S. 40(a)(ia)

The CBDT has issued Circular (No: 10/DV/2013) dated 16/12/2013 providing ‘Departmental View‘ on the controversial issue surrounding section 40(a)(ia) of the Income-tax Act, 1961.   In case of Merilyn Shipping & Transports v Addln CIT /[2012] 136 ITD 23 (VISAKHAPATNAM), it was 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’. Hence, it has to be concluded that provisions of section 40(a )(ia) are applicable only to the amounts of expenditure which are payable as on the date 31st March of every year and it cannot be invoked to disallow expenditure which has been actually paid during the previous year, without deduction of TDS.” 

S. 40(a)(ia) – CBDT issues circular providing “Departmental View” contradicting Merylin Shipping ruling

CIT v M.D. Jakir Hossain Mondal (ITA No 31 of 2013 dtd 04.04.2013) (Calcutta High Court) Background: The assessee incurred expenditure of Rs. 31 lakhs on freight but did not deduct TDS thereon u/s 194C. The AO held that as there was a failure to deduct TDS, the expenditure could not be allowed as a deduction u/s 40(a)(ia). However, the CIT(A) allowed the claim on the ground that the freight charge was a part of the price of the goods and there was no contract between the assessee and the transporter.

Merilyn Shipping case on 40(a)(ia) distinguished by Calcutta High Court

  Sri Venkatesh Paper Agencies (Hyd.) (P.) Ltd. [ITA No.: 636 (Hyd) of 2011] (Hyderabad ITAT) Background: The assessee is engaged in the business of paper and boards. During the course of assessment proceedings, the AO found that the assessee has claimed interest payment of Rs. 3,12,600 to M/s. Sinermas Pulp & Papers Ltd. without deducting tax at source. The assessee contended that the amount of Rs. 3,12,600 was paid as interest on the overdue bills and that the payment of interest was not on a deposit or loan but on purchases. Therefore, it is not required to deduct tax at source. The AO however, did not accept the explanation of the assessee and disallowed the sum of Rs. 3,12,600 u/s. 40(a)(ia) on the reasoning that whether the assessee paid the interest in respect of delayed payment of purchases or deposits or loans it has to deduct tax at source as per the provisions of the Act. CIT(A), came to held that the definition of the term interest as given in section 2(28A) of the Act would mean interest payable in any manner in respect of any monies borrowed or debt incurred and held that the definition of interest is wide enough to take within its ambit the debt owed by the assessee on account of overdue bills.

Interest on trading liability not subject to TDS u/s 194A – Hyderabad ITAT

UE Trade Corporation (India) Ltd v DCIT [ITA No.2303/Del/2011] (Delhi ITAT) Background: The assessee was engaged in trading in agricultural products. During the course of assessment proceedings from the tax audit report in Form No.3CD, the Assessing Officer noted that the tax auditor had quantified the amount of 40,41,233/- disallowable under sec. 40(a)(ia) of the Act. However, in computation of income the assessee had added back only Rs.20,16,778/-. The remaining amount of Rs.20,24,455/- was therefore, disallowed by the Assessing Officer.

No disallowance u/s 40(a)(ia) for short deduction of TDS – Delhi ITAT