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QUESTIONS & ANSWERS
Failure to deduct tax on disallowance of expenditure
What is the amendment introduced in the Finance Bill, 2008, before it became an Act relating to disallowance of expenditure on which tax was failed to be deducted at source?
Sec. 40(a)(ia) inserted with effect from April 1, 2005, disallowed the amounts from which tax was failed to be deducted, allowing it in the year of deduction on deposit of such tax with the Government.
The Finance Act now amends the section retrospectively from the date of inception of the section. There will be practically no change in respect of this law as regards duty to deduct tax and deposit the same within the stipulated period for the first eleven months of the accounting year, except for sparing delayed deduction/ deposit in the same year. As for deductions made in the month of March, disallowance of payment itself will not be made even if the deducted tax is deposited belatedly, as long such deducted amount is deposited before the due date for filing return. The amendment is claimed to be made to mitigate the hardship caused by bona fide mistakes but would cover only few cases. Relaxation should have been made for all payments made before the due date for filing return.
For the first assessment year 2005-06, the provision should not be made applicable in view of short notice. It should have been clarified that where direct payment is made by the payees before the due date for filing return, deduction should not be denied. In the other case of delay due to uncertainty in law, the Board had not been responding to requests for extension of time limits under Sec. 119(2)(b) but should exercise its powers to remove genuine hardship. The provision for disallowance covers only expenditure covered by Sec. 30 to 38 in view of the opening of the non-obstante clause to Sec. 40(a) and not to items of trading and manufacturing account. Since some officers are not aware of the significance of the non-obstante clause, this needs clarification.
All these could be done by the Central Board of Direct Taxes by issuing Circular/ Orders in exercise of its powers under Sec. 119 of the Act. As otherwise, this draconian provision under Sec. 40(a)(ia), has no justification to be in the statute.
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