Section 40(a)(ia) applies to paid and payable amounts where TDS was deductible; restrictive reading rejected

Section 40(a)(ia) is explained as applying to expenditure on which tax was deductible at source under Chapter XVII-B, whether the amount was actually paid during the year or remained payable at year-end. The restrictive view that the disallowance covered only year-end payables was rejected as an impermissible reading of a limitation not found in the text. The note also records that a cross-objection concerning the 2007 amendment to section 194C and the applicability of the TDS obligation to an individual assessee required fresh examination because the point had not been considered by the authorities below.

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Issues: (i) Whether section 40(a)(ia) of the Income-tax Act, 1961 applies to expenditure that was actually paid during the previous year and not merely to amounts shown as payable on the balance-sheet date. (ii) Whether the assessee's cross-objection, based on the amendment to section 194C and the assessee's individual status, required fresh examination by the Assessing Officer.

Issue (i): Whether section 40(a)(ia) of the Income-tax Act, 1961 applies to expenditure that was actually paid during the previous year and not merely to amounts shown as payable on the balance-sheet date.

Analysis: The provision was construed in the context of the scheme of Chapter XVII-B and the obligation to deduct tax at source. The expression used in the section was read as covering expenditure on which tax was deductible, irrespective of whether the liability had been discharged by payment during the year or remained outstanding at year-end. The restrictive interpretation adopted by the Special Bench in Merilyn Shipping was rejected. The Court held that limiting the disallowance only to amounts payable would amount to supplying a casus omissus, which is impermissible in ordinary interpretation.

Conclusion: Section 40(a)(ia) applies to amounts actually paid during the relevant previous year as well as to amounts payable, and the disallowance was correctly restored in favour of the Revenue.

Issue (ii): Whether the assessee's cross-objection, based on the amendment to section 194C and the assessee's individual status, required fresh examination by the Assessing Officer.

Analysis: The objection turned on the effect of the amendment to section 194C with effect from 01.06.2007 and on whether, for the assessment year in question, an individual assessee fell outside the obligation to deduct tax at source. That aspect had not been examined by the authorities below. The matter was therefore sent back for independent adjudication after giving the assessee an opportunity of hearing.

Conclusion: The cross-objection was restored to the Assessing Officer for fresh consideration and was not decided on merits.

Final Conclusion: The Revenue succeeded on the principal disallowance issue, while the assessee's cross-objection was relegated to fresh adjudication; the matter was thus disposed of with the Revenue's appeal allowed and the cross-objection allowed for statistical purposes.

Ratio Decidendi: Section 40(a)(ia) is attracted to any expenditure on which tax is deductible at source under Chapter XVII-B, whether the amount is paid during the year or remains payable at year-end, and a court cannot read into the provision an exclusion that the legislature did not enact.

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