disallowance of expenditure u/s 40a(ia)

[abhishek boob]

WHERE DEDUCTOR HAS FAILED TO DEDUCT TAX ON PAYMENT U/S 40a(ia) and subsequently deductee has paid tax on his income including such income which was liable for TDS, i have looked over some past cases where deductor was freed from any tax liability.
My question is that Whether such expenditure will still be disallowed under sec 40a(ia) when govt has already recovered tax? Also suggest me a case law where deductor was allowed deduction of such expenditure ,if any.

[abhishek boob]

THIS IS URGENT SO I REQUEST TO MEMBER THAT QUICKLY REPLY

[shobha nagrani]

Sir there is a judgement of the Hon'ble Chennai Bench on the point. Also see the recent amendment in Finance Act 2013 which provides that no s. 40(a)(ia) disallowance would be made if the recipient has paid the tax.

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'B' CHENNAI
ITA No.1699/Mds/2009
Assessment Year: 2006-07
M/S AMIRTHAM TRANSPORT
OOD NO 18, NEW NO 28
ANDIAPPA GRAMANI STREET
ROYAPURAM, CHENNAI-600013
PAN NO:AAFFA8550L
Vs
DEPUTY COMMISSIONER OF INCOME TAX
CIRCLE-X, CHENNAI
Pradeep Parikh, VP and Hari Om Maratha, JM
Dated: April 16, 2010
Appellant Rep by: Shri K Ramagopal
Respondent Rep by: Shri P B Sekaran
Per: Pradeep Parikh:
The assessee is in appeal before us against the order of the
ld. CIT(A), dated 10.8.2009 for assessment year 2006-07.
The grievance of the assessee is against the disallowance of
Rs.15,98,454/- made under sec.40(a)(ia) of the Income-tax
Act, 1961 (the Act) on account of non-deduction of tax at
source under sec.194C of the Act.

2. The assessee firm is engaged in the business of
transportation and it returned a total income of
Rs.3,96,540/-. In the course of assessment proceedings, it
was noticed that the assessee had paid a sum of
Rs.15,98,454/- to Smt. Amirthammal as hire charges and
no tax was deducted at source therefrom. The explanation
of the assessee was due to his own ill health, the transport
orders were executed to his wife, Smt. Amirthammal and
therefore, no TDS was deducted. The Assessing Officer did
not accept the contention of the assessee and made the
impugned disallowance. The CIT(A) noted that the
assessee has paid the TDS amount of Rs.22,825/- to the
Government on 5.8.2009 and has also filed the copies of
challans in support of the same. He therefore, observed that
the assessee was entitled to get the deduction in assessment
year 2010-11 and directed the Assessing Officer to give the
deduction in the relevant year. Accordingly, the ground
raised by the assessee was dismissed.

3. The contention of the learned counsel was that whenever
there was shortage of vehicles, third party vehicles were
hired and this hiring of vehicles had nothing to do with the
business of partnership. It was also submitted that the payee
has filed the return and paid tax on the hire charges
received by her. The contention was that there was nothing
like contract and hence sec.194C was not attracted. The
learned counsel brought to our notice the newly substituted
sec.194C with effect from 1.10.2009 which, inter alia,
provides that TDS need not be deducted from any payment
made to a contractor in the course of business of plying,
hiring or leasing goods carriages on furnishing of his
Permanent Account Number (PAN). The contention was
that this provision was curative in nature and it was to
remove the hardship faced by transporters. Therefore,
though the new section is effective from 1.10.2009, this
part of the provision should be held to be operative
retrospectively. The learned counsel referred to the Board's
Circular No.93 dated 26.9.1972 and also to certain
commentaries by Chaturvedi and Pithisaria as well as
Sampath Iyengar.

4. The ld. D.R., besides supporting the orders of the lower
authorities, submitted that while applying the provisions of
sec.194C, relationships did not matter and if the sum was
liable to TDS, the same should be deducted.

5. We have duly considered the rival contentions and the
material on record. Firstly, we are not able to comprehend
the argument of the learned counsel that hiring of vehicles
has nothing to do with the business of the partnership. As
per the material on record, the assessee firm is a transport
contractor. The submission before the Assessing Officer
was that Smt. Amirthammal is the wife of one of the
partners of the assessee and due to poor health of that
partner, the orders were executed by Smt. Amrithammal. In
other words, the orders which were supposed to be
executed by the assessee firm, were executed by the wife of
a partner which in our view, constitutes sub-contracting of
the work. Another contention of the learned counsel is that
there is nothing like contract. This is quite a vague
argument. When the work is done on behalf of the
contractor, there is a contract between the contractor and
the sub-contractor. Thus, there is no force in the argument
of the learned counsel that there is no contract at all.
Sec.194C is wide enough to include oral contracts as well.
The learned counsel has then referred to Circular No.73
dated 26.9.1972. In this Circular it has been mentioned that
a transport contractor cannot ordinarily be regarded as
contract for carrying out any work and hence, no TDS is
required to be made. It needs to be appreciated that
sec.194C was brought on the statute book with effect from
1.4.1972. In the original provision there was no reference
specifically to carriage of goods and passengers by any
mode of transport other than by railways. Therefore, the
Circular of 1972 has to be considered in the light of the
provision existing at that point of time. The provision that
the expression "work" will also include carriage of goods
and passengers was inserted in sec.194C by way of
Explanation 3 with effect from 1.7.1995. Thus, from that
date, it was specifically provided that carriage of goods
would be within the expression "work" and hence will be
liable to the provisions of sec.194C. Therefore, the reliance
of the learned counsel on Circular No.73 is misplaced.
He has then referred to the commentary of Sampath and
Iyengar in paragraph 14 on page 9530 (Vol.6, 10th Edition).
It is true that the paragraph starts by saying that sec.194C is
not applicable to contracts for mere carriage of goods
which do not include any other services like loading or
unloading. However, the same paragraph mentions later
that before amendment in 1995, sec.194C was not
applicable to transport contractors, meaning thereby that
after the amendment, it is applicable. Therefore,
considering the legal position as it is applicable to the year
under consideration, we are of the view that the assessee
was liable to deduct tax at source from the payment made
to Smt. Amrithammal.

6. Another argument taken by the learned counsel is that
where the payee has filed the return and paid tax on the
payment received, no disallowance can be made. Perhaps,
the learned counsel is mixing up two issues viz.,
disallowance under sec.40(a)(ia) and demand raised by an
order under sec.201(1) of the Act. Where the payee has
already paid tax, no demand can be raised against the payer
under sec.201(1) of the Act. But, non-deduction of tax
where it is statutorily required, will certainly invite all the
consequences under the Act irrespective whether tax has
been paid by the payee or not. Of course, where the payee
has already paid tax and if the same amount is disallowed
in the payer's case, it will certainly amount to taxing the
same amount twice. However, the legislature has taken care
to remedy this situation by providing that the sum
disallowed will be allowed as a deduction in the year of
payment. This is exactly what the CIT(A) has held and we
are in agreement with it.

7. Three more arguments of the learned counsel remained
to be dealt with. One is that if the payer is under a bona fide
belief that no tax is deductible, it will be a reasonable cause
for non-deduction of tax. Principally, we do not have any
dispute over this proposition. However, nowhere it has
been spelt out by the assessee as to what is the basis of such
a bona fide belief. Therefore, the judgments relied upon by
the learned counsel in connection with "bona fide belief"
cannot help the assessee. The second argument of the
assessee is that if the assessee acts on the advice of a legal
cell and does not deduct tax, no penalty is leviable. For this
proposition, the learned counsel has relied on the judgment
of the Supreme Court in the case of T. Ashok Pai v. CIT
292 ITR 11. The fact in that case was that the assessee had
relied on the legal cell of his banker viz., Syndicate Bank
and the advice given by the Bank was found to be incorrect.
In this context, inter alia, the Court held that penalty was
not leviable. In the present case, admittedly, the assessee
did not deduct tax on the basis of the advice given by its
own legal cell. Its own legal cell cannot be divorced from
the assessee itself and it has to be considered that the
assessee itself believe that no tax is deductible. But as
mentioned earlier, there is no basis to form such a belief.
Accordingly, the argument is rejected. The next argument
is that in the substituted sec.194C, sub-sec.(6) provides that
TDS need not be made where the payee furnishes his PAN.
The learned counsel wants this provision to be treated as
retrospective in operation. Had it been a simple amendment
in the existing provision, then perhaps, we would have
accepted the contention of the learned counsel. However,
the entire sec.194C has been substituted by a new sec.
194C with effect from 1.10.2009. When the complexion of
the entire provision has undergone a change, it is not
justifiable to treat a small part of it as retrospective in
operation. Moreover, had it been the intention of the
legislature to make it operative retrospectively, it would
have specifically mentioned it. That not being the case, we
cannot accept the argument of the learned counsel.

8. In the final analysis, we hold that Smt. Amrithammal
was a sub-contractor who carried out transport work on
behalf of the assessee firm and as per the provisions of
sec.194C, the assessee firm was liable to deduct tax at
source. Not having done so, the Assessing Officer was
justified in making the disallowance of payment under
sec.40(a)(ia). The assessee is entitled to the deduction of
the said amount in the year in which the tax is paid and the
CIT(A) has rightly directed the Assessing Officer
accordingly. We uphold his order.

9. In the result, the appeal of the assessee is dismissed.

[shobha nagrani]

Sir, pl see this:

The following second proviso shall be inserted in sub-clause (ia) of clause (a) of section 40 by the Finance Act, 2012, w.e.f. 1-4-2013 :

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.

You can argue that this is clarificatory and upholds the M/S AMIRTHAM TRANSPORT law of Chennai Bench of ITAT referred to above.