CA Surbhi Jain

TDS as the name implies, aims at collection of tax at the very source of income. Its of great significance to the Government as it propones the collection of tax, provides for a greater reach and wider base for tax and from the perspective of Tax Payer, it distributes the incidence of tax and provides for a simple and convenient mode of payment. With the presentation of Finance Bill 2014 at house, provisions of TDS stand relaxed as compared before.

As per section 192 to 196D of Income Tax Act 1961, certain payments made to NON-RESIDENT OR RESIDENT are required deduction of tax at source ( i.e.TDS) at the time “when money is credited to the account of payee in books of payer or at the time of payment” , whichever is earlier.

In this article I will be discussing Section 40(a)(i) and Section 40(a)(ia) of Income Tax Act 1961 and the amendments inserted in them as per the Finance Bill 2014. As per these sections certain payments made to NON-RESIDENT OR RESIDENT on which TDS is required to deducted but it is not deducted or deducted but not paid to the government within the time specified then such sum are disallowed for the previous year in which such sum is credited in books or paid.

Earlier there was a anomaly between the two sections, the due date specified for deduction and deposit of TDS in case of payment made to NON RESIDENT as per section 40(a)(i) so that such sum paid or credited in books during any previous year can be claimed as expense during the same previous year was 30th april of the year following that previous year. And in case of payment made to RESIDENT the due date specified for for deduction and deposit of TDS as per section 40(a)(ia) so that such sum paid or credited in books during any previous year can be claimed as expense during the same previous year was due date of filling of return of deductor of TDS as per section 139(1).

For your reference dates for different assessee for filing of income tax return as per section 139(1).

Assessee Due Date of filling of return
  • Individual

(whose accounts are not subject to audit under section 44 AB)

31st July
  • Individual
  • Firm

(whose accounts are subject to audit under section 44 AB)

  • Partner of the above mentioned firm
  • Company
30th September
  • Assessee subject to Transfer Pricing
30th November

Finance Bill has tried to bring parity regarding the above issueby making both the dates specified same as due date of return filling of deductor as per section139(1). The amendment to section 40(a)(i) has been discussed below in detail .

Here I am quoting the law and the amendment made hereunder.

As per Section40(a)(i) of Income Tax Act 1961, expenses mentioned here under will be disallowed if

“ any interest, royalty, fees for technical services or any other sum chargeable under act , which is payable,

(A)   Outside India or

(B)   In India to a Non Resident, or to a foreign company ,

on which tax is deductible at source under chapter XVIIB, and such tax has not been deducted or, after deduction has not been paid during the previous year, or on or before the due date specified as per section 200(1) or on or before the due date as per section 139(1).

Provided that where in respect of any sum, tax has deducted in any subsequent year or, has been deducted in the previous year but paid after the due date specified as per section 200(1) after the due date specified in section 139(1) , such sum shall be allowed as deduction in computing the income of the previous year in which such tax has been paid.”

Words in Bold are substituted by finance Bill 2014.

Meaning thereby disallowance under Section 40(a)(i) of Income Tax Act 1961 will be attracted

(i)    if the amount paid or payable is interest, royalty ,fees for technical services or any other sum chargeable under the income tax act and

(ii)  aforesaid sum is paid/payable Outside India to a Non resident or a foreign company or  In India to a Non resident or a foreign company and

(iii) Sum is taxable in the hands of the recipient under the income tax and Tax is deductible at source(TDS) under chapter XVIIB

(iv) And any of the following default takes place,

Default A : Tax at source has not been deducted or,

Default B: Tax at source has been deducted but has not been paid during the previous year,or       paid after the due date specified in section 139(1).

In case any of the two aforesaid defaults take place, then the payer is not allowed deduction(100%) of such sum paid or payable in that previous year for such previous year.

However one proviso (exception) to above case is where

(i)  Tax has been deducted in the subsequent year of credit or payment or,

(ii)  Tax has been deducted in the previous year but paid in any subsequent year after the time prescribed under section 139(1).

Then such sum will be allowed as deduction in the year in which such tax has been paid.

Here earlier there was an anomaly between section 40 (a)(i) and section 40 (a)(ia) [ discussed later in this article]. Government has tried to bring parity between the two by bringing amendment to the law by Finance Bill 2014.

Lets understand the amendment with help of an example, ABC Ltd. [due date of filling of income tax return is 30th September as per section 139(1)] has to make a payment of Rs 5,00,000 to MR.B as fees for technical services availed in July 2015, MR.A has deducted tax at source on the aforesaid sum but has not deposited due to any reason it with government till 30th September 2016. Prior to the amendment for claiming such payment as expense in the P/Y 15-16 MR. A has to deposit TDS with the government till 30th april 2016(i.e. for any payment credited or paid in any previous year , TDS must be deposited till 30th April of subsequent year following that previous year). But as per amendment such time limit has been extended till due date of filling of return as per section 139(1) of the deductor i.e. ABC Ltd.

Consequently , as per amendment ABC Ltd. can not claim such payment as expense for the previous year 2015-16(500000 is disallowed 100%) . He can claim such sum as expense in the year in which TDS is deposited by him with the government.

However one major difference has been introduced between the two sections by the Finance Bill 2014 . Prior to amendment, in case of default under section 40(a)(ia) [ discussed below] takes place then any sum paid under the aforesaid section is disallowed (100%) in the previous year in which such same is paid or credited in books.As per the Finance bill 2014, the disallowance in case of default is changed from 100% to 30%. Now in case of aforesaid default only 30% of such sum is disallowed and 70% will be given as deduction for the previous year in which such sum is paid or credited. The 30% of such sum will be allowed in the year of payment of TDS. Whereas in case of default under section 40(a)(i) the disallowance is 100% itself.

The amendment is discussed below in detail .

As per Section40(a)(ia) of Income Tax Act 1961, expenses mentioned here under will be disallowed if

“ any interest ,commission or brokerage, rent, royalty, 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) or any salary payable under section 192 , on which tax is deductible at source under chapter XVIIB, and such tax has not been deducted or, after deduction has not been paid on or before the due date specified in section 139(1) , thirty percent of any sum payable to a resident.

Provided that where in respect of any sum, tax has deducted in any subsequent year or, has been deducted during the previous year but has been paid after the due date specified in section 139(1) , thirty percent of such sum shall be allowed as 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 is not deemed to be an assessee in default under the first proviso to section 201(1), then for the purpose of this sub clause , it shall be deemed that 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.”

Words in Bold are inserted by finance Bill 2014.

Meaning hereby disallowance will be attracted under section 40 (a)(ia) if the amount payable isany interest, commission or brokerage, rent, royalty, 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 XVIIB, and tax is not deducted or deducted but not paid to the credit of central government before the due date as per section 139(1) i.e. is the due date of filling of income tax return .

However, again there is an anomaly between the two sections and i.e. in case resident payee( who has earned the income) has taken such sum for computing income in the return of income(ROI) under section 139 and resident payee has paid tax due on income declared by him in ROI, then the payer(who has to make payment) is not deemed to be defaulted under section 40(a)(ia).

Also salary payable to resident employees were not covered earlier by the said section which now stand covered under the same and all provisions of this section will apply same to salary also as to other nature of payment .

Lets understand this with the help of an example, say, A Ltd. Whose date of filling of return is 30th September pays the following sums without deduction of TDS, Rs. 200000 to MR.B , a resident, as rent(due date of filling of return for MR.B is 31st July) and Rs. 500000 to XYZ LTD , a resident company, as professional fees( due date of filling of return for XYZ LTD is 30th September). The above sum were paid on 1st july, 2015 without deduction of tax. Also MR.B & XYZ LTD has not added such income in their return of income.as per law tax has to be deducted and paid till 30th September i.e. due date of filling of return of A LTD for availing such payment as expense in P/Y 2015-16. Now as per amendment to Finance Bill 2014, 210000 {30% of (200000+500000)} will be disallowed in the previous year 2015-16 and 490000 (700000-210000) will be allowed as expense previous year 2015-16. However had this payment is made to NON RESIDENT under section 40(a)(i) and TDS is not deposited by due date then 100% of amount Rs.700000 would have been disallowed.

I hope my article helped you to understand the amendment by Finance Bill 2014.

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Category : Income Tax (27482)
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Tags : Budget (1956) Budget 2014 (172) section 40(a)(ia) (201) TDS (1024)

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