Disallowance for non-payment of equalization levy- Section 40(a)(ib)

By | October 16, 2016

Disallowance in respect of non-payment of equalization levy [Section 40(a)(ib)]

Key Points about Disallowance for non-payment of equalization levy- Section 40(a)(ib)

  • Chapter VIII of the Finance Act, 2016 provides for deduction of equalization levy for certain specified services. Read Equalisation levy Salient Features
  • The section applies to all assessees, whether corporate or non-corporate and whether resident – carrying on business or profession or whether non-resident – having a permanent establishment (‘PE’) in India. Hence, if a non-resident assessee is carrying on a business which is liable to tax in India, and in respect of which it is claiming deduction under sections 28 to 37 of the Act, it will be eligible to a deduction only if the conditions of this section are fulfilled.
  • A new section 40(a)(ib) has been inserted with effect from 1-6-2016 to provide that the consideration paid or payable shall not be allowed as a deduction to an assessee, if the conditions given below are fulfilled:

(a)          There is consideration paid or payable by an assessee to a non-resident.

(b)          The consideration is paid or payable for a specified service.

(c)          The specified service is such that equalization levy is deductible under the provision of Chapter VIII of the Finance Act, 2016.

(d)          Such levy

♦             has not been deducted; or

♦             after deduction, it is not been paid on or before the due date for filing return specified in section 139(1).

  • If the equalization levy is deducted in any subsequent year or has been deducted during the previous year but paid after the due date specified in section 139(1) the sum shall be allowed as deduction in computing the income of previous year in which such levy has been paid.
  • Implications of short deduction of equalization levy :whether short deduction of equalization levy can lead to disallowance of entire expenditure relating to consideration paid or payable for any specified service under section 40(a)(ib).Court/Tribunal have held that short deduction of tax cannot be the basis for disallowance under section 40(a)(ia) [see CIT v. S.K. Tekriwal [2014] ; Dy. CIT v.Chandabhoy & Jassobhoy [2012]  (Mum. – Trib.); Highlight Pictures (India) (P.) Ltd. v. Asstt. CIT [2014] (Mum. – Trib.); Apollo Tyres Ltd. v. Dy. CIT[2013]  (Cochin – Trib.); Three Star Granites (P.) Ltd. v. Asstt. CIT [2014]  (Cochin – Trib.)].

    The language used in section 40(a)(ib) is similar to section 40(a)(ia). Hence, it is a moot point whether disallowance can be made under section 40(a)(ib) in case of short deduction of equalization levy.

  • Tabulating Disallowance for non-payment of equalization levy- Section 40(a)(ib)

    Sr. No. Particulars Deductibility
    1. Equalization levy not deducted at all Not deductible
    2. Equalization levy deducted in Year 1 and paid during Year 1 within the prescribed time In Year 1
    3. Equalization levy deducted in Year 1 and paid during Year 1 but beyond prescribed time In Year 1
    4. Equalization levy deducted in Year 1 but paid in Year 2 on or before due date for filing of return under section 139(1) In Year 1
    5. Equalization levy deducted during Year 1 but paid after the due date for filing of return under section 139(1) In year of payment
    6. Equalization levy deducted in any subsequent year and paid Thereafter In year of payment

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