section 194A/194C/194J when payer is a sole proprietor

Applicability of section 194A/194C/194J when payer is a sole proprietor X is a sole proprietor. For the financial year 2009-10, his turnover is Rs. 45,00,000. During the financial year 2008-09, his turnover was Rs. 39,00,000. Before April 1, 2008, his turnover was always more than Rs. 40,00,000. He has paid interest to a non-banking non- financing company of Rs. 75,000 on April 10, 2008 without deducting tax at source under section 194A. Further, he has paid a royalty of Rs. 35,000 to a company on March 25, 2009 without deducting tax under section 194J. Likewise, on May 20, 2009, he has paid an advance of Rs. 7,50,000 to a building contractor without deducting tax at source under section 194C. I want to know whether the disallowance provisions of section 40(a)(ia) are applicable in this case. --------- A sole proprietor or an individual is supposed to deduct tax under sections 194A, 194C and 194J if his books of account are required to be audited under section 44AB in the immediately preceding financial year. In the financial year 2007-08, turnover of the sole proprietor is more than Rs. 40,00,000 and books of account are required to be audited under section 44AB. Consequently, tax has to be deducted at source under these sections during the financial year 2008-09. In the financial year 2008-09, turnover of the sole proprietor is Rs. 39,00,000. Consequently, in the immediately following financial year 2009-10, tax is not deductible under these sections. However, under section 194J an additional concession is given. Under section 194J, tax is not deductible by an individual in the following additional cases – a. if the payment is for personal purposes; or b. if it is payment of royalty. In these two additional cases, tax is not deductible under section 194J by an individual, even if his books of account are required to be audited in the immediately preceding financial year. Keeping in view these provisions, the specific points raised in the query may be answered as follows – 1. Payment of interest of Rs. 75,000 - Interest is paid on April 10, 2008. In the immediately financial year 2007-08, turnover is more than Rs. 40,00,000. Tax should have been deducted in the financial year 2008-09 under section 194A. For non-deduction of tax, provisions of section 40(a)(ia) will be attracted and Rs. 75,000 will be disallowed for calculating income of the previous year 2008-09. 2. Payment of royalty of Rs. 35,000 - Royalty is paid on March 25, 2009. In the immediately financial year 2007-08, turnover is more than Rs. 40,00,000. However, provisions of section 194J are applicable in the case of royalty only when the payer is a person other than an individual/HUF. Tax is, therefore, not deductible in this case. In other words, disallowance provisions of section 40(a)(ia) are not applicable. 3. Advance payment to building contractor - Rs. 7,50,000 is paid in advance to a contractor on May 20, 2009. During the preceding financial year 2008-09, turnover is lesser than Rs. 40,00,000. Books of account are not required to be audited. Tax is, therefore, not deductible. Disallowance provisions of section 40(a)(ia) cannot be invoked. Dr. Vinod K. Singhania