As per the provision of Section 40(a)(ia) of the Income Tax Act, 1961, any amount payable to any Indian resident person tax is to be deducted under chapter XVII-B. If tax has not been deducted or after deducting tax, has not been deposited before submission of return of Income u/s 139(9) of the Act, 30% of the amount is disallowed. Up to assessment year 2014-15 100% of the amount was to be disallowed.
Extract of Section 40(a)(ia) of the Income Tax Act,1961 – “Section 40(a)(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.
Case law: Commissioner of Income Tax Vs. S. K. Tekariwal (2014) 361 ITR 432: (2013) 260 CTR 073 In this case assessee has deducted tax @ 1% on payment to machinery contractor u/s 194C’ while assessing officer was of the view that tax is to be deducted u/s 194I @10% and disallowed the expenses.
Tribunal, accepted the view of asessee and deleted the addition. Department went to High Court and Kolkta High Court have dismissed the appeal.
Commissioner of Income Tax Vs. PVS Memorial Hospital Ltd.(2016) 380 ITR 284: (2015) 280 CTR 511.
In this case assesse have made an agreement with another hospital to provide professional services and assessee have deducted TDS @ 2% u/s 194C, while Assessing Officer is of the view that TDS is to made u/s 194J @ 5% and disallowed the expenses.
Tribunal was of the view that u/s 40(a)(ia) disallowance is possible only when two conditions are not full fill i.e. deduct tax is necessary and tax has not been deducted. Tribunal have taken the view that assesse has deducted tax but under other section, therefore provisions of section 40(a)(ia) will not apply.
Kerala High Court have taken the view that tax is to be deducted u/s 194J and deducted u/s 194C is not a matter of disallowance of expenses. This section is not charging section but is machinery section. For this Court has referred Gurusahai Saigal Vs. Commissioner of Income Tax 48 ITR 01 of Supreme Court.
Therefor if tax has been deducted u/s194C by mistake instead of section 194J, section 40(a)(ia) will not be applicable.
Author Bio
Nice Article Thank You Sir