January 2023

Business expenditure Disallowance u/s 40(a) (ia) Payments liable to deduction of tax at source Scope of section 40 Amount paid to non-resident for technical services Amount not debited to profit and loss account and not claimed as deduction in computing business income Amount could not be disallowed.

K. B. Bhujle, Advocate

64. Principal CIT vs. Linde India Ltd.
[2022] 448 ITR 682 (Cal.)
A.Y.: 2007-08
Date of order: 5th September, 2022
Section 40(a)(ia) of ITA, 1961

Business expenditure Disallowance u/s 40(a) (ia) Payments liable to deduction of tax at source Scope of section 40 Amount paid to non-resident for technical services Amount not debited to profit and loss account and not claimed as deduction in computing business income Amount could not be disallowed.


The assessee-company is engaged in the business of manufacture and sale of various industrial and mechanical gases, cryogenic and non-cryo- genic plants and vessels. A show-cause notice was issued to the assessee alleging that tax was not deducted at source in terms of the provisions of section 40(a)(ia) of the Income-tax Act, 1961 in respect of the advances as on 31st March, 2007 for import of capital goods. In reply to the show-cause notice, the assessee contended that the said advances was made towards import of capital goods on free on board (FOB) basis at foreign sea ports, leading to transfer of title to the goods outside India, and hence there is no income chargeable to tax in India and therefore the provisions of section 195 of the Act are not attracted. It was also contended that such advances to suppliers had also not been charged to the profit and loss account for the relevant assessment year. The AO completed the assessment u/s 143(3) by an order dated 30th December, 2010. The AO made disallowances aggregating to Rs. 72,89,71,972 u/s 40(a)(ia).

The Commissioner (Appeals) deleted the addition. The Tribunal upheld the decision of the Commissioner (Appeals) and held that no disallowance could be made u/s 40(a)(i)/40(a)(ia).

On appeal by the Revenue, the Calcutta High Court upheld the decision of the Tribunal and held as under:

i) An amount can be deducted in computing the business or professional income by taking away the amount from the total profits and gains of such business and profession. While preparing the profit and loss account of a business or profession an amount can be deducted from the professional or business income by debiting the profit and loss account prepared in connection with such profession or business with such amount. Such amount may also be deducted while computing the profits and gains of business or profession for the purpose of arriving at the business or professional income chargeable to tax. Therefore, if the disputed amount is neither debited from the profit and loss account of the business or profession nor has been deducted while computing the profits and gains of business or profession, section 40 of the Act does not come into operation as such amount cannot be said to have been deducted in computing the income chargeable under such head. Therefore, if an assessee has paid any amount on account of fees for technical services outside India or in India to a non-resident but has not

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