Disallowance U/s 40(a)(ia) of the I T Act, 1961.

Hi Mr Devarajan,

Thanks for your response. I appreciate your view of Section 40(a)(ia) disallowance.I am with you that the intention of the lawmakers does not seem tohave been to restrict disallowance to expenses that wereonly "payable" (as contrasted with actually "paid") during theprevious year if the assessee did not deduct TDS thereon. This isclear from the CBDT Circular No. 5 of 2005 dated July 15, 2005. Iquote below from that circular:[Further, with a view to augment compliance with TDS provisions inthe case of residents and curb bogus payments to them it has beenprovided that no deduction will be allowed in the computation ofincome where tax is not deducted from PAYMENTS of interest,commission or brokerage, fees for professional services or fees fortechnical services and payments to a contractor or sub-contractorfor carrying out any work……]The circular discussing the idea behind provisions of Section 40(a)(ia) explicitly mentions PAYMENTS of interest, commission, etc thatwill be subject to disallowance if no TDS is effected on them.Besides if the intention is also to curb fake payments to deflateprofits, then it doesn't matter whether you actually make a paymentor merely book an expense--both bring down your profits.I was aware of all this whilst I gave my reply to Mr Khurdia'squery. I wouldn't advise anyone to make no TDS and have no fear ofdisallowance of expense u/s 40(a)(ia) as long they incur the expenseby actually paying it out. But if some client approaches me with afait accompli where he's been issued a notice by the AO because hewas too negligent to deduct TDS on expenses incurred two years ago,then I would certainly try to outsmart the law and take advantage ofa clear drafting lacuna in Section 40a(ia). The reply I gave earlierwas in the particular context of Mr Khurdia's query.A primary rule of interpretation is that nothing that isn't thereshould be read into the law; and nothing that is there should beread out from it. Particularly, in relation to provisions thatinvolve imposing some sort of penalty (whether monetary or by way ofdisallowance) on the assessee, interpretation should be strict, andin case of a doubt, the benefit must go to the assessee. We canargue about upholding the spirit of the law; but it is also the dutyof the lawmakers to make their intention clear in unambiguous termsin the provisions of the relevant Statute. If we find one of ourclients having gone astray from complying with a legal provision,and we see there is a straw in that provision that we can clutch at,I think we're well within our right to clutch at it!I guess FA 2009 or a later one might amend Section 40a(ia) to addthe words "or paid" after the word "payable" and we shall have beenvindicated--that would mean that till that amendment TDS was not tobe deducted on "payments"; it was to be deducted only on provisions!But travails of Mr Khurdia won't still be over if that amendment isbrought into force with retrospective effect from A Y 2005-06!Again, I want to remind the readers: please deduct TDS on allprescribed expenses—-whether paid or simply provided for during theyear.Thanks,CA Sanjeev Bedi--- In

ICAI_CIRC_MEERUT_CA@yahoogroups.com, "Devarajan.V" wrote:>> Dear Mr.Sanjeev,>> I differ with your view. This section applies to all expensepayable during> the previous year and not only to those amount payable as on thedate of> Balance Sheet. Hence, even in those cases where payment has beenmade during> the year without TDS , it will be disallowed. As per the TDSprovisions, tax> has to be deducted as soon as the sum is payable. That is why theword> payable" is used in this section also. It does not mean the amountpayable> at the end of the year.>> CA Devarajan.V>> Hi Mr Khurdia,>> Was there just a provision of expenses on 31st March 2006 or wasthe> payment in respect of those expenses actually made during the F Y> 2005-06? This is important because Section 40a(ia) speaks of> disallowance of only those expenses that were PAYABLE. We must> interpret this provision literally and therefore if the liability> towards interest, commission, professional charges, et al had been> discharged within the F Y 2005-06 itself and nothing stood> outstanding on 31st March 2006, I don't think anything can be> disallowed u/s 40a(ia). I am quoting below section 40a(ia):>> [(ia) any interest, commission or brokerage, rent, royalty, feesfor> 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 during the previous year, or in> the subsequent year before the expiry of the time prescribed under> sub-section (1) of section 200]>> Of course, we know that all TDS sections (except Section 192)> require withholding tax at source at the time of payment orcredit,> whichever is earlier. Consequences of Section 271C will surely> follow if you don't deduct TDS whilst making a payment straightway> without having had a provision for the related expense. ButSection> 40a(ia) cannot be applied where interest, professional fee andother> TDS-deductible expenses have been PAID during the year and the> assessee has not deducted tax at source on them.>> So in case you had any of those expenses standing payable on 31st> March 2006, those will have to be disallowed u/s 40a(ia). You can> deduct and deposit the TDS in the current year if you want toclaim> them. There is no case law to give you relief in Section 40a(ia)> disallowance. Although penalty u/s 271C can be avoided if you can> prove that the payee had deposited sufficient advance tax on his> own, which fact would make the authorities go soft on you.>> Thanks,>> CA Sanjeev Bedi> >> > Dear All,> >> > One of my clients, who is a contractor has not deducted IncomeTax> at> > Source at all during 2005-2006 (AY 2006-07). His case is under> > scrutiny. AO has issued a show cause notice for disallowance U/s> 40 (a)> > (ia) of the Act.> >> > What remedy is available with us to defend our selves? Is there> any> > case law, which can be quoted to defend our self?> >> > Waiting for your quick reply.> >> > Thanks in advance.> >> >> > KAMAL K. KHURDIA