Shree Laminators Ltd. Vs ITO (ITAT Kolkata)
Introduction The Kolkata Bench of the Income Tax Appellate Tribunal, in J.D. Marketing v. ITO, Ward 37(1), Kolkata,
Introduction
The Kolkata Bench of the Income Tax Appellate Tribunal, in Shree Laminators Ltd. v. ITO, Ward-9(1), held that expenditure cannot be disallowed under Section 40(a)(ia) merely because tax was deducted at a lower rate. Following the jurisdictional Calcutta High Court’s decision in CIT v. S. K. Tekriwal, the Tribunal distinguished short deduction of tax from complete non-deduction.
The Tribunal also deleted a separate disallowance concerning interest on delayed payments for purchase of materials, holding that such interest was compensatory and connected with business operations.
Facts of the Case
The assessee filed its return on 30 September 2011, declaring total income of ₹12,04,820. During scrutiny, the Assessing Officer examined payments made to Timespac India Limited towards management consultancy fees and brokerage or commission.
The payments comprised management consultancy fees of ₹78,42,330 and brokerage/commission of ₹32,53,850. The assessee deducted tax at 4.25%, claiming entitlement to deduction at a lower rate under a bona fide belief.
The Assessing Officer considered the consultancy payments covered by Section 194J and brokerage or commission covered by Section 194H. According to the officer, tax should have been deducted at 10%.
Treating the difference as a TDS shortfall, the officer made proportionate disallowances of ₹40,88,250 against consultancy fees and ₹16,96,250 against brokerage or commission under Section 40(a)(ia).
A further amount of ₹35,045 was disallowed as interest considered penal in nature. The assessment determined total income at ₹70,24,370.
Findings of the CIT(A)
The CIT(A) sustained the disallowances under Section 40(a)(ia). The appellate authority observed that the assessee had not furnished an accountant’s certificate under Section 201(1) demonstrating that the recipient had accounted for the income and paid the corresponding taxes.
The CIT(A) also upheld the disallowance of ₹35,045 relating to interest expenditure. Aggrieved by these conclusions, the assessee approached the Tribunal.
The controversy therefore involved both the legal consequence of deducting tax at a lower rate and the character of interest paid for delayed settlement of trade liabilities.
Assessee’s Arguments
The assessee relied on CIT v. S. K. Tekriwal, 361 ITR 432 (Calcutta). It argued that Section 40(a)(ia) addresses cases involving non-deduction of tax or failure to deposit deducted tax, rather than a shortfall arising from a bona fide interpretation of the applicable provision or rate.
According to the assessee, a dispute over the rate of deduction could potentially attract proceedings under Section 201. However, that issue could not automatically justify disallowing the underlying business expenditure under Section 40(a)(ia).
For the interest expenditure, the assessee challenged its treatment as a penalty because the payment related to delayed payments for materials purchased in business.
Tribunal’s Ruling on TDS Shortfall
The Tribunal identified the principal question as whether deduction under a different provision or at a lower rate could trigger disallowance under Section 40(a)(ia).
Following the binding decision of the jurisdictional Calcutta High Court in S. K. Tekriwal, it answered this question in the assessee’s favour.
The Tribunal held that where tax had actually been deducted, a difference concerning the applicable section or rate did not amount to complete failure to deduct tax. Consequently, Section 40(a)(ia) could not be invoked to disallow the expenditure on that basis.
It therefore deleted both disallowances: ₹40,88,250 relating to management consultancy fees and ₹16,96,250 relating to brokerage or commission.
The relief rested on the distinction between short deduction and non-deduction, rather than an affirmative finding that the assessee’s claimed lower rate was correct.
Interest on Delayed Trade Payments
The Tribunal separately examined the interest disallowance of ₹35,045.
It held that interest on delayed trade payments was compensatory in character and intrinsically linked to the assessee’s business operations. Accordingly, the amount could not be sustained as a non-deductible penal payment on the facts recorded.
The Tribunal directed deletion of this disallowance as well and allowed the appeal.
Author’s Comments
The decision reinforces the importance of identifying the precise nature of a TDS default before applying an expenditure disallowance. A rate dispute and complete non-deduction have different consequences under the principle followed by the Tribunal.
However, the order should not be read as approving deduction at any rate selected by a taxpayer. The Tribunal’s reasoning preserves the distinction between relief from Section 40(a)(ia) and possible consequences under Section 201.
Businesses should retain the basis for any lower deduction claim, supporting correspondence, and payment records. The separate interest ruling also highlights that the character and business purpose of a payment, rather than its description alone, determine whether it is compensatory or penal.
Cases Discussed
- CIT Vs S. K. Tekriwal — [2014] 46 taxmann.com 444 (Calcutta); [2014] 361 ITR 432 (Calcutta). The jurisdictional High Court held that a shortfall in TDS arising from a difference concerning the applicable provision or rate did not warrant disallowance under Section 40(a)(ia), although consequences under Section 201 could arise. Followed by the Tribunal.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
This appeal filed by the assessee is directed against the order dated 31.03.2014 of the Office of the Commissioner of Income Tax passed under Section 143(3) of the Assessment Year 2011-12 of the Income-Tax Act, 1961 (hereinafter referred to as “the Act”).
2. Brief Facts of the Case the assessee filed its return of income for A.Y. 2011-12 on 30.09.2011, declaring a total income of Rs.12,04,820/-. The case of the assessee is selected for scrutiny and during scrutiny proceedings, the Assessing Officer (AO) noted payments made to M/s Timespac India Limited towards management consultancy fees Rs. 78,42,330/- and brokerage/commission of Rs. 32,53,850/-.The assessee deducted TDS at the rate of 4.25% on these amounts under the bona fide belief/claim of lower deduction rate entitlement. The AO treated these payments as falling under Section 194J and Section 194H respectively (requiring standard deduction @ 10%). On the reasoning that there was a shortfall in TDS deduction, the AO disallowed proportional amounts of Rs. 40,88,250/- and Rs. 16,96,250/- under Section 40(a)(ia).The AO further added Rs. 35,045/- on account of interest payments, holding them to be penal in nature and non-deductible. The total income was assessed at Rs.70,24,370/-.
3. Aggrieved by the order assessee preferred appeal before CIT(A) where in Ld. CIT(A) dismissed the grounds related to Section 40(a)(ia) disallowances on the reasoning that the assessee failed to furnish an accountant’s certificate under Section 201(1) to prove that the payee had accounted for the income and paid taxes thereon and also affirmed the disallowance of ₹35,045/- regarding interest expense.
4. Being aggrieved by and dissatisfied with the order assessee preferred appeal before us by taking following primary grounds:
1. Disallowance u/s 40(a)(ia) – Management Consultancy Fees: Challenge to the confirmation of disallowance amounting to ₹40,88,250/- on account of alleged lower deduction of TDS.
2. Disallowance u/s 40(a)(ia) – Commission & Brokerage: Challenge to the confirmation of disallowance amounting to ₹16,96,250/- on account of alleged lower deduction of TDS.
3. Disallowance of Interest Expense: Challenge to the addition of ₹35,045/- towards interest paid on delayed payments for purchase of materials.
4.1. The learned AR by citing a decision of Kolkata High Court passed in CIT v. S. K. Tekriwal [2014] 46 taxmann.com 444 (Calcutta) / [2014] 361 ITR 432 (Calcutta) has submitted that Calcutta High Court affirmed that Section 40(a)(ia) applies strictly to instances of non-deduction or non-payment of TDS into the Government account. Where tax has been deducted under a bona fide belief or difference of opinion regarding the applicability of specific TDS provisions/rates, it constitutes a shortfall in deduction. For such shortfalls, an assessee may be treated as an assessee-in-default under Section 201, but no disallowance can be made by invoking Section 40(a)(ia).
5. We have heard the contention and find that the primary legal issue is whether Section 40(a)(ia) can be invoked to make a disallowance in cases where tax has been deducted under a different provision or at a lower rate (i.e., cases involving a shortfall in deduction rather than complete non-deduction).Respectfully following the binding principle laid down by the Jurisdictional High Court in CIT v. S. K. Tekriwal, we hold that where tax has been deducted by the assessee (even if at a lower rate or under a different section due to difference in interpretation), the provisions of Section 40(a)(ia) cannot be invoked to disallow the underlying expenditure. Shortfall or difference in rate does not equate to complete failure or non-deduction. Therefore, the disallowance of ₹40,88,250/- and ₹16,96,250/- made by the Assessing Officer and confirmed by the Ld. CIT(A) is hereby deleted.
5.1. Regarding Ground of Interest Expense:
The interest on delayed trade payments is compensatory in character and intrinsically linked to business operations. The disallowance of ₹35,045/- is accordingly directed to be deleted.
In the result, the appeal filed by the Assessee is allowed.
Kolkata, the 15th October, 2026.
