2016 (2) TMI 752 - AT - Income Tax

Disallowance of prior period expenses u/s 40(a)(ia) - Held that - When the expenditure actually paid in the assessment year under consideration, it is allowable on actual payment basis in view of the second limb of proviso to sec.40(a)(ia) of the Act. No expenditure mentioned in sections 30 to 38 of the Act are allowable unless the necessary TDS is deducted and remitted into the government account before filing of return u/s.139(1) of the Act. The provisions of sec.40(a)(ia) stipulate that the expenses are allowable only in the year in which the necessary TDS is deducted and remitted into the government account. In the present case, though the expenditure relating to earlier period, actually TDS made in the assessment year under consideration and it is allowable in the assessment year under consideration in view of the second limb of sec.40(a)(ia). Thus in view of Provisos to section 40(a)(ia) and 40(a)(i) the deduction claimed by the assessee has to be allowed in the year in which the tax was actually paid by the assessee. - Decided in favour of assessee

Summary

Issues: Disallowance of prior period expenses under sec.40(a)(ia) of the Act.

Analysis:
The appeal pertains to the disallowance of prior period expenses under sec.40(a)(ia) of the Act. The Revenue contended that the CIT(Appeals) should have recognized the disallowance of these expenses as reported in the Tax Audit Report. The expenses in question amounting to Rs. 37,37,300 were incurred in earlier years but the actual payments, after deducting and remitting the necessary TDS, were made in the current financial year relevant to the assessment year 2010-11. The assessee did not deduct TDS in the years when these expenses were incurred, leading to their non-claim as expenditure in those years. However, based on the actual deduction/remittance of TDS in the current year, the expenses were claimed. The CIT(Appeals) noted that sec.40(a)(ia) mandates that expenses are allowable only in the year when TDS is deducted and remitted into the government account. Since the TDS on these expenses was deducted and remitted in the financial year 2009-10, the expenses became eligible for deduction in the assessment year 2010-11. Consequently, the CIT(Appeals) directed the A.O. to verify and allow the deduction of TDS on these prior period expenses, permitting Rs. 35,61,074 under sec.40(a)(ia) and confirming the disallowance of the balance Rs. 1,76,226.

The dispute revolved around the interpretation of sec.40(a)(ia) of the Act. The Revenue argued that prior period expenses are not allowable under this section. Conversely, the assessee contended that when the expenses are actually paid in the assessment year under consideration, they are allowable on an actual payment basis as per the second limb of the proviso to sec.40(a)(ia). The provision specifies that expenses are only allowable in the year when TDS is deducted and remitted. In this case, although the expenses related to an earlier period, since TDS was made in the assessment year under consideration, they were deemed allowable under the second limb of sec.40(a)(ia. The Tribunal cited a decision from the Cochin Bench in support of this interpretation, emphasizing that the deduction should be allowed in the year when the tax was actually paid by the assessee. Hence, following the precedent and provisions of the Act, the Tribunal dismissed the Revenue's appeal.

In conclusion, the Tribunal upheld the CIT(Appeals) decision, allowing the deduction of prior period expenses to the extent of Rs. 35,61,074 under sec.40(a)(ia) and confirming the disallowance of the remaining amount. The Tribunal's decision was based on the interpretation of sec.40(a)(ia) and the principle that expenses are allowable in the year when TDS is deducted and remitted, even if they relate to prior periods. The Tribunal's decision aligned with the interpretation provided in a previous case, reinforcing the allowance of such expenses in the year of actual payment of TDS.