tds on labour contract - not remitted

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

21 November 2009 In case TDS is deducted from labour sub-contractor but not remitted, then, does the entire payment made to such sub-contractor have to be added back which arriving at taxable income, in case, income is declared under presumptive basis u/s 44AD.

Labour payment is direct payment. Do we have to deduct TDS on direct expenditure also. TDS is to be made only for expenses debited to P/L account and not for expenses debited to Trading account. please give relevatn sections also where I can get property proof of this

Jagdish Narayan Sawant

Jagdish Narayan Sawant (Expert)
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23 November 2009 Dear Sir
44AD is applicable to Eligible assessee engaged in eligible business.
who are eligible assessee?
Eligible assessee are individual, HUF

individual and huf are liable to deduct tds only if the they are required get books of accounts audited under section 44AB during financial year immediately preceding the financial in which such tds deducted.

hence those covered by section 44AD are not required to follow tds provisions, because they are not required to get the books of accounts audited under section 44AB

Querist : Anonymous

Querist : Anonymous (Querist)

25 November 2009 but at the time of assessemtnt, addition of such payments was made to declared income, since TDS ought to have been deducted inspite of declainring income on presumptive basis. DO you have any case laws to support this ?

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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27 July 2025 This is an excellent and nuanced query, and it often comes up in practical assessments involving presumptive taxation under **Section 44AD** and **TDS non-compliance**.

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## ✅ **Issue Breakdown**

You're asking:

1. **If TDS is deducted but not remitted**, does the entire expense get disallowed even under presumptive taxation u/s **44AD**?
2. Is **TDS applicable on expenses** debited to **Trading Account** (like direct labour)?
3. Is there any **legal support (case laws or circulars)** stating TDS compliance is not mandatory under 44AD?

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## ✅ **Clarified Position on Each Point**

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### 🧾 **1. TDS not remitted – What happens under Section 44AD?**

Under **Section 40(a)(ia)** of the Income Tax Act:

> If TDS is deductible **but not deducted or not deposited**, **30% of such expenditure** is disallowed.

However, **this disallowance applies only when computing income under regular provisions (e.g., P\&L-based)** — **not under presumptive taxation** like 44AD.

### ✅ **Key Point**:

* Under **Section 44AD**, the income is presumed (e.g., 8% of turnover), and **no separate deduction is allowed** or disallowed.
* Therefore, **Section 40(a)(ia)** **does not apply** when computing income under **presumptive taxation**.

📌 **CBDT Circular No. 37/2016, dated 02.11.2016**:

> Where income is **computed on a presumptive basis**, **disallowances under Section 40(a)(ia)** etc. **shall not be made**.

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### ⚖️ **Supporting Case Law**:

1. **CIT vs. Surinder Pal Anand \[2010] 192 Taxman 264 (P\&H)**:

> Once income is declared under section 44AD, the assessee is **not required to maintain books**, and **no disallowance can be made u/s 40(a)(ia)**.

2. **ACIT vs. Kapil Dev \[ITAT Chandigarh, ITA No. 789/Chd/2013]**:

> Disallowance under section 40(a)(ia) not applicable when income offered under 44AD.

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### 🧾 **2. Is TDS applicable on Direct Expenses (like wages/labour) debited to Trading Account?**

Yes, **TDS is applicable** on all **specified payments** under Chapter XVII-B — regardless of whether the expense is debited to **P\&L or Trading Account**.

Examples:

* **Section 194C**: Payments to contractors/subcontractors
* If **labour contractor** is engaged — and payment exceeds limits — TDS applies, even if shown in **Trading A/c** as direct cost.

**There is no exemption just because it’s a direct expense.**

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### 🧾 **3. Is TDS compliance necessary under Section 44AD?**

✅ **If the assessee is an individual/HUF and is NOT liable for tax audit u/s 44AB in the preceding year**, then **TDS provisions are not applicable** (per Section 194C(4) and 194A(1)).

But if the assessee **was liable for audit in the preceding FY**, then **TDS is mandatory**, even under 44AD — though **disallowance under 40(a)(ia)** still won't apply if 44AD is used.

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## ✅ **Summary Answer**

| Question | Answer |
| -------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| TDS deducted but not remitted — disallowance under 44AD? | ❌ No disallowance under 40(a)(ia) if income is declared under 44AD. |
| Is TDS applicable on direct (trading a/c) expenses? | ✅ Yes, if threshold is crossed and assessee is liable to deduct TDS. |
| Is TDS applicable under 44AD? | ❌ Not if individual/HUF not liable for audit in preceding year. ✅ If audit was applicable previously, TDS may apply but still no disallowance under 40(a)(ia). |

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Let me know if you’d like templates for replies to notices or assessment objections based on this.

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