Volume 6, Issue 18


9 January 2014
www.skpgroup.com

Tax Alert

CBDT expresses its view on the scope of section 40(a)(ia) of the Income Tax Act, 1961

The Central Board of Direct Taxes (CBDT) has analysed the recent controversies around the applicability of section 40(a)(ia) of the Income Tax Act, 1961 (ITA). In this regard, CBDT has clarified vide Circular No. 10/DV/2013 dated 16 December 2013 that disallowance under section 40(a)(ia) of ITA for non-deduction of withholding tax is applicable not only on the amounts remaining payable at the end of the financial year  but also to the amounts paid during the financial year. Section 40(a)(ia) deals with the disallowance of the specified expenditure if the tax thereon has not been deducted or  after deduction has not been deposited with the Government Treasury in time.

Analysis

In our tax alert dated 24 April 2012 1, we analysed  the decision of the Income Tax Appellate Tribunal (ITAT) in the case of Merilyn Shipping and Transports vs ACIT [ITA No. 477/Viz/2008](Special Bench, Visakhapatnam) in which it was held that disallowance under section 40(a)(ia) of the ITA would not  be applicable to payments made during the financial year and would apply only to such amounts that are remaining payable as on 31 March (financial year-end) on which applicable taxes at source have not been deducted and paid to the Government Treasury.

In our subsequent tax alert dated 1 July 2013 2, we analysed the decision of the Kolkata High Court in the case of CIT vs Crescent Export Syndicate (ITAT 20 of 2013) which had reversed the abovementioned ITAT ruling and concluded that disallowance under section 40(a)(ia) of the ITA will  be applicable to all amounts, including the amounts paid during the financial year.  A similar view was taken by the Gujarat High Court in the case of CIT–IV vs Sikandarkhan N Tunvar.

Subsequently, the Allahabad High Court in the decision of ACIT vs Vector Shipping Services (TS-352-HC-2013) confirmed the findings given by the Visakhapatnam bench in the case of Merilyn Shipping. However, the decisions of the Kolkata and Gujarat High courts were not brought to the attention of the Allahabad High Court.

Now, the CBDT has issued the abovementioned Circular dated 16 December 2013 clarifying the Indian government’s stand.

Some Highlights of the Circular

  • The CBDT has expressed that provisions of section 40(a)(ia) of the ITA would cover not only the amounts payable as on 31 March but also amounts paid at anytime during the financial year.
  • The CBDT has emphasised that the statutory provisions are amply clear and in the context of section 40(a)(ia) of the ITA, the term “payable” would include “amounts which are paid during the previous year”.

SKP’s Comments

  • CBDT circulars have a binding effect only on the tax authorities and not on the taxpayer. A taxpayer can still take a view contradictory to the abovementioned Circular.
  • However, the tax authorities are now bound to follow this Circular. Hence, failing to deduct tax at source or to remit the deducted tax to the Government treasury on any amount paid during the financial year would certainly be disallowed by the tax authorities. In this regard, relief can only be prayed before the appellate authorities.
  • In our view, the decisions rendered by the Calcutta High Court and the Gujarat High Court appear to be more in line with the legislative intent and to that extent the CBDT Circular also appears to be the correct interpretation of the provisions of section 40(a)(ia). However, one will have to wait to see the final view taken by the Supreme Court in this matter.  The Circular also mentions the about the legislative amendments to provisions of section 40(a)(ia). Thus, based on past experience, one can expect that even if the Supreme Court decides the matter in favour of the taxpayers, there could be some amendment in the said provisions, which could also be retrospective.
 
Notes:
1 Section 40(a)(ia) "is not" applicable on amounts paid during the year
2 Section 40(a)(ia) "is" applicable on amounts paid during the year