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DISALLOWANCE U/S 40(a) (i) of the Income Tax Act,1961

TDS DEFAULT ON PAYMENT OF ANY NATURE OTHER THAN SALARY, TO A NON-RESIDENT / FOREIGN COMPANY

In this article I am going to have a discussion on Section 40(a)(i) of the Income Tax Act, 1961. Which deals with disallowance of certain business expenditure in case of TDS default is made by the Payer at the time of making payments to a non-resident or foreign company. Clear understanding of all the sections of disallowance is very  much important as it captures its place in  the Audit Report as well as its effects the tax liability of the assesses also. We will discuss the complete scenario one by one. Let's have a look on that:-

TDS DEDUCTION LIABILITY

Section 195 of the Income Tax Act, 1961 provides that every person whether Individual, HUF, Partnership Firm, company etc whether liable for Tax audit or not, is required to deduct TDS at the specified rates in respect of any payments made, other than salary, to a non-resident or a foreign company if the following conditions are satisfied :-

  • Amount payable is of the nature of Interest, Royalty, Fees for Technical services or any other sum other than salary
  • Amount payable is taxable in the hand of recipient in India

CONSEQUENCES IN CASE TDS IS NOT DEDUCTED

100% of the amount paid/payable will be disallowed in the hand of payer.

RELIEF IN RESPECT OF DISALLOWANCE

In case the assessee has not deducted TDS on the payments made to a non-resident or a foreign company during the relevant FY or after deduction fails to deposit the same before the due date of submission of ROI u/s 139(1) but the same was deducted and deposited by the assessee in the subsequent year, then so much of the amount disallowed in the year of TDS default will be allowed as deduction from the NP of the FY in which the tax was actually deposited. Lets have a clear understanding of this fact with the help of some examples:-

Laxminath Enterprises is a resident firm. An amount of Rs. 100000.00 is payable by the firm to a foreign company. TDS is required to be deducted upto Dec 2016. Due date of filing of ROI by the firm is 30.09.2017

Condition I:TDS is not deducted by the resident firm during the FY 2016-17

The interest amount will be disallowed in the hand of resident firm during the FY 2016-17

Condition II: TDS is deducted by the Firm on 28.12.2016 and deposited on 14.04.2017

Whole of the Interest amount will be allowed as Deduction during the FY 2016-17 as the tax is deducted during the FY 2016-17 and payment is made before the due date of filing of ROI.

Condition III: TDS is deducted by the firm on 05.04.2017 and deposited on 13.04.2017

Whole of the amount will be disallowed in the FY 2016-17 as although the TDS was deposited before the due date of submission of ROI but the TDS was not deducted before 31.03.2017

It means to get the deduction of payment made to the Non-Residents or Foreign Company, TDS should be deducted before 31st March of the relevant FY and should be deposited before the due date of filing of Return of Income, otherwise either the expenses will be fully disallowed or the allowance of deduction in respect of expenditure will be allowed in the year in which the TDS was actually deposited by the payer.


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Category Income Tax, Other Articles by - MANSHI BAID 



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