2010 (6) TMI 513 - AT - Income Tax

Rectification of mistakes - Disallowance made by the AO u/s 40(a)(ia) in respect of the payment against which the TDS was deduced in the month of March 2005 and deposited before the due date of filing of the return - AO has allowed the deduction only to the extent of Rs..2, 83, 43, 188/- and maintained the disallowance of the balance expenditure on the ground that only above amount is paid on the month of march and the balance of amount is paid earlier - Since in the case in hand when the assessee had deducted the tax in the last month of the previous year i.e March 2005 and deposited the same before the due date of filing of the retune u/s 139(1) then it is covered under clause A of section 40(a)(ia) - Regards the decision relied upon by the learned DR when the proviso to section 40(a)(ia) is not contrary to the main section/enactment then the said decision will not help the case of the revenue.

Summary

Issues Involved:
1. Confirmation of the disallowance made by the AO under section 40(a)(ia) regarding TDS payments.
2. Interpretation and application of the proviso to section 40(a)(ia).
3. Method and timing of TDS deduction and payment.
4. Consistency of the accounting method followed by the assessee.

Issue-Wise Detailed Analysis:

1. Confirmation of the Disallowance Made by the AO under Section 40(a)(ia):
The primary issue revolves around whether the CIT(A) was justified in confirming the disallowance made by the AO under section 40(a)(ia) for payments where TDS was deducted in March 2005 but deposited before the due date of filing the return. The assessee had paid Rs.2,83,43,188 to various contractors, and the AO disallowed the entire expenditure on grounds that the TDS payment was not made within the statutory period. The CIT(A) upheld this disallowance, which led to the appeal.

2. Interpretation and Application of the Proviso to Section 40(a)(ia):
The assessee argued that the proviso to section 40(a)(ia) should apply, asserting that the tax was deducted in March 2005 and deposited on 21.09.2005, before the due date of filing the return as per section 139(1). The CIT(A) dismissed this argument, leading to further analysis. The Tribunal considered the retrospective amendment to section 40(a)(ia) by the Finance Act (No.2), 2008, effective from 01.04.2005, which allowed expenditure as a deduction if TDS was deposited before the due date of filing the return.

3. Method and Timing of TDS Deduction and Payment:
The Tribunal examined the provisions of section 194C and section 40(a)(ia). The assessee contended that section 40(a)(ia) governs the actual deduction and payment of TDS, not section 194C. The Tribunal noted that section 40(a)(ia) disallows deductions if TDS is not deducted or paid within the prescribed time. However, if TDS is deducted in the last month of the previous year and paid before the due date of filing the return, the deduction is allowable.

4. Consistency of the Accounting Method Followed by the Assessee:
The assessee claimed that the method of accounting, crediting income on 31st March and deducting tax, was consistently followed and accepted by the AO. The Tribunal found that the AO allowed deductions for payments made in March 2005 but disallowed those made before March 2005. The Tribunal emphasized that the provisions of section 40(a)(ia) should be applied to ensure timely deduction and deposit of TDS, not to penalize the assessee for following a consistent accounting method.

Conclusion:
The Tribunal concluded that the CIT(A) and AO erred in disallowing the expenditure since the assessee deducted TDS in March 2005 and deposited it before the due date of filing the return. The Tribunal set aside the orders of the lower authorities and allowed the assessee's claim for deduction. The appeal was thus allowed, and the disallowance under section 40(a)(ia) was overturned.

Pronouncement:
The appeal of the revenue was dismissed, and the decision was pronounced in the Open Court on 25.06.2010.