CA Ramprasad

 CA RamprasadSection 40 of the Income Tax Act, 1961 provides for non deduction of amount of expenditure specifically mentioned there in.

One of the important provisions which merit our attention and faced by many assesses in day to day transactions is 40(a)(ia).

Section 40(a)(ia) provides for disallowance of expenditure in relation to interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to resident, or amounts payable to a resident contractor or sub – contractor for carrying out any work including supply of labour for carrying out any work.

The disallowance of amounts mentioned in section 40(a)(ia) will be made if the tax is not deducted at source or after deduction of tax at source has not paid the same on or before the due date specified in section 139(1)[1].

The word “Payable” used in this section is subject matter of controversy.

This controversy is raised in various cases before ITAT, High Courts and finally the matter reached the Supreme Court.

Historical Background of Section 40a(ia): Section 40a(ia) was introduced in the Income Tax Act, 1961 by the Finance Act 2004 W.e.f 1st April, 2005. This section overrides the provisions of sections 30 to 38 of the Income Tax Act, 1961. Initially the Finance Bill 2004 contains the word “amounts credited or paid” but later it was changed to “payable” in the Finance Act, 2004. This may be due to time limit provided for payment of TDS as per Rule 30 of the Income Tax Rules. Also using the word “paid” result in permanent disallowance, which was not the intention of legislation while introducing section 40(a)(ia).

Controversy:

Income tax is a charge on income and not on expenditure; therefore, expenses cannot be denied if they have been incurred for the purpose of business or profession. Disallowance under Section 40(a)(ia) converts the expenditure incurred into artificial income, therefore, this section should be strictly construed.

The Dispute: Whether the term “payable” in section 40(a)(ia) refers to entire payment on which TDS was required to be made in terms of various sections referred to in this section or it refers only amounts payable with reference to those sections remain outstanding as on 31st March.

In case of Merilyn Shipping and Transports Case (Visakhapatnam ITAT) the Revenue argued that if the term “payable” if restricted only to payable will throw up anomalous situation and also if the disallowance under section 40(a)(ia) of the Income Tax Act, 1961 is restricted to amounts payable then in the subsequent year such provision is actually paid off without deduction TDS or depositing the same the revenue would lose its right to disallow such expenses.

Revenue also argued that Section 40(a)(ia) of the Act would fail where the assessee is maintaining books of accounts on cash system.

The argument of the assessee is that the word “paid” has been defined in the Act and where as the word “payable” is not defined.

Section 43 of the Income Tax Act, 1961 defines the term “paid” in subsection 2. As per Section 43(2) the term paid means actually paid or incurred according to the method of accounting followed in computing income under the head “Profits and Gains from Business or Profession”. The term payable generally refers to amount (money) required to be paid , due (Oxford Dictionary).

Assessee has relied on decision of Hon’ble Bombay High Court in the case of Abdul Gaffar A.Nadiadwala V ACIT & Ors 267 ITR 488 wherein held that if the Income Tax Act does not define a term, it should be interpreted according to the plain dictionary meaning of the terms used there in.

The assessee has also argued that the provisions of section 40(a)(ia) of the Act are penal in nature because it disallow even the genuine and admissible claim of expenses under the head “ Income from Business or Profession” if the assessee does not deduct TDS on such expense. To support his view the assessee has relied on the Supreme Court Judgment in case of CIT V Vegetable Products Ltd .

The Hon’ble Supreme Court in the case of CIT V Vegetable Products Ltd (1973) 88 ITR 192 held that if the court finds that the language   of the taxing provisions is ambiguous or capable of more meaning than one, then the court has to adopt that interpretation which favours the assessee, more particularly so where the provision relates to imposition of penalty.

Rule of Interpretation:

As per the cardinal principle of Interpretation of statue words of statue must be understood in their natural, ordinary or popular sense and constructed according to their grammatical meaning unless such construction leads to some absurdity or contrary to the object of the statue. It is another rule of construction that when the words in the statute are clear, plain and unambiguous then courts are bound to give effect to that meaning irrespective of consequences.

This rule of interpretation was also referred to in by the Supreme Court in case Raghunath Rai Bareja and others V Punjab National Bank and Others.

Conclusion of Special Bench of ITAT, Visakhapatnam:

The word “payable” used in Section 40(a)(ia) of the Income Tax Act, 1961 has go be given its natural meaning and going by strict interpretation the section is applicable only to expenditure which is payable as on 31st March of every year and cannot be invoked to disallow the amounts which have already been paid during the previous year without deducting tax at source.

Forward:

Allahabad High Court upheld the decision of Special Bench Of ITAT, Visakhapatnam decision in case of Merilyn Shipping and Transport Ltd 136 ITD 23 (supra) while deciding the similar issue in case of CIT v Vector Shipping Services (p)ltd case 357 ITR 642.

Departments Special Leave Petition against Allahabad High Court decision in case of Vector Shipping Services (p) ltd case was dismissed by Supreme Court.

Bailout provision:

Finance Act, 2012 has made an amendment to this section wef 01/04/2013. If an assessee is not treated as assessee in default under first proviso of 201(1)[i], it shall be deemed that assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee.

Whether Short Deduction of TDS attracts Section 40(a)(ia)?

No. As per The Supreme Court in Hindustan Coca Cola Beverages (P.) Ltd. v. CIT [2007] 293 ITR 226  has held that where the payee has already paid tax on income of which there was a short deduction of tax at source, paid tax on income of which there was a short deduction of tax at source, recovery of tax cannot be made once again from the tax deductor.

It is further relevant to note that Explanation to section 191 now makes it unequivocal that where the person who is required to deduct any sum in accordance with the provisions of this Act does not deduct or after so deducting fails to pay, or does not pay the whole or any part of the tax as required by or under this Act, he may be deemed to be an assessee in default within the meaning of section 201(1) in respect of such tax, if the deductee has also failed to such tax directly.

Thus it is obvious that the person responsible for deduction of tax at source on an income paid can be considered as in default only where the payee has not paid any tax on such income. To put it simply, if the payee has paid tax on such income, then the payer cannot be considered as the assessee in default. The insertion of this Explanation by the Finance Act, 2008 with retrospective effect from 1-6-2003 is the reiteration of the mandate laid down by the Supreme Court in the case of Hindustan Coca Cola Beverages (P.) Ltd

As far as interest under section 201(1A) is concerned, the same is chargeable for the period between the date on which tax was deductible till the date on which the tax was actually paid.

Key Note: CBDT has issued  CIRCULAR No 10/DV/2013 dated 15th December, 2013 explaining the provisions of section 40(a)(ia). The Circular has explained that in provisions of section 40(a)(ia) of the Income Tax Act, 1961 the term “ payable” would include “amounts which are paid during the previous year”.

This Circular further clarifies that where any High Court decides any issue contrary to the department view, the department thereon shall not be operative in the area falling in the jurisdiction of the relevant High Court.

Latest Developments: Union Budget 2014 has made amendment to the section 40(a)(ia). The amended provision is as follows:

Thirty percent of any sum payable to a resident, 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. If the requirements of this section are met in subsequent year, 30% of sum which was disallowed earlier will allowed as deduction.

                                                                                                            (WEF 01/04/2015)

[1] Inserted By Finance Act, 2010. (Gujarat High Court View Om Prakash R Chaudhary and similar view expressed by Delhi HC in Oracle Software held that Amendment made by Finance Act, 2010 are retrospective in nature)

[i] Any person including the principal officer of a company, who fails to deduct the whole or any part of tax in accordance with the provisions of Chapter XVII on the sum paid to a resident or on the sum credited to the account of the resident shall not deemed to be an assessee in default in respect of such tax if such resident-

  • Has furnished his return of income U/S 139;
  • Has taken in to account such sum for computing total income in such return of income; and
  • Has paid the tax due on the income declared by him in such return of income

And the person furnishes a certificate to this effect from an accountant in such form as may be prescribed.

                                                                        (WEF 01/07/2012)

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