REGARDING TO SUBCONTRACTORS
This query is : Resolved
02 January 2010
DEAR SIR
WE HAVE SUB CONTRACTORS(X,Y,Z). WE ARE PAYING TO THEM(X,Y) THROUGH BANK ACCOUNT BUT ONE SUB CONTRACTOR THERE IS NO BANK ACCOUNT(Z). AT THIS SITUATION WE ARE PAYING TO THAT SUB CONTRACTOR(Z) THROUGH ANOTHER SUB CONTRACTOR BANK A/C(X) IS IT CORRECT OR NOT ? IN THE ABOVE SITUATION WE ARE PASSING THESE ENTRIES:
1.X A/C DR 2. Z A/C DR
TO BANKA/C TO X A/C
NOTE: WE ARE PAYING AMOUNT NEARLY 7 TO 8 LAKHS TO SUB CONTRACTOR (Z)
1. IF THE ABOVE PROCEDURE IS CORECT WHICH SECTION WILL APPLY?
2. IN THE ABOVE PROCEDURE IF THERE IS ANY DISALLOWANCES WHICH SEC WILL APPLY?
THANKS IN ADVANCE
WE HAVE SUB CONTRACTORS(X,Y,Z). WE ARE PAYING TO THEM(X,Y) THROUGH BANK ACCOUNT BUT ONE SUB CONTRACTOR THERE IS NO BANK ACCOUNT(Z). AT THIS SITUATION WE ARE PAYING TO THAT SUB CONTRACTOR(Z) THROUGH ANOTHER SUB CONTRACTOR BANK A/C(X) IS IT CORRECT OR NOT ? IN THE ABOVE SITUATION WE ARE PASSING THESE ENTRIES:
1.X A/C DR 2. Z A/C DR
TO BANKA/C TO X A/C
NOTE: WE ARE PAYING AMOUNT NEARLY 7 TO 8 LAKHS TO SUB CONTRACTOR (Z)
1. IF THE ABOVE PROCEDURE IS CORECT WHICH SECTION WILL APPLY?
2. IN THE ABOVE PROCEDURE IF THERE IS ANY DISALLOWANCES WHICH SEC WILL APPLY?
THANKS IN ADVANCE
02 January 2010
From view point of Income Tax it is ok if you are charging the requisite TDS, since you can pay the party thru any media i.e. to say cash, bank, or for any other consideration...
Bot instead of passing the composite entry, pass the dual entry for the clarity..
Bot instead of passing the composite entry, pass the dual entry for the clarity..
02 January 2010
thanks to pawan periwal.Is this entries is correct or not:
1.X A/C DR
TO BANKA/C
2. Z A/C DR
TO X A/C
We also deduct TDS from all sub contractors.
If the above procedure is correct which section will apply?
If there is any disallowances in the above procedure which section will apply?
1.X A/C DR
TO BANKA/C
2. Z A/C DR
TO X A/C
We also deduct TDS from all sub contractors.
If the above procedure is correct which section will apply?
If there is any disallowances in the above procedure which section will apply?
20 July 2025
Got it — you have a situation where:
You have subcontractors X, Y, and Z.
You pay X and Y directly through their bank accounts.
Subcontractor Z has no bank account, so you pay Z’s money through X’s bank account.
You pass these accounting entries:
Debit X’s Account
Debit Z’s Account
Credit Bank Account (paid to X’s bank account)
Your questions:
1. Is this procedure correct?
2. Which Income Tax sections apply here?
3. Are there any disallowances, and which section applies?
Explanation & Guidance:
1. Payment through another subcontractor’s bank account (Z’s payment via X’s account):
From an accounting and legal perspective, ideally you should pay each subcontractor through their own bank account for clarity and audit trail.
Paying Z through X’s bank account is not recommended because:
It creates confusion in tracking payments.
It may raise compliance issues during tax audits.
It may lead to question on genuineness of payment or possible money laundering concerns.
However, technically, there is no direct prohibition in Income Tax law on paying through a third party’s bank account, provided:
You maintain proper documentation.
You deduct TDS correctly on the payment to Z (even though paid via X’s account).
You have evidence that Z has received the money.
If the amount is large (7-8 lakhs), proper documentation and a clear trail is very important.
2. Which Sections apply?
TDS Provisions:
If you are paying subcontractors for services, you are required to deduct TDS under Section 194C (Payment to Contractors/Subcontractors).
TDS is to be deducted on the gross amount paid to subcontractor Z, regardless of the mode of payment.
Disallowance provisions:
If you fail to deduct TDS or deduct TDS but fail to deposit it timely, Section 40(a)(ia) will apply — disallowing the expenditure related to subcontractor payment to the extent of TDS not deducted or not deposited.
If the payment lacks documentary evidence or is considered suspicious, the Assessing Officer can disallow the expenses under Section 37(1) or invoke Section 40(a)(ia) based on TDS default.
Section 269SS and Section 269ST (relating to cash transactions) may be relevant if payments are made in cash exceeding prescribed limits (but here you are paying through bank).
3. Are there any disallowances?
Disallowance under Section 40(a)(ia) may occur if:
You did not deduct TDS properly on subcontractor Z’s payment.
Or TDS deducted but not deposited on time.
If payment through another subcontractor’s account raises doubts on genuineness, the Assessing Officer may scrutinize and possibly disallow if it appears as bogus or routed transactions.
Best practice advice:
Insist subcontractor Z opens a bank account to receive payments.
Make payments directly to subcontractors' bank accounts to avoid audit risk.
Deduct and deposit TDS correctly and timely under Section 194C.
Maintain proper supporting documents (agreement, invoices, payment proofs).
Pass clear accounting entries separately for X and Z for clarity.
Summary:
Query Section/Provision Notes
TDS on subcontractor payments Section 194C Deduct TDS at prescribed rates
Disallowance for non-deduction Section 40(a)(ia) Disallow expenditure if TDS not deducted/deposited
Cash payment limits (if any) Section 269SS, 269ST Not applicable if payment via bank
You have subcontractors X, Y, and Z.
You pay X and Y directly through their bank accounts.
Subcontractor Z has no bank account, so you pay Z’s money through X’s bank account.
You pass these accounting entries:
Debit X’s Account
Debit Z’s Account
Credit Bank Account (paid to X’s bank account)
Your questions:
1. Is this procedure correct?
2. Which Income Tax sections apply here?
3. Are there any disallowances, and which section applies?
Explanation & Guidance:
1. Payment through another subcontractor’s bank account (Z’s payment via X’s account):
From an accounting and legal perspective, ideally you should pay each subcontractor through their own bank account for clarity and audit trail.
Paying Z through X’s bank account is not recommended because:
It creates confusion in tracking payments.
It may raise compliance issues during tax audits.
It may lead to question on genuineness of payment or possible money laundering concerns.
However, technically, there is no direct prohibition in Income Tax law on paying through a third party’s bank account, provided:
You maintain proper documentation.
You deduct TDS correctly on the payment to Z (even though paid via X’s account).
You have evidence that Z has received the money.
If the amount is large (7-8 lakhs), proper documentation and a clear trail is very important.
2. Which Sections apply?
TDS Provisions:
If you are paying subcontractors for services, you are required to deduct TDS under Section 194C (Payment to Contractors/Subcontractors).
TDS is to be deducted on the gross amount paid to subcontractor Z, regardless of the mode of payment.
Disallowance provisions:
If you fail to deduct TDS or deduct TDS but fail to deposit it timely, Section 40(a)(ia) will apply — disallowing the expenditure related to subcontractor payment to the extent of TDS not deducted or not deposited.
If the payment lacks documentary evidence or is considered suspicious, the Assessing Officer can disallow the expenses under Section 37(1) or invoke Section 40(a)(ia) based on TDS default.
Section 269SS and Section 269ST (relating to cash transactions) may be relevant if payments are made in cash exceeding prescribed limits (but here you are paying through bank).
3. Are there any disallowances?
Disallowance under Section 40(a)(ia) may occur if:
You did not deduct TDS properly on subcontractor Z’s payment.
Or TDS deducted but not deposited on time.
If payment through another subcontractor’s account raises doubts on genuineness, the Assessing Officer may scrutinize and possibly disallow if it appears as bogus or routed transactions.
Best practice advice:
Insist subcontractor Z opens a bank account to receive payments.
Make payments directly to subcontractors' bank accounts to avoid audit risk.
Deduct and deposit TDS correctly and timely under Section 194C.
Maintain proper supporting documents (agreement, invoices, payment proofs).
Pass clear accounting entries separately for X and Z for clarity.
Summary:
Query Section/Provision Notes
TDS on subcontractor payments Section 194C Deduct TDS at prescribed rates
Disallowance for non-deduction Section 40(a)(ia) Disallow expenditure if TDS not deducted/deposited
Cash payment limits (if any) Section 269SS, 269ST Not applicable if payment via bank
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