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TMI BlogSection 40(a) (ia)- different views of High Court on ‘sum payable’, as per author the section should apply in respect of any sum otherwise allowable for the previous year.X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 40(a) (ia)- different views of High Court on ‘sum payable’, as per author the section should apply in respect of any sum otherwise allowable for the previous year. - By: - CA DEV KUMAR KOTHARI - Income Tax - Dated:- 9-9-2013 - - Relevant links and references: Section 40(a)(ia) and 145 of the Income-tax Act, 1961 (ITA) Judgment holding only sum payable as on last day of previous year attracts disallowance: Merilyn Shipping Transports Versus Assistant Commissioner of Income-tax, Range-1, Visakhapatnam 2012 (4) TMI 290 - ITAT VISAKHAPATNAM This order has been stayed vide Commissioner of Income Tax-I Versus M/s. Merilyn Shipping Transports 2013 (8) TMI 288 - ANDHRA PRADESH HIGH COURT - Appeal seems still pendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng. Commissioner of Income Tax Versus M/S Vector Shipping Services (P) Ltd. 2013 (7) TMI 622 - ALLAHABAD HIGH COURT Dated - 09 July 2013 Judgment holding sum payable at any time during the previous year attracts disallowance if tax is not deducted and / or deposited: Commissioner of Income-tax, Kolkata - XI Versus Crescent Export Syndicate Park International 2013 (5) TMI 510 - CALCUTTA HIGH COURT Dated - 03 April 2013 Commissioner of Income Tax, Kolkata-XVIII, Kolkata Versus MD. Jakir Hossain Mondal 2013 (5) TMI 511 - CALCUTTA HIGH COURT Dated - 04 April 2013 restored to ITAT to decide as per decision in case of Crescent Exports COMMISSIONER OF INCOME TAX-IV Versus SIKANDARKHAN N TUNVAR 2013 (5) TMI 457 - GUJARAT HIGH ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... COURT Dated - 02 May 2013 Three detailed judgments During April to July 2013: We find three important and detailed judgments rendered by three honorable High Courts on S.40a (ia) on the issue of sum payable and disallowance for non deduction and / or non deposit of TDS. In this write-up aspect of sum payable in context of s. 40a (ia) and disallowance for default in deduction and / or deposit of TDS is discussed. The Special Bench of ITAT in case of Merlin (supra.) by majority decision, has held that disallowance was attracted only in respect of sum payable as on last day of previous year and not in respect of sums which have already been paid to payees during course of the previous year. Following that decision as a binding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... precedence, Tribunals used follow the same. Revenue contested rulings of Tribunal. Though there appears no judgment of High court in case of Merilyn in appeal against Special Bench decision, however, High Court has stayed the judgment of Special bench. Three other High Courts have decided other appeals in which Tribunals have followed decision in Merilyn (SB). High Courts not approving decision in Merilyn: On 03.04.2013 , Calcutta High Court in case of Crescent Export (supra.) was first to hold that provisions were applicable to all sums from which tax was deductible and not only in respect to sums payable on last day of previous year. Thus, court disagreed with ruling in Merilyn case. On 02.05.2013 in case of SIKANDARKHAN (supra.) Gu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jarat High court also took view that disallowance was applicable to all sums and not only sum payable as on last day. Thus, court disagreed with ruling in Merilyn case. On 09.07.2013 in Vector Shipping (supra.) Allahabad High Court has apparently approved decision in case of Merilyn by observing inter alia as follows also: It is to be noted that for disallowing expenses from business and profession on the ground that TDS has not been deducted, the amount should be payable and not which has been paid by the end of the year. However, it appears that in the case before the Allahabad High court, the main issue was not on issue whether S. 40a (ia) is attracted on sums payable only or on all sums paid during the previous year and payabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e as on last day. Therefore, the above observations of the High Court can merely be considered as a passing remark. In fact, on reading of question, it seems that controversy involved was that revenue considered payment made to Mercator lines as payment made to a contractor for contract of carrying work of ship management , on behalf of the assessee on which tax was deductible but was not deducted. The assessee claimed that Mercator paid salaries on behalf of assessee and a reimbursement of salaries so paid by Mercator on behalf of assessee, was made by assessee to Mercator and therefore it was not payment to contractor. To put in other words, it can be said that Mercator paid salary, as an agent of assessee, and assessee reimbursed suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h salary so tax was not deductible on such reimbursement. Mercator, as an agent has deducted tax from salaries and has also deposited. S. 40a.ia is not applicable in case of salaries- added by author. Therefore, the contention of revenue was that payment made to Mercator was a payment to contractor on which tax should have been deducted. Furthermore sum was not payable on last day of previous year therefore, decision in case of Merilyn was followed by Tribunal. The High court has dismissed appeal of revenue. Therefore, it can be said that court has views that tax was no deductible on reimbursement. Therefore, there was no need to consider whether s. 40a (ia ) was attracted or not. Before Allahabad High Court, it seems that judgm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents of Calcutta High court and Gujarat High Court were not referred to by counsels of revenue or it may be that they were referred to but not found place in judgment. This can be due to reason that real controversy was whether tax was deductible at all or not. And court considered payment as reimbursement so tax was not deductible. About arguments by counsel for revenue before Allahabad High court: The High court has noted as follows: Shri Shambhu Chopra, learned counsel for the department states that the A.O. had recorded findings that on the services for which assessee was claiming allowance of the expenses, tax was not deducted at source and thus the expenses on salaries to the employees could not be claimed . He submits that ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penses were clearly disallowable under Section 40 (a) (ia) of the Act . From the above submission it is clear that the expenses were claimed as salaries of employees. It is worth to note that section 40 (a) (ia) is not at all applicable in respect of payment for salary. Therefore, with due respect, author feels that the above submission or argument of learned senior counsel appears to be wrong. If the payment was admittedly for expenses on salaries of the employees of assessee, there cannot be application for disallowance u/s 40(a) (ia) In view of author, the question framed by revenue , before Allahabad High Court were not properly drafted. In give case questions should have been on following lines covering all issues: a. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Whether, there was payment to contractor or reimbursement of salary paid on behalf of assessee by Mercator as an agent of assessee?. b. Whether persons to whom salary was paid by Mercator were employees of Mercator or Vector (assessee) ? c. Whether tax was deductible u/s 194C, on amount paid by assessee to Mercator , when in essence payment was in nature of payment to contractor and not to a disbursement agent who disbursed salary to employees of assessee? d. Whether section 40(a) (ia) applied to all sums which accrued during the previous year or which were otherwise claimed as allowable or only to sums which remained payable at the close of the previous year? e. Whether, disallowance S.40(a) (ia) was not attracted me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rely because the sum was paid before close of previous year and was not payable as on close of the previous year? Revenue lost case in absence of proper question of law: It appears that revenue lost the case due to lack of proper question. This is clear from the following order of Allahabad High Coprt: We do not find that the Tribunal has committed any error in recording the finding on the facts, which were not controverter by the department and thus the question of law as framed does not arise for consideration in the appeal. Thus the court dismissed appeal because the the question of law as framed, did not arise from order of Tribunal. Views of author on disallowance u/s 40 (a) (ia) : Author would like to express his vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ws about the controversy about sum payable as used in S. 40(a) (ia) as follows: a. The provisions is related to ascertainment of income chargeable as business or professional income for the entire previous year. For computing income of the previous year, all transactions during the whole of previous year are to be considered. b. The provision is not such which concerns state of affairs as on closing date of previous year or any particular day, as can be in case of Wealth Tax or Estate Duty. c. Liability to deduct and deposit tax at source runs over entire period and not as on close of the previous year only. As and when an event occurs (crediting or paying relevant sums), which required tax to be deducted, the tax has to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deducted and then has to be deposited within prescribed time or in case of delay can be deposited with interest as per law. d. The amount which accrued and or paid at any time during the previous year can be claimed as per method of accounting and provisions of law. Therefore, in context of S.40(a)(ia) the expression sum payable must be construed as a sum which is claimed as an allowable expenditure while computing income of the previous year. Therefore, an expenditure which is claimed ( on basis of accrual or payment), and in respect of which tax is deductible but has not been deducted or after deduction tax has not been deposited, then such sum will not be allowable. e. If the view is taken that the provision applies only in cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of sum payable as on last day, then in case cash system of accounting is followed, there will never be a disallowance. Because the sum will be debited or claimed only on payment. Once payment is made, sum no longer remain payable so S. 40(a) (ia ) will not apply. This view on playability, will thus render section redundant in case of assessee following cash basis of accounting (which is permitted vide section 145 of ITA ). However, if the view of author that disallowance is attracted only when a claim is made, or the sum is allowable, the disallowance will get attracted even in case of cash system of accounting and provision will be fully implementd. Therefore, even in case of cash basis of accounting disallowance will be called for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when a payment of allowable expenditure is made but TDS requirements are not complied with. f. A sum which represent capital expenditure or which is not allowable for any other reason will not attract s. 40(a)(ia) . Therefore, suppose a payment is made to contractor, without TDS. The amount is capitalized, and not claimed while computing business income, on such sum whether payable or already paid s. 40(a) (ia) will not be applicable because expenditure is not claimed or is not allowable. - - Scholarly articles for knowledge sharing authors experts professionals Tax Management India - taxmanagementindia - taxmanagement - taxmanagementindia.com - TMI - TaxTMI - TMITax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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