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Section 40(a)(ia): Whether applicable to sum payable at the year end or on all sums during year

Sagar Gupta 
on 22 April 2014

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Section 40(a)(ia) of the act was introduced in the Income Tax Act, 1961 by the Finance (No 2) Act, 2004 w.e.f. 01.04.2005 with the view to augment the revenue through the mechanism of tax deduction at source. This provision was bought so as to disallow the expenses on which TDS is not deducted but the same carries a debatable point now. The point is whether disallowance of non deduction of TDS shall be of amount payable at the end of the year or of all sums paid or payable during the year.

Section 40(a)(ia) of the act reads as under:

“any interest, commission or brokerage, rent, royalty, fees for professional services of fees for technical services payable to a resident, or amounts payable to a contractor or subcontractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under chapter XV1I-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….”

A plain reading of the above paragraph clearly says that disallowance will be of the amount payable at the end of the year if TDS is not deducted on the payable amount and no disallowance shall be made of amount paid or payable during the year even if TDS was not deducted.

To have more clarity, let us go through few cases:

1. Merilyn Shipping & Transport vs Addl. CIT – Special Bench

The assessee being a partnership firm, in the relevant assessment year, derived income from business of ship containers transport and handling, customs clearing and forwarding agents. It filed its return of income for A.Y. 2005-06 declaring total income of Rs. 15,24,710. The assessee had claimed brokerage expenses of Rs/ 38,75,000 and commission of Rs. 2,43,253 on which TDS was not deducted. AO disallowed the same and assessee also accepted the same. The Special Bench of ITAT, Vishakhapatnam, held that the provisions of section 40(a)(ia) of the act would apply only to the amount which remained payable at the end of the relevant financial year and could not be invoked to disallow the amount which had actually been paid during the previous year without tax deduction at source. The order of the Special Bench has since been put under interim suspension by the Andra Pradesh High court.

2. CIT vs Crescent Export Syndicate & Ors – Calcutta High Court

In this case, the Calcutta High Court held that the key words used in the section 40(a)(ia) are “on which tax is deductible at source under Chapter XVII-B’. If the question is: “which expenses are sought to be disallowed?”, the answer is bound to be disallowance of all sums paid or payable during the year.  

3. CIT vs Sikandarkhan N Tunvar – Gujrat High Court

It was held that section 40(a)(ia) would cover not only to the amounts which are payable as on 31st March of a particular year but also which are payable at any time during the year. Therefore, in this case both of the amounts is covered under section 40(a)(ia) and both the amounts are disallowed i.e. paid or payable during the year or at the end of the year if TDS is not deducted.

4. CIT vs Vector Shipping Services (P) ltd – Allahabad High Court

It was held that section 40(a)(ia) was brought on statute to disallow the claim of even genuine and admissible expenses of the assessee under the head ‘Income from Business and Profession’ in case the assessee under the hear ‘Income from Business and Profession’ in case the assessee does not deduct TDS on the expenses. The default in the assessee does not deduct TDS on such expenses. The default in deduction of TDS would result in disallowance of expenditure on which TDS was deductible. In this case, high court has affirmed the decision of the Special bench in Merilyn Shipping that for disallowance under section 40(a)(ia) of the act, the amount should be payable and not which has been paid during the year.

5. ACIT, Mumbai vs Rishti Stock and Shares pvt Ltd – ITAT, Mumbai

In this case, ITAT examined various case laws of different High Court and concluded that section 40(a)(ia) covers all the amounts payable at the end of the year along with the amounts paid during the year.

Therefore, it can be seen that it is a debatable point as to which amount should be disallowed in case of non deduction of TDS. To bring clarity on the subject, CBDT bought out a circular (circular No 10/DV/2013 dt. 16.12.2012). This circular says that both the amount i.e. paid or payable during the year is covered under the purview of section 40(a)(ia). But, where any High Court has decided an issue contrary to the ‘Departmental View’, the ‘Departmental View’ thereon shall not be operative in the area falling in the jurisdiction of the relevant High Court. However, the CCIT concerned should immediately bring the judgment to the notice of CTC.

CIRCULAR No 10/DV/2013 (Departmental View)

F. No. 279/Misc./M-61/2012-ITJ (Vol.-II)

Government of India

Ministry of Finance

Department of Revenue

Central Board of Direct Taxes

New Delhi, the December 16th 2013

Subject: Circular on Section 40(a)(ia) of the Income Tax Act, 1961-reg.

1. It has been brought to the notice of the Board that there are conflicting interpretations by judicial authorities regarding the applicability of the provisions of section 40(a)(ia) of the Income-tax Act, 1961 (`the Act’) with regard to the amount not deductible in computing the income chargeable under the head ‘Profits and gains of business or profession”.

2. Section 40(a)(ia) of the Act reads as under:

“ any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), 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…’:

3. In the case of Merilyn Shipping & Transports v. Addl. CIT, it was held by Special Bench of ITAT, Vishakhapatnam, that the provisions of section 40(a)(ia) of the Act would apply only to the amount which remained payable at the end of the relevant financial year and could not be invoked to disallow the amount which had actually been paid during the previous year without deduction of tax at source. The order of the Special Bench has since been put under interim suspension by the Andhra Pradesh High Court.

a. The Hon’ble Calcutta High Court and Hon’ble Gujarat High Court in the case of Commissioner of Income-tax, Kolkata-XI v. Crescent Exports Syndicate and Commissioner of Income-tax-IV v. Sikandarkhan N Tunvar respectively, have held that section 40(a)(ia) of the Act would cover not only the amounts which are payable at the end of the previous year but also which are payable at any time during the year.

b. The Hon’ble High Courts have further held that the intention of the legislation was to disallow certain types of expense, subject to provisions of Chapter XVII-B, which are payable at any time during the year but no tax was deducted at source or if deducted was not paid within the stipulated time. There is no such condition that amount should remain payable at the end of the year.

c. The Hon’ble Allahabad High Court in CIT v. Vector Shipping Service (P) Ltd. has affirmed the decision of the Special Bench in Merilyn Shipping that for disallowance under section 40(a) (ia) of the Act, the amount should be payable and not which has been paid during the year. However, the decisions of the Hon’ble Gujarat and Calcutta High Courts (supra) were not brought to the attention of the Hon’ble Allahabad High Court.

d. In the case of ACIT, Circle 4(2), Mumbai v. Rishti Stock and Shares Pvt. Ltd. in ITA No. 112/Mum/2012, Hon’ble ITAT, Mumbai in its order dated 02-08-2013 has examined the decision of the Hon’ble Allahabad High Court (supra) as regards to section 40(a)(ia) of the Act and concluded that the same was an ‘orbiter dicta’ while the decisions of the Hon’ble Gujarat and Calcutta High Court (supra) were ‘ratio decidendi’. The ITAT accordingly applied the view taken by the Hon’ble Gujarat and Calcutta High Court as ratio decidendi prevails over an orbiter dicta.

4. After careful examination of the issue, the Board is of the considered view that the provision of section 40(a) (ia) of the Act would cover not only the amounts which arc payable as on 31st March of a previous year but also amounts which are payable at any time during the year. The statutory provisions are amply clear and in the context of section 40(a) (ia) of the Act the term “payable” would include “amounts which are paid during the previous year”.

5. Where any High Court decides an issue contrary to the ‘Departmental View’, the `Departmental View’ thereon shall not be operative in the area falling in the jurisdiction of the relevant High Court. However, the CCIT concerned should immediately bring the judgement to the notice of the CTC. The CTC shall examine the said judgement on priority to decide as to whether filing of SLP to the Supreme Court will be adequate response for the time being or some legislative amendment is called for.

6. The above clarification may be brought to the notice of all officers

Now, decision from Supreme Court or amendment in Act is awaited to bring further clarity on the matter.

Author:

Sagar Gupta

Email: info@onlinelawsolutions.com

Webiste: www.onlinelawsolutions.com

 

Acknowledgment: The Tax Referencer


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