Opinion Of Eminent Legal Luminaries On Controversial Issues

Is Disallowance U/s. 40(a) Justified On The Amounts Provided At The End Of The Year?

QUERY: Assessee has not deducted tax at source on certain provisions made on last day of the financial year? Assessee refers to the decision of Special Bench of ITAT and takes a view that no disallowance u/s. 40(a)(ia) can be made?
ANSWER: The view of the assessee is not correct. In fact, the Special Bench in Merilyn Shipping & Transports v. ACIT [136 ITD 23 (Visakhapatnam) (SB)] has specifically held that the provisions of section 40(a) (ia) are applicable to the amounts of expenditure which are payable as on March 31 of every year. However, the said provisions could not be invoked to disallow expenditure which has been actually paid during previous year without deductions of tax.

Against the said decision, the Andhra Pradesh High Court has granted "Interim suspension" on a petition by the Department.

However, the Calcutta High Court in CIT v. Crescent Export Syndicate has reversed the decision of the Special Bench and held :

“The key words in s. 40(a)(ia) are “ on which tax is deductible at source under Chapter XVII – B” and this makes it clear that it applies to all expenses. Nothing turns on the fact that the legislature used the word ‘payable’ and not ‘paid or credited.’ Unless any amount is payable, it can neither be paid nor credited. If an amount has neither been paid nor credited, there can be no occasion for claiming any deduction. The Special Bench was wrong in making a comparison between the draft Bill and the enacted law to determine the intention of the Legislature. A comparison is permissible only between the pre-amendment and post amendment law to ascertain the mischief sought to be remedied or the object sought to be achieved by the amendment. The fact that the impact of s. 40(a)(ia) is harsh is no ground to read the same in a manner which was not intended by the legislature. The law was deliberately made harsh to secure compliance of the provisions requiring deductions of tax at source. It is not the case of an inadvertent error. For the same reason, the second proviso sought to become effective from 1st April, 2013 cannot be held to have already become operative prior to the appointed date. Consequently, the majority view in Merilyn Shipping & Transports is not acceptable.”

But, recently the Mumbai Tribunal in Jitendra Mansukhlal Shah Vs. DCIT [ITA Nos 2293 & 2294/Mum/2013 dated March 04,2015] has held that, the assessee having made the payment, section 40a(ia) cannot be attracted because it speaks of the amount “payable” and it does not cover the amount already paid. The ITAT Chennai Benches have taken into consideration the decision of the ITAT Special Bench in Merilyan Shipping & Transport (supra), the order of which was suspended by the High Court but at the same time there was a subsequent judgement of the Hon’ble Allahabad High Court in the case of M/s. Vector Shipping Services (P) Ltd., wherein it was held that section 40(a)(ia) applies only to those amount which remains payable by the end of previous year. In other words, in respect of payments already made section 40(a)(ia) is not attracted (i) ACIT Vs. Eskay Designs (ITA No. 1951(Mad) 2012 dated 09/12/2013) (ii) ITO Vs. Theekathir Press (ITA No. 2076/Mad/2012 & Co. no. 155/Mad/2013 dated 18/09/2013). Though there are contrary decisions of the other Hon’ble High Courts i.e. Hon’ble Calcutta High Court and Hon’ble Gujarat High Court. In the light of the decision of the Hon’ble Allahabad High Court it can be said that there can be two views possible in this matter in which event the one which is in favour of the assessee has to be followed in the light of the decision of the Hon’ble Supreme Court in the case of Vegetable Products Ltd. [88 ITR 192]. Hon’ble Allahabad High Court in the case of CIT Vs. Vector Shipping Services (P) Ltd. (supra) has held that for disallowing expenses from business and profession on the ground that TDS has not been deducted, amount should be payable and not which has been paid by the end of the year. The said decision of Allahabad High Court was made subject to special leave petition filed before the Supreme Court and their lordships vide their order dated 02/07/2014 in CC no. 8068/2014 have dismissed the SLP. In view of the above discussion the decision relied upon by the Ld. D.R. would have no application and we have accepted the claim of the assessee to the extent of labour payments are made during the year under consideration and to that extent no disallowance should be made.
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