Section 40a a of the Income Tax Act,1961
Section 40(a)(IA) of the Income Tax Act, 1961, deals with the deduction of thirty percent 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.
The provision also includes provisions for situations where tax has been deducted in a subsequent year or paid after the due date specified in sub-section (1) of section 139. Additionally, it addresses cases where the assessee fails to deduct tax but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201. The explanation clause further clarifies the terms used in 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:
According to section 40(a)(ia) of the Income Tax Act, if payments are made to residents without deducting tax at source (TDS), the deductor can only claim deduction for such payments as expenditure in the previous year if the TDS is deducted during that year and paid before the due date for filing the income tax return under section 139(1) of the Act.
However, if there’s non-deduction or non-payment of TDS from certain payments made to residents, the entire amount of expenditure for which TDS was deductible is disallowed under section 40(a)(ia) when computing income under the head “Profits and gains of business or profession”. Section 40a a of the Income Tax Act,1961 This disallowance of the entire expenditure amount can lead to undue hardship.
To mitigate the hardship caused by non-deduction or non-payment of TDS on payments made to residents as specified in section 40(a)(ia) of the Income Tax Act, the disallowance is now restricted to 30% of the expenditure amount on which TDS is not deducted.
Previously, the entire amount was disallowed. Initially, the non-deduction or non-payment of TDS on such payments resulted in disallowance only for specified categories like interest, commission, brokerage, rent, royalty, fee for technical services, or fee for professional services. Section 40a a of the Income Tax Act,1961 NOW, section 40(a)(ia) of the Income Tax Act broadens the scope of disallowance to include every category of payment made to a resident on which tax is required to be deducted at source under Chapter XVII-B of the Income Tax Act.
Controversy Surrounding Section 40(a)(ia):
The controversy pertains to determining the amount to be disallowed under section 40(a)(ia) of the Income Tax Act for non-deduction or short deduction of tax at source. There are three main views on this issue:
Disallowance of 30% of the entire amount: This view suggests that 30% of the total amount should be disallowed, regardless of whether tax was deducted or short-deducted on certain portions.
- Disallowance of 30% of the amount not deducted or short-deducted (Proportional basis): According to this view, the disallowance should be calculated proportionally based on the amount on which tax was not deducted or was short-deducted.
Disallowance only for non-deduction of tax at source and not short-deduction: This perspective argues that disallowance under section 40(a)(ia) should only apply to cases where tax was not deducted at all, not for cases of short-deduction.
Analysis of Views:
- The third view is also deemed illogical because section 40(a)(ia) explicitly mentions failure to deduct the “whole or any part of the tax,” indicating that both non-deduction and short-deduction should result in disallows he first view is considered illogical because it fails to account for situations where tax was deducted and paid on the majority of the amount, but not on a minor portion. Section 40a a of the Income Tax Act,1961 The second view is considered to be the most reasonable and fair approach, as it ensures that the disallowance is made proportionally based on the extent of non-deduction or short-deduction.
- One relevant case law is as follows:
No Disallowance for Non-Deduction of TDS under Sections 194H or 194J:
In the absence of a principal-agent relationship and technical services, disallowance under Section 40(a)(ia) for non-deduction of TDS under Sections 194H and 194J was not justified. The case involved trade offers totaling INR 834,92,63,976 provided by the assessee to its distributors (including HCL Info systems Ltd and other distributors).
The absence of a principal-agent relationship meant that the benefit extended to distributors could not be treated as commission under Section 194H. Additionally, the Assessing Officer (AO) had not provided any reasoning or finding to support the contention that there was payment for technical services liable for withholding under Section 194J.
Reference: Nokia India Pvt. Ltd. vs. DCIT (ITAT Delhi) – ITA No. 5791/Del/2015.
Another relevant case is as follows:
Disallowance under Section 40(a)(ia) Not Applicable to Short-Deduction of TDS:
The appellate proceedings revealed that the appellant had deducted TDS at a lower rate, leading to a contention that the provisions of section 40(a)(ia) were not applicable. It was evident that this was not a case of non-deduction of TDS per se, as TDS was indeed deducted under section 194C, albeit at a lower rate, while no deduction was made under sections 194-H, 194-I, and 194-J. Additionally, the Assessing Officer had disallowed the sum only under the first head. Therefore, in cases involving short deduction of TDS, the disallowance under section 40(a)(ia) does not apply.
Reference: A.K. Industries vs. ACIT (ITAT Kolkata) – ITA No. 665/Kol/2018.
Another significant case pertains to:
Disallowance of Interest under Section 40(a)(ia) if Deductee Furnished Form 15G or 15H:
It was argued that disallowance of interest paid to individuals who furnished Form 15G and Form 15H should not be made under section 40(a)(ia) for non-deduction of TDS. The contention was that the requirement of filing Form 15G and 15H with the prescribed authority, namely, CIT, was merely procedural and should not result in a disallowance under section 40(a)(ia).
Reference: JCIT vs. Karnataka Vikas Grameen Bank (ITAT Bangalore) – ITA No. 1391 & 1392/Bang/2016.
In another case, it was determined that:
No TDS under Section 194C on Reimbursement of Vehicle Expenses:
The scenario involved an instance where the assessee provided a vehicle to the concerned parties, and the assessee was responsible for bearing the actual vehicle expenses incurred by the cab owners, which would then be reimbursed by the concerned parties. It was concluded that the reimbursement of actual expenses incurred by the assessee could not be treated as a payment subject to TDS under section 194C.
Reference: Sri. Singonahalli Chikkarevanna Gangadharaiah vs. ACIT (ITAT Bangalore) – ITA No. 785/Bang/2018.
In another case, it was established that:
If the assessee complies with section 194C(6), no disallowance under Section 40(a)(ia):
The assessee contended that upon obtaining either the declaration stipulated under the second proviso to the pre-amended section 194C(3) or the PAN details under the current section 194C(6), they were not required to deduct any tax at source on payments made to the contractor or subcontractor, regardless of whether such information was furnished to the authorities as prescribed under the third proviso to the amended section 194C(3) or the current section 194C(7). Therefore, if the assessee complies with the provisions of section 194C(6), disallowance under section 40(a)(ia) does not arise even if there is a violation of provisions of section 194C(7) of the Act.
Reference: DCIT vs. Murugarajendra Oil Industry (P) Ltd. (ITAT Bangalore) – ITA No. 2094/Bang/2017.
For More Information : https://taxgyany.com/