Opinion Of Eminent Legal Luminaries On Controversial Issues

Whether Disallowance U/s. 40(a)(ia) Be Justified, If Payee Has Paid The Tax On That Income?

QUERY: A Pvt. Ltd., and B Ltd. are sister concerns. A Pvt. Ltd. has made the payment of job work charges to B Pvt. Ltd. A.O. has made the disallowance of job work charges u/s. 40(a)(ia) for non deduction of TDS, in the hands of A Pvt. Ltd. B Pvt. Ltd, offers the job work income from A Pvt. Ltd., in the return of income. Since A Pvt. Ltd., closes its business operations in subsequent year, it cannot claim deduction of the TDS deposited to the credit of government will A Pvt. Ltd., still be liable for disallowance u/s. 40(a)(ia)?
ANSWER: Yes. As per section 28 of the Income-tax Act 1961, the assessee should carry on the business during the year. Section 28 reads as under:

“The following income shall be chargeable to income tax under the head” Profits and gains of business or profession” –

(i) the profits and gains of any business or profession which was carried on by the
assessee at any time during the previous year ………….”

The Supreme Court in the case of Bombay Steam Navigation Co. (P) Ltd., vs. CIT [56 ITR 52] held that “for section 28 to come into operation, a business must have been carried on during the previous year. It is only the income earned from the business that is carried on that is chargeable under this head.”

Furthermore, the Supreme Court in Dubash (Executors of the Estate of J.K.) vs. CIT [19 ITR 182] has pointed out that under section 28 the emphasis is on the person carrying on the business, not so much on the owner thereof. The fundamental idea underlying the words “business or profession” is continuous exercise of activity and the same central idea is implicit in the word “carried on by the assessee” occurring in section 28(i) of the Act.

Once, the assessee carries on the business during the year, then, income has to be computed as per section 29 of the Act, in accordance with the provisions contained in sections 30 to 43D of the Act.

However, in case of lull or inactive business during the year, the Punjab High Court in CIT vs. Bhart Nidhi Ltd. [60 ITR 520], has stated that once the business is commenced it does not cease to be carried on merely because there is a period of lull, quiescence, or temporary inactive. A business may be inactive for a period merely because there is period of lull, quiescence or temporally inactive. A business must be inactive for a period or merely because of dormancy of the business, the conclusion that it has ceased to run does not arise. It is only a complete discontinuance of the business that will put an end to its existence.

Thus, from the above decisions, it is clear that business should be continued for claiming expenditure, if there is a period of lull business, expenditure can be claimed.

Now, if A Ltd., is having lull in business, it can claim the deduction provided it has made the payments of TDS in subsequent year but, if it has discontinued the business it cannot claim deduction under section 40(a)(ia) of the Act.

Even if payee has paid the tax on the said amount, a disallowance could be made u/s.40(a)(ia) of the Act, as per Mumbai Tribunal in DCIT vs. DICGC Ltd., bearing ITA Nos. 2361 & 2524/Mum/2011 dated February 3, 2012.

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