ITAT Rajkot Allows Earlier TDS Disallowance in Year of Actual Tax Payment

RS Industech Private Limited Vs ITO (ITAT Rajkot)

Omission in Return Does Not Defeat Statutory Relief: ITAT Allows Earlier TDS Disallowance in Year of Payment

The Controversy

The Rajkot ITAT allowed a deduction of ₹10,48,139 under the proviso to section 40(a)(ia), representing expenditure disallowed in the preceding assessment year because the related TDS had not been deposited within the prescribed time.

The assessee subsequently deposited the TDS but omitted to claim the corresponding deduction in its original return for AY 2018-19. It sought the deduction through a letter during assessment proceedings, without filing a revised return. The Assessing Officer did not allow the claim, and the CIT(A) upheld that treatment.

The Tribunal nevertheless admitted and allowed the additional claim, holding that the deduction was statutorily allowable in the year of TDS payment.

Earlier Disallowance and Subsequent Compliance

The assessee, a private limited company engaged in the erection and repair of construction and engineering equipment, maintained regularly audited books of account.

For AY 2017-18, it had deducted tax from certain expenditure but failed to deposit that tax on or before the due date under section 139(1). Consequently, the applicable portion of the expenditure was disallowed under section 40(a)(ia).

The TDS was subsequently deposited on 21 and 22 March 2018, falling within FY 2017-18, relevant to AY 2018-19. The assessee therefore claimed that the previously disallowed amount became deductible while computing income for AY 2018-19.

However, its original return, filed on 26 October 2018, did not contain this deduction. The claim was subsequently submitted to the Assessing Officer through a letter dated 10 January 2020.

The assessment had been selected for limited scrutiny concerning TDS default and the resulting disallowance. The Assessing Officer completed the assessment under section 143(3) by accepting the returned income, without granting the additional deduction.

Why the CIT(A) Rejected the Claim

The CIT(A) treated the absence of a revised return as a principal procedural obstacle. Relying on Goetze (India) Ltd. v. CIT, 284 ITR 323 (SC), the appellate authority held that the Assessing Officer could not entertain a fresh deduction claim made through a written submission instead of a revised return under section 139(5).

The CIT(A) also raised an evidentiary objection. According to the appellate order, the assessee had not furnished a comprehensive one-to-one reconciliation connecting the TDS deposited in March 2018 with the specific expenditure disallowed for AY 2017-18.

The assessee’s reliance on CBDT Circular No. 14 of 1955 was also rejected. The CIT(A) considered that the circular’s emphasis on departmental fairness could not override statutory procedure or the Supreme Court’s ruling.

Although acknowledging that appellate authorities could admit additional claims, the CIT(A) declined to exercise that power. It observed that the TDS payment was already known when the original return was filed, and that the assessee had not explained its failure to claim the deduction or revise the return.

Assessee’s Submissions Before the Tribunal

The assessee argued that its entitlement arose directly from the proviso to section 40(a)(ia). Once the TDS relating to the earlier disallowance had been paid, the corresponding deduction belonged to the subsequent year.

It also relied on the CBDT circular and Article 265 of the Constitution, contending that an otherwise allowable deduction should be considered in determining its taxable income.

On the procedural issue, the assessee specifically submitted that the Tribunal could entertain the additional claim and direct the Assessing Officer to grant relief, notwithstanding the objection concerning the absence of a revised return.

The Revenue supported the treatment adopted by the lower authorities.

Tribunal’s Reasoning and Decision

After examining the submissions, case records and paper books, the Tribunal found that the TDS had been deducted earlier but deposited only in March 2018. It consequently held that the expenditure disallowed for AY 2017-18 became allowable in AY 2018-19, corresponding to the financial year of payment.

The Tribunal referred to the Cochin Bench decision reported at 59 taxmann.com 90, concerning Penpol Ltd., for the proposition that payments affected by the relevant TDS disallowance provisions become deductible in the year in which the tax is actually paid.

Characterising the relief as a statutory deduction duly allowable, the Tribunal allowed the additional claim of ₹10,48,139 and directed the Assessing Officer to grant it.

The appeal was allowed outright. The Tribunal did not remit the claim for fresh adjudication.

Author’s Comments

The decision highlights the importance of distinguishing substantive entitlement from the procedure used to claim it. Here, the Tribunal accepted that the subsequent TDS payment satisfied the statutory condition for allowing the earlier disallowed expenditure.

The relief concerns the previously disallowed 30% portion of expenditure. It should not be understood as allowing merely 30% of that already disallowed amount.

The order also illustrates the value of pursuing an omitted claim before the appellate forum. However, taxpayers should maintain a clear reconciliation between the original disallowance, the relevant TDS liability and its subsequent payment. Although the Tribunal granted relief directly in this case, those records remain central to establishing the deduction and preventing a duplicate claim.

Cases Discussed

• Termo Penpol Ltd. v. ACIT (ITAT Cochin) — (2015) 59 taxmann.com 90. Followed concerning deduction of expenditure previously disallowed under the TDS provisions in the year when the deducted tax is actually paid.
• Goetze (India) Ltd. Vs CIT (Supreme Court) — (2006) 284 ITR 323. Relied upon by the CIT(A) for rejecting a fresh deduction claim before the Assessing Officer in the absence of a revised return. The Tribunal nevertheless entertained and allowed the statutory claim.

FULL TEXT OF THE ORIGINAL ORDER OF ITAT RAJKOT

Captioned appeal filed by the assessee, pertaining to assessment year (AY) 2018-19, is directed against the order under section 250 of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) passed by the National Faceless Appeal Centre (NAC) Delhi/Commissioner of Income-tax (Appeals) [in short ‘NFAC/Ld.CIT(A)’], dated 06.03.2026, which in turn arises out of an assessment order passed by the Assessing Officer u/s 143(3) of the Act, dated 14.02.2020.

2. The grounds of appeal raised by the assessee are as follows:

1. That the Ld. AO has erred on facts and in law and failed to consider the claim of Rs.10,48,139/- allowable u/s 40(a)(ia) of the I.T. Act, 1961.

2. That, the findings of the Ld. AO and Ld. CIT(A) are not justified and are bad-in-law.

3. That, the assessee craves to add, amend, alter or delete any of the above grounds of appeals.

3. The brief facts necessary to be noted for the purpose of disposal of this case are as under. The assessee’s case was selected for limited scrutiny assessment under the E-assessment Scheme, 2019 on the following issues, viz: Default in TDS & Disallowance for such Default. Ground No. 1 raised by the assessee, before the Tribunal is related to the rejection of the claim for deduction of Rs.10,48,139/-. The Assessing Officer passed the order u/s 143(3) by accepting the returned income and ignoring the assessee’s request for admitting claim of an additional deduction made via a letter during assessment proceedings, before the assessing officer. The assessee, contended before the assessing officer that since the TDS was paid in March 2018, the deduction for the previously disallowed expenses is mandatory under the proviso to section 40(a)(ia) of the Act. However, the assessing officer rejected the claim of the assessee, therefore, aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before the Ld. CIT(A), who has confirmed the action of the Assessing Officer, observing as follows:

6.1.1 The primary issue for consideration is whether a fresh claim for deduction, not made in the original Return of Income, can be entertained by the Assessing Officer through a mere written submission without the filing of a Revised Return under section 139(5). Section 139(5) of the Act provides a specific statutory mechanism for an assessee to correct any “omission or wrong statement” by filing a revised return within the prescribed time limit. In the present case, the assessee filed its return on 26.10.2018. If the assessee discovered an omission regarding the claim under section 40(a)(ia), the appropriate legal remedy was to file a revised return.

6.1.2 The Hon’ble Supreme Court in Goetze (India) Ltd. v. CIT [2006] 284 ITR 323 (SC) has categorically held that the Assessing Officer has no power to entertain a claim for deduction otherwise than by filing a revised return. The Apex Court held that the statutory scheme of the Act does not permit the AO to deviate from the return of income filed by the assessee unless the return is revised under the law. As the assessee herein failed to utilize the window provided u/s 139(5), the AO was legally bound to ignore the fresh claim made via the letter dated 10.01.2020.

6.1.3 Furthermore, regarding the merits of the claim under the proviso to section 40(a)(ia), it is observed that the assessee has not provided a comprehensive one-to-one reconciliation between the TDS paid in March 2018 and the specific items of expenditure disallowed in the assessment/audit of AY 2017-18. A deduction under this proviso is not an automatic allowance; it requires strict verification of the nexus between the prior disallowance and the current payment. In the absence of a revised return, the AO had no occasion to conduct such a factual verification.

6.1.4 Regarding the reliance on CBDT Circular No. 14 of 1955, it is a settled position that departmental circulars cannot override the express provisions of the Act or the law declared by the Hon’ble Supreme Court. The circular emphasizes “fairness,” but it does not empower the authorities to bypass the mandatory procedural requirements of section 139. The assessee’s failure to comply with the procedural law (filing a revised return) cannot be cured by invoking general principles of natural justice.

6.1.5 While the appellate authority has the power to admit new claims, such power is discretionary and intended for cases where the assessee was prevented by sufficient cause from making the claim. In this instance, the assessee was fully aware of the TDS payment made in March 2018 at the time of filing the original return in October 2018. There is no explanation provided for the failure to claim this deduction in the ITR or to file a revised return thereafter. Procedural negligence does not warrant the exercise of appellate discretion to bypass the Supreme Court’s mandate in Goetze India. Accordingly, Ground No. 1 is dismissed”

4. Aggrieved by the order of Ld. CIT(A), the assessee is in further appeal before this Tribunal.

5. I have given our thoughtful consideration to rival contention. I have perused case file as well as paper books furnished by assessee.

6. Learned Counsel for the assessee argued that during the course of assessment proceedings, the assessee has made additional claim of allowability of expenses pertaining to assessment year (A.Y.) 2017-18, the same was disallowed due to non-deduction of TDS in that year. Since, the assessee has paid TDS during the year, the assessee has made additional claim as per proviso to section 40(a)(ia) of the I.T. Act. However, the additional claim has not been allowed during the course of assessment proceedings. The AO has also not made any reference for disallowance. Being aggrieved by the order of AO, the assessee has preferred an appeal before CIT(A), who has also dismissed the appeal of the assessee. The Ld. Counsel submitted that assessee is a Private Limited Company engaged in the business of Erections and Repairing of Construction / Engineering Equipment. The assessee-company has been maintaining books of account regularly. The books of account are duly audited both under Companies Act as well as under I.T. Act. In the present case, the order u/s 143(3) of the Act has been passed by the National e-Assessment Centre on 14.02.2020 without considering the additional claim of Rs. 10,48,139/- allowable to the assessee u/s 40(a)(ia) of the Act. The learned AO while passing the assessment order u/s 143(3) for A.Y. 2018-19 has not considered the additional claim of Rs. 10,48,139/-, allowable to the assessee u/s 40(a)(ia) of the Act, though not claimed in the return of income but allowable as per circular no. 14 (XL-35) dated 11.04.1955 and article 265 of constitution of India.

7. Learned Counsel for the assessee further argued that the assessee was required to deduct TDS, which was in fact deducted, however the assessee failed to deposit the TDS amount to the government account. However, the assessee paid the so deducted TDS in March 2018, therefore, claim should be allowed in the assessment year 2018–19. The Ld. Counsel again pointed out that TDS was deducted in the assessment year 2017-18, but actually paid in the assessment year 2018-19, that is, in the subsequent assessment year, therefore, claim should be allowed in the subsequent year, on payment basis. The Ld. Counsel further pointed out that Ld. CIT(A) disallowed claim of the assessee because Assessing Officer cannot entertain the fresh claim unless the assessee files the revised return of income. However, the Appellate Tribunal may entertain this issue and may direct the Assessing Officer to grant the relief to the assessee, as the assessee has paid the TDS (taxes) in subsequent year.

8. On the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which I have already noted in my earlier para and is not being repeated for the sake of brevity.

9. I have considered submissions of both the parties. I note that during the assessment year (AY) 2017-18, the assessee has incurred various expenses amounting to Rs. 38,27,130/- on which TDS of Rs. 93,719/- was deducted but was not paid on or before due date u/s 139(1) and hence the 30 percent of the amount paid or credited on which TDS was not paid was disallowed in AY 2017-18. The said TDS has been paid by the assessee on 21.03.2018 and 22.03.2018, that is, in FY 2017-18. Hence, as per proviso to section 40(a)(ia) the thirty percent of sum payable shall be allowed in the year in which the TDS is deposited. I note that the assessee has duly deposited the TDS in FY 2017-18, the amount disallowed in income of AY 2017-18 shall be allowed in AY 2018-19. Thus, disallowance of Rs.10,48,139/- made in income of AY 2017-18 shall be allowed as deduction in the computation of income of AY 2018-19.

The details of TDS for A.Y. 2017-18 which has been paid in A.Y. 2018-19 is as under:

10. I note that proviso of section 40(a)(ia) of the Act, clearly states that in case the TDS has been paid in subsequent year, 30% of such disallowance of expenses shall be allowed as deduction in subsequent year in which the payment of taxes are made. Therefore, I note that since the assessee has paid TDS in the present year, the 30% expenses, which have been disallowed in A.Y. 2017-18 is allowable as expenses in the A.Y. 2018-19. The identical view has been taken in the case of Termo Penpol Ltd. v. ACIT (59 taxmann.com 90) (Cochin Trib.) that in view of provisos to section 40(a)(ia) and section 40(a)(i), deduction of those payments which was liable to TDS had to be allowed in year in which tax was actually paid by assessee. Therefore, considering the above facts and circumstances of the case, I allow the additional claim of deduction u/s 40(a)(ia) of the Act, which is statutory deduction duly allowable. Hence, I direct the assessing officer, to allow the claim of the assessee.

11. In the result, appeal of the assessee is allowed.

Order is pronounced in the open Court on 08/10/2026.