Messages

I think the discussion took so many interesting twists and Sri Rama Samy had argued in a way and I took another argument in a different way. Let us examine the evalution of sec. 40(a)(ia) from the beginning. Initially the section was incorporated as under according to which the TDS not deducted or if deducted but not paid during the previous year or within the time allowed under the provisions of sec. 200(1), then expenditure pertaining to such TDS is not allowable as deduction.  The sec originally enacted is reproduced hereunder for ready reference...................

   "(ia)   any interest, commission or brokerage, fees for profes¬sional 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 during the previous year, or in the subsequent year before the expiry of the time pre¬scribed under sub-section (1) of section 200 :
      Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deduct¬ed in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.
      Explanation.—For the purposes of this sub-clause,—
   (i)   "commission or brokerage" shall have the same meaning as in clause (i) of the Explanation to section 194H;
   (ii)   "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9;
   (iii)   "professional services" shall have the same mean¬ing as in clause (a) of the Explanation to section 194J;
   (iv)   "work" shall have the same meaning as in Explanation III to section 194C;"

As per my understanding, the TDS which is deducted and which is to be paid on 7th of the immediately following month should be paid during the previous year itself and the amount deducted during the last day of the financial year should be paid on or before 31st day of May of the following year in order to get the allowance of the said expenditure. If the expenses of the nature specified in the section are not paid as per the dates mentioned above, then such expenditure is not allowable under the provisions sec. 40(a)(ia). It was further provided that if the TDS is paid  after the dates specified, then relevant expenditure is allowable in the F.Y. in which the TDS is paid.

   However, by the Finance Act 2008 an amendment has been brought into the section and as per the amended provisions, TDS deductable during the previous year other than for the month of March ( first 11 months of the financial year upto Feb)  should be paid before the end of the financial year and TDS deductable for the month of March should be paid before the due date of filing return of income u/s 139(1) to get the relevant expenditure allowed during the year itself .  Needless to say that it was also provided that if the TDS is paid after the dates specified above, then such expenditure is allowable in the F.Y. in which the relevant TDS is paid.
For the sake of clarity the amendment brought into the sec  is reproduced hereunder-

"(a)   in sub-clause (ia), with effect from the 1st day of April, 2005,—
   (i)   for the words, brackets and figures "has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of section 200", the following words, brackets and figures shall be substituted and shall be deemed to have been substituted, namely:—
      "has not been paid,—
   (A)   in a case where the tax was deductible and was so deducted during the last month of the previous year, on or before the due date specified in sub-section (1) of section 139; or
   (B)   in any other case, on or before the last day of the previous year";
   (ii)   for the proviso, the following proviso shall be substituted and shall be deemed to have been substituted, namely:—
      "Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted—
   (A)   during the last month of the previous year but paid after the said due date; or
   (B)   during any other month of the previous year but paid after the end of the said previous year,
      such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.";"

However, another amendment is brought into the sec. by the Finance Act 2010 as per which if the entire TDS of the previous year is paid before filing return of income u/s 139(1) then the relevant expenses are allowed (cannot be disallowed) in that previous year itself. If the TDS of the previous year is paid after the due date of filing return of income, then the relevant expenses are allowable during the year in which the relevant TDS has been paid. The amendment brought is reproduced as it is for better understanding.

"Amendment of section 40.
12. In section 40 of the Income-tax Act, in clause (a), in sub-clause (ia),—
   (a)   for the portion beginning with the words "has not been paid,—" and ending with the words "the last day of the previous year", the words, brackets and figures "has not been paid on or before the due date specified in sub-section (1) of section 139" shall be substituted;
   (b)   for the proviso, the following proviso shall be substituted, namely:—
      "Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid."."

Finally to rationalize the provisions an amendment is carried out in sec. 40a(ia) in the Fiinance Act 2012 as per which if the deductee had filed return of income duly paying the taxes on the  income received from the deductor and the deductor is able to fulfill the conditions specified therein then it is deemed that the deductor has deducted and paid the TDS on the date of filing return of income by the deductee. The exact amendment is as under-

"Amendment of section 40.
11. In section 40 of the Income-tax Act, in clause (a), in sub-clause (ia), after the proviso and before the Explanation, the following proviso shall be inserted with effect from the 1st day of April, 2013, namely:—
"Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso."."

If we analyse the amendments brought into the sec. chronologically, then it is clearly evident
that the rigours of the provision are toned down and ultimately have been brought down
substantially. If the arguments of Sri Rama Samy are analysed, then the amendment brought by F. Act  2012 will lose its relevance. By the amendment brought by F.Y. 2010 the deductor got time to deposit the entire TDS (either deducted or not deducted) upto the due date of filing return of income u/s 139(1). Governments ultimate goal is to collect the tax due  from the income embedded in the amount exchanged between deductor and deductee. It can be in the form of TDS from the deductor or in the form of regular taxes from deductee. When the section already says that the payment of TDS can be made upto the date of filing return of income by the deductor to get the allowance and the amendment is only to rationalize (make the provisions more logical and reasonable) the said provisions, can we say that even if the tax is paid by the deductee, disallowance is required for the previous year and the same can be allowed during the subsequent year.  As stated earlier the provisions of sec. 40(a)(ia) are enacted to ensure that due taxes are collected on the income from the receipt that changed hands between deductor and deductee. By the amendment brought through F. Act  2012, the legislation cannot go back and say that even  if the deductee files return before the due date  duly paying taxes on the income received from the deductor then the expenses for the previous year should be disallowed in the hands of deductor and the same should be allowed in subsequent year. In my opinion, the provisions should be read harmoniously and cannot be permitted to pick out a part of sentence from one proviso and attach that part to another part of the sentence of other proviso to attribute different meaning to the section which even the legislation can not visualise ( Please refer to SC decisions reported in 198 ITR 297 and 287 ITR 242).   

Accorignly, I still feel that if the deductee files return of income duly paying taxes, then the
expenditure of deductor should not be disallowed during the previous year. Please correct me if I am wrong.     

Even now I failed to understand the situation narrated by you and how it is different from the discussion made above. For your clarity the amendment brought into the  Act is as under "Provided further that where an assessee fails to deduct the whole or any part of the tax ........................................................... Thus the amendment brought also deals with a situation where tax has not been deducted during the year the deductee had filed return of income duly paying the taxes. In such a situation, as per the amended provisions the disallownace cannot be made under 40(a)(ia). That is my understanding. I may be corrected If I am wrong.

while coming to the above conclusion, I think a point was missed. By the amendment brought in sec. 40(a)(ia) in F.Y. 2010, the deductor is getting time to deduct and deposit all the TDS  upto the date of filing return of income. One should not forget that "all the TDS" means the entire TDS deducted during the previous year and "the date of filing of return of income" will always be in  the subsequent financial year which means that TDS deducted during this year can be deposited during the next financial year, of course, before filing the return of income. If it is proved that due taxes have been paid by the deductee before filing return of income where is the question of deductor being punished under the amended provisions sec. 40(a)(ia). I think the intent of legislation can be explained in this way also. Is it not so.

Return of income will always  be filed in subsequent year. It is true not only in the case of deductee but also in the case of deductor. Ergo, while filing return of income by the deductor he can ascertain that the particular receipt from him was included by the deductee and due taxes were paid by him and finally ensure that he also filed return of income. Then there is no question of any disallowance u/s 40(a)(ia) in his hands. In my opinion, this is the intent of legislature while making the amendment. Moreover, scrutiny assessment of the deductor will be taken up only after 1 year or so. If it is proved that all the conditions specified are fulfilled then it is sufficient compliance to get out of the rigours of the provisions of sec. 40(a)(ia).

as per amendment brought in Finance Act 2012, if the assessee is not deemed to be in default then the expenditure need not be disallowed u/s 40a(ia). I am surprised to note that as to how you have seen one amendment in sec. 201(1) and missed the consequential amendment in sec. 40a(ia).

this decision is also on interest u/s 220(2) but not on interest u/s 201(1A). The issue in question is about the allowability of interest u/s 201(1A). Therefore, the issue is still open for discussion.

All the above arguments have been considered by Hyderabad ITAT in the case of My Home Power Limited and finally it has been held by the ITAT that  the proceeds  received by selling CERs i.e. carbon credits are capital receipts and accordingly not taxable. The same is reported in 27 taxman.com 27. Till a High Court reverses this decision, the same can be utilised by everybody to strengthen the argument that carbon credits are not revenue receipts to attract tax liability.  However,  the alternative argument that the deduction u/s 80IA should be extended to carbon credits also is not answered by ITAT as it was felt that this argument is academic in nature. Therefore, we have to wait till a decision comes on the issue of allowability of 80IA deduction on CERs.

on 02-11-2012,  Hyd ITAT has held in the case of My Home Power Ltd  that  the proceeds  received by selling CERs i.e. carbon credits are capital receipts and accordingly not taxable. The same is reported in 27 taxman.com 27. Till a High Court reverses this decision, the same can be utilised by everybody to strengthen the argument that carbon credits are not revenue receipts to attract tax liability.

on 02-11-2012, Hyd ITAT has held in the case of My Home Power Ltd that  the proceeds  received by selling CERs i.e. carbon credits are capital receipts and accordingly not taxable. The same is reported in 27 taxman.com 27

unless your client had regular business transactions like supplying some material or purchasing material for the said company and the money taken was towards supply of material, there is no way he can escape from deemed dividend provided the company is a private limited company in which public are not substantially interested and the company had sufficient reserves (accumulated profits) before issuing the loan. One interesting feature is that, the reserves or accumulated profits means the surplus arisen by providing the depreciation as per incometax ACt but not the depreciation as per companies Act as per the citation reported in 121 TTJ 713. Please verify whether your client's case falls under any of these categories.

sorry, just type 40(ia) in the search button of this forum and you will get the answer.

if you just type 40a(ia) in the search button of this forum, you will find the link for the same.

I do accept your argument that the case cited by you is not appealed against before higher appellate fora doesnot mean the law declared is correct. As we see the logic, TDS is always allowable and interest on TDS is also always allowable in my opinion. As correctly pointed out by you, interest on direct taxes are not allowable as cited by CA Manoj Gupta Sir and as pronounced by Hon,ble Supreme Court. However, in the case on hand, TDS cannot be construed as direct tax in the hands of deductor but it is the liability of the deductee discharged by deductor because of the vicarious liability casted upon him by the statute. If it is considered that TDS is also a direct tax, then regular TDS deducted is not at all allowable as pointed out by me in earlier answers.

With regard to your queries, you have to revise the returns otherwise department may think that you have not paid the interest and there is every possibility that they may raise once again the intersest on that because of which you have to go all the way to office and convince them by showing already paid challans. If you want face all thism then the answer is left to you.

Interestingly, I have seen an argument written by somebody in this forum with regard to 40a(ia) disallowance and TDS demand. I found that the same is logical and reasonable. Once the deductee had filed return of income duly reflecting the receipts from the deductor, then not only the demand u/s 201(1) but also the demand u/s 201(1A) cannot be enforced in the hands of deductor. To overcome that an amendment has been brought into statute 201(1A) by way of a proviso in the Finance Act, 2012. When the section says that interest is to be charged till the date of payment of the relevant tax either by the deductor or by the deductee, the newly inserted proviso says interest is payable till the date of finling return of income by the deductee. It appears that the law makers didnot make note of this while proposing the amendment. Think from this angle also.

First of all, Kindly enlighten the basis on which you have come to the conclusion that interest on TDS will be disallowed in your case. Any expenditure incurred for the purpose of business is allowable as per sec. 37(1). Accordingly, personal incometax is also allowable under the said section. But the intention of legislature is not to allow incometax under the provisions of 37(1). Ergo, one more section i.e. 40(a) has been introduced in the statute so that personal incometax paid by an assessee is not to be allowed even if it is found allowable. Further, in the normal course, when TDS is deducted which section makes the assessee entitle for claiming the same as expenditure. For example, if a professional payment is made to a person who had done services worth Rs. 1,00,000/- then only 90,000/- is paid to that person and the remaining balance of Rs. 10,000/- shall be payable to the government in the form of TDS. Then which section says the TDS of Rs. 10,000/- is also allowable in the hands of deductor. Therefore, a logical conclusion is that TDS , either paid in normal course or paid subsequently when the defect is found, is allowable in the hands of deductor. Since there was no section prescribed for  disallowance of  the interest on TDS, the same is also allowable as per the provisions of section 37(1) in the hands of deductor. Now coming to interest on TDS I could not find any section in IT Act, which says that the same is not allowable. Further, interest paid by you cannot be passed on to deductees so that they are entitled to claim it. I dont accept this argument. However, as stated above, interest paid by you is allowable in the hands of deductor. This is my opinion as on today. I am ready to correct myself if a reasonable interpretation which is against the above argument is presented.

As per sec. 112, there is no question of claiming any deduction under chapter VIA from the income computed under this head. If your income is positive  then only u can claim deduction under chapter VIA. If ur income is in negative, Where is the question of claiming any deduction. Chpater VIA deductions are meant for reducing tax liability, if any. I(f there is no tax liability at all, there is no question of claiming any deduction.