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CIT vs. Palam Gas Service (Supreme Court) judgement
Whether under section 40(a)(ia) of Income Tax Act 1961 word payable includes paid also? Whether TDS is required to be deducted when amount is actually paid?
Section 40(a)(ia) of Income Tax Act 1961
Any interest, commission or brokerage, rent, royalty, fees for professional services, fees for technical services, any amount payable to a resident contractor or sub contractor, if in respect of such
- Tax has not been deducted, or
- After deduction has not been paid on or before the due date mentioned under section 139(1) of Income Tax Act 1961
30% of such amount on which tax has not been deducted shall not be allowed as a deduction in the previous year in which the expenses are incurred, while computing the income chargeable under the head Profit and gains of business or profession.
However, where in respect of any such sum, tax has been deducted in any subsequent year or tax has been deducted during the previous year but paid after the due date specified under section139(1), such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.
Palam Gas Services v. CIT (Supreme Court)
The taxpayer was engaged in the business of purchase and sale of LPG cylinders. It sub- contracted the work for transportation of LPG to three persons for which total payment was made without withholding any tax on the same. The assessing officer disallowed the expenditure claimed by the taxpayer in its tax return under section 40(a)(ia) of the Income-tax Act1961 on the ground that the taxpayer has not deducted any tax on the same under section 194C of the Income Tax Act 1961.The taxpayer preferred an appeal before Commissioner of Income Tax (Appeals) who confirmed the order of the AO. The Income Tax Appellate Tribunal (ITAT) also concurred with the view taken by the CIT (A). The High Court dismissed the appeal of the taxpayer affirming the order of ITAT.
The Supreme Court agreed with the observations of the majority High Courts i.e. Gujarat , Calcutta, Madras and Punjab & Haryana and held that section 40(a)(ia) covers not only those cases where the amount is payable but also when it is paid. Accordingly, the judgment of the Allahabad High Court in CIT v. Vector Shipping Services (P.) Ltd.  stands overruled. The Supreme Court held that the obligation to deduct tax at source is mandatory and applicable irrespective of the method of accounting adopted. If the assessee follows cash system of accounting, then, tax is required to be deducted at source at the time of making payment. And if mercantile system is followed than at the time of credit to the account of payee.
Thus as per Supreme Court Judgement in Palam Gas Service , tax is required to be deducted as per section 40(a)(ia) of Income Tax Act 1961 when the amount is payable or when the amount is paid, as the case may be,
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