No disallowance u/s 40( a)(ia) for tds under different provi

Nabeel (CA) (3288 Points)

12 November 2011  

No disallowance u/s 40( a)(ia) for TDS under different provision


Disallowance of expenditure u/s 40(a )(ia) of the I T Act for non TDS  is very technical and common these days in an assessment proceeding. In one case DCIT vs. S.K Tekriwal I.T.A. No. 1135/Kol/2010, Assessment Year : 2007-08 , before ITAT, Kolkata , the issue was whether A.O can disallow the expenditure u/s 40( a) (ia ) of the I T Act when assessee deducted tax at source , but under a different provision and also deposited the deducted tax .


TDS case: The facts

The assessee is engaged in the business of construction .During the course of assessment proceedings, A.O noticed that the assessee has debited total payments of 3,37,37,464/- under the head ‘machine hire charges’. The Assessing Officer also found that the assessee has deducted tax @ 1% on such payments, therefore, he required the assessee as to why tax u/s. 194I of the Act was not deducted. It was explained before the Assessing Officer that payments were made to sub-contractors for completion of specific work; and therefore, tax was deducted @ 1% as per the provisions of section 194C(2) of the Act.

The Assessing Officer concluded that the payments were made for hiring of machines, and that the provisions of section 194I of the Act are applicable in the case of the assessee and so, tax should have been deducted @ 10%. The Assessing Officer then made proportionate disallowance under the provisions of section 40a (ia) of the Act in respect to ‘machinery hire charges’. Aggrieved, assessee preferred appeal before CIT(A) who deleted the addition made by the A.O.


The decision by Tribunal

We are of the view that the provisions of section 40(a)(ia) of the Act has two limbs, one is where, inter alia, assessee has to deduct tax and the second where after deducting tax, inter alia, the assessee has to pay into Government Account. There is nothing in the said section to treat, inter alia, the assessee as defaulter where there is a shortfall in deduction. With regard to the shortfall, it cannot be assumed that there is a default as the deduction is not as required by or under the Act, but the facts is that this expression, ‘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 on or before the due date specified in sub-section (1) of section 139′. This section 40(a)(ia) of the Act refers only to the duty to deduct tax and pay to government account. If there is any shortfall due to any difference of opinion as to the taxability of any item or the nature of payments falling under various TDS provisions, the assessee can be declared to be an assessee in default u/s. 201 of the Act and no disallowance can be made by invoking the provisions of section 40(a)(ia) of the Act.


Summing up on disallowance for non TDS

This decision of Tribunal clarifies that provision u/s 40(a )(ia) is for non TDS and not for short fall of deduction or deduction under a different head.