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Doubt sec 40a(ia)

CA Babit Khurana (learning is my passion) (338 Points)

20 April 2010

As per section 40a(ia) payment of cousulting fee made to resident or non resident without deduction of tds is disallowed.

My Queries

Q1- Suppose a person have to deduct tax on payment of consulting fee to resident of india, but failed to to do so later ITD issued notice that you have to deduct and pay tax on such payment. That person without deduction of tax pay the necessary amount out of his pocket as Tds now can he claim deduction of expeniture on which tds should be deducted.

Q2 IS deduction and deposit both are necessary to claim deduction of expenditure under setion 40a(ia) of IT Act,1961.

Pl give ref to support your answer.

Thanks in advance

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13 Replies

Amir (Learner) (4016 Points)
Replied 20 April 2010

Dear Babit,

This issue has not settled yet......

Based on Law what we have at present , Deduction of expenditure shall not be allowed if Tax has not been deducted & deposited...

So mere Deposit (from own pocket) will not allow the deduction....

But Yes, Law needs to be amended on this front since many authors are of the opinion that deduction will be allowed in case of Deposit only (& which should be the case actually)

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SUDHIR & PRADEEP JI (CA FINAL+LLB + DISA) (2299 Points)
Replied 20 April 2010

nice answer amir

you are right that the deduction will be calimed only when the tds has been deposited in the credit of central government it does'nt matter whether it is from its own pocket or from the other asseessee pocket.

if im wrong pls correct me.

CA Babit Khurana (learning is my passion) (338 Points)
Replied 20 April 2010

Pradeep as per amir reply only deposit of tds is not enough to claim expenditure as deduction. I think you are missread amir reply pl read this line again So mere Deposit (from own pocket) will not allow the deduction

Madroamer (-) (168 Points)
Replied 20 April 2010

hi dudes,

see the dept considers only deduction and payment of TDS. so say 1000.Rs paid TDS is 10/- but u paid Rs. 1000/- to the person without deducting tds but u paid out of ur own hands Rs. 10/- the dept cant disallow it. actual state is u have to recover the amount of TDS paid by u Rs. 10/- is recoverable from the party. as such he ll stand as debtor in ur acc's. this is reply to Amir

Related to Babit

once TDS is paid then the expense can have availed as expenditure for that period for which TDS was deducted or paid out of ur pocket.

Eg:

AY 2009-10

Gross - 1000

TDS 10

not deducted nor paid.

for AY 2009-10 the Expense is disallowed

when u pay TDS in AY 2010-11 den that expense can be considered as expense of AY 2010-11 and as such tax liab can be adjusted. so the Act or dept never takes away the expenses paid but it requires the assessee to pay TDS to claim the expense.

Aditya Maheshwari (CA in Practice) (35867 Points)
Replied 20 April 2010

So suppose if the party had come here in India to perform the service and has now gone back to his own country and suppose one or two years have passed by then how will you claim the expenses even if TDS has been deducted? Though the law is not clear as it states TDS to be deducted, but how to claim the expenses then.

In your case even if TDS is paid from own pocket will not lead to allowance of expense then what is the use of paying the TDS. I think payment of TDS will lead to deduction of TDS as you have to debit some account also though at the end of the day the said amount will also be transferred to the profit & loss a/c. So this should lead to deemed deduction in my view.

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CA Babit Khurana (learning is my passion) (338 Points)
Replied 20 April 2010

Dear Aditya Maheshwari sir can you explain this in simple sense.

Thanx in advance

Aditya Maheshwari (CA in Practice) (35867 Points)
Replied 20 April 2010

If you pay TDS and the TDS is borne by the comapny paying it and even then the expenses will not be allowed then what is the use of paying TDS and if expenses are to be allowed then what should be done?

Also payment of TDS should lead to deduction of TDS as you have to debit some account to have a credit in the TDS ledger as you will have to close the TDS ledger account also by transferring the balance to the profit & loss a/c. So this should lead to deemed deduction in my view.

nidhi (student) (58 Points)
Replied 20 April 2010

I thnk deduction can d claimed only whn it has been deducted and deposited in favour of C.Govt before expiry of the time prescribed.

CA Sanjay Jha (ACCOUNTS MANAGER) (914 Points)
Replied 21 April 2010

Dear khurana G

If u have not deducted TDS from your party, u can not to claim expenditure.

If u have deducted TDS but not paid, u can not to claim expenditure.

If u have not deducted TDS but paid our paocket then TDS and Expenditure both are disallowed.

ITD wants that TDS should be deducted from Expenditure and deposited for claiming TDS.

Hari Krishna.D (CA & CWA Final) (38 Points)
Replied 21 April 2010

Hi,

Not only that, if the tds is deducted but is not paid to the credit of CG within prescribed date, the assessee cannot be allowed the expenditure, however if he deposits the dedn amount in next assessment year, he can claim allowance of such expenditure in that year, if im wrong pls correct me.

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Max Payne (employed) (2574 Points)
Replied 21 April 2010

I am also agreeing with Aditya Sir..

You can take the TDS paid out of own pocket to the P&L account, and disallow the TDS amount u/s 37.

Expense can be claimed in the year of payment.

Amir (Learner) (4016 Points)
Replied 21 April 2010

Dear Friends,

Neither TDS nor Expenses will be allowed unless both deduction & deposit happens..........

I can support my view with the extract of an article - But the author wrote this article in 2008. So any amendment or any decision can have different answer. but Don't think that has happened so far....

From the above, the provisions of section 40[ia] throws out an apparent meaning that if tax is not deducted, the expenditure will not be allowable even if the tax deduction amount is paid in to the treasury either by the payer from his own pocket or by the payee in form of his own tax.

This will surely strike any one as unjust and perverse to one’s conscience that the deduction should be denied even when the tax deducted amount has been deposited in the Government coffers.

These provisions are therefore being challenged in writ petitions in several Courts as on date and the matters are pending.

Entrire article is available at -

https://www.itatonline.org/articles_new/index.php/opinion-%E2%80%93-failure-to-deduct-tds-%E2%80%93whether-amounts-not-deductible/

Lakshman rao Kalamdani (Chartered Accountant) (30 Points)
Replied 13 August 2011

Dear Babit Khurana & Other Friends,

Pl refer to CIT V.NESTLE INDIA LTD (2005) 275 ITR 1 (DELHI HC) wherein it was held that, the most significant aspect of this provision is its payment within the time specified in law. You may also derive support from CBDT Circular No.5 (2005) 276 ITR (St) 151) (165) where the objects of introduction of Sec.40a(ia) are explained and also pl refer to the Supreme Court decision in HINDUSTAN COCO COLA BEVERAGES PVT LTD 293 ITR 163, the ratio of decision could be applied to your case.

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