2012 (4) TMI 290 - AT - Income Tax

Interpretation of Income Tax Act: Timing of TDS payment crucial for Section 40(a)(ia) compliance

MERILYN SHIPPING & TRANSPORTS, BLUE MARINE LOGISTICS P. LTD., RAJAMAHENDRI SHIPPING AND OIL FIELD SERVICES LTD. AND PEDDU SRINAVASA RAO Versus ASSISTANT COMMISSIONER OF INCOME-TAX, RANGE-1, VISAKHAPATNAM, ADDITIONAL COMMISSIONER OF INCOME-TAX, VISAKHAPATNAM

The Tribunal held that Section 40(a)(ia) of the Income Tax Act applies solely to amounts payable as of the end of the financial year and not to amounts ... Whether Section 40(a)(ia) can be invoked only to disallow expenditure of the nature referred to therein which is shown as 'payable' as on the date of the balance sheet or it can be invoked also to disallow such expenditure which become payable at any time during the relevant previous year and was actually paid within the previous year – A.O. dis-allowed expenses incurred on brokerage and commission on ground of non-deduction of TDS – reference to Special bench - Held that:- The word 'payable' used in section 40(a)(ia) is to be assigned strict interpretation, in view of the object of Legislation, which is intended from the replacement of the words in the proposed and enacted provision from the words 'amount credited or paid' to 'payable'. Further, Circular No. 5 of 2005, date 15th July, 2005 issued by CBDT clarifies that the intention to introduce this provision was brought to curb bogus payments by creating bogus liability.Therefore, following cardinal principle of interpretation, Special Bench in view of dissenting view expressed by one of its members hold in light of majority view of the Members that section 40(a)(ia) is applicable only to expenditure which is payable as on 31st March of every year and cannot be invoked to disallow the amounts which are already been paid during the previous year, without deducting tax at source – Decided in favor of assessee. Issues Involved:1. Applicability of Section 40(a)(ia) of the Income Tax Act to amounts paid versus amounts payable.2. Interpretation of the term 'payable' in Section 40(a)(ia).3. Legislative intent behind Section 40(a)(ia).4. Impact of non-deduction of TDS on disallowance of expenses.5. Judicial interpretation and precedents regarding Section 40(a)(ia).Detailed Analysis:1. Applicability of Section 40(a)(ia) of the Income Tax Act to amounts paid versus amounts payable:The core issue in this appeal revolves around whether Section 40(a)(ia) can be invoked to disallow expenses that were actually paid during the financial year without TDS or if it applies solely to amounts that remained payable as of the balance sheet date. The special bench constituted to address this question concluded in favor of the assessee, determining that Section 40(a)(ia) applies only to amounts payable as of 31st March each year and not to amounts already paid during the year.2. Interpretation of the term 'payable' in Section 40(a)(ia):The majority view held that the word 'payable' should be given its natural meaning, implying that Section 40(a)(ia) is applicable only to expenses outstanding as of the end of the financial year. The term 'payable' was distinguished from 'paid,' and it was emphasized that the legislative intent was clear in using 'payable' to exclude amounts already paid.3. Legislative intent behind Section 40(a)(ia):The legislative history and the amendments to the Finance Bill were scrutinized. Initially, the Bill included the terms 'credited' or 'paid,' but these were replaced with 'payable' in the final enactment. This change was interpreted as a deliberate legislative decision to target only amounts outstanding as of the balance sheet date. The legislative intent was to ensure compliance with TDS provisions without causing undue hardship by disallowing expenses already paid.4. Impact of non-deduction of TDS on disallowance of expenses:The assessee argued that disallowance should not apply to amounts paid without TDS during the financial year, as the primary objective of Section 40(a)(ia) was to ensure TDS compliance. The Tribunal agreed, noting that the provision was not intended to penalize genuine business expenses already paid. The proviso to Section 40(a)(ia) allows for the deduction of such expenses in subsequent years if TDS is eventually paid, reinforcing the view that the section targets unpaid amounts.5. Judicial interpretation and precedents regarding Section 40(a)(ia):The Tribunal referenced various judicial interpretations, including the decisions in Teja Constructions and Jaipur Vidyut Vitaran Nigam Ltd., which supported the view that 'payable' refers to amounts outstanding as of the balance sheet date. The Tribunal also considered the decision of the Hon'ble Madras High Court in Tube Investments of India Ltd., which upheld the constitutional validity of Section 40(a)(ia) but did not specifically address the 'paid' versus 'payable' issue.Conclusion:The Tribunal concluded that Section 40(a)(ia) of the Income Tax Act applies only to amounts payable as of 31st March of each financial year and not to amounts already paid during the year without TDS. Consequently, the disallowance was reduced to Rs. 1,78,025, the amount outstanding as of 31st March 2005, and the appeal of the assessee was allowed. The decision emphasized the importance of interpreting tax provisions in light of their legislative intent and the practical implications for taxpayers.