M/s. Merilyn Shipping & Transports vs. ACIT (ITAT Visakhapatnam Special Bench)
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.
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.