Navin Agicha

Extract of Revised Section 40(a)(ia) of the Income Tax Act,1961 amended vide Finance Act, 2014 as applicable in relation to assessment year 2015-16 and subsequent years-

Section 40(a)(ia)  [any interest, commission or brokerage,  [rent, royalty,fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work)], 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 resident payee referred to in the said proviso.]

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:-

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).

(Author can be reached at agicha.navin@gmail.com)

Related Article-

Budget 2014- Disallowance of expenditure for non- deduction of tax at source U/s. 40(a)(ia) 

Parities & Anomalies Brought Between Section 40(a)(i) & Section 40(a)(ia) by Finance Bill 2014 

Budget 14- Disallowance for non Payment or non deduction of TDS restricted to 30%

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19 responses to “S. 40(a)(ia) Disallowance for Non Deduction and Short Deduction of TDS from A.Y. 2015-16”

  1. Milan says:

    What would be your ans if company deducted TDS under wrong section.whether in this case section 40(a)(ia) attract or not???

  2. bhavesh says:

    sec 194D : i am lic agent and have paid referal charges to individuals, but was not aware of 194D . i am not under audit. am i liable to deduct tds .

  3. krishnan says:

    if the company fails to deduct TDS on say interest payment, the interest expenditure gets dissallowed. right?
    But if the recipient has offered gross interest as its income, can now the company claim expenditure?

  4. krishnan says:

    if the company fails to deducted TDS on say interest payment, the interest expenditure gets dissalowed. right?
    But if the recipient has offered gross interest as its income, Can now the company claim expenditure?

  5. Vaishali says:

    Is section 40(a)(ia) also attracted when TDS related to F.Y 15-16 deducted in F.Y 16-17 but Paid before the Due date ?

  6. Amol Rode says:

    ok

    \

  7. Tanay says:

    What if employer fails to deduct tax of Employee. Will 40(a)(ia) be attracted?

  8. Gurkureet says:

    Assessee disallowed 100k under 40a (ia) on year end provision and subsequently reversed the entire 100k on the first day of the next financial year. On receipt on bills for 90k pertaining to the last year, he paid the same with tds. Now in the next financial year, whether 100k or 90k is allowed as an allowance in the subsequent year of payment of 90k?? Thanks in advance, experts

  9. David says:

    Assessee disallowed 100k under 40a (ia) on year end provision and subsequently reversed the entire 100k on the first day of the next financial year. On receipt on bills for 90k pertaining to the last year, he paid the same with tds. Now in the next financial year, whether 100k or 90k is allowed as an allowance in the subsequent year of payment of 90k?? Thanks in advance, experts

  10. Krishna Raotole says:

    Dear, Sir

    if i m importer we release material trough CHA agent we paid him full amount of expenses which he paid on behalf of us but he did not deduct any TDS on expenses , so plz if i booked all expenses in my books of account should it disallows or not

    and if the expenses disallowed should i go in appeal or not.

  11. anupama says:

    is there any compulsion for the remuneration to partner in partnership firm.it means if we do not want to give remuneration to one partner and only to another partner, is it allow or not

  12. Jitender Kumar says:

    There is no updation in the above section I read section 40(a)(ia) as on 27/04/2015.

  13. Sabin Bhaskaran says:

    In the provisions no where it says disallowance shall be restricted to 30%. It says after disallowance, if Tax is deducted and Paid subsequently 30% of amount disallowed shall be allowed as deduction in the year in which such tax has been deducted and paid.

    Pls Clarify

  14. shankeran says:

    What would be the case in case of provisions made, let say Auditor’fees, where the bills are received only subsequent to the audit, would it be right to deduct TDS based on the provision. If so deducted and remitted, the concerned auditor can not claim the TDS in the PY, since he has not shown this as his revenue. What would be correct thing to follow both for the Assesee and the Auditor
    regards

  15. karunakaranm says:

    Sir,
    I have gone through the article which is useful. However, I have some thoughts for consideration.
    In the main provisions of section 40(a)(ia), the words :fails to deduct” the whole or part’ are not there but only in the proviso these words appear. Hence, for short deduction, no disallowance is required as per the main provisions of the Act and also as per the various decisions on the subject. (49 taxmann.com. 187(Mum);Appollo Tyres Ltd (Cochin ITAT), S.K. Tekriwal Cal HC etc)

    Further, as regards the allowance of 30%, the disallowance from 1/4/2015 is only 30% and therefore the allowance is also 30% and there is no ambiguity in the provisions.

  16. Subhash Bhaskar says:

    Mr. Navin thanks for writing a nice analysis on sec.40(a)(ia) of the IT Act,1961. But my analysis and views on this section interpretation are different from you. I lay my views on the basis of following.

    1) If we read the proviso to sec.40(a)(ia) as amended by Finance Act, 2014 it states that :

    “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”

    and If we read the proviso to sec.40(a)(ia) as amended by Finance Act, 2013 it states that:

    “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,such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid”

    By comparision of Finance Act, 2014 and 2013 we see that under FA,2013 whole of the expenditure was allowed deduction if the tds was deposited in the next year or after the due date mentioned u/s 139(1). But as per FA, 2014 only 30 percent of the such is allowed deduction if the tds was deposited in the next year or after the due date mentioned u/s 139(1).

    As per your illustration if an assessee deduct the tds in the next fy or after deduction deposit the same after expiry of due date u/s 139(1), in my view he shall be allowed deduction of only 30,000 in the next fy.

    So in my opinion non-deduction of tds provisions have become more stringent in comparision to FA, 2013

  17. S Banerjee says:

    If tax is deducted but not deposited under the IT Act payer will not only subject to interest and penalty but could be prosecuted. So law is very stringent for payer.

  18. Chokkalingam says:

    What about tax deducted but not paid to the Govt.What is the relief to the payee.He is unnecessarily put into the difficulty. Govt does not bother to resolve this issue.Payee becomes helpless and bear the entire burden.Every body argues in favour of the payer and does not bother about the payee.

  19. B.Chackrapani Warrier says:

    Thanks for the updating.

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