This is a classic case to show how the interpreration of a particular word/sentence in any section can completely turn the tables on Lawmakers.

In this case, assessee incurred brokerage of Rs 38.75 Lakhs and commision of Rs 2.43 Lakhs during the year without deduction of TDS. It had a payable of Rs 1.78 lakhs at the year end. All the payments were made during the year without deduction of TDS. 

Department disallowed Rs 38.75 lakhs + 2.43 lakhs completely u/s 40(a) (ia).  

However, aggrieved by the decision, assessee went for an appeal to CIT(A) where it was rejected and then later to Special Bench of ITAT. The Majority view of the special bench was as follows.

Sec 40(a)(ia) provides for disallowance of certain expenditure if TDS is not deducted before paying the same.

It is reproduced below for your reference,

[any interest, commission or brokerage, [rent, royalty,fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work)], 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 :] 

On a careful reading ( verbatim) , we notice that this section clearly disallows Interest, commision, Professional fees etc and other amounts payable  on which TDS has not been deducted or after deduction not been deposited within the aforesaid due date.

Sec 40(a)(ia) was amended under Finance Act by replacing the Words "PAID OR CREDITED" with "PAYABLE". 

From this amendment, we can make out the real intention of the law was to Disallow only those expenditures which remain payable as on March 31st. This section cannot disallow all those expenditures which has already been paid to payee on which TDS was not deducted.

The Special bench, by majority decided in favour of the assessee. 

Recently, another case Mrs Kanika Singh V/s ITO was decided based on the Merlyn decision by another tribunal in favour of assessee.

Posted 2 years, 11 months ago by HS VEDANTA DESHIKA

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