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 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'.
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.
