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

[satyanveshi]

Only to communicate that if the tax is paid( either by the deductor in the form of TDS  or by the deductee in the form of regular taxes) after the due date of filing of return of income in the immediate succeeding year or following  years to immediate succeeding year then the legislation wanted to communicate that in that year( may be immediate succeeding year  or following years to immediate succeeding year) only the expenditure of the deductor should be allowed. If you still dont agree, you try to draft a provision communicating the above meaning and I am sure you will also end up drafting in  the same way legislation had done. So, try to draft the provision communicating the above meaning......................

[Sumit, FCA, Rjt.]

In a Recent Decision - Rajkot ITAT has taken a view that if tax is not deducted at the time of payment / credit, but deducted belatedly in the same year in March, such TDS can not be termed as tax deducted "at source" - and therefore disallowance u/s. 40(a)(ia) prevails, despite the fact that assessee paid the TDS before due date of filing ROI.

The Controversy revolving around sec. 40(a)(ia) carries itself to a step further with a renewed vigor, with a Recent Tribunal decision revolving around words "at source", and thereby again importing applicability of Ch. XVII-B for time-limits of deduction, which otherwise have been held by various tribunals & High Courts as being govern by sec. 40(a)(ia) itself.

The questions which stems from this renewed controversy are
-         Whether disallowance can be made u/s. 40(a)(ia), in cases when tax is not deducted "at source" ie. (at the time of payment/credit) – but has been deducted later in the same financial year, and especially in the month of March. (as applicable to AY 2005-06 & onwards) (after considering the amendment of Fin Act 2010 as retrospective)
-         Meaning thereby, whether a belated deduction can not bring the assessee a sigh of relief, even if it has paid the same before due date of filing return of income u/s. 139(1), in case the belated deduction was in the month of March.
-         Another probable controversy may arise, branching from above controversy that in cases where the assessee has already "paid' the amounts claimed as expenditure, "how can the assessee, later on, deduct a tax from it – so as to make the deduction "at source".
-         Therefore, in the situations where expenditure has been paid off to the payee without TDS and later on even if the assessee has deducted the TDS by way of debiting the amount of TDS to the account of payee in the month of MARCH (as if it will be recoverable in future form the payee, and as the result will be debit balance of payee's ledger), and thus paid it out of its own pocket; whether the disallowance of 40(a)(ia) would prevail ?

I have come across few decisions, which is against the above view taken by Rajkot ITAT, as placed by in this forum under : "40(a)(ia) - deduction "at source" - new controversy - Rajkot ITAT".

I request  Ld. Experts to give me HC/SC Decisions covering the above Issue, if there are any ..

[subash agarwal,Adv kolkata]

Dear Ramaswamy,
The provision of Sec 40(a)(ia) itself provides relief from its rigour in the following  situations-
a)   Where tds was deducted in the year1 but deposit was made in the Year 2 but before the due date of filing of return, no disallowance of expense will be made at all.
b)   Where tds was deducted in the year1 but deposit was made in the Year 2 but after the due date of filing of return, disallowance of expense will be made in year 1 but the deduction will be allowed in year 2.
c)   Where tds was not deducted in the year1 but deduction was made in year2 and deposit was also made in year 2, disallowance of expense will be made in year 1 but the deduction will be allowed in year 2.
d)   Where tds was not deducted in the year1 but deduction was made in year2 and deposit was  made in year 3, disallowance of expense will be made in year 1 but the deduction will be allowed in year 3.
e)   Where the tds was not deducted at all but the payee has paid tax on such income and filed his ROI within the due date , no disallowance of expense will be made at all.
f)   Where the tds was not deducted at all but the payee has paid tax on such income and filed his ROI  after the due date but before the end of year2, disallowance of expense will be made in year 1 but the deduction will be allowed in year 2.

It is due to the first proviso underlined by you that the benefit of deduction stated in clause  (c) and ( d) above is available. For clear understanding you will have to read the underlined portion along with last  portion of the sentence appearing after comma. The complete sentence is as under-
“Provided that where in respect of any such sum, tax has been deducted in any subsequent year, ---------------- such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.”

I hope this clarifies the position.
Warm Regards,
Subash Agarwal, Advocate

[satyanveshi]

Rajkot decision appears to be not logical and not as per the practicality. This is because, once TDS is not deducted and the relevant amount is paid to the payee, it cannot be deducted from the payee at all and any how the amount is to be paid from the personal coffers of the deductor only. Whether this amount of  deducted TDS is allowable u/s 201(1) or not is a separate question altogether and is not relevant for our discussion. However, What ultimately government wants is the amount of TDS is to be deposited in governments kitty from the deductor in the form of TDS. It is immaterial, in my personal opinion,  whether it is paid from the personal funds of the deductor or from the funds to be paid to the deductee.  That is why it is provided that the disallowed expenditure u/s 40a(ia) is allowable when the TDS is deposited in the governments account in the subsequent year(s). If the proposition that the TDS deductible in the months of Apr to Feb is deducted in March and deposited before filing of return of income, then also disallowance can be made is accepted then it becomes absurdity because, without deduction if the amount is paid to the deductee it cannot be deducted again from the deductee at all and the amount should be paid from the personal coffers of the deductor as stated above. If the argument is accepted then the expenditure is not at all allowable as it cannot be recovered  from the amount to be paid to deductee in subsequent years also. How the deductor will pay that TDS in subsequent years, without deducting from the payment to be made from the deductee, when the entire amount has already been paid to him and his present whereabouts are not known to the deductor. Just because he didnot keep the address of the deductee, he has to forego the expenditure eternally and he had to bear the consequential disallowance. Therefore,  the second limb of the section that it will be allowed as and when the same is paid in subsequent years will become otiose and redundant. This is not the intention of the legislation. Therefore, the decision of RajKot do not appear to be logical and the right course of action would be to charge interest from the date of deductible to the date of actual deduction and any how that is paid before filing of return of income the expenditure should have been held as allowable.   This is my view..................... if any other view is there, it is whole heartedly welcome.............................

[Sumit, FCA, Rjt.]

Dear Mr. Satyanveshi,

What you have expressed is very correct. I have come across 2 of Guj. HC decisions, which directly or indirectly affirms the view which is absolutely in negation of view taken by Rajkot ITAT.

I would request to give me some HC/SC Decisions, if there are any in your knowledge.

Thanks.