Section 40a(ia) Case laws

By | October 23, 2015

Section 40a(ia)Section 40a(ia): Applicability in case of capitalization of expenses ?
Held- Not applicable
Income Tax Officer vs. M/s Hariom Organizers Pvt. Ltd (ITAT Ahmedabad Bench ITA no. 1496/Ahd/2009)

Where an expenditure has been capitalized and tds is not deducted thereon u/s40a(ia) the same is not disallowable.

Section 40a(ia)- Whether Depreciation is to be disallowed on expenses capitalized on which TDS not deducted u/s 40a(ia) ?

Held- No

Commissioner of Income Tax Faridabad vs. Mark Auto Industries Ltd. (Punjab & Haryana High Court ITA no. 57 of 2009)

Where expenditure is capitalized and TDS is not deducted in accordance with
provisions of Section 40a(ia), Depreciation thereon can’t be disallowed.
“The Tribunal while accepting the plea of the assessee, in para 3, had noticed as
“3. Ground no.4 is against deletion of an addition of Rs.6,88,175/ – made by the AO on account of deduction of depreciation on technical know-how as the assessee failed to deduct tax in accordance with the provision contained in section 40(a)(i). The finding of the learned CIT(A) was that the assessee had incurred expenditure by way of technical know-how, which was capitalized amount as made in the return of income. Since the assessee had not claimed deduction for the amount paid, the provisions contained in section 40(a)(i) were not attracted. The learned DR could not find any fault with this direction of the
CIT(A) also although she referred to page 4 of the assessment order, where it was mentioned that the tax deducted in respect of the payment was made over to the Government in the subsequent year and, therefore, depreciation could not be deducted on the capital expenditure incurred by the assessee. In reply, the learned counsel pointed out that the expenditure by way of technical know how was capitalized and it was not claimed as revenue expenditure. Therefore, there was also no reason to disallow depreciation on such capitalized amount as the aforesaid provision does not deal with deduction of depreciation. Having considered arguments from both the sides, we are of the view that there is no error in the order of the learned CIT(A) which requires correction from us.Thus, this ground is also dismissed. Learned counsel for the revenue was unable to substantiate that in the absence of any requirement of law for making deduction of tax out of the expenditure on technical know how which was capitalized and no amount was claimed as revenue expenditure, the deduction could be disallowed under Section 40(a)(i) of the Act. Accordingly, no infirmity could be found in the order passed by the Tribunal which may warrant
interference by this Court.”

Section 40a(ia)- Whether disallowance u/s Section 40a(ia) applies in case of short deduction of TDS ?

Held- No
Deputy Commissioner of Income Tax vs. M/s S.K.Tekriwal (ITAT Kolkata ITA no 1135/Kol/2010)

Where there is a shortfall in deduction of TDS, no disallowance u/s 40a(ia) can be made.
“We are of the view that the provisions of section 40(a)(ia) of the Act has two limbs, one is where, inter alia, assessee has to deduct tax and the second where after deducting tax, inter alia, the assessee has to pay into Government Account. There is nothing in the said section to treat, inter alia, the assessee as defaulter where there is a shortfall in deduction. With regard to the shortfall, it cannot be assumed that there is a default as the deduction is not as required by or under the Act, but the facts is that this expression, ‘on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction has not been paid on or before the due date specified in sub-section (1) of section 139’. This section 40(a)(ia) of the Act refers only to the duty to deduct tax and pay to government account. If there is any shortfall due to any difference of
opinion as to the taxability of any item or the nature of payments falling under various TDS provisions, the assessee can be declared to be an assessee in default u/s. 201 of the Act and no disallowance can be made by invoking the provisions of section 40(a)(ia) of the Act.”

Section 40a(ia), 194C:Whether disallowance u/s Section 40a(ia) applies in case of non-submission of return in Form 15J ?
Held- No

Commissioner of Income Tax vs. ValibhaiKhanbhaiMankad (ITA no. 1182 of 2011)
Where the assessee did not deduct TDS on payment to transporte rs on receiving Form 15-I but did not furnish Form 15-J within prescribed time as required under Rule 29D, no disallowance could be made us 40a(ia). It was held by High Court

“In our view, therefore, once the conditions of further proviso of section 194C(3) are satisfied, the liability of the payee to deduct tax at source would cease. The requirement of such payee to furnish details to the income tax authority in the
prescribed form within prescribed time would arise later and any infraction in such a requirement would not make the requirement of deduction at source applicable under sub-section (2) of section 194C of the Act. In our view, therefore, the Tribunal was perfectly justified in taking the view in the impugned judgment. It may be that failure to comply such requirement by the payee may result into some other adverse consequences if so provided under the Act.However, fulfillment of such requirement cannot be linked to the declaration of tax at source. Any such failure therefore cannot be visualized by adverse
consequences provided under section 40(a)(ia) of the Act.”

Section 40a(ia), Section 201(1A) – Disallowance u/s 40a(ia) whether renders assesse in default u/s 201. ?
Pfizer Ltd. Vs. Income Tax Officer (TDS) ITA no. 1667/Mum/2010
Where a disallowance has been made u/s 40(a)/40a(ia), the same can’t be subject to provisions of TDS under Section 201(1) on the reason that assesse should have deducted tax and no interest can be charged u/s 201(1A).

Section 40a(ia), Section 80IB: Disallowance u/s 40a(ia) whether eligible u/s 80IB. ?
Income Tax Officer Ward 5(1) Baroda vs. Keval Construction (Gujrat High Court. ITA no. 443 of 2012)
Where expenditure was disallowed u/s 40a(ia) for non deduction of TDS, the ultimate profit after making the disallowance would qualify for deduction u/s 80IB.

Section 40a(ia) – Whether Circular no. 739 dated 25.03.1996 is valid ?
Sood Bhandari & Co. vs. Central Board of Direct Taxes & another (Punjab & Haryana High Court CWP no. 3765 of 1997)
Circular no. 739 dated 25.03.1996 is not beyond the power conferred on it under Section 119 of Income Tax Act.
“Section 40(b)(ii) contemplates the authorization of remuneration or interest. The authorization does not mean an agreement to pay, but to quantify the amount of salary or the rate of interest payable to the partners. If the said aspects are not determined prior to the financial year, the same are capable of adjustment at the end of the financial year keeping in view the profits earned with a view to increase expenditure and reduce income. The circular issued by the Board explains the expression authorized in the aforesaid circular dated 25.03.1996. The said circular does not run counter to any of the provisions of the Act. Therefore, the circular being clarificatory in nature cannot be said to be beyond the powers of the Board conferred on it under Section 119 of the Act.”

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