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Payment to contractors with out deducting tds

Jyothis (Article) (1127 Points)

10 September 2015

A ltd paid Rs.1,00,000 to "C",who undertakes electrical works of office building.Entire amount in respect of such work is capitalised by Altd.Out of Rs.100,000 ,Rs.80,000 being labour cost & Rs.20,000 being material cost.

A ltd fails to deduct tds on total amount payable to "C".

What are consequence for default.

Since the amount is capitalised, No disallowance for depreciation.

Is Altd free all penalities/Compliances.

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19 Replies

S. Shiroor (Others) (1207 Points)
Replied 10 September 2015

Take 10k from him and pay TDS online and file TDS return. Tell him to file IT return to claim it.

Ashok J (CA Final) (880 Points)
Replied 10 September 2015

Tds is only 8000....no tds on sale of goods

1 Like

S. Shiroor (Others) (1207 Points)
Replied 10 September 2015

Thanks Ashok. If the payment is made under 94C then 2%

Miss Rinkal (Student) (1304 Points)
Replied 11 September 2015

In the invoice are labour cost and material charges shown separately? If not, then TDS will be on Rs 100000/-, apart from it take a declaration from service provider that he has considered the income and will include in his return of income or tell the service provider to reimburse to the extent of TDS amt.

Also TDS not deducted hence there will be disallowance of 30% of payment I.e Rs 30000/- and with all the interest and penalties for failure of deducting TDS. However if it is paid before the due date of filing it return, such sum would not be disallowed.

1 Like

Jyothis (Article) (1127 Points)
Replied 11 September 2015

There will be no disallowance for Depreciation,as it is a statutory deduction & not specific expense.Since the amount is capitalised.

Can all company follow capitalisation of expense as a remedy for non deduction of TDS

Miss Rinkal (Student) (1304 Points)
Replied 11 September 2015

@ Jyothis:

Refer to the case law Sumilon Industries Ltd (ITAT), dated 12.11.2010

Even though it is statutory deduction, Sec 40 starts with "Notwithstanding any thing contained in Sec 30 to 38,...." and in it Sec 32 which is related to depreciation is also covered.

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Jyothis (Article) (1127 Points)
Replied 11 September 2015

But disallowance was deleted for frieght amount on P&M capitalised.

Various case laws supports, no disallowance on amount capitalised.

Is there any other ways, payer be held as asssessee in default on the ground accounting is not important,since payment is made to contractor

Miss Rinkal (Student) (1304 Points)
Replied 12 September 2015

@ Jyothis:

Sorry I misunderstood. And thanks also. This debate actually helped me to go through the concept with further clarification.

Here are the points which will clear the concept of 40a(ia) completely

Applicability to Section 30 to 38 or other Sections also

A question arose whether the provisions of Section 40(a) (ia) is applicable to sums allowable as expenses under Sections other than 30 to 38 of the Act, for computation of income chargeable under the head “Profits and gains of business or Profession”.

Section 40 clearly stipulates that “Notwithstanding anything to the contrary in Sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”. Hence from the above it is evident that the provisions of Section 40(a)(ia) of the Act is applicable only for sums which are otherwise allowable under Sections 30 to 38 of the Act and not under any other section of the Act.

In strict sense if any expense is otherwise allowable under Section 28 of the Act then the same will not be covered by the provisions of Section 40(a)(ia) of the Act. Similar law has been laid down by the Hon’ble Hyderabad ITAT in the case of Teja Construction vs. ACIT reported in 39 SOT 13.

Whether the provisions of Section 40(a)(ia) is applicable to Capital expenses.

As discussed above provisions of Section 40(a)(ia) of the Act is applicable to sums allowable under Sections 30 to 38 of the Act. Hence if any capital expense is allowable as deduction under Sections 30 to 38 of the Act while computing income under the head “Profits and gains from business or profession”, the same will be covered under Section 40(a)(ia) of the Act.
Under Section 35 of the Act expenses incurred on capital assets for research and development is allowable as deduction and hence the same will be covered by the provisions of Section 40(a)(ia) of the Act.
A question arises where the claim of depreciation under Section 32 of the Act is covered under Section 40(a) (ia) of the Act. The provisions of Section 40(a)(ia) of the Act is applicable to payments specified therein which are allowable under Section 30 to 38 of the Act. Since the claim of depreciation is not payment or expenditure in strict sense but the same is statutory allowance, so strictly the claim of depreciation will not be covered under Section 40(a))(ia) of the Act. Further the actual cost and WDV is defined in Section 43 of the Act and provisions of Section 40(a)(ia) of the Act does not override the provisions of Section 43 of the Act.
In the case of Shri Vishnu Anant Mahajan vs. ACIT in ITA No. 3002/Ahd/2009 for A.Y. 2006-07 the Hon’ble Special Bench ITAT, Ahmedabad vide its order dated 25.05.2012, after relying on the decision of the Hon’ble SC in the case of Nectar Beverages P Ltd vs. DCIT reported in 314 ITR 314 and of Hon’ble Mumbai ITAT in the case of Hoshang D Nanavati vs. ACIT in ITA No. 3567/Mum/2007 has held that “Depreciation” is not an expenditure but the same is statutory deduction.

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Jyothis (Article) (1127 Points)
Replied 12 September 2015

So can i conclude if an expense on which TDS is deductable under chapter XVII-B,(Say payment to contractors) is capitalised.

No disallowance/other interest/penalty provision under 201 and payer will not be deemed to be assesse in default.

Again can i suggest not to deducted on payments made to contractors if we capitalise such expenses.

Miss Rinkal (Student) (1304 Points)
Replied 12 September 2015

Only if such capitalised expenses do not form part of profit and loss A/c except depreciation

1 Like

Jyothis (Article) (1127 Points)
Replied 12 September 2015

Thank u for clearing All my doubts regarding disallowance for non deduction of tds.

1 Like

Miss Rinkal (Student) (1304 Points)
Replied 12 September 2015

Not only your doubt but mine as well. Even I had wrong opinion abt dep first but the same is clarified on further reference. Thanks to you and your question

Jyothis (Article) (1127 Points)
Replied 17 September 2015

If we consider no disallowancefor Depreciation u/s 40(ia)- non deduction of tds, what will be the situation in case of tds to be deducted in case of payment on purchase of any immovable property.Since we are capitalising Land purchase as Fixed asset.

How will income tax authorities ensure proper compliance of deduction of tds, if all such payments are capitalised.(Say payment to contractors capitalised,Purchase of land).

Since no disallowance for expenses capitalised.

Miss Rinkal (Student) (1304 Points)
Replied 18 September 2015

@ Jyothi S.:

There will be no disallowance but penalty and interest provisions will attract. Each section is independent of itself. Disallowanceis not done because it was a capital expenditure and it was not debited to P&L.

However penalty and interest will be levied because TDS was not deducted.

1 Like