2014 (11) TMI 720

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.... Ld. CIT(A) has erred in deleting the addition of Rs. 88,689/- made u/s 40(a)(ia) of the I. T. Act, 1961 as the assessee failed comply with the provisions of Section 194C on printing the stationery expenses." 4. The A.O in the case of scrutiny assessment for assessment year 2007-08, disallowed a sum of Rs. 64,55,563/- and 88,689/- by invoking the provisions of sec. 40(a)(ia) of the Act. A sum of Rs. 64,55,563/- was disallowed by the A.O by observing the following:- "23. .....................I am of the opinion that assessee was getting professional and technical services from SRL Ranbaxy Ltd., as such payments made to SRL Ranbaxy Ltd. covered u/s 194J of the I.T Act, 1961 and TDS has to be deducted at source on these payments. 24. As the assessee failed to comply the provision of section 194J or 194C, the expenses amounting to Rs. 64,55,563/- are disallowed u/s 40(a)(ia) and added back to total income of the assessee. .................." 4.1 A sum of Rs. 88,689/- was disallowed by the A.O for the following reasons:- "25. Vide order sheet entry dated 23.11.2009 the assessee was also asked to furnish party wise details of expenses for printing and stationary. In reply to this as....

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....ditions made by the Assessing Officer for assessment year 2008-09. 6. The Revenue being aggrieved is an appeal before us. The ld. DR supported the order of the Assessing Officer. The ld. AR on the other hand submitted that he has strong case on merits, however, it was submitted that the matter can be examined afresh by the Assessing Officer in light of second proviso to sec. 40(a)(ia) of the Act, which, according to him, is retrospective in operation, in view of judicial precedents on the subject. 7. We have heard rival submissions and perused the material on record. The second proviso to sec. 40(a)(ia) inserted by Finance Act, 2012 reads as under:- "Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum, but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purpose of this subclause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso." 7.1 Even though above stated proviso was inserted w....

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....tion of tax at source by the assessee. In other words, deductibility of expenditure is made contingent upon the income, if" any, embedded in such expenditure being brought to tax, if applicable. In effect, thus, a deduction for expenditure is not allowed to the assessees, in cases where assessees had tax withholding obligations from the related payments, without corresponding income inclusion by the recipient. That is the clearly discernable bigger picture, and, unmistakably, a very pragmatic and fair policy approach to the issue - howsoever belated the realization of unintended and undue hardships to the taxpayers may have been. It seems to proceed on the basis, and rightly so, that seeking tax deduction at source compliance is not an end in itself, so far as the scheme of this legal provision is concerned, but is only a mean of recovering, due taxes on income embedded in the payments made by the assessee. That's how, as we have seen a short while ago, Hon'ble Delhi High Court has visualized the scheme of things as evident from Their Lordships' reference to augmentation of recoveries in the context of "loss of revenue" and "depriving the Government of the tax due and payable".....

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....of this legal provision, in our humble understanding, it could not be an "intended consequence" to disallow the expenditure, due to non deduction of tax at source, even in a situation in which corresponding income is brought to tax in the hands of the recipient. The scheme of Section 40(a)(ia), as we see it, is aimed at ensuring that an expenditure should not he a/lowed as deduction in the hands of an assessee in a situation in which income embedded in such expenditure has remained untaxed due to tax withholding lapses by the assessee. It is not, in our considered view, a penalty for tax withholding lapse but it is a sort of compensatory deduction restriction for an income going untaxed due to tax Withholding lapse. The penalty for lax withholding lapse per se is separately provided for in Section 271C. and, section 40(a)(ia) does not add to the same. The provisions of Section 40(a)(ia), as they existed prior to insertion of second proviso thereto, went much beyond the obvious intentions of the lawmakers and created undue hardships even in cases in which the assessee's tax withholding lapses did not result in any loss to the exchequer. Now that the legislature has been compassi....