Section 40(a)(ia) and 35(2AB)

Tax planning 1639 views 4 replies

HARRY PARIKH

Practice

25 Points Joined August 2009

Dear All,

There is an Indian company engaged in the business of manufacturing scooters. It has a R&D facility in Mumbai and that R&D faciltiy takes certain professional services from a local service vendor (say some technical advisory). Rs. 1,000 is the bill. The payment to for such technical advisory is covered under section 194J of ITA and TDS on it works out to Rs, 100 (say).

Now in the return of income, the R&D facility is eligible for claiming 35(2AB) weighted deduction of 200% of the revenue expenditure incurred. Since the paymet made to such professional services is in connection with R&D, the R&D unit will claim Rs. 2000 as weighted deduction. But what happens if there is a default in TDS payment and the expense paid of Rs. 1000 is disallowable u/s 40(a)(ia) ?

The question is that the amount payable to vendor is Rs. 1000 on which there is a default, whereas the deduction u/s 35(2AB) is on expenses is Rs. 2000. Should the Indian company take deduction of 2000 and then take a disallowance of 1000 or will it take complete disallowance of 2000 and claim it only when TDS is paid.

REgards,

Harry

Replies (4)

Vijay

Adamo Studio

2112 Points Joined March 2011

Completely Disallowed

HARRY PARIKH

Practice

25 Points Joined August 2009

Hi Vijay - i understand that there is "not withstanding" clause in section 40(a)(ia) but 40(a)(ia) only deals with disallowance of expenses which are payable to the vendor and on which tax is deducted at source. Whereas section 35(2AB) is not having any reference to deposit of TDS or other compliances. It only require "incurrence" of expenses.

Can you give some case law or other reference material that you are referring to ?

CA Nikhil Bhansali

Service

128 Points Joined September 2009

Dear Harry,

Here are 2 provision of Income Tax are contradicting each other

There are 2 principle of Interpreting of Law here:

i) Principle of generalia specialibus non derogant : As per this principle provision which is more specific has to give effect over the provision which is general. In our case

a) Sec 40 (a) says Disallowing Professional fees (including professional fees paid for Scientific Research) if TDS is not deducted. It is General Provision

b) Sec 35(2AB) : Weighted average deduction for expenditure incurred on Scientific Research. It is Special Provision

Hence, as per this Rule we have to give effect sec 35(2AB) over sec 40 (a)

ii) Notwithstanding Principle : As per this principle if any sec starts with “Notwithstanding…….” Then such provision has to give effect over the provision of the Act.

Hence, as per this Rule we have to give effect sec sec 40 (a) over sec 35(2AB).

In my opinion, we can give effect to both provision. First allow Rs.2000 then Disallow rs.1000 u/s 40 (a) ----- (Principle of Harmonised interpretation)

PLEASE SHARE YOUR VIEW ALSO

Ankur Bhatia

Chartered Accountant

35 Points Joined July 2008

Sec 40(a)(ia) NOTHWITHSTANDING ANYTHING CONTAINED UNDER SECTION 30 TO 38

'the AMOUNT PAYABLE to contractor,etc.........on which TDS has to be deducted.......shall not be allowed as deduction'.

Harmonious interpretation would be that part expenditure of Rs1000/- alone shaal be disallowed U/s 40(a)(ia) and Rs1000/- shall be allowed U/s 35(2AB).