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| DATE: | April 11, 2012 (Date of publication) |
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| Click here to download the judgement (merilyn_40_a_ia_TDS_paid_payable.pdf) |
S. 40(a)(ia) TDS Disallowance applies only to amounts “payable” as at 31st March and not to amounts already “paid” during the year
The assessee incurred brokerage expenses of Rs.38.75 lakhs and commission of Rs.2.43 lakhs without deducting TDS. Of this only Rs. 1.78 lakhs was payable and the rest was paid. The AO disallowed the entire expenditure u/s 40(a)(ia). Before the CIT (A), it was argued that disallowance u/s 40(a)(ia) could be made only of the amount “payable” and not of that which had already been “paid” though it was rejected. On appeal to the Tribunal, the matter was referred to the Special Bench. HELD by the Special Bench:
Per the majority (S. V. Mehrotra, AM, dissenting):
When s. 40(a)(ia) was proposed to be inserted by the Finance Bill 2004, it applied to any “amount credited or paid”. However, when enacted by the Finance Act 2004, it applied only to “amount payable”. The words “credited/ paid” and “payable” have different connotations and the latter refers to an amount which is unpaid. The change in language between the Bill and the Act is conscious and with a purpose. The legislative intent is clear that only the outstanding amount or the provision for expense (and not the amount already paid) is liable for disallowance if TDS is not deducted. Also, s. 40(a)(ia) creates a legal fiction by virtue of which even genuine and admissible expenses can be disallowed for want of TDS. A legal fiction has to be limited to the area for which it is created. Consequently, s. 40(a)(ia) can apply only to expenditure which is “payable” as of 31st March and does not apply to expenditure which has been already paid during the year.
Per S. V. Mehrotra, AM:
The object of s. 40(a)(ia) is to ensure that the TDS provisions are scrupulously implemented without any default. If a narrow interpretation is assigned to the term ‘payable’, the object with which s. 40(a)(ia) was inserted would be frustrated. The Legislature could have never intended that only amounts payable at the end of the year should be disallowed but not the amounts paid during the year. The reason the words “credited” or “paid” were dropped was because they came within the ambit of the term “payable” and would have been superfluous. As s. 40(a) is applicable irrespective of the method of accounting followed by an assessee, the term ‘payable’ covered the entire accrued liability. Also s. 40(a)(ia) is to be interpreted harmoniously with the TDS provisions as its operation depends solely on the provisions contained under Chapter XVII-B & it provides for one of the consequences of non-deduction of tax. In the backdrop of the TDS provisions, the term “payable” means the amount “payable” “on which tax was deductible at source under Chapter XVII-B”. Consequently, s. 40(a)(ia) applies to all expenditure which is actually paid and which is payable as at the end of the year.
Kindly recheck the above webpage. Whether there is some mistake in mentioning names of honorable members at twoplaces? It seems so. How the same member can express two opposite views? Please check:
Per the majority (S. V. Mehrotra, AM, dissenting):
xxxx Consequently, s. 40(a)(ia) can apply only to expenditure which is “payable” as of 31st March and does not apply to expenditure which has been already paid during the year.
Per S. V. Mehrotra, AM:
xxx Consequently, s. 40(a)(ia) applies to all expenditure which is actually paid and which is payable as at the end of the year.
With due respect to the Special Bench Members, I would find reasoning in the dissenting Member’s decision to be legally correct as the term “payable” encompasses the amount “accrued and credited but not paid” and it becomes “paid” when actually disbursed to the payee. So also that “outstanding” as on 31st March is that “credited but not paid”. Hence legislature has correctly substituted the words “credited/paid ” with “payable’ as unless it is payable it can be neither credited nor paid. So ultimately the controversy is not settled but left open to be decided by a higher judicial forum. All Tribunals are going to adopt the majority member’s decision in the appeals pending before them and all such decisions are going to be the subject matter of departmental appeals before the various High Courts. Again the first decision from a High Court in the matter favorable or not to one side, would be the subject matter of special leave before the Supreme Court. We may reasonably expect the matter to be settled in a couple of years.
On a carefully reading again I find that reporting is correct my comment of 12.04.12 is not correct, may be I had made it in haste and overlooked some words it may be due to reading in very small fonts position without enlarging them.
So far concept of ‘sum payable’ is concerned, there seems logic, because when a sum has already been paid, and any sum is not payable it is very difficult to deduct tax, in some situations it may be impossible to deduct and deposit tax. Another reason is that when sum has already been paid without TDS, the recipient is required to and can pay his advance tax – he knows that he has received full amount without TDS.
The government , for benefit of revenue can be well advised to reduce TDS requiremnts, TDS rate and insist for more payment of tax by way of installments of advance tax. In that case government will be beneficial because TDS may be on 31st March, but it can be considered even against installment of advance tax payable on 15th June. TDS may be deposited in April – May or even later but recepient of income get credit even for first installment payable on 15th June / 15th September as the case may be. Furthermore, recipient get interest w.e.f. 01st April though the TDS can be deposited later on.
More advance tax instead of TDS will also reduce burden of refunds with interest.
In case of delay in payment of advance tax government charges higher interest.
There can be many more administrative and financial advantages by reducing TDS and increasing advance tax requirements.
Has the High Court of A.P. stayed the operation of the above judgement on appeal being filed by the Dept.
Yes Sir. It is here. http://itatonline.org/archives/index.php/cit-vs-ms-merilyn-shipping-transports-andhra-pradesh-high-court-special-bench-verdict-on-s-40aia-applying-only-to-amounts-payable-stayed/