T N Pandey: TDS need not be filed for pay by voucher

CHAT ROOM

We are road contractors. The number of our construction sites, and subsequently, the turnover, keeps on increasing every year. We have a large fleet of machinery. New plant and machinery are acquired, using loans from banks.

Will the growth of our business be termed as an "extension of existing business", inviting disallowance under Section 36(I) (iii) of the interest? If we disallow it, can the interest be capitalised, to claim depreciation?

The Finance Act, 2003 added a provision to Section 36(iii) of the Income Tax Act, 1961, saying "provided that any amount of interest paid in respect of capital borrowed for acquisition of new assets for the extension of existing business or professions (whether capitalised in the books of accounts or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction". Hence, if there is an interval between the date of acquisition of the asset and its use, the interest for this period would not be admissible as deduction".

The two per cent eduction cess will be effective from April 1, 2004. During the first quarter of the current financial year, we have recovered tax deducted at source from payments made to several sub-contractors, whose final bills have also been settled, on completion of the jobs.

Now, if the cess is effective from April 1, 2004, we shall have to bear that amount, as it is not practical to recover it from the deductees. Is there any remedy?

As far as deduction of the education cess for TDS is concerned, it will apply only after the Finance Bill has received the assent of the President.

A professional consultant is required to visit our factories and offices in three different states. He issues a bill for the professional fees.

But for travel and and other expenses, he submits a hand-written statement on a plain paper, and the amount is reimbursed on our payment vou-cher, duly signed by him. Are we required to deduct tax at source from such reimbursement?

Section 194J stipulates deduction of tax at source from "fees" for professional services. In Circular No 715, dated August 8, 1995, the Central Board of Direct Taxes said in a reply to the question (whether deduction of tax at source under Section 194J has to be made out of the gross amount of the bill, including reimbursements or excluding reimbursements for actual expenses) Section 194 J refers to any sum paid. Obviously, reimbursement amounts cannot be deducted out of the bill amount for the purpose of TDS.

This circular applies in situations of composite. When separate bills have been given in respect of out-of-pocket expenses, the claim cannot be said to be for fees and hence, no tax is to be deducted while paying such bills.

As per the new sub-clause (ia) in clause (a) of Section 40, where tax has been deducted or paid in any subsequent year, the sum, from which tax was deducted, shall be allowed as deduction in the previous year in which such tax is paid. TDS for the month of March is payable in April.

Does this amendment imply that sums, from which tax is deducted in March, shall not be allowed for the previous year ended March 31, but only in the subsequent year, although TDS is paid in April, within the time prescribed?

If so, would it not be penalising the tax deductor for no fault committed by him, because he cannot be expected to pay March TDS in that month itself?

The new sub-clause (ia) inserted in Section 40 of the Finance Act 2004, relates to various categories of payments to a resident like interest, commission, brokerage fees for professional or technical services or amount paid to contractor or sub-contractor.

Such payments will not be allowed deduction in income computation, if taxes have not been deducted or after deductions have not been paid before the expiry of time prescribed under Section 200(1).

Hence, if tax has been deducted by March 31 of the relevant previous year, the deduction can be claimed even if payment is not made by this date but is made within the period prescribed under Section 200(1).