Monday 23 April 2012

Section 40(a)(ia) applies only to the amounts “payable” as on balance sheet date and not to the amounts already “paid” during the year.

Facts
 The taxpayer, a partnership firm, derived income from the business of handling and transport of ship containers, customs clearing and as forwarding agents.
 In the return of income, the taxpayer claimed a deduction for brokerage and commission paid, on which the tax payer had not withheld taxes.
 The Assessing Officer (AO) disallowed the expenses under section 40(a) (ia) for non-deduction of taxes.
 The taxpayer preferred an appeal before the Commissioner of Income-tax (Appeals) [“CIT(A)”].
 Before the CIT(A), it was submitted that the said provisions were applicable only for the amounts “payable” and accordingly the disallowance should be restricted only to the outstanding brokerage and commission as on 31.3.2005.
 The CIT(A) rejected the taxpayer’s contention and observed that considering the purpose of the TDS provisions and section 40(a)(ia) being directly related to such TDS provision, a harmonious construction of the word “payable” leads to the inevitable conclusion that it would also include amounts already “paid”..
 Aggrieved by the order of the CIT(A), the taxpayer preferred an appeal before the Income-tax Appellate Tribunal (“ITAT”).
 Before the ITAT, the taxpayer placed reliance on a decision of Hyderabad Tribunal1 . As the Division Bench of Visakhapatnam Tribunal was not in agreement with the decision of Hyderabad Tribunal, the matter was referred to the Special Bench to resolve the issue.

Issues before the Special Bench of Visakhapatnam Tribunal
 Whether Section 40(a)(ia) of the Act can be invoked only to disallow such expenditure which is shown as “payable” as on the balance sheet date or it can be invoked to disallow such expenditure which becomes payable at any time during the relevant previous year and which is actually paid within that previous year.
Observations and Ruling of the Special Bench of the Tribunal
 Section 40(a)(ia) of the Act was introduced by the Finance Act, 2004 with effect from 1 April 2005 with a view to augment the revenue through the mechanism of tax deduction at source.
 On a comparison between the proposed Finance (No. 2) Bill, 2004 and the Finance Act, 2004, it is evident that the legislature has replaced the word “amounts credited or paid” (as mentioned in the Finance Bill) with the word “payable” in the final enactment.
 Although the word “paid” has been defined under Section 43(2) of the Act, the word “payable” has not been defined under the Act. The meaning of the term “payable”, according to the dictionary is (a) that must be paid, (b) able to be paid. It is clear from the above that the term “payable” cannot be equated with the word “paid”.
 The legislature consciously replaced the word “amounts credited or paid” with the word “payable” in the final enactment and such change was done with a purpose. Thus intent has been made clear that only the outstanding amount or the provision for expenses (liable to TDS) are to be disallowed in the event of default in complying with the TDS provisions.
 The disallowance would be applicable only if any amount is “payable”; if the amount is already paid, there could not be any disallowance.
 The scope and effect of section 40(a)(ia) has been brought out by the CBDT Circular2 , which provides that the intention to introduce section 40(a)(ia) was to curb bogus payments by creating bogus liability.
 Further, where the language of the enactment is clear, the intention of the legislature is to be gathered from the language used. A construction which requires, for its support, addition or substitution of words, has to be avoided unless it is covered by the rule of exception, including that of necessity. In the provisions of section 40(a)(ia) of the Act, there is no such exception and the only word provided by legislature is “payable”.
 Further, section 40(a)(ia) creates a legal fiction for the amounts outstanding as at the end of every year and it cannot be extended for taxing the amounts already paid. In other words, this fiction cannot be extended any further and therefore, cannot be invoked to disallow the genuine and reasonable expenditure which was already paid.
 In the instant case, the word “payable” used in section 40(a)(ia) of the Act is to be assigned strict interpretation, in view of the object of the legislation, which could be inferred from the intention of the legislation by replacing the words “amounts credited or paid” to “payable” as enacted.
 The provisions of section 40(a)(ia) are applicable only to the expenses payable as on 31st March of every year and cannot be invoked to disallow the amounts which have already been paid during the previous year, without deducting tax at source.

Conclusion
Disallowance under section 40(a)(ia) is attracted only if the amounts (liable to TDS) are payable as on the balance sheet date; thus the amounts already paid do not come within the purview of this disallowance provision, even if the appropriate taxes have not been deducted/remitted.
Source: Merilyn Shipping & Transports Vs. Addl. CIT, Range 1 (Visakhapatnam Special Bench) (20 taxmann.com 244)

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