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Disallowance of expenditure on account of non-deduction of tax is also
applicable to the amounts which have already been paid during the year
10 October 2014
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 Income-tax Act, 1961
(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, 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.
______________
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)
3
CIT v. Vector Shipping Services (P) Ltd [2013] 357 ITR 642 (All)
The Mumbai Bench the Income-tax Appellate Tribunal
4
in the case of Rishti Stock and Shares Pvt Ltd dealt
with this issue and held that the Allahabad High Court
has given passing remarks, which are only obiter
dicta. However, the Calcutta High Court and the
Gujarat High Court had 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 Tax Deduction at Source (TDS)
default is applicable to expenditure paid during the
year.
In view of the above contrary views of the High
Courts’/Tribunal, the Central Board of Direct Taxes
5
(CBDT) issued a circular clarifying ‘departmental
view’ that disallowance under Section 40(a)(ia) of the
Act would also cover amounts payable at any time
during the year. It was clarified that the term ‘payable’
will include ‘amounts which are paid during the
previous year’. It has also been clarified that where
any High Court decides an issue contrary to the
'departmental view', such view shall not be operative
in the area falling in the jurisdiction of the relevant
High Court.
_______________
4
ACIT v. Rishti Stock and Shares Pvt. Ltd (ITA No.112/Mum/2012) (Mumbai
Tribunal)
5
CBDT Circular No. 10/DV/2013, 16 December 2013
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Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Subsequently, the Supreme Court had dismissed the
tax department’s Special Leave Petition (SLP) against
the Allahabad High Court ruling in the case of Vector
6
Shipping Services (P) Ltd.
The Mumbai Tribunal in the case of Pratibhuti Viniyog
7
Ltd. , while distinguishing the Allahabad High Court’s
ruling in the case of Vector Shipping Services Pvt. Ltd.,
held that the issue of 'paid and payable' was not
subject of reference before the Allahabad High Court.
The issue therein was decided on basis that tax has
already been deducted, hence no disallowance under
Section 40(a)(ia) of the Act was made in that case.
On the other hand, the Bangalore Tribunal in the case
8
of Capital Pharma has followed the Allahabad High
Court ruling in the case of Vector Shipping and
observed that the tax department’s SLP in Vector
Shipping Services has been dismissed by the Supreme
Court. Further, there was no decision of the
jurisdictional High Court on this issue. Accordingly,
following the decision of the Supreme Court in the case
9
of Vegetable Products , the Bangalore Tribunal has
held that the decision in favour of the taxpayer has to
be followed. Accordingly, the Bangalore Tribunal
deleted the disallowance under Section 40(a)(ia) of the
Act.
Recently, the Chandigarh Tribunal in the case of Rana
10
Sugars Ltd (the taxpayer) while following the decision
of the Gujarat High Court in case of Sikandarkhan N.
Tunvar & Ors, confirmed the order of lower authorities
where the lower authorities had disallowed the
payments made by invoking the provisions of Section
40(a)(ia) of the Act for non-deduction of tax at source.
The Tribunal observed that in case of a simple
dismissal of an SLP by the Supreme Court, it cannot be
said that the Supreme Court has laid down any law.
When an SLP is dismissed in limine or simplictor as
such, it cannot be said that the Supreme Court has
commented on the merits of the issue. It is a simple
case of rejection of prayer for entertaining the SLP.
__________________
6
Vector Shipping Services (P) Ltd (CC No(s). 8068/2014) (Supreme Court)
ITO v. Pratibhuti Viniyog Ltd. (ITA No. 1689/Mum/2011) (Mumbai Tribunal)
Capital Pharma v. ITO (ITA No. 34 (Bang) 2013) (Bangalore Tribunal)
9
CIT v. Vegetable Products [1973] 88 ITR 192 (SC)
10
DCIT v. Rana Sugars Ltd (ITA No. 48/Chd/2011) – Taxsutra.com
7
8
Chandigarh Tribunal’s ruling
 The Gujarat High Court in case of Sikandarkhan N.
Tunvar & Ors has held that provisions of Section
40(a)(ia) of the Act are applicable where the amount
has been paid or remain payable. However, the
Allahabad High Court in case of Vector Shipping
Services (P) Ltd has followed the decision of
Special Bench in case of Merilyn Shipping &
Transport. Both these decisions were considered by
11
the Tribunal in case of Hi Tech Foods wherein the
Tribunal followed the decision of Gujarat High Court
in the case of Sikandarkhan N Tanwar where it was
held that Section 40(a)(ia) of the Act would cover
not only to the amounts which are payable as on 31
March of the particular year but also which are
payable at any time during the year.
 The taxpayer relied on the Allahabad High Court
ruling in the case of Vector Shipping Services (P)
Ltd. Further the taxpayer claimed that the SLP filed
by the revenue against this decision has already
been dismissed by the Supreme Court. In this
regard, the Tribunal held that dismissal of SLP by
the Supreme Court in case of Vector Shipping
Services (P) Ltd would not change the legal
position.
 The Supreme Court in case of V.M. Salgaocar and
12
Bros. Pvt Ltd
had observed that different
considerations apply when a SLP is simply
dismissed by saying ‘dismissed’, and an appeal
provided under Article 133 is dismissed with the
words ‘the appeal is dismissed’. In the former case
it has been laid down by the Supreme Court that
when a SLP is dismissed, Supreme Court had not
commented on the correctness or otherwise of the
order from which leave to appeal is sought. But
what the Court meant was that it does not consider
it to be a fit case for exercise of its jurisdiction under
Article 136 of the Constitution.
 On a perusal of the decision of V.M. Salgaocar and
Bros. Pvt Ltd it indicates that if an SLP is dismissed
in limine or simplictor, it cannot be said that the
Supreme Court has commented on the merits of the
issue. It is a simple case of rejection of prayer for
entertaining the SLP. The same view was taken by
the Supreme Court again in the case of
Kunhayammed and others v. State of Kerala and
13
another .
__________________
11
Hi Tech Foods v. ITO (ITAs No. 987, 988 & 989/Chd/2011) (Chandigarh
Tribunal)
12
V.M. Salgaocar and Bros. Pvt Ltd v. CIT [2002] 243 ITR 383 (SC)
13
Kunhayammed and others v. State of Kerala and another [2000] 245 ITR
360 (SC)
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
 If an SLP is dismissed by the Supreme Court, then it
cannot be said that the Supreme Court has laid
down any law. In the case of Vector Shipping
Services, the Supreme Court had dismissed the
SLP. Therefore, it was a case of simple dismissal of
SLP and cannot be said to have laid down any law.
 Accordingly, the Tribunal followed the decision of
the Gujarat High Court in case of Sikandarkhan N.
Tunvar & Ors instead of the decision of Allahabad
High Court in case of Vector Shipping Services, and
confirmed the order of lower authorities where the
lower authorities had disallowed the payments made
by invoking the provisions of Section 40(a)(ia) of the
Act for non-deduction of tax at source.
Our comments
The controversy with respect to disallowance under
Section 40(a)(ia) of the Act has been a matter of
debate before the Courts/Tribunal. The Supreme Court
had dismissed the SLP filed by the tax department
against the decision of Allahabad High Court in the
case of Vector Shipping.
The Chandigarh Tribunal in the present case observed
that if an SLP is dismissed in limine or simplictor, it
cannot be said that the Supreme Court has commented
on the merits of the issue. It is a simple case of
rejection of prayer for entertaining the SLP.
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. All rights reserved.