2008 (12) TMI 244 - AT - Income Tax

Summary

Issues involved:
The judgment involves the interpretation of section 40(a)(iii) of the Income Tax Act, 1961 regarding the disallowance of an amount paid as salary to non-resident employees due to failure in timely depositing the tax deducted at source.

Issue 1 - Disallowance under section 40(a)(iii):
The Revenue challenged the decision of the CIT(A) to allow relief under section 40(a)(iii), arguing that the tax deducted but not paid in time should lead to disallowance. The AO disallowed Rs. 1,24,69,040 as salary paid to non-resident employees for failure to deposit the TDS within the prescribed time. The AO referred to Circular No. 7 of 2003 and held that the expenditure is not allowable under section 40(a)(iii) as the TDS on salary was not paid within the specified time frame. The CIT(A) directed the AO to allow the deduction, emphasizing that disallowance can only be made when tax has not been paid or deducted. The Departmental Representative supported the AO's decision, citing the obligation on the assessee to pay TDS within the prescribed time. The Revenue contended that the entire amount of salary paid to non-resident employees should be disallowed and added back to the income of the assessee.

Issue 2 - Interpretation of section 40(a)(iii):
The Tribunal analyzed section 40(a)(iii), noting that the deduction of salary payment to non-residents is disallowed if tax has not been paid or deducted under Chapter XVII-B. The Tribunal highlighted that the amendment by the Finance Act, 2003 did not introduce a requirement for payment of TDS within a specific time frame for sub-clause (iii) unlike sub-clause (i) of section 40(a). The Tribunal referred to precedents where the intention of the provision was to protect the Revenue's interest, emphasizing that the mere delay in payment after deduction does not attract the rigours of section 40(a)(iii) as long as taxes were deducted and paid under Chapter XVII-B. The Tribunal upheld the CIT(A)'s decision to allow the deduction of the salary paid to non-resident employees, as the tax was deducted and subsequently paid to the Government account, even if not within the time limit specified under section 200(1).

In conclusion, the Tribunal rejected the Revenue's ground and dismissed the appeal, affirming the CIT(A)'s order to allow the deduction of the salary paid to non-resident employees under section 40(a)(iii).