S.

40(a)(ia) TDS Disallowance applies only to amounts payable as at 31st March and not to amounts already paid during the year

The assessee incurred brokerage expenses of Rs.38.75 lakhs and commission of Rs.2.43 lakhs without deducting TDS. Of this only Rs. 1.78 lakhs was payable and the rest was paid. The AO disallowed the entire expenditure u/s 40(a)(ia). Before the CIT (A), it was argued that disallowance u/s 40(a)(ia) could be made only of the amount payable and not of that which had already been paid though it was rejected. On appeal to the Tribunal, the matter was referred to the Special Bench. HELD by the Special Bench:

Per the majority (S. V. Mehrotra, AM, dissenting):

When s. 40(a)(ia) was proposed to be inserted by the Finance Bill 2004, it applied to any amount credited or paid. However, when enacted by the Finance Act 2004, it applied only to amount payable. The words credited/ paid and payable have different connotations and the latter refers to an amount which is unpaid. The change in language between the Bill and the Act is conscious and with a purpose. The legislative intent is clear that only the outstanding amount or the provision for expense (and not the amount already paid) is liable for disallowance if TDS is not deducted. Also, s. 40(a)(ia) creates a legal fiction by virtue of which even genuine and admissible expenses can be disallowed for want of TDS. A legal fiction has to be limited to the area for which it is created. Consequently, s. 40(a)(ia) can apply only to expenditure which is payable as of 31st March and does not apply to expenditure which has been already paid during the year.

Per S. V. Mehrotra, AM:

The object of s. 40(a)(ia) is to ensure that the TDS provisions are scrupulously implemented without any default. If a narrow interpretation is assigned to the term payable, the object with which s. 40(a)(ia) was inserted would be frustrated. The Legislature could have never intended that only amounts payable at the end of the year should be disallowed but not the amounts paid during the year. The reason the words credited or paid were dropped was because they came within the ambit of the term payable and would have been superfluous. As s. 40(a) is applicable irrespective of the method of

accounting followed by an assessee, the term payable covered the entire accrued liability. Also s. 40(a)(ia) is to be interpreted harmoniously with the TDS provisions as its operation depends solely on the provisions contained under Chapter XVII-B & it provides for one of the consequences of non-deduction of tax. In the backdrop of the TDS provisions, the term payable means the amount payable on which tax was deductible at source under Chapter XVII-B. Consequently, s. 40(a)(ia) applies to all expenditure which is actually paid and which is payable as at the end of the year.

Related Judgements
1.

Dalal Broacha Stock Broking Pvt Ltd vs. ACIT (ITAT Mumbai Special Bench)
The device adopted by the assessee was obviously with the intention to avoid payment of full taxes. There is obvious tax avoidance. S. 36(1)(ii) is intended to prevent escape from taxation by describing the payment as bonus or commission when in fact it should have reached the shareholders as

2.

ACIT vs. Mahindra Holidays & Resorts (ITAT Chennai Special Bench)
In E.D. Sassoon & Co. Ltd. v. CIT 26 ITR 27, the Supreme Court held that two conditions are necessary for income to have accrued to or earned by an assessee viz. (i) the assessee has contributed to its accruing or arising by rendering services or otherwise, and (ii)

3.

ACIT vs. Dr. B.V. Raju (ITAT Hyderabad Special Bench)

The taxability of a non-compete fee depends on the purpose for which it is paid. A noncompete fee can be divided into two categories: (a) consideration received by the transferor of a business for agreeing not to carry on the same business; (b) consideration received by other persons associated