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Disallowance of expenditure under Section 40(a)(ia) of the Income-tax Act –
law is evolving
14 August 2013
Background
1
In the case of Merilyn Shipping & Transport , the
Special Bench has held that disallowance of
expenditure on account of non-deduction of tax is
restricted only to the expenditure ‘payable’ as at the
end of the previous year. After the Special Bench
decision in the case of Merilyn Shipping & Transport,
2
the Calcutta and Gujarat High Courts have given
reasoned ruling distinguishing the decision of Merilyn
Shipping & Transport. The High Courts have held that
the views expressed in the case of Merilyn Shipping &
Transports are not acceptable. Therefore, disallowance
under Section 40(a)(ia) of the Act can be made even
for the amounts which have been paid during the year .
On the other hand Allahabad High Court in the case of
3
Vector Shipping Services (P) Ltd without dealing with
the decision of Calcutta and Gujarat High Court have
held that for disallowance of expenditure on which tax
has not been deducted, the amount should be payable
and not which has already been paid by the end of the
year. One may contend that the decision in the case of
4
Vector shipping Services (P) Ltd is per incuriam .
Recently, the Mumbai Tribunal in the case of Rishti
5
Stock and Shares Pvt Ltd dealt with this issue and held
as follows:
•
_______________
1
Merilyn Shipping & Transports v. ACIT [2012] 20 taxmann.com 244
(Visakhapatnam) (SB)
2
CIT v. Crescent Export Syndicate [2013] 33 taxmann.com 250 (Cal), CIT v.
Md. Jakir Hossain Mandal [2013] 33 taxmann.com 123 (Cal), CIT v.
Sikandarkhan N. Tunvar [2013] 33 taxmann.com 133 (Guj)
The Mumbai Tribunal observed that the Allahabad
High Court has given passing remarks, which are
only obiter dicta.
_________________
3
CIT v. Vector Shipping Services (P) Ltd (ITA No.122 of 2013)
The Supreme Court in the case of Paras Laminates (P) Ltd (1990) 186 ITR
722 (SC), held that the decision is given per incuriam when the court has acted
in ignorance of a previous decision of its own or of a court of co-ordinate
jurisdiction which covered the case before it, in which case it must be decided
which case to follow; or when it has acted in ignorance of a House of Lords
decision, in which case it must follow that decision; or when the decision is
given in ignorance.
5
ACIT v. Rishti Stock and Shares Pvt. Ltd (ITA No.112/Mum/2012)
4
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•
The Calcutta High Court and the Gujarat High Court
have dealt with this issue arising out of the Special
Bench decision in the case of Merilyn Shipping and
Transports and specifically disapproved it and such
decision constitutes the ratio decidendi of these cases.
•
It is the ratio decidendi of a judgment which prevails
upon the contrary obiter dicta of another judgment.
Accordingly, disallowance under Section 40(a)(ia) of the
Act for TDS default is applicable to expenditure paid
during year.
The Allahabad High decision in the case of Vector Shipping
Services (P) Ltd and Mumbai Tribunal decision in the case
of Rishti Stock and Shares Pvt. Ltd are summarised in
annexures given below:
Annexure 1
Vector Shipping Services (P) Ltd
Facts of the case
•
The High Court held that for disallowing
expenditure from business and profession on the
ground that tax has not been deducted, the
amount should be payable and not which has
been paid by the end of the year.
• Accordingly, the High Court upheld the Tribunal’s
decision.
Annexure 2
Rishti Stock and Shares Pvt. Ltd
Facts of the case
• During the year under consideration the Assessing
Officer (AO) disallowed the amount on account of
transaction charges under Section 40(a)(ia) of the
Act for non-deduction of tax.
• The taxpayer relying on the Special Bench
Tribunal’s decision in the case of Merilyn Shipping
and Transports claimed that since the payment was
not outstanding at the end of the year, the
disallowance could not be made.
•
During the year under consideration the taxpayer made
payment to Mercator Lines Ltd without deduction of tax
for performance of ship management work on behalf of
the taxpayer.
•
The taxpayer claimed that the payment to Mercator was
a ‘reimbursement of salaries’ and Mercator had
deducted tax on the payments made by it to the
employees and therefore, it was not required to deduct
tax.
• Further the Allahabad High Court in the case of
Vector Shipping Services (P) Ltd. has decided
similar issue in favour of the taxpayer and held that
in view of the conflicting decisions on the issue, the
view in favour of the taxpayer should be followed.
•
The Assessing Officer (AO) disallowed the entire
payment under Section 40(a)(ia) on the ground that tax
was not deducted on such payment.
Issue before the Tribunal
The Tribunal relying on the decision of Merilyn Shipping
and Transports upheld the taxpayer’s claim and held
that tax was not required to be deducted on a
reimbursement.
Taxpayer’s contention
•
High Court’s ruling
•
•
The provision of Section 40(a)(ia) of the Act was
introduced in the Act to disallow the claim of genuine
and admissible expenditure of the taxpayer in case the
taxpayer does not deduct tax on such expenditure. The
default in deduction of tax would result in disallowance
of expenditure on which such tax was deductible.
In the present case tax was deducted at source from
the salaries of the employees paid by Mercator Lines
Ltd. Further the circumstances in which such salaries
were paid by Mercator Lines Ltd. on behalf of the
taxpayer were sufficiently explained.
• However, during the course of hearing in this case
the Tribunal discussed that the Calcutta High Court
6
in the case of Crescent Export Syndicate reversed
the decision of the Special Bench Tribunal.
• Whether expenditure paid during the year on which
tax has not been deducted can be disallowed?
• The taxpayer relying on the decision of the
Allahabad High Court in the case of Vector
Shipping Services (P) Ltd contended that since the
amount was paid during the year, the disallowance
could not be made.
Tribunal’s ruling
• The Special Bench of the Visakhapatnam Tribunal
in the case of Merilyn Shipping and Transports has
held that unless the amount is payable at the end
of the year, no disallowance can be made under
Section 40(a)(ia) of the Act. It was held that the
expenditure which has already been paid during
the year could not be disallowed under Section
40(a)(ia) of the Act.
___________________
6
CIT v. Crescent Export Syndicate [2013] 33 taxmann.com 250 (Cal)
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• Subsequently, this issue came up before the Calcutta
High Court in the case of Crescent Export Syndicate
wherein the High Court after considering the decision of
Merilyn Shipping and Transports disapproved the view
taken by the Special Bench. Further, the Calcutta High
Court has reiterated the same view in the case of Md.
7
Jakir Hossain Mandal .
• Thereafter, the Gujarat High Court in the case of
8
Sikandarkhan N. Tunvar has disproved the Special
Bench decision in the case of Merilyn Shipping.
• On perusal of the decision of Vector Shipping Services
(P) Ltd relied on by the taxpayer it indicates that the
deductor had deducted tax on salaries paid by it on
behalf of the taxpayer, in respect of which the
disallowance was made by the AO. The Allahabad High
Court observed that for disallowing expenditure from
business and profession, on the ground that tax has not
been deducted, the amount should be payable and not
which has been paid by the end of the year. The
Tribunal observed that the High Court has given passing
remarks, which are only obiter dicta.
• On perusal of the decision of Vector Shipping Services
(P) Ltd it indicates that there is no reference to the
deletion of disallowance under Section 40(a)(ia) of the
Act when the expenditure has been paid, such remarks
of the High Court can be considered as obiter dicta.
• The Calcutta and Gujarat High Court have dealt with this
issue and specifically disproved the Special Bench
decision and therefore such decisions constitute the ratio
9
decidendi of the present case.
• The Tribunal thus confirmed the principle that it is the
ratio decidendi of a judgment which prevails upon the
contrary obiter dicta of another judgment. Accordingly,
disallowance under Section 40(a)(ia) of the Act for TDS
default is applicable to expenditure paid during year.
____________________
7
CIT v. Md. Jakir Hossain Mandal [2013] 33 taxmann.com 123 (Cal)
CIT v. Sikandarkhan N. Tunvar [2013] 33 taxmann.com 133 (Guj)
9
The reason or rational of the decision
8
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