Once tax has not been deducted and even if such tax has been paid by the deductee, disallowance u/s.40[a][ia] can still be made.

ACIT vs. DICGC Ltd (ITAT Mumbai) – ITAT held that even if payee pays tax on payments which are liable for Deduction of Tax at Source (TDS), the payment would still be disallowed under Section 40(a)(ia) of the Income-tax Act,1961 (the Act) in the hands of payer.  It distinguished decisions in the case of Hindustan Coca Cola Beverage (P) Ltd v. CIT [2007] 293 ITR 226 (SC) and Mahindra & Mahindra Ltd v. DCIT [2009] 30 SOT 374 (Mum) (SB) and observed that these two decisions were rendered in the context of Section 201(1) of the Act and principles laid down therein could not be adopted for the purpose of interpreting Section 40(a)(ia) of the Act.

Sec.201 deals with the mode of recovery of taxes and once tax due has already been paid then the same demand cannot be enforced again. However, sec.40[a][ia] deals with the dis allowance of expenditure itself. Therefore, merely by invoking the Heydon’s principle the statutory provisions cannot be rendered redundant. Therefore, we are of the opinion that once tax has not been deducted and even if such tax has been paid by the deductee, dis allowance u/s.40[a][ia] can still be made.

 The second part of the argument is that the Hon’ble Bombay High Court in the case of CIT vs. Kotak Securities Ltd. [supra] has observed in para-31 that both the parties has proceeded on the footing that tax was not deductible u/s. 194J for the last 10 years, therefore, provisions of sec.40[a][ia] could not be invoked. It was contended that in the last many years in the case before us also no tax was held to be deductible, therefore, assessee and department proceeded on the footing that no tax was deductible. However, on query by the Bench Ld. Counsel of the assessee admitted that in A.Y 2006- 07 dis allowance u/s.40[a][ia] was made for the first time but that year was not available by the time assessment for A.Y 2007- 08 was completed. However, this defense is not available in A.Y 2008-09 because by that time revenue has already invoked the provisions of sec.40[a][ia] and this fact was known to the assessee. Therefore, in our opinion, in view of para-31 of the decision of the Hon’ble Bombay High Court in the case of Kotak Securities Ltd., provisions of  sec.40[a]ia] are not applicable for A.Y 2007- 08 whereas the same are applicable in A.Y 2008- 09.

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