2012 (7) TMI 187 - AT - Income Tax

Dis-allowance u/s 40(a)(ia) - failure to deduct tax at source u/s 194C - amounts stood paid during the instant year itself - Held that - Provisions of Section 40(a)(ia) 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. See Merilyn Shipping & Transports vs. ACIT (2012 (4) TMI 290 (Tri)) - Decided in favor of assessee.

Summary

Issues:
1. Disallowance under section 40(a)(ia) of the Income Tax Act for assessment years 2006-07 & 2005-06.
2. Interpretation of the term "payable" in section 40(a)(ia) concerning TDS deduction on outsourcing expenses.

Analysis:
1. The Appellate Tribunal ITAT, Delhi heard appeals against the orders of the ld. CIT(A) for the assessment years 2006-07 & 2005-06. The primary issue revolved around the disallowance of Rs. 1,31,56,505/- and Rs. 69,83,006/- respectively, under section 40(a)(ia) of the Income Tax Act. The appellant contended that these amounts were not the income or expenditure of the assessee and were diverted at source, thus absolving the obligation to deduct TDS under section 194C.

2. The Tribunal examined the provisions of section 40(a)(ia) in light of the decision of the Special Bench in the case of Merilyn Shipping & Transports. The Special Bench clarified that the term "payable" replaced "credited or paid," indicating that only outstanding amounts liable for TDS under Chapter XVII-B were subject to disallowance. The Tribunal concurred with this interpretation, emphasizing that disallowance could only apply to amounts payable as on 31st March of each year.

3. For the assessment year 2006-07, the Tribunal found that only Rs. 9,68,170/- was outstanding as payable on 31.03.2006. Consequently, the disallowance was restricted to this extent. The order of the ld. CIT(A) was set aside, directing the AO to verify the outstanding amount as on 31.03.06 and make disallowance accordingly.

4. In the case of assessment year 2005-06, the appellant claimed outsourcing expenses of Rs. 69,83,006/- without TDS deduction. The Tribunal, following the same interpretation of the term "payable," allowed the appeal as no amount was payable as on 31.03.2005. The AO was instructed to verify the claim as directed in the previous year.

5. Ultimately, the Tribunal allowed the appeal for the assessment year 2005-06 and partly allowed it for the assessment year 2006-07, based on the aforementioned directions. The judgment emphasized strict interpretation of the term "payable" in section 40(a)(ia) regarding TDS obligations on outsourcing expenses.

6. The order was pronounced on 19.06.2012 by the Appellate Tribunal ITAT, Delhi, with detailed analysis and directions provided for each assessment year.