2015 (5) TMI 617 - HC - Income Tax

Disallowance contemplated by Section 40(a)(ia) - Whether can be applied when payments in respect of which tax is deductible at source has already been made by the assessee to the payee at the time of computing the income chargeable under the head profits and gains of business or profession i.e. at the close of the year? - Held that - When we examine Section 40(a)(ia) in the backdrop of these sections, we find that it refers to the amount payable on which tax was deductible at source under Chapter XVII-B . Applying the principles of eujesdem generis, it can easily be inferred that term payable in section 40(a)(ia) has to be interpreted in the light of sum referred to in various sections contained in Chapter XVII-B noted above, on which tax was deductible and, therefore, the term payable in Section 40(a)(ia) refers to entire amount on which tax was required to be deducted. Keeping in view the principles of harmonious construction, the term payable in Section 40(a)(ia) cannot be read separately from the provisions relating to TDS as pleaded on behalf of assessee. In our opinion, ld. CIT (Appeals) has rightly observed that taking the spirit of TDS provision into account and Section 40(a)(ia) being directly related to such TDS provision, a harmonious construction of the word payable leads to inevitable conclusion that the said word also includes the paid amount. It is evident that the emphasis is on liability to pay and not on actual payment. If we accept the contention of assessee, then Section 40(a)(ia) would become otiose and the section will not be attracted where payment is made though without deducting tax at source. The provisions of section 40(a)(ia) of the Income Tax Act, 1961, are applicable not only to the amount which is shown as payable on the date of balance-sheet, but it is applicable to such expenditure, which become payable at any time during the relevant previous year and was actually paid within the previous year. In the result the question is decided in favour of revenue

Issues Involved:
1. Applicability of Section 40(a)(ia) of the Income-tax Act, 1961.
2. Interpretation of the term "payable" in Section 40(a)(ia).
3. Whether Section 40(a)(ia) applies to both cash and mercantile systems of accounting.
4. The mandatory nature of the requirement to deduct tax at source under Chapter XVII-B.
5. The impact of non-deduction or non-payment of TDS on disallowance of expenses.

Detailed Analysis:

1. Applicability of Section 40(a)(ia) of the Income-tax Act, 1961:
The primary issue was whether the disallowance under Section 40(a)(ia) can be applied when payments, on which tax is deductible at source, have already been made by the assessee to the payee at the time of computing the income chargeable under the head "profits and gains of business or profession" at the close of the year. The court concluded that Section 40(a)(ia) applies to both paid and payable amounts, rejecting the assessee's argument that it applies only to amounts payable at the year-end.

2. Interpretation of the Term "Payable" in Section 40(a)(ia):
The court held that the term "payable" in Section 40(a)(ia) is descriptive of the nature of payments by the assessee to the payees and does not limit the provision to amounts outstanding at the year-end. The word "payable" was interpreted to include amounts that have been paid during the year. The court emphasized that the term "payable" should not be read in isolation but in the context of the entire provision.

3. Applicability to Both Cash and Mercantile Systems of Accounting:
The court clarified that Section 40(a)(ia) applies to both assessees following the cash system and those following the mercantile system. The intention behind the provision is to ensure the recovery of tax, irrespective of the accounting system followed by the assessee. The court referred to the Explanatory Note to Finance Bill (No.2) of 2004, which indicated that the provision aimed to augment compliance with TDS provisions and bring more taxpayers within the tax network.

4. Mandatory Nature of the Requirement to Deduct Tax at Source:
The court emphasized that the liability to deduct tax at source under Chapter XVII-B is mandatory. The use of the word "shall" in the relevant sections indicates that the provisions are obligatory. The court supported this view by citing judgments from the Calcutta and Madras High Courts, which highlighted the mandatory nature of TDS provisions and their role in augmenting tax compliance and revenue collection.

5. Impact of Non-Deduction or Non-Payment of TDS:
The court held that if an assessee fails to deduct and pay TDS, the payments in respect of which TDS was to be deducted and paid are to be disallowed under Section 40(a)(ia). The court rejected the argument that disallowance should only apply to amounts payable at the year-end, stating that such an interpretation would render the provision ineffective. The court also disagreed with the view taken by the Allahabad High Court in Commissioner of Income Tax vs. M/s Vector Shipping Services (P) Ltd., which held that Section 40(a)(ia) applies only to amounts payable at the year-end.

Conclusion:
The court answered the question of law against the assessee, holding that Section 40(a)(ia) applies to both paid and payable amounts, and the requirement to deduct tax at source is mandatory for both cash and mercantile systems of accounting. The appeals were dismissed, affirming the disallowance of expenses where TDS was not deducted or paid as required.

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