The CBDT has issued a Circular No. 10/DV/2013 dated 15.12.2013 in which it has analyzed the controversy created by recent judgements on the question whether the term “payable” in s. 40(a)(ia) includes the amounts that have already been paid during the year or it refers only to the amounts outstanding as at the year end. It is noted that while the Special Bench of the Tribunal in Merilyn Shipping 136 ITD 23 (SB) and the Allahabad High Court in Vector Shipping has taken the view that the disallowance in s. 40(a)(ia) does not apply to amounts that are already paid, a contrary view has been taken by the Calcutta High Court in Crescent Export Syndicate/ Md. Jakir Hossain Mondal and the Gujarat High Court in Sikandarkhan Tunvar.
The CBDT has expressed the view that the disallowance u/s 40(a)(ia) would apply even to the amounts that have already been paid during the year. It is also clarified that if the High Court takes a view contrary to that taken by the CBDT, the CBDT’s view would not apply in that jurisdiction though steps should be taken to decide whether a SLP should be filed or legislative amendments made.
Download CBDT Circular On Scope Of S. 40(a)(ia) TDS Disallowance (61.6 KiB, 8,399 hits)
This notification of the CBDT is against the legislative intention. While enacting section 40(a)(ia) Legislature first used the ward Paid but while preparing the bill for consideration by the High Power Committee the ward “payable” is inserted in place of paid. Therefore it is not a case left for any further clarification by CBDT.
In Pradip J. Mehta 300 ITR 231 (SC) it was held that the benefit of doubt should invariably go to the taxpayer. This has been followed in Eskay Designs (attached). Contrast with the view taken in Rishti Stock and Shares (ITAT Mumbai) and the Department’s Circular No. 10/DV/2013 dated 15.12.2013 […]
If there is a doubt that would be clarified from current and for past years there should not be any dis allowance under this section
the view taken by special bench is correct. CBDT should interfere with favorable orders of the court, it should be decided by Apex court,
I find the comments of Eswar to be appropriate and sensible.
And above all, this would result in duplication in tax remitance, by the payee at the time of filing his return offerring the income in his hands and tax deduction by the payer, subsequently, in respect the amounts paid and disallowed u/s 40(a)(ia), so as to claim allowibility of expenditure in the year of deduction. The situation is unwarranted, while there is no mechanism to claim refund of the duplicated tax liability. Prudent principles of Taxation would never call for double taxation on the same income, which would necessarily occur, when conditions of section 40(a)(ia) try to embrace expenses already paid during the year, on its fold.
The position taken by CBDT, that ” the disallowance u/s 40(a)(ia) would apply even to the amounts that have already been paid during the year” is incorrect. This special provision was introduced to tide over an imbalance in revenue recovery, when the payer and payee adopt, different methods of revenue recognition. The payer, on mercantile basis, will debit the expenditure in his books which would remain “payable”. The payee, on cash system,will not recognize the same as income, till its actual receipt..Therefore, what-so-ever tax planning the transacting parties undertake by adopting two different systems, deferment of tax liability was forbidden, by this section 40(a)(ia), and tax on “amounts payable ” were also collected on an “year-to-year” basis and not at the year, when the payee actually receives and offers it as income. While in respect of paid amounts, the debit of expenditure by the payer and offering of income in the hands of payee is simultaneous, in the same year and there is no postponement of tax liabilty by the payee. Hence, it was clearly intended to cover such expenditure of which the amounts are “payable” at year end and not those “paid” during the year.
It is pertinent to highlight that the legislature thought it fit to exclude payments covered under section 192 from the purview of section 40(a)(ia), because in recognition of income under the head ” salaries”, the distiction “paid” and ” payable” has no effect.
Hence, the finding of Special Bench of the Tribunal in Merilyn Shipping 136 ITD 23 (SB) and the Allahabad High Court in Vector Shipping,that the disallowance in s. 40(a)(ia) does not apply to amounts that are already paid, is perfectly in order.