Long story of short tds and its implications
The Missing
The Hyderabad bench of Income Tax Appellate Tribunal (ITAT) in Asstt. CIT v Singareni Colleries Co. Ltd. [2022] 26 ITR (Trib)-OL 88 held that section 40(a)(ia) is applicable only in those cases where tax has not been deducted at all. In this case the assessee has deducted tax at lower rate. To the contrary the Kerala High Court in CIT vs. PVS Memorial Hospital Ltd. [2016] 380 ITR 284 (Ker) at a subsequent point in time held that deduction under a wrong provision of law will not save an assessee from section 40(a)(ia). Of the two different decisions the Tribunal order contain reference to only the decision from Calcutta High Court in CIT v. Tekriwal (S. K.) [2014] 361 ITR 432 (Cal). The Kerala High Court has been left out from reference in the decision rendered by the bench.
What is the law behind?
Section 29 requires one to compute the business income in accordance with the provisions under section 30 to 43D. Section 40(a) (ia) which has been inserted in between outline a disallowance scheme. It requires 30% disallowance of an expenditure on which applicable TDS is not deducted or not deposited by the taxpayer. Interestingly at the same time it provides that if you make good the default before the due date of filing of taxes then this section will lack application. Yet further it discounts its application in a situation where such TDS is deposited by the payee duly accompanied with a prescribed certf8cate from the payee.
Not to mention that there are additional provisions that independently come into effect to corner a taxpayer in such consequences u/s 201 (1) and 201(1A).
Real Story behind such provisions of section 40(a) (ia)
Disallowance u/s 40(a)(ia) as introduced by the Finance (No.2) Act, 2004 w.e.f. 01.04.2005 is originally explained as under vide Circular No 5 dated July15, 2005:-
Certain amounts not to be allowed as deduction while computing income under the head “profits and gains of business or profession” if tax not deducted at source
Under the existing provisions of sub-clause (i) of clause (a) of section 40 of the Income-tax Act, no deduction is allowed in the computation of income on account of interest, royalty, fees for technical services or any other sum which is payable outside India, or in India to a non-resident or to a foreign company, if tax is not deducted at source from payments of these sums or after deduction of tax at source, payment is not made to the account of the Central Government before the expiry of time prescribed under sub-section (1) of section 200 and in accordance with other provisions of Chapter XVII-B. Deduction of the sum is, however, allowed where tax has been deducted, or after deduction has been paid in any subsequent year in computing the income of that previous year.
With a view to rationalize the provisions of sub-clause (i), the Act has substituted the said sub-clause to provide that in any case in which 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 sub-section (1) of section 200, the sum from which tax has been so deducted or paid shall be allowed as deduction in computing the income of the previous year in which the tax has been paid to the account of the Central Government.
Further, with a view to augment compliance with TDS provisions in the case of residents and curb bogus payments to them it has been provided that no deduction will be allowed in the computation of income where tax is not deducted from payments of interest, commission or brokerage, fees for professional services or fees for technical services and payments to a contractor or sub-contractor 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.
It has, however, been provided that in any case where tax has been deducted from the payments of any of the aforementioned sums to residents in any subsequent year or has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of section 200, the sum of payment shall be allowed as a deduction in computing the income of the previous year in which the tax has been paid to the account of the Central Government.
These amendments take effect from 1st April, 2005 and apply in relation to the assessment year 2005-06 and subsequent assessment years.” (unquote)
Apparently this provision is meant to check bogus payments and not bona fide amounts paid or incurred in the course of business. As far as payments to non residents there is a certain rationale as there is no way one can reconcile the amount paid with corresponding taxes filed by the payee in his territory. However as regards TDS on domestic payments there is no rationale to disallow payments and expenditure that are genuine and forthcoming. The AO therefore is required to also substantiate the bogus nature of payment to invite application of section 40 (a) (ia) as otherwise there is an independent scheme of consequences for default in TDS u/s 201/201(1A). Further with the introduction of annual information statements etc. cross referencing is an order of the day. As a result the provisions of section 40 (a) (ia) has no relevance today in case of genuine expenditure/payments and may be lifted from the Act in the upcoming budget.
Calcutta high court favourale view
The Tribunal in this case held that where tax was deducted by the assessee, though under a bona fide wrong impression under wrong provisions, the provisions of section 40(a)(ia) could not be invoked and that if there was any shortfall due to any difference of opinion as to the taxability of any item or the nature of payments falling under various tax deduction at source provisions, the assessee could be declared to be an assessee in default under section 201 but no disallowance could be made invoking the provisions of section 40(a)(ia). The High Court in granting their satisfaction upheld the view that there is nothing in the section to treat, inter alia, the assessee as defaulter where there is a shortfall in deduction due to any difference of opinion as to the taxability of any item or the nature of payments falling under various TDS provision.
Kerala high court unfavorable view
The Kerala High Court in a cut short mode opined that the provision of section 40(a)(ia) (supra) is not a charging section but is a machinery section and such a provision should be understood in such a manner that the provision is workable following multiple decisions of the Supreme Court in Gursahai Saigal v. CIT [1963] 48 ITR (SC) 1, CIT v. Mahaliram Ramjidas [1940] 8 ITR 442 (PC) and India United Mills Ltd. v. Commissioner of Excess Profits Tax [1955] 27 ITR 20 (SC). In their reference to Calcutta High Court judgement it held that ‘In so far as the judgment of the Calcutta High Court in CIT v. S. K. Tekriwal [2014] 361 ITR 432 (Cal), which was relied on by the Tribunal is concerned, with great respect, for the aforesaid reasons, we are unable to agree with the views that if tax is deducted even under a wrong provision of law, section 40(a)(ia) cannot be invoked.’
Hyderabad bench miss
This bench of the Tribunal gave a miss to the decision of the Kerala High Court.
Overview
The provision as it was launched enabled total disallowance hence it was thus certain that it has its application only as regard bogus payments/booking of false bills without TDS. This kind of provision thus enabled the AO to disallow 100% expense without having to reject the books of account considering the bogus nature of payment. The present scheme to restrict disallowance to an adhoc 30% of expenditure however does not go entirely with the intent of law as it originally was and rather contradicts the scheme. The law as it was originally framed did not wish to touch the genuine payments and expenditure which falls short of TDS or short TDS, as the case may be having regard to separate set of consequences in section 201 /201(1A). The present provisions in section 40 (a) (ia) therefore assume excessive nature of jurisdiction and thus are a matter of legislative challenge in the Courts.
The bench to the basics may have referred the subject to the special bench. By overlooking the Kerala High Court decision the decision by the ITAT suffers more from vice of law and has become less than speaking order wanting to be quashed.
In the situation the tax auditor may also have to consider the ramifications of these different interpretations in their report observations.
CA Gopal Nathani