Sec- 40 (a) (ia)- Amendments, Clarifications, Controversies & Litigation

[Advocate Anumita]

Law of Taxation and changes incorporated by CBDT (Central Board of Direct Taxes) every year has turned out to be more complex and controversial for each passing years. It is a charging statute and levy of tax is separate on each of the individuals and the levy is governed by the Income Tax Act, 1961. The strategy of Taxation can be broadly classified upon considerations like raising revenue/funds, put a check upon consumption and use of articles. The main source of earning of revenue is by way of application of TDS provisions which is laid down by the statute in Chapter-XVII "COLLECTION & RECOVERY OF TAX".

http://asmlegal.blogspot.in/2012/09/amendments-clarifications-controversies.html

[Ramasamy]

Can Ao disallow expenditure on account of non-deduction of TDS on payment made to resident payee even if payer is not deemed to be an assessee as per amended provision of Sec 201 (1)?

[satyanveshi]

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).

[Ramasamy]

As per the amended provision, the date of submission of return by resident recipient shall be taken as date of deduction of tax and payment of tax. Since, resident payee can file return of income only in subsequent financial year, i had a doubt that whether AO can allow that expenses only in the FY in which actual tax paid by resident recipient.

[satyanveshi]

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).

[Advocate Anumita]

Dear Ramasamy,

For your reference, please check out the link.

http://articles.economictimes.indiatimes.com/2007-08-16/news/28405717_1_tax-authorities-tax-department-income-tax-appellate-tribunal

[Ramasamy]

Hi Anumita

In my opinion, amendment made in Section 201 (1) in line with SC ruling to protect deductor only from the recovery of tax  equivalent to non deduction if  resident payee has paid tax on the non deduction amount by way advance tax or self assessement tax. However, deductor is still  can be penalized under section 201 (1A) - Interest @ 1% p.m from the date of deductible to till the date of return filed by resident payee and similiary u/s 40 (a) (ia) for non deduction of TDS within the same financial year. However, deductor has option to claim the disallowed amount u/s 40 (a) (ia) in the subsequent financial year in which resident payee has paid the tax and filed the return... Please correct me if i am wrong.

[satyanveshi]

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.

[Ramasamy]

Hi Satyanveshi

We are not discussing about the case where TDS has been deducted in the book within the same financial year but remittance made in the subsequent FY on or before due date of return filing. As per the amendment made in finance act 2012, deemed date of deduction and payment of TDS will be the date of furnishing return of income by resident payee.The due date of furnishing of return by the resident payee will always be in the next financial year. Therefore, deduction for business expenses will be available in the next financial year if resident payee has paid the tax and filed his return . However, in the year of incurrence of business expenses there will always be disallowance under section 40(a)(ia) due to non-deduction of TDS.

[satyanveshi]

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.

[Ramasamy]

Please read highlighted line items of sub clause given in Section 40 a (ia) together.

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.

[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.]

[Advocate Anumita]

Please check the link for reference.

http://www.simpletaxindia.net/2012/05/no-dis-allowance-us-40aia-even-tds-has.html

[satyanveshi]

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.     

[Advocate Anumita]

I don't think there should be any confusion anymore. :)

[Ramasamy]

I agree your logical view but can any one of you clarify me why below highlighted line was not removed from one of the sub clause mentioned in Section 40 (a) (ia) when legislature amended  this section in  Finance act 2010 & Finance Act 2012.


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.]