Case Law Details
RELEVANT PARAGRAPH
15. It will also be relevant to mention that in the Memorandum explaining the provisions relating to direct taxes in the Finance Act, the above clause has been described under the head `Measures to plug revenue leakages’ and the relevant portion of Memorandum Explaining the Provisions Relating to Direct Taxes is reproduced below:-
Enforcing compliance of provisions of TDS Under the existing provisions of sub-clause (/) of clause (a) of section 40, failure to make deduction at source from payment of interest, royalty, fees for technical services or any other sum which is payable outside India, or in India to a non-resident or to a foreign company or failure to make payment to the account of the Central Government, attracts dis allowance of such payments in the hands of the payer. Deduction of such sum is, however, allowed in the computation of income if tax is deducted, or after deduction, paid in any subsequent year in computing the income of that year.
With a view to augment compliance of TDS provisions, it is proposed to extend the provisions of section 40(a)(/) to payments of interest, commission or brokerage, fees for professional services or fees for technical services to residents, and payments to a resident contractor or sub-contractor for carrying out any work (including supply of labor for carrying out any work), on which tax has not been deducted or after deduction, has not been paid before the expiry of the time prescribed under sub-section (1) of section 200 and in accordance with the other provisions of Chapter XVII-B. It is also proposed to provide that where in respect of payment of any sum, tax has been deducted under Chapter XVII-B or paid in any subsequent year, the sum of payment shall be allowed in computing the income of the previous year in which such tax has been paid.
The proposed amendment will take effect from 1st day of April, 2005 and will, accordingly, apply in relation to the assessment year 2005-2006 and subsequent years. [Clause 11]
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16. A combined reading given to the provisions, object and Memorandum explaining the provision will reveal that this sub-clause has been inserted in the statute to enforce the compliance of provisions of TDS. To enforce the compliance of provisions of TDS, it has been provided in the statute that no deduction of any of the expenses mentioned in the sub-clause will be allowed unless TDS is deducted and if the TDS deducted that is paid to the Government. It is also stipulated that the said expenses will be allowed in the computation of income only if the tax is deducted and after deduction the same is paid and if it is paid in subsequent year, then, it will be allowed in the subsequent year. Therefore, the intention of the legislature is clear that the nature of expenses mentioned in sub-clause (ia) cannot be allowed unless tax deducted has been paid thereon. It is true that if a liability is ascertained and it has been quantified and it has accrued, then, according to mercantile system of accounting, the same has to be allowed as an expenditure irrespective of the fact that whether any such expenditure has been debited to Profit & Loss Account as allow ability of an expenditure will not depend upon accounting treatment given by the assessee to a particular expense. If the expenses have been incurred for the purpose of business and they are allowable otherwise, the entry in the books of account, whether it is made or not is not relevant for the purpose of considering the allow ability thereof. But, here, the statute has put a bar on the allow ability of such expenditure and the general proposition of allow ability does not override the provision of statute whereby it has been made clear that certain expenditure described in sub-clause (ia) of Section 40(a) will be allowed only when tax deductible thereon is deducted and paid.
17. Here, the contention of Ld. AR is that the word ‘deductible’ referred to in Section 40(a) (ia) refers to the deductibility of tax in accordance with the provisions of Section 193 as applicable to the present case. We do not find any force in such argument as the word ‘deductible’ referred to in Section 40(a) (ia) refer to the nature of expenditure which inter alia include interest. If such argument of Ld. AR is to be accepted, then, proviso to Section 40(a) (ia) will become redundant, which clearly states tnat in cases wneie me lax in lespcui 01 any such sum (the nature of expenditure which inter alia include interest), has been deducted in subsequent year or has been deducted during the last month of previous year, but paid after the said due date or during any other month of previous year, but paid after the end of the said previous year, such sum shall be allowed as a deduction in computing the income of previous year in which such tax has been deducted. The proviso makes it clear that unless tax is deducted on such sum and the same is paid, no deduction is permissible to be allowed. It is not disputed even by the assessee that on interest accrued on debentures the liability of TDS is there. It is only the case of the assessee that during the year under consideration it is not liable to deduct tax at source as no entry has been made in the books of account. The provisions of Section 40(a) (ia) are applicable irrespective of the fact that whether or not any entry has been made in the books of account as interest expenses which are claimed by the assessee in the computation of income, are liable for TDS payments. Therefore, we hold that the Ld. CIT (A) was wrong in holding that without payment of TDS, the assessee was eligible to claim interest expenditure accrued on debenture. Ld. CIT (A) has wrongly held that provisions of Section 40(a)(ia) are not applicable. From the objects stated for bringing such provision on statute, Memorandum Explaining the Provisions Relating to Direct Taxes and the provision itself, it is clear that the expenditure claimed by the assessee inter alia including interest can be allowed only if the assessee has paid TDS thereon Probably, the CIT (A) has not properly understood the provisions of Section 40(a)(ia). The observations of CIT (A) that in the past no such dis allowance has been made also does not have any relevance as this provision has been brought on the statute only w.e.f. Assessment Year 2005-06.
18. In view of the above discussion, it is held that expenditure claimed by the assessee as interest accrued on debentures cannot be allowed to the assessee in view of specific provisions of Section 40(a) (ia). Here, it may be mentioned that Ld. AR of the assessee had contended during the course of appellate ^•uuccuiiiyb mat in case it is neid that assessee is not entitled to claim such expenditure during the year under consideration, then, a direction may be given for the allow ability of the same in the year in which the assessee has made the payments of TDS. For this purpose, it may be mentioned that such claim of the assessee is even recognized by the provisions of Section 40 (a) (ia) and the assessee can claim the same in accordance with law in the year in which it has made the payment of TDS.
