Hon’ble Supreme Court puts an end to Section 40a(ia) Controversy

One of the classic controversies, lasting for more than a decade, is disallowance for non-deduction/payment of TDS on domestic payments u/s 40a(ia). This section has seen a number of amendments since its birth by the Finance Act, 2004 wef AY 2005-06, which were basically in the nature of softening the harsh provisions of the section and also widening the coverage of the TDS net by way of covering all heads of TDS deduction right from Section 192 to 194. However, a major controversy, which has now been finally, concluded by Hon’ble Apex Court, had been the TDS `paid’ or ‘payable’. In order to understand the genesis of the whole controversy, it would be relevant to reproduce the section 40a(ia):

“S. 40 – Amounts not deductible:

Notwithstanding anything to the contrary in Sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”,—

 (ia) any interest, commission or brokerage, 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 during the previous year, or in the subsequent year before the expiry of the time prescribed”

Interpretation assigned to words `payable’ by a section of judiciary was that this dis-allowance, is applicable only on those cases where the TDS remained `payable’ as on 31st March of the financial year and did not cover the cases where no TDS was deducted during the year or at the end of year. This controversy got its legs by the judgement (by majority members) in the case of Merilyn Shipping & Transports v ACIT [2012] 20 taxmann.com 244 (Vis) by the Hon’ble ITAT special Bench at Vizag. Though, this judgement did not find favour with a number of Hon’ble High Courts but the Hon’ble High Court of Allahabad in the case of CIT v. Vector Shipping Services (P) Ltd., (2013) 357 ITR 642 supported the view taken in Merilyn. SLP against the judgement of Hon’ble Allahabad High Court was dismissed in limine (i.e. without giving any reason) by Hon’ble Supreme Court, which was again interpreted as the confirming the view taken in the case of Vector Shipping judgement.

Now the Hon’ble Supreme Court has pronounced a very elaborate judgement in the case of `M/s. Palam Gas Services Vs CIT on 3^rd May, 2017 where the Hon’ble Court has held in para 15 that:

“It cannot be held that the word ‘payable’ occurring in Section 40(a)(ia) refers to only those cases where the amount is yet to be paid and does not cover the cases where the amount is actually paid. If the provision is interpreted in the manner suggested by the appellant herein, then even when it is found that a person, like the appellant, has violated the provisions of Chapter XVIIB (or specifically Section 194C and 200 in the instant case), he would still go scot free, without suffering the consequences of such monetary default in spite of specific provisions laying down these consequences. The Punjab & Haryana High Court has exhaustively interpreted Section 40(a(ia) keeping in mind different aspects.”

This judgement makes it crystal clear that payable includes the paid also and therefore, the provisions are applicable in all cases whether the TDS paid or payable. Thus, the Hon’ble Supreme Court has put an end to a controversy, thereby giving a clarity to a number of cases pending before Judiciary.