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40(a)(ia) - deduction "at source" - new controversy - Rajkot ITAT

Started by Sumit, FCA, Rjt., February 28, 2013, 05:47:41 PM

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Sumit, FCA, Rjt.

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 question which stems from this renewed controversy is
-         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.      On the above issue the Hon'ble Gujarat High Court in the case of CIT-I V/s. PATEL RAMNIKLAL HIRJI (TA No. 605 & 606 of 2011) (DoJ – 23.08.2012), after noting following facts :
"the assessee had shown the amount of Rs.3,16,100/- as commission paid, which came to be disallowed by the Assessing Officer under section 40(a)(ia) of the Income Tax Act, 1961, on the ground that instead of deducting tax at source at the time of payment, the assessee deducted tax at source in the month of March only

Has upheld the view of ITAT Rajkot as well as CIT(A) whic deleted the addition, as the tax was paid before due date of filing return of income u/s. 139(1), considering the amendment of Fin Act 2010 as retrospective.

The Hon'ble Guj. High Court has dismissed the revenues' appeal after considering the views taken by the ITAT, stating "it is clear that the Tribunal recorded its confirming findings on the basis of relevant material, which were proper and reasonable. In the circumstances, none of the four questions raised any substantial question of law to be considered by this court"

     II.      The similar situation also arose before Hon'ble Gujarat High Court in the case of ITO, Wd 5(3), Baroda V/s. SUN ENTERPRISES (TA No. 1454 of 2011) (DoJ – 18.09.2012),  wherein
o        Hon'ble A'bad ITAT (ITA No. 451/Ahd/2009 dtd. 13.05.2011) in its order at para 7 noted as under:§         "To a query by the AO, the assessee submitted the following details of the cases in which TDS was not deducted on credit of the amount and also worked out the amount disallowable as per the provisions of sec. 40(a)(ia) of the Act :
Sr. No.
Name of the persons to whom payment made
Nature of Payment
Total amount Paid / credited
Amount disallowable
Remarks
XXX
XXX
XXX
XXX
XXX
No Deduction u/s. 194C was made at the time of credit / payment


... xxx xxx xxx ...
          ... However, the AO did not accept the submissions of the assessee on the ground that the assessee deducted the tax only on 31./03/2007 on payment of transportation/labour charges of Rs. 3126738 & paid to Govt. on 30/05/2005, thereby violating the provisions of sec. 200(1) & 40(a)(ia) of the Act. Accordingly AO disallowed.
§         The Tribunal affirmed the view of CIT(A) by upholding that
"in the instant case, tax deducted from payment of Rs.3127638 on 31.03.2005 ie. in the last month of the financial year has been paid on 23.06.2005 ie. before the due date specified in sec. 139(1) of the Act. In the light of these facts and in view of aforesaid prov. Of sec. 40(a)(ia) of the Act as amended by the Fin. Act 2008 w.e.f. 1.4.2005, we do not find any infirmity n the findings of the ld. CIT(A). In view thereof, especially when the Rev. have not place before any material so as to enable us to take a different view in the matter, we are not inclined to interfere."
§         
o        The Hon'ble Guj. HC, while deciding the above matter, carried before it by Revenue, after noting important facts of the above case in its decision, noted that:
"From the record thus it emerges that the assessee had made the deposit in the government account the TDS deducted before the due dat of filing return under sec. 139(1) of the Act. In that view of the matter, in view of the statutory amendment, the Tribunal committed no error. No question of law arises. Tax appeal is therefore dismissed."

  III.      For what is effect of summary dismissal of Tax Appeal on the basis of "no substantial question of law arises" – assessee may resort to Hon'ble Guj. HC decision in case of NIRMA IND. LTD. (2006) 283 ITR 402 (GUJ) – and its binding effect on Tax Tribunals.

   IV.      The issue has already been, long-back, considered by Hon'ble ITAT Mumbai in case of Bapusaheb Nanasaheb Dhumal, making categorical finding:
HELD allowing the appeal:
Failure to deduct or deposit tax as per s. 194C or Chapter-XVII makes the assessee liable to the consequences provided under the said Chapter-XVII. ...the conditions for allowability of deduction are prescribed u/s 40(a)(ia) itself and Chapter-XVII and s. 194C are not relevant. If the condition of deduction and payment prescribed u/s 194C / Chapter XVII are held applicable for disallowance of deduction u/s 40(a)(ia), then s. 40(a)(ia) will be rendered meaningless, absurd and otiose. Since the assessee had (belatedly) deducted tax in the last month of the previous year i.e. March 2005 and deposited the same before the due date of filing the return u/s 139(1), deduction had to be allowed u/s 40(a)(ia) (A).

      V.      The similar view has been adopted by many other tribunals in identical facts, few of them are, as complied below

SR. NO
ASSESSEE
COURT
ITA No. &
DT OF JUD
REMARK
1.
SUGAM CONSTRUCTION PVT LTD
A'BAD ITAT
ITA NO. 1828/AHD/2010
21-Dec-2012
HELD - "it is not the claim of AO that tax has not been deducted at all, but he has held that the appellant did not deduct any tax up to the month of Feb and deducted tax only in MARCH - Followed J K CONST. CO. GUJ HC - no disallowance
2.
ROYAL BUILDERS
A'BAD ITAT
ITA NO. 2744/AHD/2009
29-Dec-2011
various payments "on account" made through out the year – TDS made in the march only - BAPUSAHEB NANASAHEB DHUMAL - FOLLOWED - NO DISALLOWANCE
3.
RATNA DEVELOPERS
A'BAD ITAT
ITA NO. 1591/AHD/2011
18-Nov-2011
Payments made between Apr to Feb - TDS was made in MARCH - followed coordinate bench's decision in case of DIVYA DEVELOPERS - no disallowance
4.
ANSARA EJAZ AHMED
A'BAD ITAT
ITA. No. 2238/AHD/2008
1-Oct-2010
Violation of 194C - DR Argues TDS to be made 'at the time of payment' - Actual TDS in March - Matter remanded back with direction to consider "amended provision" of law.
5.
DELLOITE HSKINS & SELLS
A'BAD ITAT
ITA NO. 1546/AD/2008
13-Sep-2010
Various payments "on account" made through out the year – TDS made in the march only - BAPUSAHEB NANASAHEB DHUMAL - FOLLOWED - NO DISALLOWANCE
6.
M K GURUMURTHY
BANGLORE ITAT
ITA NO. 717/BANG/2011
10-May-2012
Specific ground of appeal take by revenue : "CIT(A) is not correct in deleting the addition of Rs.1730932 made by AO as the assessee had belatedly deducted tax from April  2007 TO FEB 2008 in the month of MARCH 2008 – followed BAPUSAHEB NANASAHEB DHUMAL – Also applied VIRGIN CREATION - Held No disallowance.
7.
AADI ASSOCIATES
CUTTACK ITAT
ITA NO. 262/CTK/2011
5-Aug-2011
DR argued - "Amount which the assessee claimed as exp. was to suffer deduction of tax at source at the threshold and therefore could not be postponed to the fact that law provided for deduction of tax at source in the month of march
- H S MOHINDRA & BAPUSAHEB NANASAHEB DHUMAL followed - no disallowance

8.
HARISHANKAR PAPER PRODUCTS
HYDRABAD ITAT
ITA NO. 1179/HYD/2010
10-Dec-2010
various payments made through out the year - TDS made in the march only by way of PROVISION - BAPUSAHEB NANASAHEB DHUMAL & H S MOHINDRA - FOLLOWED - NO DISALLOWANCE
9.
VIKAS CONSTRUCTION
INDORE ITAT
ITA NO. 39/IND/2010
28-Mar-2011
follows NANASAHEB BAPUSAHEB DHUMAL – no disallowance.
10.
SUPER HARYANA ROADWAYS
PUNE ITAT
ITA NO. 193/PN/2009
7-Jan-2011
follows NANASAHEB BAPUSAHEB DHUMAL & H S MOHINDAR - DELHI ITAT
11.
DEEPAK VAISHWANATH BHAMARE
PUNE ITAT
ITA NO. 1237/PN/2009
30-Jun-2011
followed - BAPUSAHEB NANASAHEB DHUMAL and SUPER HARYANA ROADWAYS - no disallowance
12.
VIVEK KEDIA
KOLKATA ITAT
ITA NO. 1040/KOL/2011
25.11.2011
Payments were made on account of ... XXX ..., from the month of April to March, but he has deducted the Tax on entire payment under various heads in the month of Marchfollowed H S Mohindra – no disallowance.


   VI.      The section 40(a)(i) – which is analogues to section 40(a)(ia) wherein identical phraseology occurs – " .... on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted ..." – Hon'ble Rajasthan High Court had an occasion to deal with an issue in the case of ACIT Vs. FARASOL LTD. (1987) (163 ITR 364 RAJ),
o        Wherein –
§         The assessee had paid interest to a foreign bank, without deduction of tax at source (as per sec. 40(a)(i).
§         AO disallowed the sum
§         However, later on assessee paid TDS amount towards its liability of TDS. (from its own pocket)
§         Appellate Asst. Commissioner deleted the addition, based on payment of TDS.
§         Tribunal upheld the order of AAC.
§         Hon'ble Rajasthan HC took the view that Payment of TDS, whether in consonance of Provisions of Act or otherwise, it is covered in the term "Paid" as occurring in the sec. 40(a)(i)
o        On the above ratio, it may be inferred that term "Paid" before due date of filing return of income u/s. 139(1), covers both – payment of tds deducted in accordance with chap. XVII-B and also the amount paid by assessee towards its liability under chap XVII-B, out of its own pocket.

VII.      Hon'ble Madras High Court, while testing the constitutional validity of sec. 40(a)(ia), the noted the following;

"41. As against the submissions of the petitioners that the provision is illusory, the learned counsel contended that though the words used in the proviso are deduct and pay, there is no prohibition for the assessee to make the payment without any deduction. In that context, the learned counsel relied upon Section 195A and stated that such a situation is envisaged therein. The learned standing counsel also relied upon 163 ITR 364 (Addl. CIT vs. Farasol Ltd.) where in the context of Section 40(a) it was held by the Rajasthan High Court that even where the amount is paid out of the assessee's pocket but not deducted, he would be eligible for the deduction."

...  xxx xxx xxx ...

...When we consider the said submission, as rightly pointed out by the learned standing counsel for the revenue, proviso to Section 40(a)(ia) will have to be read along with the main provision. Under the proviso to Section 40(a)(ia), the assessee is entitled for claiming the deduction in the event of a defaulted payment is made good in any subsequent year. The provision however makes it clear that such deduction are allowed in computing the income of the previous year in which such tax has been paid. If the proviso is read along with Section 40(a)(ia) there can be no dispute that the assessee who committed any default in complying with Chapter XVII-B of the Act is not left high and dry. The proviso provides a remedial measure and thereby enable the assessee to claim for deduction either in the immediate subsequent year or in any other subsequent year to the relevant year in which the default came to be committed. The learned counsel attempted to point out that proviso cannot be said to cover all the situations of default, in as much as, the TDS has to be made at the point of payment either by way of credit or by way of direct payment and there is no specific provision contained in the proviso to cover such situation. In other words, the contention is that while under Chapter XVII-B the deduction can be made only at the point of payment and in the event of default being committed, there would be no scope for the payer to make any deduction at any later point of time, the proviso will be really unworkable.

71. While meeting the said argument, the learned standing counsel pointed out that such a contention is far fetched in as much as a reading of Section 201 makes it clear that the default in respect of TDS would not only cover failure to deduct or after deduction failure to pay, but even failure to pay on its own thus covering default in all situations. The learned standing counsel for the Revenue therefore contended that the proviso will not only come to the rescue for those who failed to pay after deduction but to also those who though not made any deduction were prepared to make the payment on their own and thereby rectify the defect who can validly take umbrage under the proviso and consequently claim the benefit of allowance in the subsequent year. The submission of the learned standing counsel is in consonance with what is stipulated in the proviso and therefore there is every justification in accepting the said submission. When the said submission can be validly accepted, it will have to be held that the effect or the rigor of restriction of disallowance made under Section 40(a)(ia) can be rectified by the assessee himself by resorting to the benefits contained in the proviso to that Section. Therefore, when Section 40(a)(ia) is read along with its proviso, there is no scope to hold that the said provision is so very harsh or creates any insurmountable situation for the assessee to claim the deduction of expenditure actually made. We therefore hold that Section 40(a)(ia) cannot be read in isolation but must be read along with its proviso and when it is read in that manner, there would be no scope to hold that there will be any harsh treatment meted out to any assessee in the matter of disallowance of any expenditure validly made by them."

The above decision was rendered prior to Finance Act 2010.
Reading the above decision in light of 40(a)(ia) as amended by Fin. Act 2010, would mean that words "deducted" as does not mean ONLY deducted "at source", But it would encompass in itself – any deduction, be it at source or otherwise, or out of its pocket.

The above decision also, indirectly grants sanctity to the ratio in case of FARASOL LTD. (supra).


May one conclude form the above that word "deduction" would encompass in itself – any deduction, be it "at source", or otherwise, including belated deductions ?

I request ld. readers to enrich the discussion with their views.

RAJESH75

The Hon'ble ITAT , Rajkot has taken different view on the very controversial subject. The issue may affect large no. of such cases.

It is also seen from the facts of the case that all the expenses are paid during the year. In such situation only confusion which could be drawn from the said decision is why the Hon'ble Tribunal has not followed the decision of Special Bench in the case of Merilyn Shipping & Transports v/s Addl. CIT  136 ITD 23 ( Vis. SB) . As from the facts it could be gathered that most of expenses are paid by the assessee and there is no payable or outstanding.

In my opinion , if the Rajkot Bench has followed special decision in any other cases, it would be a good case to argue by filling Misc. Petition and one could take the benefit of the decision of special bench.

Sumit, FCA, Rjt.

Dear Mr. Rajesh,

You have rightly pointed out that this controversial view would have far reaching effects on many day to day cases, which are otherwise settled under law.

But, in my humble view, taking up M.A. on the basis of non-consideration of Sp. Bench Decision in case of Meryline 136 ITD 23, would not be possible, because Hon'ble A.P.  HC has granted "interim suspension" on the decision.

Though there are verdicts affirming binding force of a decision under "suspension", But also there are adverse decisions of various HC (incl. jurisidiction HC of Guj.) which would make it debatable - whether such decision carries binding force or not ?

And this would sum up in the situation that it would not be "a mistake apparent on record" (being it debatable).

However, it would be better if this M.A. can be taken up, on the basis of 'non-consideration of Jurisidictional HC".

Devang Shah

Dear Sumit,

In the context of the binding force of a decision under "suspension", you may wish to consider the Hon'ble Supreme Court decision in Shree Chamund Mopeds Ltd. v. Church of South India Trust Association, Madras AIR 1992 SC 1439, 1444, which has held that 'stay of order' of an Appellate Authority / Court by a higher Court means that the order passed by the Appellate Authority / Lower Court still continues to exist in law, inspite of the 'stay' and its existence is not destroyed.

Hope you will find it useful!

Sumit, FCA, Rjt.

#4
Dear Mr. Devang,

It is true that the Hon'ble SC has explained the law on what is the position in the state of suspension/stay, in the case law cited by you.

But, in case of Union of India & Ors. vs. Kamlakashi Finanace Corporation Ltd. – AIR (1992) 711 (SC)

Hon'ble Apex court has held that  :

"It cannot be too vehemently emphasized that it is of utmost importance that in disposing of the quasi-judicial issues before them, revenue officers are bound by the decision of the appellate authorities. The order of the Appellate Collector is binding on the Assistant Collectors working within his jurisdiction and the order of the Tribunal is binding upon the Assistant Collectors and the Appellate Collectors who function under the jurisdiction of the Tribunal. The principles of judicial discipline require that the orders of the higher appellate authorities should be followed unreservedly by the subordinate authorities. The mere fact that the order of the appellate authority is not "acceptable" to the department – in itself an objectionable phrase – and is the subject matter of an appeal can furnish no ground for not following it unless its operation has been suspended by a competent court. If this healthy rule is not followed, the result will only be undue harassment to assessee and chaos in administration of tax laws."



The above wordings may lead a person to believe that there exists a cleavage of opinion on binding force of an order in suspension.


Other views are invited.