. in ITA No. 112/Mum/2012, Hon’ble ITAT, Mumbai in its order dated 02-08-2013 has
examined the decision of the Hon’ble Allahabad High Court (supra) as regards to
section 40(a)(ia) of the Act and concluded that the same was an ‘orbiter dicta’
while the decisions of the Hon’ble Gujarat and Calcutta High Court (supra) were
‘ratio decidendi’. The ITAT accordingly applied the view taken by the Hon’ble
Gujarat and Calcutta High Court as ratio decidendi prevails over an orbiter
dicta.
4.
After careful examination of the issue, the
Board is of the considered view that the provision of section 40(a) (ia)
of the Act would cover not only the amounts which arc payable as on 31st March
of a previous year but also amounts which are payable at any time during the
year. The statutory provisions are amply clear and in the context of section
40(a) (ia) of the Act the term “payable” would include “amounts which are paid
during the previous year”.
5.
Where any High Court decides an issue contrary
to the ‘Departmental View’, the `Departmental View’ thereon shall not be
operative in the area falling in the jurisdiction of the relevant High Court.
However, the CCIT concerned should immediately bring the judgement to the
notice of the CTC. The CTC shall examine the said judgement on priority to
decide as to whether filing of SLP to the Supreme Court will be adequate
response for the time being or some legislative amendment is called
for.
6.
The above clarification may be brought to the
notice of all officers
Now, decision from Supreme
Court or amendment in Act is awaited to bring further clarity on the matter.
Author:
Sagar Gupta
Email: info@onlinelawsolutions.com
Website: www.onlinelawsolutions.com
Acknowledgment: The Tax Referencer
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