Friday, May 5, 2017

Section 40a(ia) for TDS on amount paid or payable and disallowance thereon for non compliance - A Conclusive Judgment by Supreme Court

The Supreme Court Judgment clears ambiguity on the issue of paid/ payable TDS and 30% Disallowance of Expenditure Incurred for non deduction of TDS even  though payment has been made to Payee.
Section 40a (ia) talks about disallowance of expenditure for deduction of TDS thereon. There have been many controversies regarding around Section 40a(ia) i.e. whether TDS is deductible on Paid / Payable Basis, whether expenditure will be disallowed only when expenditure is payable.
I. Abstract of Section 40a:
Notwithstanding anything to the contrary in Section 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head  " Profits & Gains of Business & Profession"
(ia) any interest, commission or brokerage, fees for professional services or fees for technical services payable to a resident or amounts payable to a resident or a contractor or sub contractor, being resident  for carrying out any work ( including supply of labor for carrying out any work), on which tax is deductible at source under Chapter XVII-B & such tax has not been deducted , or after deduction , has not been paid  during the PY, or in the subsequent year before the expiry of time  prescribed under sub section (1) of section 200.
Provided that where in respect of such sum, tax has been deducted in any subsequent year or has been deducted in the previous year but paid in any subsequent year after the expiry of time prescribed under subsection (1) of section 200, such sum shall be allowed as deduction in computing the income of the previous year in which such tax has been paid.
II. Question of Law Decided by Supreme Court.
Now, the question arises whether Section 40a(ia) shall be applicable only when as on 31st March of F.Y.
(i) amount is payable to resident or resident contractor or
(ii) when amount has actually been paid to a resident or resident contractor.
i.e. whether  expenditure shall not be disallowed when payment for expenditure has already been made without deduction of TDS.
III. Judgment of Supreme Court in case of Palam Gas Service vs. Commissioner of Income Tax.
Section 40(a) will be applicable even in those cases where amount has already been paid to the resident payee as decided by the Supreme Court.  
This question has decided by Supreme Court in Palam Gas Service Vs Commissioner of Income Tax. Supreme court has ruled that Section 40(a) (ia) will also be applicable in those situations where amount has already been paid to the resident by the assessee & no TDS has been deducted on the same by the assessee or where TDS has been deducted but not deposited with the government.
The Hon'ble Supreme Court held that , the word "payable"  mentioned u/s 40(a) shall mean expenditure paid as well as payable.
        i.            Wilful defaulter of TDS will go scot free , if Section 40(a) is interpreted with the term "Payable only".
The Hon'ble Supreme Court observed that if section 40(a) were to include disallowance of expenditure payable only then in such a case even when it is found that a person , like the appelant has violated the provisions of Chapter XVIIB (or specifically Sections 194C & 200 in the instant case), the assessee will go scot free from the clutches of law, without suffering the consequences of such monetary default  in spite of specific provisions laying down these consequences. 
IV. Brief Facts of the Case:  PALAM GAS SERVICE Vs. CIT , Civil Appeal No. 5512 of 2017.
The assessee is engaged in the business of purchase and sale of LPG cylinders. The main contract of the assessee for carriage of LPG was with the Indian Oil Corporation. The assessee had received the total freight payments from the IOC to the tune of Rs.32,04,140/. The assessee had got the transportation of LPG done through three persons, namely, Bimla Devi, Sanjay Kumar and Ajay to whom he made the freight payment amounting to Rs. 20,97,689/.
The AO observed that the assessee had subcontracted with the three persons within the meaning of Section 194C of the Act &, therefore, was liable to deduct tax at source from the payment of Rs. 20,97,689/. Due to non deduction of TDS, the said freight expenses were disallowed by the AO as per the provisions of Section 40(a)(ia) of the Act. The assessee preferred an appeal before the CIT(A), Shimla who had upheld the order of AO. The matter thereafter came up in appeal before the ITAT which too met with the same fate.  In further appeal to the Hon’ble High Court u/s 260A of the Act, the outcome remained unchanged and accordingly, the assessee preferred further appeal before the Hon’ble Supreme Court.

V. Decision of Supreme Court
The Hon’ble Apex Court held that section 40(a)(ia) of the Act covers not only those cases where the amount is payable but also when it is paid. The word 'payable' in Section 40(a)(ia) would mean only when the amount is payable and not when it is actually paid. Grammatically, it may be accepted that the two words, i.e. 'payable' and 'paid', denote different meanings. But The Punjab & Haryana High Court, in case of "P.M.S. Diesels & Ors." , referred to above, rightly remarked that the word 'payable' is, in fact, an antonym of the word 'paid'.

VI Conclusion
The compliance with above provisions ensures not merely the collection of tax but also enables the authorities to bring within their fold all such persons who are liable to come within the network of tax payers.

It is noticeable that Section 40(a) is applicable irrespective of the method of accounting followed by an assessee. Therefore, by using the term 'payable' law intended to include entire amount of receipts a contractor or a resident is entitled for.
If assessee follows mercantile system of Accounting: Then the moment amount was credited to the account of payee on accrual of liability, TDS was required to be deducted.

If assessee follows cash based system of Accounting: Then on making payment TDS was to be made as the liability was discharged by making payment.

The TDS provisions are applicable both in the situation of actual payment as well of the credit of the amount.