I-T - Whether expression 'payable' in sec 40(a)(ia) refers to entire payment on which TDS was required to be made or only to amount outstanding as on 31st March of every year
WHAT are the consequences of not deducting the TDS or after deducting not paying the deducted tax to the Government?
As per section 201 of Income Tax Act 1961,
• Without prejudice to any other consequences, the defaulter will be deemed to be an assessee in default.
• He is liable to pay an interest at 12% P.A. from the date on which the tax was deductible till the date of actual payment.
• The TDS along with the interest will be a charge on all the assets of the defaulter.
• He is liable to rigorous imprisonment for a term which shall not be less than 3 months, but which can extend up to 7 years and fine.
• He is liable to a penalty equal to the tax not deducted.
Knowing the above liabilities, no sane person would invite the wrath of the department by not deducting TDS or after deducting not paying to the government. But there is more! A new sub clause (ia) of Sec 40(a) had been inserted into the Income Tax Act by Finance Act (No. 2) of 2004. Under this clause if on any interest, commission or brokerage, rent, royalty, fees for professionals etc., TDS is deductible and if not so deducted or after deduction not paid, the entire expenditure will not be deducted while computing the income chargeable under Profits and gains of business or profession. Putting in English, this can be explained by the following example.
• Supposing you have paid Rs. 1.00 Crore in the previous year as Interest, fee etc, and you have either not deducted tax or after deducting not paid it to the Government, apart from the five consequences mentioned above, this one Crore will not be permitted as an expenditure in your profits and gains computation. With the result, you may have to pay a higher rate of income tax on the entire amount of Rs. 1.00 Crores in the year of default.
Section 40(a)(ia) reads as:
(ia) Any interest, commission or brokerage, fees for professional services or fees for technical services payable to a resident, or amounts credited or paid to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour carrying out any work), on which tax has not been deducted or, after deduction, has not been paid before the expiry of the time prescribed under sub-section (1) of section 200 and in accordance with the other provisions of Chapter XVII-B :
Provided that where in respect of any such sum, tax has been deducted under Chapter XVII-B or paid 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.
The ITAT Special Bench, Visakhapatnam sometime back in Merilyn Shipping & Transports, Visakhapatnam Vs Additional Commissioner of Income Tax- 2012-TIOL-184-ITAT-VIZAG-SB, delivered a landmark decision on Section 40(a)(ia).
In this case, the assesse, a partnership firm, derived income from business of ship containers transport and handling, customs clearing and as forwarding agents. It filed its return of income for assessment year 2005-06 declaring total income of Rs.15,24,710/- on 29.03.2006. In the course of assessment proceedings, the Assessing Officer noticed that the assessee had claimed certain expenditure in Profit & Loss A/c., i.e. brokerage expenses of Rs.38,75,000/- and commission of Rs.2,43,253/-without deducting TDS on payment of these amounts as required under section 40(a)(ia) of the Income Tax Act. The Assessing Officer intimated the defaults. In response, assessee's representative accepted his failure for non-deduction of TDS at the time of making payment and agreed for the disallowance. Accordingly, Assessing Officer disallowed brokerage of Rs.38,75,000/- and commission of Rs.2,43,253/-. Before CIT(Appeals), it was submitted that at the time of assessment, the assessee was under bona fide belief that the provisions of section 40(a)(ia) of the Act were applicable for both the amounts 'paid' as well as 'payable'. However, on careful reading of the said provision and after going through the expert opinion, it was found that the said provisions were applicable for the amounts 'payable' only. It was, thus, submitted that since in the assessee's case, the outstanding brokerage and commission as on 31.03.2005 was only Rs.1,78,025/-, disallowance should have been restricted to only Rs.1,78,025/-.
The matter reached the Special Bench with the question, "Whether Sec. 40(a)(ia) of the Income Tax Act can be invoked only to disallow expenditure of the nature referred to therein which is shown as "payable" as on the date of the balance sheet or it can be invoked also to disallow such expenditure which become payable at any time during the relevant previous year and was actually paid within the previous year? "
The Special Bench by majority held, " The provisions of section 40(a)(ia) of the Act are applicable only to the amounts of expenditure which are payable as on the date 31st March of every year and it cannot be invoked to disallow which had been actually paid during the previous year, without deduction of TDS".
If this was confusing, in brief what it meant was:
• The assessee incurred brokerage expenses of Rs.38.75 lakhs and commission of Rs.2.43 lakhs without deducting TDS. Of this only Rs. 1.78 lakhs was payable and the rest was paid. The AO disallowed the entire expenditure under section 40(a)(ia).
• Assessee argued that disallowance under section 40(a)(ia) could be made only of the amount "payable" and not of that which had already been "paid".
• The Tribunal SB by majority held that Section 40(a)(ia) can apply only to expenditure which is "payable" as of 31st March and does not apply to expenditure which has been already paid during the year.
Revenue is obviously not happy with this decision and took the matter in appeal to the High Court.