Issue at hand:
Whether the provisions of Section 40(a)(ia)(expenses not allowable when TDS is not deducted or paid) are applicable only to the amounts that remain payable on 31st March or also to the amounts already paid or credited during the year?
History of Section 40(a)(ia):
The provisions of Section 40(a)(ia) of the Act were brought on Statute by the Finance Act, 2004, w.e.f. 01.04.2005.
Understanding the issue:
There have been many controversies with relation to Section 40(a)(ia) of the Income Tax Act, 1961. However a controversy that has recently come into light again is the controversy which has been created by the use of the word ‘payable’ in the text of the Section.
This controversy which was considered dead has suddenly been kicked alive on rejection of the Special Leave Petition (SLP) filed by the Revenue against the Allahabad High Court decision in Vector Shipping Pvt. Ltd.
The section says that any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139, then such expenditure shall not be allowable as expenditure in computing the income under the head ‘Profits and Gains of Business and Profession’.
The controversy has mainly arisen due to different interpretations of the word ‘payable’ by the Revenue and the assessee.
Revenue’s Interpretation:
The Revenue has interpreted that the word ‘payable’ includes the amount paid or credited. Unless any amount is payable, it can neither be paid or credited. This section was deliberately made harsh to secure compliance of the provisions requiring deductions of tax at source. The term ‘payable’ cannot be ascribed narrow interpretation. Had the intentions of the Legislature was to disallow only items outstanding as on 31st March, then the term ‘payable’ would have been qualified by the phrase as outstanding on 31st March. However, no such qualification is there in section and, therefore, the same cannot be read into section.
With respect to this, Revenue argued that the interpretation of the word ‘payable’, if restricted to payable, will throw up an anomalous situation. As per Revenue if the disallowance under section 40(a)(ia) is restricted to amounts payable then in the subsequent year when such provision is actually paid off without deducting TDS or depositing the same the Revenue would lose its right to disallow such expenses. According to Revenue, this would render the provision of section 40(a)(ia) otiose and its objective of augmenting Revenue through the compliance of TDS provision would fall flat. Another argument taken by Revenue was that section 40(a)(ia) would fail where assessee is maintaining books of account on cash system and according to Revenue, this is because there would be no amount claimed as expenses from outstanding or from payable amount.
Hence, the expenditure which is not only outstanding as on 31st March, but which was also paid or credited during the year would be disallowed if TDS on the same is not deducted or paid.
Assessee’s interpretation:
The provision of section 40(a)(ia) clearly uses the term ‘payable’ and not ‘paid’. Hence, if the literal construction of this word is taken, then no word can be substituted in place of the said word ‘payable’ nor can any new word be supplied in the provision.
On a comparison between the proposed and enacted provision, the only conclusion which can be reached is that Legislature consistently replaced the words ‘amount credited’ or ‘paid’ with the word ‘payable’ in the final enactment and such change was not done without any purpose. It is a basic presumption that enactment was brought in by the Legislature was well-thought of and properly worded in order to give meaning to its intent by changing the words from ‘credited’ or ‘paid’ to ‘payable’. The legislative intent has been made clear that only the outstanding amount or the provision for expense liable for TDS is sought to be disallowed in the event there is a default of TDS.
Reference may also be made, for the scope and effect of section 40(a)(ia) as clarified by CBDT (Central Board of Direct Taxes) in Circular No. 5 of 2005, dated 15-7-2005 to show that the intention to introduce this provision was brought to curb bogus payments by creating bogus liability.
The literal rule of interpretation really means that there should be no interpretation of the statute, rather in other words, one should read the statute as it is without doing any violence to the language. While interpreting the word “payable” in this provision, the word of a statute must be understood in its natural, ordinary or popular sense and construed according to its grammatical meaning. In the present dispute, the word ‘payable’ used in section 40(a)(ia) is to be assigned strict interpretation, in view of the object of Legislation, which is intended from the replacement of the words in the proposed and enacted provision from the words ‘amount credited or paid’ to ‘payable’.
Assessee also contends that consequences of non-deduction are contemplated under Chapter XVII itself and, therefore, further disallowance contemplated under section 40(a)(ia) for non-deduction of tax did not include the amounts, which were paid without TDS.
The sub-section speaks of the amount ‘payable’ on which the tax is not deducted and, therefore, it should apply only if any amount is ‘payable’, but if the amount is already paid the provisions of this section should not apply.
Court Decisions:
- In the case of DCIT vs. Ashika Stock Broking Ltd. 44 SOT 556 the Kolkatta ITAT decided the matter in favour of Revenue and after following its decision dated 15.01.2010 in the case of Poddar Son’s ExL P Ltd vs. ITO in ITA No. 1418(Kol.)/09 has held that provisions of Section 40(a)(ia) of the Act are applicable to even sums paid during the year.
- In the case of Teja Construction vs. ACIT 39 SOT 13 the Hyderabad ITAT has decided the issue against the Revenue and has held that provisions of Section 40(a)(ia) of the Act are not applicable in respect of sums/amount paid during the year and which are not payable at end of the year on date of balance sheet, as it is applicable only in respect of “Payable amount” shown in balance sheet as outstanding expenses on which TDS has not been made. Similar laws were laid in various other cases.
- To resolve the above issue a Special Bench was constituted and the Visakhapatnam Special Bench of ITAT in the case of Merilyn Shipping & Transport vs. Addl CIT 20 taxmann.com 244 has decided the issue against the Revenue and after comparing the proposed and enacted provision which is intended from the replacement of the words in the proposed and enacted provision from the words ‘amount credited or paid’ to ‘payable’ has held that it has to be concluded that provisions of Section 40(a)(ia) are applicable only to the amounts of expenditure which are payable as on the date 31st March of every year and it cannot be invoked to disallow expenditure which has been actually paid during the previous year, without deduction of TDS.
- After the Special Bench decision in the case of Merilyn Shipping & Transport, the Calcutta and Gujarat High Courts[1] have given reasoned rulings distinguishing the case of Merilyn Shipping & Transport. The High Courts have held that the views expressed in the case of Merilyn Shipping & Transport are not acceptable on the following grounds:
- ‘Comparison between the pre-amendment and post amendment law is permissible for the purpose of ascertaining the mischief sought to be remedied or the object sought to be achieved by an amendment. But the same comparison between the draft and the enacted law is not permissible. Nor can the draft or the bill be used for the purpose of regulating the meaning and purport of the enacted law. It is the finally enacted law which is the will of the legislature.’
- ‘If the interpretation as advanced by the assessee is accepted, it would lead to a situation where the assessee who though was required to deduct the tax at source but no such deduction was made or more flagrantly deduction though made is not paid to the government, would escape the consequence only because the amount was already paid before the end of the year in contrast to another assessee who would otherwise be in a similar situation but in whose case the amount remained payable till the end of the year. There is no logic why the legislature would have desired to bring such irreconcilable and diverse consequences.’
- ‘If the question is “which expenses are sought to be disallowed?” The answer is bound to be “those expenses on which tax is deductible at source under Chapter XVII ‘B. Once this is realized nothing turns on the basis of the fact that the legislature used the word payable and not paid or credited.’
- However, the Allahabad High Court in the case of Vector Shipping Services Pvt. Ltd., without dealing with the judgements of the Gujarat and Calcutta High Courts, held 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.’
- In view of the above contrary views of the High Courts and Tribunals, the CBDT had issued the circular No. 10/DV/2013 dated 16 December 2013 clarifying ‘departmental view’ that disallowance under Section 40(a)(ia) would also cover amounts payable at any time during the year. It was clarified that the term ‘payable’ will include ‘amounts which are paid during the previous year’. It has also been clarified that where any High Court decides an issue contrary to the ‘departmental view’, such view shall not be operative in the area falling in the jurisdiction of the relevant High Court.
- Now, the SLP submitted to the Supreme Court by Revenue against the Allahabad High Court decision in the case of Vector Shipping Pvt. Ltd. has been dismissed. It is now a well settled principle of law that when a special leave petition is summarily dismissed under article 136 of the Constitution, by such dismissal this court does not lay down any law. The Apex Court’s last word on the controversy as to whether disallowance u/s 40(a)(ia) for TDS default applies only to expenses payable at the year end and not to expenses paid during the year, therefore, is still awaited
Conclusion:
With the contrary views by the different High Courts and dismissal of the SLP by the Supreme Court, the controversy has been restored for a fresh consideration. The issue should be taken as one that is wide open till such time as it is addressed by the apex court of the land.
[1] CIT v. Crescent Export Syndic’ate [2013] 33 taxmann.com 250 (Cal), 262 CTR 0525; CIT v. Md. Jakir Hossain Mandal [2013] 33 taxmann.com 123 (Cal); CIT v. Sikandarkhan N. Tunvar [2013] 33 taxmann.com 133 (Guj)