Opinion Of Eminent Legal Luminaries On Controversial Issues

Can Disallowance Be Made U/s. 40(a)(a) For Non-Deduction Of Tax On Depreciation?

QUERY: S. 40(a)(ia) lays down that the expenditure mentioned therein viz., interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services or payment to a contractor/ sub-contractor on which tax is deductible at source under Chapter XVIIB, but has not been deducted or after deduction not been paid, would not be allowed as a deduction in computing the business income of the payer-assessee till such TDS is paid within specified time limit. Can Assessing Officer disallow the depreciation on the amount capitalized on which no TDS was deducted, for payments made to contractor who is resident?
ANSWER: Section 40 starts with “notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”: -

(ia) any interest, commission or brokerage, [rent, royalty] fees for professional 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 carryout 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 before the specified date mentioned in the said sub-section.

A non-obstante clause is usually used in a provision to indicate that the provision should prevail despite anything to the contrary in the provision mentioned in such non obstante clause. In case there is any inconsistency or a departure between the non obstante clause and another provision, one of the objects of such clause is to indicate that it is the non obstante clause which would prevail over the other section as per CIT vs. Nav Bharat Enterprise (P) Ltd. (No. 2) [170 ITR 332 (AP)].

Further a perusal of the above provision show that it is only when a deduction is claimed in computing the income chargeable under the head “Profits and gains of business or profession” that the above provision is attracted. The deduction claimed should be of interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services. The claim for depreciation made by the assessee does not fall within any of the categories mentioned in the aforesaid provision. Therefore, it is not possible to make disallowance of depreciation by resorting to the provisions of section 40(ia) of the Act. [See ITA No. 1497/Mum/2010 dt. March 9, 2011] Furthermore, in SMC Demaag (P) Ltd. vs. DCIT [132 TTJ 498], the Delhi Tribunal has held that depreciation cannot be disallowed on the ground that at the time of remittance no tax was deducted at source. Provisions of section 40(a)(i) are not applicable for claim of deduction under section 32.
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