S.40(a)(ia) not applicable to amounts paid by 31st March

ITAT VISAKHAPATNAM (SPECIAL BENCH)

Merilyn Shipping & Transports
v.
Assistant Commissioner of Income-tax

Date of Decision – 29.03.2012

Question: “Whether Section 40(a)(ia) of the Income Tax Act can be invoked only to disallow expenditure of the nature referred to therein which is shown as  payable as on the date of the balance sheet or it can be invoked also to disallow such expenditure which become payable at any time during the relevant previous year and was actually paid within the previous year.”

Held that section 40(a)(ia) cannot be invoked in respect of amounts actually paid within the previous year without deduction of TDS. Section 40(a)(ia) applies only to amounts outstanding as of 31st March of every year (Majority view).   Section 40(a)(ia) would apply only to amounts outstanding as of 31st March of every year on which TDS not deducted and not to amounts paid during previous year without deduction of TDS for following reasons:

• Legislature by consciously replacing words from ‘credited’ or ‘paid’ in Finance (No.2) Bill,2004 to ‘payable’ in Finance (No.2) Act, 2004 has made it clear that only outstanding amount or provision for expenses which are liable for TDS, are to be disallowed in event there is default in not following TDS provisions under Chapter XVII-B of Act

• CBDT’s Circular No.5 of 2005, dated 5th July, 2005 clarifies that intent of section 40(a)(ia) is to curb bogus payments by creating bogus liabilities

• Madras High Court has held in para 61 of its judgment that “section 40(a)(ia) ….would result in disallowance of whole of expenditure and thereby entire sum expended would attract levy of tax at a prescribed rate with all other conditions such as surcharge etc.”.-Tube Investments of India Ltd. v. ACIT [2009] 185 Taxman 438 (Mad.)

• Circular No.5/2005, dated 5-7-2005 – Extract – Further, with a view to augment compliance of TDS provisions in case of residents and curb bogus payments to them it has been provided that no deduction will be allowed in computation of income where tax is not deducted from payments of interest, commission or brokerage, fees for professional services or fees for technical services and payments to a contractor or sub-contractor 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 during previous year, or in subsequent year before expiry of time prescribed under sub-section (1) of section 200.