Section 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.
Case on hand for analysis:
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
GaffarA.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 naturebecause 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 RaghunathRaiBareja 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 226/163 Taxman 355 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 a Circular on 15th
December, 2013 explaining the provisions of section 40(a)(ia). The Circular has
explained thatin 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
Softwareheld 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-
(i)
Has furnished his
return of income U/S 139;
(ii)
Has taken in to
account such sum for computing total income in such return of income; and
(iii)
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.
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