S. 40(a)(ia) Disallowance for Non Deduction & Short Deduction of TDS

Article contains Extract of  Section 40(a)(ia) of the Income Tax Act,1961, It Explains Disallowance for non-deduction or non-payment of TDS under Section 40(a)(ia) , Controversy around Section Section 40(a)(ia) and  Examples related to Disallowance for non-deduction or non-payment of TDS under Section 40(a)(ia).

Extract of  Section 40(a)(ia) of the Income Tax Act,1961 –

“Section 40(a)(ia) 

(ia) thirty per cent of any sum payable to a resident, 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 :

Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, thirty per cent of such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid :

Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the ³⁸[resident] payee referred to in the said proviso.

Explanation.—For the purposes of this sub-clause,—

(i) “commission or brokerage” shall have the same meaning as in clause (i) of the Explanation to section 194H;

 (ii) “fees for technical services” shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9;

(iii) “professional services” shall have the same meaning as in clause (a) of the Explanation to section 194J;

(iv) “work” shall have the same meaning as in Explanation III to section 194C;

 (v) “rent” shall have the same meaning as in clause (i) to the Explanation to section 194-I;

(vi) “royalty” shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9;”

Disallowance for non-deduction or non-payment of TDS:

Under section 40(a)(ia) of the Act, in case of payments made to resident, the deductor is allowed to claim deduction for payments as expenditure in the previous year of payment, if tax is deducted during the previous year and the same is paid on or before the due date specified for filing of return of income under section 139(1) of the Act.

In case of non-deduction or non-payment of tax deducted at source (TDS) from certain payments made to residents, the entire amount of expenditure on which tax was deductible is disallowed under section 40(a)(ia) for the purposes of computing income under the head “Profits and gains of business or profession”. The disallowance of whole of the amount of expenditure results into undue hardship.

In order to reduce the hardship, non-deduction or non-payment of TDS on payments made to residents as specified in section 40(a)(ia) of the Act, the disallowance shall be restricted to 30% of the amount of expenditure on which TDS is not deducted.

Earlier, 100% of such amount is disallowed.

Earlier, the non-deduction or non-payment of TDS on payments made to residents results in disallowance only with respect to certain specified categories of payments (viz. interest, commission, brokerage, rent, royalty, fee for technical services or fee for professional services).

NOW section 40(a)(ia) of the I-T Act to increase the scope of disallowance to every category of payment made to a resident on which tax is required to be deducted at source under Chapter XVII-B of the I-T Act.

Controversy related to Section 40(a)(ia):-

What amount to be disallowed us 40(a)(ia) on non deduction or short deduction?

Views:-

1) 30% of whole amount.

2) 30% of amount which TDS not deducted or short deducted (Proportional basis).

3) disallowance under section 40(a)(ia) is only for non deduction of tax at source and not short-deduction of tax.

Analysis of views

1) First view is illogical as if person have deducted and paid tax on maximum amount but he didn’t deducted and paid on minor amount.

2) Second view is True and fair view as 30% disallowance to be made on proportionally .

3) Third view is illogical because section 40(a)(ia) says that fails to deduct the whole or any part of the tax.

Let us understand it with some Examples:-

1) Tax to be deducted us 194J @10% is Rs 10,000/- on Rs 1,00,000/- and no deducted and paid. What will be amount of disallowance?

Answer:– No tax deducted and paid on Rs 1,00,000.

So Amount of disallowance will be Rs 30,000/- (30% of Rs 1,00,000/-) and if it is paid after due date then Rs 30,000/- will be allowed as deduction in next year.

2) Tax to be deducted us 194J @10% is Rs 10,000/- on Rs 1,00,000/- and actually deducted and paid Rs 1,000/-. What will be amount of disallowance?

Answer:- Tax deducted and paid is Rs 1,000/- means on Rs 10,000/- tax is deducted and on Rs 90,000/- tax is not deducted.

So Amount of disallowance will be Rs 27,000/- (30% of Rs 90,000/-) and if it is paid after due date then Rs 27,000/- will be allowed as deduction in next year.

This is solved based on second view discussed above and if we take first view then disallowance will be Rs 30,000 which will be incorrect. To prove that first view is incorrect , let discuss example no 3.

3) Tax to be deducted us 194J @10% is Rs 10,000/- on Rs 1,00,000/- and actually deducted and paid Rs 9,000/-. What will be amount of disallowance?

Answer:- Tax deducted and paid is Rs 9,000/- means on Rs 90,000/- tax is deducted and on Rs 10,000/- tax is not deducted.

So Amount of disallowance will be Rs 3,000/- (30% of Rs 10,000/-) and if it is paid after due date then Rs 3,000/- will be allowed as deduction in next year.

This is solved based on second view discussed above and if we take first view then disallowance will be Rs 30,000 which will be incorrect. Hence with this example it is proved that first view is incorrect.

Final Conclusion is that in case of non deduction and short deduction amount disallowed us 40(a)(ia) will be 30% of amount which TDS not deducted or short deducted (Proportional basis).

Some Related Caselaws are as under:

1. No Disallowance for non deduction of TDS u/s 194H or 194J in absence of principal-agent relationship and technical services.

Disallowance under Section 40(a)(ia) for non deduction of TDS u/s 194H and 194J on account of trade offers amounting to INR 834,92,63,976 provided by assessee to its distributors (HCL Info systems Ltd as well as other distributors) was not justified as there was absence of a principal-agent relationship thus, benefit extended to distributors could not be treated as commission under Section 194H and also, AO had not given any reasoning or finding to the extent that there was payment for technical service liable for withholding under Section 194J. Refer – Nokia India Pvt. Ltd. Vs DCIT (ITAT Delhi) – ITA No. 5791/Del/2015

2. Disallowance u/s 40(a)(ia) not applicable to Short-Deduction of TDS

The proceeds to disallow the sum u/s 40(a)(ia) respect of which no TDS was deducted. During the appellate proceedings the AR of the appellant submits that TDS was deducted at a lower rate and hence provisions of section 40(a)(ia) are not applicable in respect of the appellant. It is sufficiently clear from a perusal of the foregoing lower appellate discussion that this is not an instance of non-deduction of TDS per se. The assessee had indeed deducted TDS u/s.194C albeit at a lesser rate followed by three other head(s) of 194-H, 194-I and 194-J involving nil deduction. And also that the Assessing Officer had disallowed the impugned sum under the first head only. Therefore, at the end the impugned disallowance u/s 40(a)(ia) does not apply in a case involving short deduction of TDS. Refer – A.K. Industries Vs ACIT (ITAT Kolkata) – ITA No. 665/Kol/2018

3. No interest allowance u/s 40(a)(ia) if deductee furnished Form 15G or 15H

Disallowance of interest paid to persons who furnished Form 15 G and Form 15 H  should not be made u/s 40a(ia) for non deduction of TDS as the requirement of filing of Form 15G and 15H with the prescribed authority viz., CIT was only procedural and that could not result in a disallowance u/s 40a(ia). Refer – JCIT Vs Karnataka Vikas Grameena Bank (ITAT Bangalore) – ITA No. 1391 & 1392/Bang/2016

4. No Section 194C TDS on reimbursement of vehicle expenses

Where a vehicle was provided by assessee to the concerned parties and assessee was to bear the vehicle expenses actually incurred by the cab owners which will be reimbursed by the parties concerned, reimbursement of actual expenses incurred by assessee could not be treated as payment subject to TDS under section 194C. Refer – Sri. Singonahalli Chikkarevanna Gangadharaiah Vs ACIT (ITAT Bangalore) – ITA No. 785/Bang/2018

5. If assessee complies with section 194C(6), no disallowance U/s. 40(a)(ia)

Assessee claimed that on obtaining of either the declaration contemplated under second proviso to the pre-amended section 194C(3) or the PAN details under the present section 194C(6), the assessee was not required to make any deduction at source on the payments made to the contractor or sub-contractor, irrespective of the fact whether or not such information was furnished to the authorities as prescribed under third proviso to the amended section 194C(3) or the present section 194C(7). So if assessee complies with the provisions of section 194C(6), disallowance under section 40(a)(ia) does not arise just because there is violation of provisions of section 194C(7) of the Act. Refer – DCIT Vs Murugarajendra Oil Industry (P) Ltd. (ITAT Bangalore) – ITA No. 2094/Bang/2017

Check More case Laws on Section 40(a)(ia) at following link- https://taxguru.in/tag/section-40aia/?type=judiciary-2

(Author ‘Navin Agicha‘ can be reached at [email protected])

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Republished with Amendments