Tds deducted wrongly in previous year.

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

06 January 2012 We have deducted TDS @1% to a Partnership concern under sec 194C (Instead of 2%) in previous assessment year and filed our return accordingly. Party also claimed TDS as per certificate given by us.

Now we got notice under sec201(1) for short deduction of tax.

What options we have now ??

CA PARAS BAFNA

CA PARAS BAFNA (Expert)
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08 January 2012 The expenditure will be disallowed proportionately.
.
You can take a plea by requesting the ITO as the said assessee firm has already been assessed and the department is not going to suffer any loss of revenue, penalty proceedings may be dropped. Considering the evidences produced , the amount of Short TDS and Penalty may not be levied. However, Interest may be levied.

Querist : Anonymous

Querist : Anonymous (Querist)

10 January 2012 @ Paras Ji,

I got little confused.

Firstly you said "The expenditure will be disallowed proportionately".

If so then where is the matter of short TDS & penalty arises ?

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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27 July 2025 Good question! Let me clarify the confusion:

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### 1. **Short TDS and Penalty:**

* You deducted TDS at 1% instead of 2%, so there is **short deduction of tax**.
* Under **Section 201(1)**, the tax department can issue a notice for **tax demand** including **interest and penalty** on short TDS.

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### 2. **Disallowance of Expenditure:**

* If you have **not deducted full TDS**, the department may **disallow proportionate expenses** while assessing your income.
* This means your **taxable income increases** because part of your expenses (equal to short TDS amount) will be **added back**.

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### 3. **How both relate?**

* **Disallowance of expenditure** is a consequence on your income tax calculation.
* **Short TDS & penalty** arise due to **non-compliance of TDS rules**.

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### 4. **What you can do now:**

* **Pay the shortfall TDS** along with **interest** under Sections 201(1A) and 206C.
* **Request the Assessing Officer** to waive penalty considering:

* Deduction was made (although at lower rate).
* Party has claimed TDS as per certificate.
* Department is not losing revenue eventually.
* Keep records showing that the deductee (partnership firm) was assessed on full income.

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### Summary:

| Issue | Consequence | Remedy |
| ------------------ | ------------------------------------ | -------------------------------------------------- |
| Short TDS deducted | Tax demand, interest, penalty | Pay short TDS + interest; plead for penalty waiver |
| Short TDS leads to | Proportional disallowance of expense | Adjust accounting, claim relief from AO |

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Would you like help drafting a letter or representation to the Income Tax Officer for penalty waiver?

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