MARCH 17, 2012

Rationalization in rigorous provisions for disallowance of business expenditure

By Asit K Dash, Advocate

UNION Budget is an annual exercise of the Hon’ble Finance Minister to bring more clarity in the fiscal statutes.  The tax payers are required to interpret new provisos and explanations in the statutes.

In the present Union Budget, Hon’ble Finance Minister had made several attempts to provide certain benefits to the class of business income earners. In this article, the author has made an attempt to analyse the newly proposed proviso to section 40(a)(ia) of the Income-tax Act.

The proposed proviso shall protect the taxpayers from application of the draconian principles which were applied by the assessing officers during the assessment proceedings.

As per the new proviso, where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B, but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purpose of the sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the assessee.

Prior to the insertion of the proviso, it was open to the assessing officers to apply the provision in pro-revenue manner without considering the arguments of the assessee that the taxes have been paid/deposited by the deductee, hence it should not be held as assessee in default as defined in section 201 of the Act.

The proposed insertion of the proviso shall bring the clarity regarding the disallowance under section 40(a)(ia) of certain business expenditure like interest, commission, brokerage, professional fee, etc. due to non-deduction of tax.

In order to synchronized the above proviso, the Finance Minister has also proposed to amend section 201, which says the payer who fails to deduct the whole or any part of the tax on the payment made to a resident payee shall not be deemed to be an assessee in default in respect of such tax if such resident payee–

(i) has furnished his return of income under section 139;

(ii) has taken into account such sum for computing income in such return of income; and

(iii) has paid the tax due on the income declared by him in such return of income, and the payer furnishes a certificate to this effect from an accountant in such form as may be prescribed.

The date of payment of taxes by the resident payee shall be deemed to be the date on which return has been furnished by the payer. These beneficial provisions are proposed to be applicable only in the case of resident payee.

From the above, it seems that the Finance Minister has incorporated the views expressed by the Hon’ble Delhi High Court in past in case of CIT vs. Adidas (I) Marketing Pvt. Ltd. (2006-TIOL-210-HC-DEL-IT), CIT vs. Majestic Hotel Ltd. (2006-TIOL-261-HC-ALL-IT), CIT vs. Select Holidays Resorts Ltd. 207 CTR 234 (Del).

Effective date of amendment

In the Finance Bill, it is proposed that the amendment in section 201 shall be effected from 1 July 2012. On the other-hand the effective date of insertion of proviso to section 40(a)(ia) is mentioned as 1 April 2013, i.e. from Assessment Year 2013-14. It means there is a gap of a quarter in between the effective dates of the both the amendments. The intention behind such timegap is unclear from the Finance Bill.