2018 (6) TMI 616 - HC - Income Tax

Disallowance u/s 40(a)(ia) - notional amount of expenditure on which no TDS was deducted - Penalty - Held that - Commissioner noticed the submission on behalf of the assessee that in a similar situation where the bills had been raised late on the assessee and the amount covered by the bills was paid during the financial year and only the tax in respect thereof deposited in the subsequent year, the penalty was not attracted - thus in the present case no penalty is attracted.

Summary

Issues: Interpretation of Section 40(a)(ia) of the Income Tax Act, 1961 regarding disallowance of year-end provisions for expenditure incurred before bills were received.

Analysis:
The appellant raised the substantial question of law regarding the disallowance of year-end provisions of expenditure under Section 40(a)(ia) of the Income Tax Act, 1961. The appellant contended that despite making provisions for payment during the financial year, no provision for Tax Deducted at Source (TDS) had been made as bills were not received before the close of the year. The Assessing Officer held that the absence of TDS provision attracted Section 40(a)(ia). However, the appellant argued that TDS was deducted promptly upon bill receipt and deposited within the stipulated time. The Commissioner (Appeals) noted a similar situation endorsed by the Court where the penalty was not attracted when tax was deposited in the subsequent year after bill receipt.

The Court analyzed Section 40(a)(ia) as a penalty provision for non-compliance with TDS deduction and deposit requirements. It emphasized strict construction of the provision, stating it would not apply if no tax was deductible at source before the close of the year. Even with a lenient interpretation, the penalty would not apply if tax was deducted at the time of payment and deposited on time. The Court highlighted the mandatory nature of TDS deduction and deposit under Section 40(a)(ia), imposing penalties for non-compliance. The decision of the Commissioner (Appeals), supported by the Court's view on a similar issue, was upheld, setting aside the Appellate Tribunal's judgment and restoring the Commissioner's order regarding the provision for commission and transportation.

In conclusion, the Court found the Appellate Tribunal erred in interfering with the Commissioner's order, emphasizing the strict interpretation of Section 40(a)(ia) and the timely deduction and deposit of TDS to avoid penalties. The judgment set aside the Appellate Tribunal's decision and restored the Commissioner (Appeals) order on the specific provision, leaving other aspects untouched. ITA No. 61 of 2018 and GA No. 3752 of 2014 were disposed of with no order as to costs.