sec. 40(a)(ia)- paid/payable controversy

[satyanveshi]

From a plain reading of the provisions of sec. 40(a)(ia), it is understood that it deals with two situations....

i) the persons who have not deducted TDS during the financial year;
ii) persons who have deducted TDS, but the deducted TDS has not been paid to the government's kitty within the stipulated time limit;

For first category of persons, the dis-allowance will attract invariably for the year under consideration and the said expenditure will be allowed only during the subsequent  financial years whenever the relevant TDS is deducted and paid ( emphasis supplied to the words deducted and paid) to the governments account as per the first proviso. 

For the second category of persons if the deducted TDS is paid before the due date of filing of return of income u/s 139(1), no disallowance during the year under consideration and if the deducted TDS is not paid as mentioned above, then only the relevant expenditure will be disallowed for the year and will be allowed for the year in which the deducted TDS is paid to the government's account.

As per my understanding and experience as of now, if TDS is not deducted during the financial year and was deducted during the April month of the subsequent F.Y and paid to the government account during the same month (ie. April) then also, disallowance will be attracted for current year and the disallowed expenditure will be allowed in subsequent F.Y. This is not a new innovation, even Singhania in his book law and practice has stated the same.  Further, in the cases where second proviso is attracted, during the current financial year dis-allowance will be attracted and the said dis-allowance will be made good during the next financial year because, the non deducted TDS would be  deemed to have been deducted and paid to the governments account only when the deductee has paid the taxes and filed the return of income. In this case also, date of deduction is next financial year when the deductee would be filing his return of income and therefore the case falls under first category but not under second category.

From a Harmonious reading of the section as well as provisos, it is abundantly clear that in order to get the expenditure allowed, the TDS which was not deducted earlier should be deducted ( emphasis supplied to the word deducted) subsequently and should be paid to the governments account.

Once the entire amount of the expenditure is already paid to the deductee, how can the TDS amount be deducted from that expenditure again. if at all it is required by law that it should be paid, then the same can be paid only from the personal coffers of the deductor. But nowhere it is specified  that if the amount is paid ( even from the amounts belonged to the assessee) by any means then the relevant expenditure will be allowed. The provisos clearly says that non deducted TDS should be deducted and paid to the government account in order to get the allowance of the expenditure.

Therefore, some incometax AOs may argue that since the amounts subsequently paid is not from the deducted funds ( entire expenditure amounts have already been paid to the deductee) and what is paid now is the personal amount of the assessee and therefore, the requirement of law is not fulfilled and accordingly,  he is unable to  allow the said expenditure. If this argument is taken by any incometax AO, is there any remedy to counter the said argument. If we accept this argument, the relevant expenditure will never be allowed because, the TDS can never be deducted from the paid amount. This is not the intention of the legislature. Therefore, it is just impossible to pay the deducted funds again as stated by the law in the cases where the amounts have already been paid to the deductees.     

Therefore, what is envisaged by the section framers is that it is applicable only to the cases where the amounts are still outstanding and payable to the deductees. If the amount is payable, then the amount can be deducted subsequently and balance amount can be paid to the deductees and the deducted amount can be paid to the government in the form of TDS.

Further, as per my understanding, sec. 40(a)(ia) is introduced only to prevent the persons not to reduce the profit just before filing of return of income by claiming some bogus(?) expenditures. If the amount of expenditure is paid during the financial year it cannot be bogus expenditure by any stretch of imagination because if the intention of the deductor is to claim the bogus expenditure he will plan in such way that he will deduct TDS also and the balance amount will only be paid to the recipient. Whereas in the cases where entries are made just before filing return of income, he will show that the expenditures are still payable and accordingly try to reduce the profits ( only this type of entries can be made in the books of accounts subsequently and he cannot manipulate the books with paid amounts that too through banking channel). In order to prevent such cases, this sec has been introduced so that the such expenses will be allowed only when TDS is deducted and paid to the governments kitty.

Thus, the section is applicable only to the cases where expenditures are payable and not applicable to the cases where expenses were already paid during the current financial year itself. This is my understanding of law... if anybody contradicts and come with a logical reasoning I have no objection to change my opinion. I hope all our fraternity will roam on this issue and come out with different opinions so that a solution can be found to a long persisting problem(?).