2012 (5) TMI 715 - AT - Income Tax

Tribunal allows appeal, directs AO to allow expenditure claim under section 40(a)(ia)

The Tribunal allowed the appeal, directing the Assessing Officer to allow the claim of expenditure of Rs. 16,70,760/-, as the provisions of section ... Applicability of section 40(a)(ia) to amounts paid during the previous year - Interpretation of 'payable' in section 40(a)(ia) - Allowability of deduction where tax is deducted and deposited before the due date for filing return - Retrospective effect of amendment to the proviso to section 40(a)(ia)Applicability of section 40(a)(ia) to amounts paid during the previous year - Interpretation of 'payable' in section 40(a)(ia) - Whether section 40(a)(ia) is attracted to disallow expenditure actually paid during the previous year though TDS was not deducted or paid by the statutory due date - HELD THAT: - The Tribunal applied the Special Bench decision in ACIT v. Merilyn Shipping & Transports which held that the legislature's substitution of the word 'payable' (in place of 'credited or paid') in section 40(a)(ia) indicates that only amounts outstanding as on the last day of the previous year are liable to be disallowed. The word 'payable' must be given its ordinary grammatical meaning and confined to amounts which remain payable on 31st March; amounts actually paid during the previous year are not within the mischief of section 40(a)(ia). Applying that ratio to the facts, the payments of the amounts in question having been made during the year, section 40(a)(ia) could not be invoked to disallow those expenditures despite non-deduction or non-payment of TDS by the earlier statutory due date. [Paras 9, 10]The addition under section 40(a)(ia) cannot be sustained in respect of amounts paid during the previous year; such payments are deductible.Allowability of deduction where tax is deducted and deposited before the due date for filing return - Retrospective effect of amendment to the proviso to section 40(a)(ia) - Whether expenditure is allowable where TDS was deducted and deposited after the statutory due date for payment but before the due date for filing the return of income - HELD THAT: - The Tribunal noted the substituted proviso to section 40(a)(ia) (as discussed by the Calcutta High Court in CIT v. Virgin Creations and followed by several Tribunals) permits allowance of expenditure where tax has been deducted and deposited before the due date for filing the return under section 139(1), even if such deduction/deposit occurred after the statutory date prescribed for payment. On the facts, the assessee deducted tax and deposited it before the due date for filing the return (though after the earlier deposit due date). Following the Calcutta High Court's view on retrospectivity and the consequent Tribunal decisions, the Tribunal held that once tax was deducted and deposited before the return filing due date, the related expenditure could not be disallowed under section 40(a)(ia). [Paras 11, 12, 13]Since tax was deducted and deposited before the due date for filing the return, the expenditure is allowable and the disallowance under section 40(a)(ia) is not warranted.Final Conclusion: The appeal is allowed: the Assessing Officer is directed to permit the claimed expenditure for AY 2007-08 (payments made during the year and tax deducted/deposited before the due date for filing the return), and the addition under section 40(a)(ia) is set aside. Issues involved: The judgment involves the appeal against the order of Commissioner of Income Tax (Appeals) related to assessment year 2007-08 under section 143(3) of the Income-tax Act.Issue 1: Contravention of Section 250(6) of the Income Tax ActThe appellant contended that the order passed by the CIT(A) erred in contravention of the provisions of Section 250(6) of the Income Tax Act, 1961.Issue 2: Addition of Payment to Contractors under Section 40(a)(ia)The main issue raised in the appeal was against the addition of Rs. 16,70,760/- made by invoking provisions of section 40(a)(ia) of the Act for non-deduction of tax at source under section 194C of the Act.Details of the Judgment:The Assessing Officer noted that the assessee had made payments to subcontractors totaling Rs. 44,88,764/-, out of which Rs. 16,70,760/- had no tax deducted at source. The CIT (Appeals) upheld the disallowance of these payments under section 40(a)(ia) of the Act.The appellant argued that the issue was covered by precedents such as CIT Vs. Virgin Creations and ACIT Vs. Rajamahendri Shipping & Oil Field Services Ltd. The appellant also highlighted that TDS was deducted and deposited before the due date of filing the return of income.After considering the contentions, the Tribunal found that the provisions of section 40(a)(ia) were not applicable to the amount paid to subcontractors during the year. The Tribunal referred to the Special Bench decision in ACIT Vs. Merilyn Shipping & Transports, stating that non-deposit of TDS does not merit disallowance if the expenditure has been paid.The Tribunal also discussed the amendment to section 40(a)(ia) by the Finance Act, 2010, and the retrospective nature of the proviso. Citing various decisions, including CIT Vs. Virgin Creations, the Tribunal held that once tax was deducted and deposited before the due date of filing return of income, there was no merit in disallowing the expenditure.In conclusion, the Tribunal allowed the appeal filed by the assessee, directing the Assessing Officer to allow the claim of expenditure of Rs. 16,70,760/-.