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IS IT ALLOWED

abhishek (STUDENT) (162 Points)

02 April 2010

DEAR ALL

what if TDS not deducted on a building construction contract?

--is depreciation on same allowed?

--will the payment made to contractor be disallowed?and will be added back humbly by the AO in the income of assesse?

--how that capital expenditure will be treated?

please explain ur clear views

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12 Replies

Nicky (Chartered Accountant) (245 Points)
Replied 03 April 2010

Assuming the person getting the building constructed is using the stated building as a Fixed Assets, hence the question of depreciation arises:

a) Section 40 starts with "Notwithstanding anything contrary in section 30 to 38..." and section 32 requires the assessee to own the building, in the instant case the assessee owns the building and depreciation is not subject to TDS hence Depreciation would be allowed.

b) Now we come to 40a(ia), wherein it clearly states any payment to contractor or sub contractor but again the beginning of section 40 reads "the following amounts shall not be deducted in computing income chargeable under the head business and profession". when he haven't deducted it so where is the question of adding it?

Would like to draw your attention to similar situation under section 40A3, where if you pay in cash for Fixed Assets disallowance under 40A(3) is not administered ( Circular No. 34/05.03.2007 )

abhishek (STUDENT) (162 Points)
Replied 03 April 2010

well said nicky brother,,,but could u tell me one thing

if depreciation will be allowed on asset

and there is no question of addition of payment as income

then why there is obligation of making TDS on works contract?

assuming the above said statements are true ,then what if TDS not made?

whats the rationale behind the law where it has been expressly stated to make TDS on construction contract?

CA Babit Khurana (learning is my passion) (338 Points)
Replied 03 April 2010

Dear Abhishek

If you not deduct tds than you are not allowed to capitalized assets, then if you can not allowed to to capitalized than how can you take depriciation as an expenses.

If this is allowed than threre is now question of deduction of tax at source.

So as per my view Income TAx Act can not allowed to capitalized this payment, if company can not deduct tds.

Max Payne (employed) (2569 Points)
Replied 04 April 2010

Circular No. 34, dated 5-3-1970

Nicky sir,

small date correction.

Abhishek, Nicky sir has given the correct answer......

The same is income of contractor no?? thats why we have to deduct TDS u/s 194C.... If not deducted, the 201 and 221 will apply....

Also for depreciation, disallowance does not come, because, 40(a)(ia) speaks of

"any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid......."

It does not cover depreciation.... It covers amt payable to contractor, but not the depreciation. Since we didn't claim deduction for the payment, the disallowance wont come.

(DEPRECIATION IS AN ALLOWANCE ON THE BLOCK OF ASSETS, not on the individual asset - see sec 32(1))

Nicky (Chartered Accountant) (245 Points)
Replied 05 April 2010

Dear Abhishek and Babit,

In normal course whenever one reads he reads about what is not written beneficially... from the assessee's point of view and not the other way round..

Questions like how can? in absence of specific provisions cannot be validated...

Probably, this dose not answer your question why WC has TDS, because it is an expenditure and expenditure hence attracted by the norms of TDS,

Secondly, we cannot capitalize assets if we have not paid the TDS? Don’t we buy a motor car and capitalize, where is the question of TDS

In short, capitalization and deduction of TDS have no rationale

CA. Ashish Bihani (C.A.) (307 Points)
Replied 05 April 2010

Nicky is right...

abhishek (STUDENT) (162 Points)
Replied 05 April 2010

thanks nicky sir for your clear views but honestly speaking,this issue is not clear to me at optimal,please sir could your expand your clarifications

best wishes

Nicky (Chartered Accountant) (245 Points)
Replied 05 April 2010

Abhishek let me know which view of mine you need clarification and u need clarification by way of case laws or specific provisions or more text please do let me know