By Kirit S. Sanghvi, Chartered Accountant
1.0 Facts :
1.1 ABC Ltd. credits on 1st October, 2009 the account of Mr. X, a resident, with Rs.55,000 being commission on sales payable to him. ABC Ltd. deducts tax at source @ 5% being oblivious of the actual rate applicable. This results in a short deduction of tax of Rs.2,750.
1.2 ABC Ltd. also credits on the same day the account of Mr. Y, a resident, with Rs.55,000 being commission on sales payable to him. The company deducts tax at source @ 15%. This results in an excess deduction of tax of Rs.2,750.
1.3 The company has made accounting entries in accordance with the above facts, and cleared the accounts of Mr. X and Mr. Y before 31st December, 2009. Thus, the balances in these accounts are reduced to nil. It is believed that in neither account any further credit will arise till 31st March, 2010.
1.4 The company uploads its quarterly TDS statement with the above information.
1.5 When the CFO of the company is informed that commission paid to Mr. X is likely to be disallowed u/s.40(a)(ia) on account of short deduction of tax thereon, he argues that there is no overall short deduction when payments to Mr. X and Mr. Y are considered together.
1.6 The company seeks your opinion about the allowability of deduction in respect of commission paid to Mr. X. The company also seeks your views on whether the company is liable to pay interest u/s.201 in respect of this short deduction of tax.
2.0 Opinion :
2.1 Let us first see how S. 40(a)(ia) when read with the substantive part S. 194A would work. For a better comprehension, substantive parts of S. 40(a)(ia) and S. 194A are reproduced below :
40(a)(ia) : “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”.
194A : “(1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of interest other than income by way of interest on securities, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force :
2.1.1 The following features of S. 40(a)(ia) when r.w. the substantive part of S. 194A stand out in order that the provisions of S. 40(a)(ia) may apply.
(i) Tax on interest is deductible in respect of every credit or payment of interest if the amount of credit or payment exceeds or is likely to exceed the specified amount in a financial year. Thus, the liability is fastened to credit or payment, as the case may be.
(ii) Tax on specified incomes should be deductible under Chapter XVII-B.
(iii) Such tax should not have been deducted;
or
(iii) after deduction, such tax should not have been paid before the specified dates.
2.1.2 It is admitted that tax in this case is deductible since income is a specified income and that the full tax has not been deducted. Further, when taxes deducted from payments made to Mr. X and Mr. Y are taken together, there is no shortfall.
2.2 The following issues arise out of the facts and the queries :
(i) Whether full tax at source should be deducted and paid on a specified income in order that no disallowance u/s.40(a)(ia) may be made.
(ii) Whether some tax deduced at source and paid to the Treasury on a specified income can make S. 40(a)(ia) inapplicable making thereby the entire underlying income eligible for deduction.
(iii) Is it possible that the amount of disallowance u/s.40(a)(ia) is restricted to the amount which bears to the amount of expenditure the same proportion as the amount of tax not deducted bears to the amount of full tax ? In other words, can the amount of disallowance be decided by the formula :
(iv) Whether an excess tax deduction in one case can be adjusted against shortfall arising in another case so as to avoid disallowance u/s.40(a)(ia) and interest.
2.2.1.1 As regards the first issue, a view can be taken that a small shortfall may make the entire underlying expenditure disallowable u/s.40(a)(ia). The reason for holding this view is that S. 40(a)(ia) applies when a tax in respect of a specified income is deductible and such tax has been either not deducted or not paid. Therefore, in this case, Rs.5,500 was the tax deductible from the payment made to Mr. X, and therefore, such tax should have been deducted and paid if one wants to avoid disallowance under these provisions. Since such tax was not deducted and paid, S. 40(a)(ia), prima facie, becomes applicable making the entire underlying expenditure disallowable.
2.2.1.2 Another view can also be taken that if some as against the full tax is deducted from credits or payments of specified incomes, full allowance for the underlying expenditure should be made. The reason for holding this view is that, as seen above, S. 40(a)(ia) will primarily apply if there is a tax deductible in respect of a specified income and such tax has not been deducted, meaning thereby, that full of such tax should not have been deducted. In other words, in order that this case may fall in S. 40(a)(ia), the amount not deducted should be Rs.S,SOO,no more and no less. In case a part deduction of tax has been made, as in the case of payment to Mr. X, no disallowance u/s.40(a)(ia) can be made.
2.2.1.3 I must admit that the views expressed in paragraphs 2.2.1.1 and 2.2.1.2 are unreasonable and outrageously extreme. A person, who deducts some tax from a specified income and another person who does not deduct any tax at all from a similar income, cannot be treated on par. If the views expressed in paragraph 2.2.1.1 are accepted, both these persons suffer full disallowance whereas the offence of the first person is certainly mitigated by the fact he has made some deduction of tax at source. For similar reasons, the views expressed in paragraph 2.2.1.2 can also not be accepted as these views put on par persons who have fully complied with the law, with persons who have shown no compliance at all. It would be absurd to say that two persons, one of whom has made the full payment of tax at source of Rs.5500 and the other person who has made no payment at all, will both enjoy full allowance of the underlying expenditure.
2.2.2 Therefore, the better view is that disallowance of the expenditure is restricted to the amount which bears to the amount of expenditure the same prociate that any amount is mathematically a sum of several amounts and any amount can be broken up into several sub-amounts. For example, a thousand is also a summation of eight hundreds and two hundreds, and likewise. Thus, a view can be taken, when Rs.2,7S0 is deducted in the case of Mr.X, that the underlying expenditure in respect thereof is Rs.27,SOO. Viewed thus, there is full deduction of tax @ 10% from Rs.27,500. The remaining Rs.27,500 of the expenditure is the amount in respect of which the default has been committed. It is this last amount which will suffer disallowance.
2.3.1 We shall now deal with issue No. 4 : whether excess deduction in one case can be adjusted against the shortfall arising on account of short deduction in anether case. In this particular case, since the information with excess and short deduction of tax has been uploaded, inter account adjustment between the two accounts is not possible unless this information is revised and reuploaded. The obligation on a person is to deduct proper tax in respect of an expenditure. Though expenditures incurred in favour of Mr. X and Mr. Y have a similar nature, they represent different expenditures, and there is admittedly a default committed in respect of payment made to Mr. X. Therefore, the excess deduction of tax in the case of payment to Mr. Y will not be available for adjustment against the shortfall of tax in the case of Mr. X.
2.3.2 However, inter account adjustment between Mr. X and Mr. Y would have been possible before uploading the information in the quarterly statement by debiting Mr. X’s account in whose case short tax was deducted and crediting Mr. Y’s account in whose case an excess tax was deducted and thereby a net short payment of commission was made. The company would, thereafter, recover Rs.2,750 from Mr. X and pay it over to Mr. Y. Or else, if the company is unable to recover such amount from Mr. X, the company could write it off and claim it as a commercial loss. It should be remembered that such tax borne by the company is not ‘a tax levied on the profits or gains ,of any business or profession’, and therefore S. 40(a)(ii) operating as a disallowance of expenditure by way of income-tax, will not apply.
Needless to say that if inter account adjustment is carried out between the accounts of Mr. X and Mr. Y, the TDS certificates should be issued accordingly.
3.0 Conclusion:
The amount to be disallowed in this case should be Rs. 27,500, that is, on a proportionate basis. No inter account adjustment is possible once the information is uploaded; unless the information is revised. TDS certificates should be issued in accordance with the information uploaded.
