Deduction of tax at source is one of the modes of tax recovery. It mandates the payers to deduct tax at source on some of the expenses and thus a part of the tax due from the recipient or payee is collected at the earliest point of time.

The tax deduction provisions were toothless till the Finance Act, 2004 inserted Section 40(a)(ia), which are applicable from the assessment year 2005-06 onwards.

The fallout of the amendment was that the taxpayers have to deduct tax at source without any reward or rebate and in the event of non-compliance, the expenditure for which the tax was not deducted at source would be disallowed. This is in addition to penal provisions for non-complying with mandatory tax deduction at source provisions contained in law.

Amendments

The time limit for remitting the amounts by way of tax deduction was originally prescribed till the end of the financial year and only for the last day of the financial year (i.e. March 31), the extended time limit prescribed in rule 30 of the Income-tax Rules applied. The Finance Act, 2008 gave a retrospective relief from the rigours of the provision by extending the time limit for remitting the tax deductions made in the whole month of March of each financial year, up to the ‘due date' for filing the return specified in Section 139(1).

The Finance Act, 2010 again amended Section 40(a)(ia) and gave uniform extension of time for remitting the tax deducted at source by allowing time till the ‘due date' for filing the return specified in Section 139(1).

In effect, the tax deducted during the whole financial year could be remitted up to the ‘due date' for filing the return specified in Section 139(1) and thus avoid disallowance of expenditures.

Retrospectivity

In Bharati Shipyard Ltd vs. Dy.CIT 11 ITR (Trib) 599 (Mum) (SB), the taxpayer contended that the amendment brought in by Finance Act, 2010 extending the time limit for remitting the tax deduction at source as retrospectively applicable from financial year 2004-05 that is right from the insertion of Section 40(a)(ia).

The tribunal held that in the absence of a specific indication by the Legislature in the amendment, retrospective application could not be presumed. Thus, the appeal before the tribunal for the assessment year 2005-06 was negatived in spite of the taxpayer keeping the matter alive till the provisions were amended by the Finance Act, 2010.

Short deduction

Where the taxpayer has deducted tax at source at less than a rate mandated by the statute whether the expenditure would be disallowed in toto or it would be allowed on proportionate basis is litigated in the recent times. In Dy.CIT vs. S.K.Tekriwal (ITA No.1135/Kol/2010 order dated October 21, 2010) the taxpayer deducted tax at source at one per cent on the assumption that the payment fell in the category of sub-contract payments.

The Revenue contended that the payments were covered under Section 194-I which warranted tax deduction at 10 per cent (then). The Tribunal looked into the facts of the case and held that there was some difference of opinion with regard to rate of tax deduction and since the taxpayer had deducted tax at source at a rate which is disputed, the allowance of expenditure could not be disturbed.

However, a precedent to the case could be found in Dy. CIT vs. Chandobhoy & Jessobhoy (ITA No.20 /Mum/ 2010 dated July 8, 2011) in which the tribunal was categorical to hold that the disallowance under Section 40(a)(ia) would apply only for non-deduction of tax at source and not in the case of short deduction of tax at source.

Applicability

The applicability of TDS provisions for all expenses or only in respect of expenses covered by Sections 30 to 38 was discussed in Teja Constructions v. ACIT (2010) 5 Taxmann.com 61 (Hyd-ITAT). It was held that applying the literal rule and on strict interpretation of Section 40(a)(ia), disallowance of expenditure would apply only to the extent the amounts were shown as payable at the end of the year. Also, it was held that the provisions of Section 40(a)(ia) would apply only to items covered by Sections 30 to 38 and not to Section 28. Thus, all the direct cost and expenditure covered by Section 28 are beyond the scope of disallowance envisaged in Section 40(a)(ia).

(The author is an Erode-based chartered accountant.)

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