Disallowance U/s. 40(a)(ia) also applies to payment made during the year without TDS deduction

Provision of section 40(a)(ia) of the Act are applicable not only to the amounts which is shown as payable on the date of balance sheet but it is applicable to such expenditure which becomes payable at any time during the relevant previous year and was actually paid within the previous year.

1. During the course of assessment proceedings, the appellant company furnished details of tax deducted at source from the payments made regarding Consultancy & Professional fees. From such details, the Assessing Officer noted that out of the total payment made for Rs.9,24,547/-, tax was deducted at source on Rs.6,31,143/- only. It was explained on behalf of the appellant that as the balance of Rs.2,93,404/- was ‘out of pocket expenses which was reimbursable, tax was not deducted on the same. However, the Assessing Officer observed that as per the clarifications issued by CBDT in· respect of Circular No.715 dt 08.08.1995, reimbursements of payments referred to under sec. 194C and 194J could not be deducted out of the bill amount for the purpose of tax deduction at source. Therefore, the Assessing Officer concluded that the appellant company ought to have deducted tax at source on the reimbursable out of pocket expenses of Rs.2,93,404/- which it failed to do, thereby attracting the provisions of section 40(a)(ia) of the LT. Act, 1961. In this background, the amount of Rs.2,93,404/- was disallowed and added back to the. total income of the appellant.

2. The appellant, on the other hand, submitted that the appellant during the course of assessment proceedings . has furnished details of consultancy and professional charges paid of Rs.9,24,547/- out of which tax was deducted on amount of Rs.6,31,143/- and on the remaining expenses which was reimbursed, no tax has been deducted at source. It is vehemently argued that provision of section 194J on such type of expenses was not applicable and simultaneously there was no applicability of section 40(a)(ia) of the I.T. Act. The appellant also placed reliance on the decision of the Special Bench of the ITAT, Vishakhapatnam in the case of Merilyn Shipping Transports vs ACIT ITA NO. 477/VIZ/2008, wherein it has been held that only those amounts which are payable at the end of this year can be disallowed and where such payments have been made there is no question of attracting section 40(a)(ia) of the I.T Act. It is stated that in the appellant’s case as it has already been stated and admitted that expenses were paid by way of reimbursement, therefore the payments have been made and as per the ratio laid down in the decision of the Special bench no additions are called for. I find much force in the arguments advanced on behalf of the appellant company. Section 40(a)(ia) is applicable only in respect of TDS defaults if amount is payable. If amount is actually paid and taxis not deducted under sections 193, 194A, 194C, 194 H, 194- I, and 194 J either at the time of payment or at the time of giving credit to the recipient, section 40(a)(ia) is not applicable. In view of the decision of the Special Bench of the Hon’ble ITAT, Vishakhapatnam (supra) relied upon by the appellant and also in view of the ratio laid down by the Hyderabad Tribunal in the case of Teja Constructions v. CIT [2010] 39 SOT 13 (Hyd.)(URO), it is noted that going by the rule of strict interpretation, the default with reference to actual ‘payment’ of expenditure would not entail disallowance.

3. In the light of the above discussion and observation and perusing the facts of the case and keeping in view the emerging legal position as above and also for the following summerised reasons, this ground of appeal is decided accordingly :-

(i)The appellant has paid professional charges of Rs. 9,24,547/- which includes payment of out of pocket expense of Rs. 2,93,404/-.

(ii)  As per the Id AR the appellant has paid Rs. 2,93,404/- before the end of the year hence, in view of decision of special bench of ITAT in the case of Merlyn Shipping Transports v ACIT ITA No. 477/VIZ/2008 this payment cannot be disallowed by applying section 40(a)(ia).

(iii)  Since in the remand report the AO has not commented on correctness or otherwise of submission of ld AR hence AO has directed to verify and allow all the payment which were made during the year and to disallow only those payment which were outstanding as on last day of the accounting year. Accordingly this ground is decided in favour of the appellant as above.

4. At the time of hearing before us, the ld. DR referred to the case law of the Hon’ble High Court of Calcutta in the case of CIT vs Crescent Export Syndicate 262 CTR 525 (Cal) and he stated that the Hon’ble Calcutta High Court have over ruled the decision in the case of Merilyn Shipping & Transports vs. Addl. CIT (2012) 136 ITD 23/20 taxmann.com 244 (Vishakhapatnam). In the case of Crescent Export Syndicte the Hon’ble Jurisdictional High Court had opined that the provisions of section 40(a)(ia) of the Act are application not only in respect of payments outstanding at the end of the year but also in respect of payment which are paid during the year without making TDS. The ld. AR reiterated the submissions made before the subordinate authorities and relied on the order of ld. CIT(A).

5. We have perused the case records and heard the rival contentions analyzing the facts and circumstances herein and we arrive at the considered view that the majority ruling in the case of Merilyn Shipping and Transports (supra) was that if all amounts have been paid then no disallowance can be made u/s 40(1)(ia) of the Act if the amounts are found to be payable as on the year end then no disallowance can be made u/s 40(10(ia) of the Act. That in effect the Tribunal analyzing the section 40(a)(ia) of the Act had held that in the case of omission to deduct tax even the genuine and admissible expenses are to be disallowed. But it sought to remove the rigour of law by holding that the disallowance shall be restricted to the money which is yet to be paid. However, we have observed that in the case of Crescent Export Syndicate (supra) jurisdictional High Court observed that there can be no denial that the provision in question is harsh. But there is no ground which was not intended by the Legislature. The law was deliberately made harsh to secure compliance of the provisions requiring deduction of tax at source. It is not the case of an inadvertent error and accordingly the Hon’ble High Court held that the provision of section 40(a)(ia) of the Act are applicable not only to the amounts which is shown as payable on the date of balance sheet but it is applicable to such expenditure which becomes payable at any time during the relevant previous year and was actually paid within the previous year. In the result the question is decided in favour of the revenue and against the assessee. Respectfully following the decision of the Jurisdictional High Court of Calcutta we decide this issue in favour of the revenue and reverse the findings of the order of the ld. CIT(A). Therefore this ground is decided in favour of the revenue.