S. 40(a)(ia) read with S. 194C of the Income-tax Act, 1961 — Tax deductible for the year deducted belatedly on the last day of the accounting year and paid before the due date for filing of return — Whether AO justified in disallowing the expenditure u/s.

ITAT ‘B’ Bench, Mumbai

A.Y. : 2005-06. Decided on :
25-6-2010

Counsel for assessee/revenue :
Anil J. Sathe/

S. S. Rana

During the year, the assessee
had paid various sums to contractors but the tax was deducted only on 31-3-2005.
According to the AO, as per the provisions of S. 194C, the assessee was required
to deduct and pay the tax regularly in each month when the contractors were
paid. Since the assessee had deducted full amount of the tax only on 31-3-2005,
he restricted the allowance of deduction only in respect of payments made during
the month of March and disallowed the deduction in respect of the payments which
were credited and made during the period other than the month of March 2005. On
appeal the CIT(A) upheld the order of the AO.

Before the Tribunal the Revenue
submitted that the assessee had failed to deduct and pay tax as required
u/s.194C. According to it, S. 40(a)(ia) grants relaxation of time period in
depositing the TDS only in a case when the tax was deductible and deducted in
the last month of the previous year — where the time for deposit of tax is
allowed till the due date of filing of the return u/s.139(1). In cases where the
tax is deductible prior to the month of March, then the same has to be deducted
before the end of the last month of the previous year and paid by the due date
as given in S. 194C. According to it, since the assessee had failed to deduct
and pay tax as required u/s.194C and other provisions of Chapter XVII of the
Act, the AO was justified in disallowing the expenditure claimed. It also relied
on the decision of the Supreme Court in the case of Madurai Mills and Co. Ltd.
(89 ITR 445).

According to the Tribunal the
controversy revolves around the applicability of the provisions of S. 194C while
disallowing the expenditure u/s. 40(a)(ia). According to it, the provisions of
S. 194C are relevant only for the purposes of ascertaining the deductibility of
the tax from the payments made. Once it is determined that the nature of payment
falls under the provisions of Chapter XVII, the disallowance for non-compliance
with TDS provisions would be governed by the provisions of S. 40(a)(ia).
According to it, the proviso to S. 40(a)(ia) makes it further clear that even in
the case when the tax has been deductible as per the provisions of Chapter XVII,
but deducted in the subsequent year or deducted during the last month of
previous year, but paid after the due date u/s.139(1) or deducted during the
other months of the previous year, but paid after the end of the said previous
year, then the said sum would be allowed as deduction in the previous year in
which the tax is paid. According to it, if the conditions of deduction and
payment prescribed under Chapter XVII are applicable for disallowance of
deduction, then the provisions of S. 40(a)(ia) would be rendered as meaningless.
It further added that as per S. 40(a)(ia) when the tax is deducted, even
belatedly, and deposited belatedly, then deduction is not denied and is
allowable in the previous year in which the tax was deposited. According to it,
the provisions of Chapter XVII were relevant only for ascertaining the
deductibility of the tax at source and not for the actual deduction and payment
for attracting the provisions of S. 40(a)(ia).

Therefore, since the assessee
had deducted the tax in the last month of the previous year and deposited the
same before the due date of filing of the return, it allowed the claim of the
deduction of the assessee. It further observed that the case relied on by the
Revenue is not relevant.