IMPORTANT POINTS
Section 40(a)(ia) covers not only those cases where the amount is payable but also when it is paid. Failure to deduct the tax and depositing it with Central Government makes an assessee defaulter u/ss 196, 200 and 201. Consequently, such payments are not deductible expenditure u/s 40(a)(ia).
SLP dismissed in limine does not amount to confirming view of High Court.

JUDGMENT :

A.K. SIKRI, J.

The neat question which arises for consideration in this appeal relates to the interpretation of Section 40(a)(ia) of the Income Tax Act, 1961 (hereinafter referred to as the 'Act'). Section 197C of the Act has also some bearing on the issue involved.

2) Section 40 of the Act enumerates certain situations wherein expenditure incurred by the assessee, in the course of his business, will not be allowed to be deducted in computing the income chargeable under the head 'Profits and Gains from Business or Profession'. One such contingency is provided in clause (ia) of sub-section (a) of Section 40. This provision reads as under:

“S. 40 -Amounts not deductible:

Notwithstanding anything to the contrary in Sections 30 to [38], the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”,—

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(ia) any interest, commission or brokerage, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of Section 200;

Provided that where in respect of any such sum, tax has been deducted in any subsequent year or has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.

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3) As per clause (ia), certain payments made, which includes amounts payable to a contractor or sub-contractor, would not be allowed as expenditure in case the tax is deductible at source on the said payment under Chapter XVIIB of the Act and such tax has not been deducted or, after deduction, has not been paid during the previous year or in the subsequent year before the expiry of the time prescribed under sub-section (1) of Section 200 of the Act. In the instant case, certain payments were made by the appellant assessee, in the Assessment Year 2006-2007 but the tax at source was not deducted and deposited. We may point out here itself that as per Section 194C of the Act, payments to contractors and sub-contractors are subject to tax deduction at source. The Income Tax Department/Revenue has, therefore, not allowed the amounts paid to the sub-contractors as deduction while computing the income chargeable to tax at the hands of the assessee in the said Assessment Year.

4) It can be seen that Section 40(a)(ia) uses the expression 'payable' and on that basis the question which is raised for consideration is:

“Whether the provisions of Section 40(a)(ia) shall be attracted when the amount is not 'payable' to a contractor or sub-contractor but has been actually paid?"

5) Some facts which will have bearing on the aforesaid issue need to be mentioned at this stage:

The appellant-assessee is engaged in the business of purchase and sale of LPG cylinders under the name and style of M/s. Palam Gas Service at Palampur. During the course of assessment proceedings, it was noticed by the Assessing Officer that the main contract of the assessee for carriage of LPG was with the Indian Oil Corporation, Baddi. The assessee had received the total freight payments from the IOC Baddi to the tune of Rs.32,04,140/-. The assessee had, in turn, got the transportation of LPG done through three persons, namely, Bimla Devi, Sanjay Kumar and Ajay to whom he made the freight payment amounting to Rs. 20,97,689/-. The Assessing Officer observed that the assessee had made a sub-contract with the said three persons within the meaning of Section 194C of the Act and, ther