SECTION 40(a)(ia)

Query 1]

Sir, in my case,  disallowance of expenses has been made u/s 40 (a)(ia) of the I.T. Act for the A.Y. 2009-10 due to late payment of TDS on rent & transportation expenses paid to various parties during the months of January and February 2009 on 15.06.2009. Please elaborate the consequences of this disallowance? How will the expenses be allowed in the Assessment Year 2010-11? Whether it can be corrected by making an application u/s 154 or I have to revise my return filed for the A.Y. 2010-11

What will be the interest payable/consequences? What will be the implications of penal proceedings u/s 271(1)(c)? Whether disallowance u/s 40(a)(ia) will be treated as filing of inaccurate particulars of income & made liable to penalty u/s 271(1)( c)? Please give case laws if any on the matter. It will be very helpful if the required details are given urgently. [Ajay Agrawal – akagrawal87@gmail.com]

Opinion:

For the general benefit of readers at large, we are elaborating the background & provision of section 40(a)(ia) since its inception. The brief history of the provision is as under:

(i) Introduction by the Finance (No.2) Act, 2004:

Section 40(a)(ia) was insert in the Income Tax Act by the Finance (No. 2) Act, 2004 with effect from 1st April, 2005. The provisions of the say section as insert originally with effect from 1st April, 2005 reads as under:

“Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or 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 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 deduct or, after deduction, has not been pay during the previous year, or in the subsequent year before the expiry of the time prescribe under sub-section (1) of section 200:
Provided that where in respect of any such sum, tax has been deduct in any subsequent year or, has been deduct in the previous year but pay in any subsequent year after the expiry of the time prescribe under sub-section (1) of section 200, such sum shall be allow as a deduction in computing the income of the previous year in which such tax has been pay.”

The legislative intention behind introduction of the above provisions as given in the Memorandum explaining provisions in the Finance (No. 2) Bill 2004 was to augment the compliance of TDS provisions and a provision therefore was make therein to disallow expenses against which tax was not deduct at source and/or the tax having been deduct at source was not pay to the credit of the Central Government within the time prescribe in section 200(1). It was also provide that if a deduction is subsequently make towards tax and pay after the time limit, the assessee would be entitle to claim deduction in the year in which payment is actually make.

(ii) Amendment by the Finance Act, 2008

With a view to mitigate this hardship, section 40(a)(ia) was amend by the Finance Act, 2008 and the provisions so amend reads as under:

“Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deduct in computing the income chargeable under the head “Profits and gains of business or profession”,–

(ia) 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 deduct or, after deduction, has not been pay,–

(A) in a case where the tax was deductible and was so deduct during the last month of the previous year, on or before the due date specifie in sub-section (1) of section 139; or

(B) in any other case, on or before the last day of the previous year

Provide that where in respect of any such sum, tax has been deduct in any subsequent year, or has been deducte-

(A) during the last month of the previous year but paid after the said due date; or

(B) during any other month of the previous year but pay after the end of the said previous year, such sum shall be allow as a deduction in computing the income of the previous year in which such tax has been pay.”

(iii) Amendment by Finance Act, 2010

The amendment made by Finance Act 2008 to the provisions of section 40(a)(ia) with retrospective effect from 1-4-2005 still left out several assessees with grave hardships and un-intended consequences. Consequently, various representations were make to the Finance Minister with a request to tone down the rigour of law which was causing harsh and unintend consequences.

Accordingly, the provisions of section 40(a)(ia) were amend by the Finance Act, 2010 and the said provisions as amend with effect from 1-4-2010 reads as under:

“Notwithstanding anything to the contrary in section 30 to (38), the following amounts shall not be deduct in computing the income chargeable under the head “Profits and gains of business or profession”.

“(ia) 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 subcontractor, 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 and such as has not been deduct or after deductions, has not been pay on or before the due date specifie in sub-section (1) of section 139.

Provide that where in respect of any such sum, tax has been deduct in any subsequent year, or has been deduct during the previous year but pay after the due date specifi in sub-section (1) of section 139, such sum shall be allow as a deduction in computing the income of the previous year in which such tax has been pay.”

While proposing the aforesaid amendments to section 40(a)(ia), Finance Minister stated in para 137 of his Budget Speech delivered in the Parliament on 26-2-2010 as under:

“Relaxing the current provisions on disallowance of expenditure, I propose to allow deduction of such expenditure, if tax has been deduct at any time during the financial year and pay before the due date of filing the return. This will allow most Deductor additional time up to September of the next financial year. At the same time, I propose to increase the interest charge on tax deduct but not deposit by the specifie date from 12 per cent to 18 per cent per annum”

The Memorandum explaining the provisions in the Finance Bill 2010 also gave the following justification for the amendments proposed in section 40(a)(ia).

“It is propose to amend the said section to provide that no disallowance will be make if after deduction of tax during the previous year, the same has been pay on or before the due date of filing of return of income specifie in sub-section (1) of section 139.”

As is clearly evident from the speech of the Finance Minister while presenting the budget for the year 2010-11 as well as the Memorandum explaining the amendments proposed in section 40(a)(ia), the amendments to section 40(a)(ia) were make to alleviate the genuine hardships and unnecessary financial liabilities impose on the tax payers by refusing to give deductions of bona fide expenditure only for the reason of technical non-compliance of TDS provisions.

Such an attempt was earlier also make by making the amendments to the provisions of section 40(a)(ia) by the Finance Act, 2008 and the said amendments were consciously make with retrospective effect from 1-4-2005 keeping in view that the same were make with a view to mitigating the hardships cause to the assessee. The amendments make again to the provisions of section 40(a)(ia) by the Finance Act 2010 to tone down the rigour of law with the same intention, however, are make with effect from 1-4-2010.

Recently in the case of Bansal Parivahan (India) (P) Ltd. v. ITO (2010) 36 (II) ITCL 427 (Mum B Trib  ,wherein the facts were resembling with your case, it was held that invoking the provisions of section 40(a)(ia) is not sustainable as the amendments made in the said provisions by the Finance Act, 2010 which, being remedial/curative in nature, have retrospective application. While delivering the judgment, the Tribunal had relied on the decision of Supreme Court in CIT v. Alom Extrusion Ltd. (2010) 32 (I) ITCL 2 (SC) in the context of section 43B.

It may be very interesting to note that the Honble supreme court in the case of Allied Motors (P) Ltd. (1997) 224 ITR 677  wherein it has observed that when a proviso in a section is inserted to remedy unintended consequences and to make the section workable, the proviso which supplies an obvious omission therein is required to be read retrospectively in operation, particularly to give effect to the section as a whole.

With above basic framework, the point wise replies to your queries are as under:

1. As a result of disallowance, a demand (of tax & interest) appears to have been raised on you. Correction by making an application u/s 154 is not possible; you can file an appeal to get the required relief.
2. If you admit the disallowance in the A.Y. 2009-10, you can file a revised return claiming the amount as deduction in the A.Y. 2010-11. As a result, probably, you may be require to pay the demand in the A.Y. 2009-10 & may be entitled for refund in the A.Y. 2010-11.

1. In view of above detailed discussion at length & in totality of the facts of the case, we doubt the applicability of penal provision u/s 271(1)(c).

SECTION 40(a)(ia)

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