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Supreme Court upholds disallowance of expenditure on default in withholding tax, irrespective of whether it is paid or payable

This Tax Alert summarizes a recent ruling of the Supreme Court (SC) in the case of Palam Gas Service (Taxpayer), wherein the issue before the SC was whether disallowance of expenses for failure to withhold taxes under the Indian Tax Laws (ITL) is applicable only in respect of expenses which remain “payable” or if it also covers expenses actually “paid” during the year without withholding of taxes.

The ITL provides for various consequences for failure to withhold taxes, which include disallowance of expenses “payable”, on which tax is deductible at source but such tax has not been deducted or, after deduction, has not been paid on or before the due date of filing return of income (disallowance provision).

Use of the expression “payable” in the disallowance provision gave rise to an issue of whether the disallowance applies only in respect of expenses remaining “payable” as on the last day of the tax year or whether it is also applicable in respect of expenses “paid” during the tax year without withholding tax. The High Courts (HC) were divided on this issue, but majority of the HCs held that disallowance is triggered even if expenses are “paid” during the tax year without withholding tax.

After taking note of the conflicting rulings of the HCs on the issue, the SC upheld the majority view that disallowance is triggered regardless of whether the amounts are “payable” or are actually paid during the tax year.

Income Tax Slab Rates for FY 2017-18 | AY 2018-19

Categorized based on age group

Particulars Category Based on Age Based on date of Birth
  Non Senior Citizen Aged below 60 years Born on or after 01.04.1958
Individual-Resident Senior Citizen Aged 60 or above but below 80 years Born on or after 01.04.1938 but before 01.04.1958
  Super Senior Citizen Aged above 80 years Born before 01.04.1938

Income Tax Slab Rates for Residential Individual FY 2017-18 i.e. AY 2018-19

Particulars Income Tax Rates
Income Slabs Non- senior Citizens Senior Citizens Super Senior Citizens
Upto Rs. 2,50,000 Nil Nil Nil
Rs. 2,50,001 to Rs. 3,00,000a 5% Nil Nil
Rs. 3,00,001 to Rs. 5,00,000 5% 5% 5%
Rs. 5,00,001 to Rs. 10,00,000 20% 20% 20%
Above Rs. 10,00,000 30% 30% 30%

Compliance Calendar for May17

Due Date Act/Enactment Nature of Transaction Existing Rules Mode
15th of Every month EPF & MP ACT 1952 Remitttance of Contributions Challan/ECR to be generated/uploaded "online" Remittance of Challan (Pay online through SBI or other bank)
15th of Every month EPF & MP ACT 1952 Statement Showing IW with nationality & Wages Statement IW-1 & Form - 5 & 2 Concerned/Regional RO
21st of Every month ESI ACT, 1948 Remittance of Contributions Challan/ECR to be generated/upload "online" Pay Online

Recent Updates On Compliance

Amendments in the Workmen’s Compensation Act

THE EMPLOYEE'S COMPENSATION (AMENDMENT) ACT, 2009 is the new name of THE WORKMEN'S COMPENSATION (AMENDMENT) ACT, 2009. Hence the words Workman/Workmen in the act require to be read as Employee.

The Compensation Payable on Death: Then INR 80000 and Now INR 120000

The compensation payable on permanent Total Disablement: Then INR 90000 and Now INR 140000

Actual monthly wages to be calculated without ceiling of INR 4000. In case of death, Max amount of claim compensation payable- INR 4.56lakh and for Permanent Disablement INR 5.58lakh

Definition of workmen replaced by "Definition of Employee"- also now includes CLERICAL employees

Contractor, not principal employer responsible for provident fund dues, Recent direction issued in the letter dated 2nd February 2017

The principal Employer is responsible for making sure that the contractor is registered with WPFO before awarding contract. But On allotment of independent code number, a contractor acquires the status of ‘establishment’ and responsible for deposit of employee provident fund Contributions.

2012 LLR 702, Madras High Court Says, “With respect to the contractors, who are registered with the provident fund department, having the independent code number, they are to be treated as ‘independent employee’. The petitioner, therefore, cannot be treated to be ‘principal employer’ for the purpose of those contractors”.

Definition of Wages for calculation of gratuity

For ESI contribution, even incentives are taken into consideration but what will you be the position when gratuity is to be calculated?

When it comes to gratuity, wages means basic plus dearness allowance and no other allowances including incentives.

The payment of incentives as paid to the employees is not wages under section 2(s) of the payment of gratuity act. Their Lordships observed that they have misunderstood the act and have wrongly held the concept of wages under the payment of gratuity act. If the payments have already made to respective employee by authorities, the same not going to be recovered

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Employee Self Service