The issue under consideration in this write up is whether disallowance u/s 40(a)(ia), 40A & 43B of Income Tax Act, 1961 are attracted in case of an eligible assessee declaring income under presumptive taxation scheme contained in section 44AD, 44ADA & 44AE.
Section 44AD, 44ADA & 44AE starts with a non-obstante clause reading as ”Notwithstanding anything to the contrary contained in section 28 to 43C….” meaning thereby that section 44AD, 44ADA & 44AE has overriding effect on section 28 to 43C which includes section 40(a)(ia), 40A & 43B. It prima facia sounds as if no disallowance u/s 40(a)(ia), 40A & 43B are attracted while computing income under section 44AD, 44ADA & 44AE.
Now let us examine these sections one by one to arrive at a logical conclusion-
Section 43B
It starts with non obstante clause reading as “Notwithstanding anything contained in any other provision of this act…” meaning thereby that section 43B has overriding effect over all other provision of the act including section 44AD, 44ADA & 44AE. While the overriding effect of section 44AD, 44ADA & 44AE is limited over section 28 to 43C, section 43B has a large overriding effect in as much as it overrides all other provisions of the act.
Section 43B was inserted in the Income Tax Act vide Finance Act, 1983. Memorandum explaining provisions of Finance Bill 1983, in paragraph 60 thereof, states that section 43B is proposed to be inserted to curb the practice of not discharging statutory liabilities for a longer period of time either by disputing it or for other reasons, while claiming the same as deduction while computing taxable income on the pretext that books of accounts being maintained on mercantile or accrual basis. Thus the intention of the legislature behind insertion of section 43B was to curb the practice of not paying statutory liabilities still claiming it as deduction from taxable income under the Income Tax Act.
On the other hand, presumptive taxation provisions are introduced to help small businesses to comply with taxation provisions without consuming time and resources also lowering the compliance costs for such taxpayers and reducing the administrative burden on the tax machinery. However, to achieve this objective, it must not be the intention of legislature to allow small taxpayers deduction of statutory liabilities without actual payment thereof.
The Panaji Tribunal in case of Good Luck Kinetic v. ITO [2015] 58 taxmann.com 267 while dealing with disallowance u/s 43B against income computed u/s 44AF held as under:-
A perusal of Sec. 44AF clearly shows that the opening words in the said section are “notwithstanding anything to the contrary contained in Sec. 28 to 43C”. A perusal of the provisions of Sec. 43B shows that the opening words are “notwithstanding anything contained in any other provisions of this Act”. As per the provisions of Sec. 44AF admittedly once the presumptive tax provision is applied, the income of the Assessee is fixed at 5% of the total turnover. The non-obstante clause in Sec. 44AF is not the only words that call for interpretation. When the presumptive tax rate is applied u/s 44AF, the said sum equalling 5% of the total turnover is deemed to be the profit and gains of such business chargeable to tax under the head “Profits and gains of business or profession?. It only means that the deduction allowable u/s 28 to 43C is deemed to have been already granted to the Assessee. This is because the said provisions u/s 28 to 43C are provisions relating to the computation of business income of the Assessee. However, a perusal of the provisions of Sec. 43B shows that the said provision is a “restriction” on the allowance of a particular expenditure representing statutory liability and such other expenses claimed in the profit and loss account unless same has been paid before the due date of filing the return. The statutory liability in the present case has not been paid before the due date of filing the return. Further, the non-obstante clause in Sec. 43B has a far wider amplitude because it uses the words “notwithstanding anything contained in any other provisions of this Act”. Therefore, even assuming that the deduction is permissible or the deduction is deemed to have been allowed under any other provisions of this Act, still the control placed by the provisions of Sec. 43B in respect of the statutory liabilities still holds precedence over such allowance. This is because the dues to the crown has no limitation and has precedence over all other allowances and claims. In these circumstances, we are of the view that the disallowance made by the AO by invoking the provisions of Sec. 43B of the Act in respect of the statutory liabilities are in order even though the Assessee’s income has been offered and assessed under the provisions of Sec. 44AF of the Act.
Hence, in my opinion, disallowance u/s 43B is very much attracted while computing income under section 44AD, 44ADA & 44AE.
Section 40(a)(ia)
Section 40 starts with a non obstante clause reading as “Notwithstanding anything to the contrary in section 30 to 38….” . Thus section 40 does not have overriding effect over section 44AD, 44ADA & 44AE, while all these sections have overriding effect over section 40.
In ITO v. Mark Construction [2012] 23 taxmann.com 398 (Kolkata), the Tribunal held that disallowance under section 40(a)(ia) could not be made in case of assessee opting for presumptive taxation scheme.
Section 40(a)(ia) disallows 30% of any sum payable to a resident on which tax is deductible at source under chapter XVII-B and such tax has either not been deducted or deducted but not deposited on or before the due date specified in section 139(1).
The SMC Bench, Kolkata in the case of Jaharlal Mukherjee v. ITO [IT Appeal No. 73 (Kol.) of 2014) dated 5-8-2015], held as follows:—
11. The next issue is to be decided in this appeal is as to whether the provision of section 40(a)(ia) of the Act can be made applicable for the assessee when his income is determined in accordance with the presumptive scheme u/s 44AD of the Act. From the bare reading of section 44AD of the Act, it can be seen that it starts with an “non obstante clause”. “Notwithstanding anything to the contrary contained in section 28 to 43C “. This goes to prove that the provisions of section 44AD of the Act overrides all other provisions contained in section 28 to 43C. Admittedly, the provisions of section 40(a)(ia)of the Act falls within this range of sections 28 to 43C of Chapter-XVIIB of the I.T. Act.
When an income is presumptively taxed u/s 44AD of the Act any further business income by applying the provisions of sections 28 to 43C (including section 40(a)(ia) of the Act) would get telescoped with the presumptive income determined. For this reason, the legislature had provided section 44AD of the Act with a non obstante clause having an over riding effect over other provisions of sections 28 to 43C of the Act.
It is pertinent to dwell upon the impact of non obstante clause at this stage. It is well known that the non obstante clause is a legislative device which is usually employed to give over riding effect to certain provisions over sum contrary provision that may be either in the same enactment or some other enactment to say “to avoid the operation and effect of all contrary provisions”.
Reliance is placed in this regard on the following decisions :
(i) Union of India v. G.M.Kokial AIR 1984 (SC) 1022 at page 1026.
(ii) R.M. Adaikalava v. State of Tamil Nadu [1998] 230 ITR 663 at 674 (Madras Full Bench decision).
It is well settled that while dealing with the “non obstante clause” in which the legislature wants to give overriding effect to section. “it must try to find out to the extent legislature had intended to give one provision over riding effect over another provision. Such intention of the legislature in this behalf is to be gathered from the enacting part of the section. Reliance is placed in this regard on the decision of the Hon’ble Apex Court in the case of A.G. Varadarajulu v. State of Tamil Nadu [1998] 146 CPR (SC) 117 at page 123.
A clause beginning with an expression “Notwithstanding anything contained in this Act or in some particular act or in any law for the time being in force or in any contract” is more often than not appended to a section in the beginning with a view to give the enacting part of the section in case of conflict, over riding effect over the provision of the Act or the contract mentioned in the “non obstante clause.” It is equivalent to say that in spite of the provision of the case or any other act in the “non obstante clause” or any contract or documents mentioned, the enactment following it will have its operation or that the provision embraced in the non obstante clause would not be impediment for an operation of an enactment.
Reliance is placed in this regard on the decision of the Hon’ble Apex Court in the case of Chandavarkar Sita Ratna Rao v. Ashalata S.Guram reported in AIR (1987) (SC) 117 at page 134.
The words “shall deemed” or the key words and they are indicative of the legislative intent that the tax shall be chargeable on presumptive income, computed as per sub-section (1) of section 44AD of the Act. The very purpose of the very enactment of section 44AD of the Act is to provide hassle free proceedings. Such proceedings are made to complete the assessment provided the conditions laid down in such enactment are fulfilled.
The assessment of income under presumptive basis u/s 44AD is similar to the income determined on an estimated basis by the AO after rejecting the books of account of the assessee. Once the books are rejected the doors of the AO are closed for looking after other provisions of the Act which are relevant for determining the business income of the assessee, unless or otherwise specifically provided in the provisions of section 44AD of the Act itself such as allowance of interest and remuneration to partners in the case of a partnership firm. Reliance is placed in this regard on the decision of Hon’ble Andhra Pradesh High Court in the case of Indwell Constructions v. CIT reported in 232 ITR 776 (AP), wherein Lordships had held as under :—
“The pattern of assessment under the Income-tax Act, 1961, is given by section 29 which states that the income from profits and gains of business shall be computed in accordance with the provisions contained in sections 30 to 43D of the Act. Section 40 provides for certain disallowances in certain cases notwithstanding that those amounts are allowed generally under other sections. The computation under section 29 is to be made under section 145 on the basis of the books regularly maintained by the assessee. If those books are not correct or complete, the Income-tax Officer may reject those books and estimate the income to the best of his judgment. When such an estimate is made, it is in substitution of the income that is to be computed under section 29.
In other words all the deductions which are referred to under section 29 are deemed to have been taken into account while making such an estimate. This will also mean that the embargo placed in section 40 is also taken into account.”
This decision supports the view that when the assessee cannot claim any expenses after applying the net profit rate, then the AO too cannot make addition after applying the net profit rate. Even if the assessee commits any default under Chapter XVIIB of the Act with regard to the TDS provision, it is only for the TDS officer to take suitable action on the assessee, the doors of the AO are absolutely shut when the income is determined on presumptive basis u/s 44AD of the Act.
In view of the aforesaid facts and circumstances, the legal provision of section 44AD of the Act shows an overriding effect over other provisions contained in section 28 to 43C of the Act, I hold that the provisions of section 40(a)(ia) of the Act cannot be invoked in the instant case as the income is directed to be determined on presumptive basis u/s 44AD of the Act. Accordingly, ground Nos.3, 5, 6 and 7 are allowed in favour of the assessee.
These decisions of the Kolkata ITAT in the case of Mark Constructions & Jaharlal Mukharjee has been upheld by the Surat Bench of ITAT in the case of Bipinchandra Hiralal Thakkar Vs. ITO [2021] 124 taxmann.com 236 (Surat-Trib.), in which it was held that:-
13. We note that assessing officer also took the stand and contended that “the dues to the crown has no limitation and has precedence over all other allowance and claims”.
We note that provisions of section 44AD have been enacted by the Legislature/Crown to provide benefit to small businessmen in terms of cost savings. A small businessmen having turnover below the specified limit, say, in assessee`s case the turnover/sales is below one crore rupees, therefore he need not to maintain books of accounts and need not to get the books of accounts audited from a Chartered Accountant, under section 44AB of the Act, this way, there is a cost saving in the hands of the assessee (small businessmen). This benefit (cost saving) has been provided by the Legislature/Crown to the small businessmen in India by enacting the provisions of section 44AD of the Act. Therefore, at the cost of repetition we state that the Legislature/Crown has enacted the provisions of section 44AD of the Act with a “non obstante clause”. “Notwithstanding anything to the contrary contained in section 28 to 43C “. This goes to prove that the provisions of section 44AD of the Act overrides all other provisions contained in section 28 to 43C of the Act. At this juncture it is also important to note that Article 265 of the Constitution of India lays down that, “No tax shall be levied or collected except by authority of law”. The Hon’ble Supreme Court of India has held that the provision under Article 265 of the Constitution of India is applicable not only for levy but also for the collection of taxes and the expression “assessment” within its compass covers both the aspects carried out by the executive functionary [Chottabhai Jethabhai Patel v. Union of India 1962 SCR Supl.(2)].
Therefore, it is required that whole of the process of taxation must follow the procedures which are valid under the law and must adhere to law i.e. substantive one as well as procedural one too. Therefore, in other words it is provided in the Constitution of India that every step should be taken to ensure that levy and collection of the taxes is strictly in accordance with law – not only substantive one but the procedural law, as well. Therefore, we do not agree with the statement of the assessing officer to the effect that “the dues to the crown has no limitation and has precedence over all other allowance and claims.” The assessee’s turnover for the Assessment Year 2013-14 is to the tune of Rs. 92,33,844/- which is below one crore rupees, the threshold limit prescribed u/s 44AD of the Act and the assessee had filed the return of income on presumptive basis u/s.44AD of the Act therefore assessee is entitled to take the benefit of the provisions of section 44AD of the Act. In view of the reasons set out above, as also bearing in mind entirety of the case, we are of the considered view that the assessee is entitled to take the benefit of the provisions of section 44AD of the Act. Based on the above factual position narrated above and precedents applicable to the facts, it is abundantly clear that assessee is not liable to deduct TDS under section 40(a)(ia) of the Act, therefore we delete the addition of Rs. 11,59,064/-. As we have allowed the assessee`s appeal on legal ground, therefore all other issues on merits of the additions, in the impugned assessment proceedings are rendered academic and infructuous.
Based on these judgements, one can conclude that no disallowance u/s 40(a)(ia) is attracted if income is computed u/s 44AD, 44ADA & 44AE.
Section 40A
Section 40A(1) states that the provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this act relating to the computation of income under the head “Profits & gains of business or profession”.
Wordings of section 40A(1) does not make it clear whether it overrides section 44AD, 44ADA & 44AE. Section 44AD, 44ADA & 44AE as stated earlier, overriding effect over section 28 to section 43C. which includes section 40A also. Therefore, in my opinion, disallowance u/s 40A is not attracted if income is computed under provisions of section 44AD, 44ADA & 44AE.
In ITO Jaipur Vs Rajesh Kumar Gupta, Alwar, Jaipur Bench (SMC) of ITAT dealing with disallowance u/s 40A(3) against income declared u/s 44AF held that “The presumptive system of tax u/s 44AF starts with non-obstante clause and overrides other provisions. In view thereof, there is no justification in making the addition which is deleted. Since the addition is deleted on merits, there is no need to go into alternative ground. Thus the appeal of the assessee is allowed. “
However, the issue is not away from controversy and clarification is needed as to which section has a overriding effect on another – 40A or 44AD/ADA/AE?
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Well articulated article.
Thanks for providing very useful and informative article