Messages

many ITATs have held that the deduction allowable under MAT provisions is to be calculated on the basis of book profits after making the adjustments specified in respective sections of 115J/115JA/115JB. The decisions are reported in 90 ITD 34, 290 ITR 172(AT) and 106 ITD 193 , 13 sot 414. as stated in the earlier postings, the only High court decision available is 248 ITR 372 which is nothing but GTN Textiles case. However, this case is completely based on a circular no. 680 issued by CBDT on the provisions of sec. 115J. Revenue authorities argue that the wording given in sec. 115J is different from to that of wording in latter sections 115JA/115JB. So far no decision supporting the argument of revenue authorities is found. Some people argue that the decision of Rohan Dyes reported in 270 ITR 350 supports the argument of revenue. But there is no clarity in this decision. Till the issue is settled by Apex Court, this is another issue of contention from both sides. Sofar as the sun set clause, I cannot accept the argument that though the deduction under the section is phased out, it should be allowed in its entirety so far as provisions of MAT are concerned. BUt when the courts have decided, that should be accepted as judicial discipline as has been held by bombay high Court in 256 ITR 385 and 257 ITR 315 

As expressed by me earlier, 40a(ia) is a draconian provision and it appears contradictory to my logic. The section says that if the expenditure attracts TDS and the TDS is not deducted or deducted tax is not remitted within the time allowed therein then the corresponding expenditure is not allowed in the hands of the deductor for that year, however, the same will be allowed as and when the said TDS is remitted to Government's kitty. I think, while framing the section, the legislation has missed another section 191 as per which taxes on the income of the deductee is to be paid by him ultimately.  Aftral TDS is introduced only to get governement's  share from the expenditure claimed by a person. There is no guarantee that the other person receiving amount will pay tax, therefore, tax will be collected from the payment itself in the form of TDS. Futher, the government will gets its share very easily and throughout the year and by this measure, tax evasion, if any,  of course,  can also be checked. Sec. 191 says if TDS is not deducted, then tax is to be paid the deductee directly. Even the section 201(1) which is for enforcing the TDS provisions  also cannot be invoked if the deductee pays the taxes. The CBDT vide its letter issued in 1997 has explained the above mentioned priniciples and lateron as per the explantion inserted in sec. 191 with effect from 01.06.2003 reiterated the same. The very purpose of TDS is collecting taxes from the expenditure. So when it is proved that the deductee pays the taxes on this particular item, there is no logic appearing in enforcing the TDS provisions again to collect the same taxes. I dont say that penalty u/s 271C cannot be levied. Since the assessee has not discharged the  the onus, no doubt, he is liable for penalty. But enforcing the same amount from him as per the provisions of Sec. 40a(ia), in my opinion, is not correct. A hormonious reading of the sections 201(1), 191 and 40a(ia) appears to be contradictory to me, at least, as one section among these sections appears to be excessive. Once the relevant taxes are paid, as on today, there is no demand u/s 201(1). However, expenditure of deductor is liable to be disallowed under the provisions of 40a(ia). Is it not unjustified. If it is so how? The government has got its share from the deductee and again it is getting its share from the deductor in the form of disallowance of the expenditure. it appears to me double taxation. Then one can argue that it is similar to the provisions of Sec. 43B where even if the taxes are paid by the receipient the payer is not absoved from his liability. This can easily be distinguished as once the amount is paid to the government account the deductor is always at liberty to issue TDS certificate to that extent to the deductee and  no such requirement is there in sec. 43B. Once it is found that TDS is not deducted, then the expenditure  will be allowed only when TDS is deducted and paid to the exchequer. Meanwhile let us assume that the deductee has already discharged his liability. Even then deductors expenditure is allowed only when TDS is remitted. Earlier disallowance is now allowed in his hands. Therefore, he will issue a TDS certificate to the deductee as the said TDS is always the tax liability of the deductee and in noway it is the liability of the deductor. Since the deductee has  already paid the taxes, the said taxes is to be refunded to him alongwith interest. Why to collect from the deductor and refund it to the deductee. Nothing is gained by the government either from the deductor or from the deductee. I find no logic in this activity.  I may be wrong but I wanted to know where I went wrong.

                   My final conclusion is that an amendment is to be made which allows the expenditure of the deductor when he proves that the taxes have already been paid by the deductee on the amounts received from the deductor. Any contradictory view in this regard is whole heartedly welcome and this will help in comprehending the provisions of section. 40a(ia).   

With best regards .......................

These views are in everybodys knowledge. Just to throw further light I am uploading this. What is accounted and what is unaccounted. In my view accounted means what is offered to taxation and unaccounted is what is not offered to taxation. Therefore, the assessees who have offered their income u/s 44AF though their real income more than what has been offered are not entitled to credit the capital accounts with that excess amount as it is not offered for taxation. Since a beneficial section is there on statute, he can utilise that. Therefore, the excess income he had earned can be spent out side the books of accounts. One he brings the same into books, he is duty bound to offer the sources. Since this is not offered to taxation, he is liable to pay tax on that amount. Therefore, I stick to the opinion that he need not show the P & L account prepared by him and just can file the return of income u/s 44AF. Once he decided to show everything in books, he has to offer everything in the return and should come out clean. I think he cannot avail both the benefits. This is my opinion. Any other views on this subject are welcome. 

The assessee neednot show the P & L account prepared by him. He simply can file the return stating that his case fulfills all the conditions specified in that section ie. 44AF and therefore, he can offer 5% of the turnover as profits. However, he is entitled to credit his capital account with only the amount offered to taxation. Just because, his p& L account shows profit of 12% he cannot credit the capital account with that amount which is not offered for taxation.

Hope this will clarify the position.

This is a very  typical issue. Courts have also decided on both sides. If you see the section, it says that any other escaped income that comes to notice of the AO during the course of assessment proceedings may be brought to tax. Revenue authorities interpret this wording implies that once the assessment is reopened, entire assessment deemed to have been reopened and they have powers to reassess the income of the assessees basing on the principles laid down by Apex court decision reported in 75 ITR 373. But the courts say that what is set a side is only the underassessment  but not the whole assessment basing on the corrected statement of Supreme Court reported in 198 ITR 297. BUt revenue authorities argue that this decision is not applicable to the present scenario as this decision was rendered for the assessment year earlier to the period of 1989. After 1989, according to revenue authorities, material change has been brought in sec. 148 wherein it was incorporated that "AO may assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the assessment proceedings under this section". This argument of the revenue authorities is negated by Punjab and Haryana Court in the decisions reported in 255 ITR 220, 269 ITR 378 and 189 CTR 154. Please note that the amendment brought in sec. 148 after 1989 was considered by P & H Court and even it held that reassessment is open only qua items on the basis of which the assessment is reopened. This decision was followed in many ITAT decisions reported in 94 ITD 329, 108 TTJ 1 and 16 sot 325. But the revenue authorities quote the case laws reported in 268 ITR 494, 291 ITR 500, 249 ITR 311, 295 ITR 525 and 300 ITR 324(AT) to support their argument. But it can be observed that many of these decisions are based on first supreme court decision reported in 75 ITR 373. Since Supreme Court itself has corrected its statement in its latter decison reported in 198 ITR 297, the CA community says that the revenue authorities argument is not correct and they support their statement with the Apex Courts decision reported in 293 ITR 1 wherein the court held that for the purpose of 263 the limit available is to computed from the date of original assessment but the date of reassessment wherein the issues involved are not the subject matter. Though this decision is not directly on this issue, indirectly it supports the argument that what is set aside is not whole assessment and only the underassessment and the original assessment still holds good for the remaining points. In addition to the above decisions revenue authorities take help of the Apex Court decison reported in 250 ITR 193 wherein it upheld the principle that the reassessment has completely effaced the original assessment as has been held by the High Court decison reported in 197 ITR 694. The question put by the author was left unanswered by the Supreme Court in this decion of 250 ITR 193.

               Since the decisions are on both sides, this issue is required to be settled by supreme Court decision. Whether any of the P & H decisions have been taken to Supreme Court or not is not in the knowledge me. if some body  throws further  light on this complicated issue which will  immensely help the readers to come to a conclusion. Please share your views so that everbody will learn out of the experience of others.

With best wishes...................     

Even now I am not convinced. So far my observation says that agricultural income is exempted u/s 10(1) and the devidend is exempted u/s 10(34) and the long term capital gains arisen on account of transfer of listed securities are exempted u/s 10(38) and I dont find any special status for agricultural income granted by constitution. Please enlighten me under what section the special status is granted. As it is mentioned each year is a separate unit and the income of a particular year is taxed and the expenses incurred during that year are only allowable from the said income. Therefore, there is no strength in argument that the expenses incurred during this year should be allowed on the basis of estimation that the exemption granted  to dividend hitherto will be lifted next year and when the income in the form of devidend is received, the same is taxable. Since this year devidend which is not taxable  is just not received, the expenses cannot be allowable on the plea that in future devidend will lose its exemption. In future, if devidend is made taxable, the relatable expenses incurred during that year are only allowable. No way the expenses incurred last year are allowed. This is for the time being my opinion. I have no objection, if somebody corrects me.   

This argument leads to the conclusion that agricultural expenses debited to P & L account cannot be disallowed  during the year in which no agricultural income is received. However, I didnot go thru the decision reported in 20 sot 1. I will come back again after going thru the said decision. The logic appears to be not logical and therefore not acceptable.

I also support the argument that loan cannot be added u/s 56(2). Some AOs have already added the same donot conclusively establish the legal position. The addition is bound to be deleted by higer appellate forums. Sec. 56(2) is intended to tax the purported gifts which will be used to increase the capital. Here in the instant case, the capital is not increased. If the loan is proved with a confirmation and the loan giver stands to the test of appeal, the same cannot be added on the plea that no interest is charged on it. In my opinion, AO donot have the power as to how the assessee should run his business in other words whether the assessee should take a  interest bearing loan or a non interest bearing loan. Only when the said loan is written off  and credited to capital then as per the explanation inserted in 41(1) it can be taxed during the that year. Some argue that the loan which is received on capital account cannot be taxed even u/s 41(1). But in my opinion, it can be taxed. Ultimately, my conclusion is that unless, the loan is written off, it cannot, in any way, taxed in the hands of the assessee.

Yes, why not. Please see the decision of Apex Court reported in 115 ITR 519 ( CIT vs Rajendra Prasad Moody) wherein the Apex Court held that even if the income is not earned during the year under consideration, the expenditure incurred is allowable.Following the said principle, even if the exempted income is not earned during the year under consideration, the relatable expenditure is not allowable. I hope this case law clarifies the issue. 

Yes, the issue raised is very much relevant and logical. Once, it is proved that tax has been paid by the deductee, then there is no loss to revenue. Therefore, the enforcement of TDS in the hands of deductor appears to be non logical. But there is no answer for the question that TDS provisions will become redundant once this argument is accepted. But other side of the  logic is more reasonable and nobody could find any fault with it. Till a circular is issued by the board in 1997, nobody from revenue side accepted the argument that once the deductee paid  the taxes, decuctor should not be treated as assessee in default in respect of that TDS. Since many courts have accepted the argument and relieved the deductors from the demand u/s 201(1), finally CBDT had issued a circular in 1997 and ultimately made an amendment( not directly but indirectly) in Sec. 191 as per which the above mentioned proposition has been accepted.

                  Further, after this amendment also, many argue that once the deductee pays the tax, demand u/s 201(1) can be waived but not the demand u/s 201(1A). They quote the case law reported in 293 ITR 226 to support their argument. In my opinion, this is also not correct. once it is proved that the deductee paid the taxes alongwith interest u/s 234B and 234C then the department didnot lose anything. Because, the interest received from deductee u/s 234B and 234C is more or less equal to the interest chargeable u/s 201(1A) in the hands of the deductor. Though this is not directly enunciated, but indirectly supported the judgements reported in 271 ITR 395, 287 ITR 354, 288 ITR 379, 304 ITR 338(AT), 253 ITR 310 and 91 ITD 450. I dont say that penalty u/s 271C should also waived once the deductee pays the taxes.

                  Futher, there is no answer to this question that there is no provision existed as on today to prevent the revenue from enforcing the provisions of sec 40a(ia) when it is brought to the notice that deductee had already paid the taxes. Since TDS is not the liability of the assessee and the liability of some body else discharged by the assessee, it cannot be written off in his books and should be reduced from the payment to be made to the deductee or else he should request the deductee to return that amount by issuing a TDS certificate to that effect in case the payment is already made by him. In fact, nothing prevented him from issuing the TDS certificate. Even in the case of deductee also, if no claim is made in the return and two years are already over, he cannot made a frest claim which is against the provisions of Sec. 155(14). But natural justice says the same amount cannot be collected twice. Once from the deductee as a tax liability and secondly from the deductor in the form of enfocing the provisions of Sec. 40a(ia).

                Even the amendment brought in the F.Y. 2008 wherein it has been allowed to pay the TDS deducted before filing of the return of income is applicable only to the deductions made during the month of March of the preceeding F.Y.. For other payments, the amended provision is not applicable and the same should be remitted before the expiry of the F.Y. otherwise, there is every possibility that the relevant expenditure will be disallowed by the A.Os invoking the provisions of Sec. 40a(ia). In view of the above, this issue needs further elobaration and requires further amendment commensurating the argument that provisions of sec 40a(ia) are not applicable when it is proved that deductee had already paid the relevant taxes. But as of now, this argument will not be accepted by the revenue authorities.

I hope I have shared my views on this complicated subject.

First of all, it is to be examined whether the said liability has arisen on account of revenue expenditure or a capital receipt. In case, the expenditure is claimed earlier years and because the payment is not made so that  it was reflected as a liability, then the assessee is under an obligation to prove such liability. Even then it can be proved as a carried forward liability and not created during the year under consideration. Therefore, to make such liability as an addition, the A.O. has to wait till the same is credited to P & L account. If it is not credited it cannot be added during the year under consideration and the A.O. should prove that the expenditure claimed is bogus one and the same should be added as income for the year during which the liability has been created by debiting the P & L account.

In case, if the liability is created on account of capital receipt i.e. a loan received from a creditor and now he is unable to substantiate the same, even then it can be added u/s 68 during the year in which the loan is brought into the books. Without writing of the liability by the assessee which is a carried forward one, In my opinion, it cannot be added to the income for the year under consideration. Even in the case of 222 ITR 344 also, liability has been written off and the same was credited to P & L account and again claimed as a capital receipt in the computation. Therefore,  the Apex Court had held that the same is taxable which is a trading receipt. For application of this case law also, the liabilities written off should be  connected to the business of the assessee. In case, assessee is a manufactureing unit of some other goods and the genuine loan taken by the assessee has been shown as a liability and subsequently because of unforeseen circumstances like death of the loan giver, if such liability has been written off in the books, then whether the case law of Apex court 222 ITR 344 will apply or not. I have some doubts in this regard. In such cases,  only the explanation inserted in sec 41(1) will have to be invoked wherein it is mentioned as liability ( not clearly mentioned as a trading liability and therefore, the liabilities written off created on accout of capital receipt ) which is written off. Any other views in this regard are welcome.

Dear Sir,

If you see the section, it says that the same is applicable only when the person obtains whether any cash or in any other manner whatsoever, any amount in respect of such trading liability which means that the person should obtain the benefit mentioned therein. So far as the liability is shown in the books it cannot be treated that the person has obtained any benefit out of the liability. Only when it is written off in books, it will be treated that he is no longer be under an obligation to pay to his creditor and therefore, the said amount has been credited to p & l account. Even in the Explanation inserted w.e.f. 01-04-1997 also, writing off is mentioned and therefore, I came to the above conclusion. Otherthan this, I didnot come across any case law in this regard. If anybody knows any case law in this regard, please let the same be shared through this forum.

I think it cannot be. If the creditors account is debited by crediting P & L account by the assessee himself, then there is every possibility to tax the amounts under cessation of liability. Otherwise, it is not possible,  so long as they are shown as sundry creditors.

Certainly, if the rent paid is more than 1.2 lakhs for a owner TDS has to be deducted. Though the same is compensation in other words, the intention of TDS is to tax the rent in the hands of receipient. Therefore, TDS has to be deducted on such payment, upcourse, if it exceeds the limit specified in sec. 194I.

No, in my opinion MAT credit cannot be claimed before surcharge and education cess because, MAT credit is allowable from the tax liability only. Tax includes surcharge as per the Supreme Court decision reported in 83 ITR 346. Therefore, first we have to calculate surcharge and education cess and then MAT credit follows.