Section 40(a)(ia) Disallowance for Non Deduction & Short Deduction of TDS under Income Tax

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

When tax deducted at source (TDS) is not deducted or paid from certain payments made to residents, the entire amount of tax-deductible expenditure is disallowed for computing income under the heading “Profits and gains of business or profession” under section 40(a)(ia). The total amount of expenditure being disallowed causes unreasonable hardship.

To reduce the burden, non-deduction or non-payment of TDS on payments made to residents under section 40(a)(ia) of the Act should be limited to 30% of the amount of expenditure on which TDS is not deducted.

Previously, 100 percent of such an amount was prohibited.

Previously, non-deduction or non-payment of TDS on payments made to residents resulted in disallowance solely for a few specific types of payments (viz. interest, commission, brokerage, rent, royalty, fee for technical services, or fee for professional services).

NOW, under section 40(a)(ia) of the Income Tax Act, every category of payment made to a resident on whom tax is due to be deducted at source under Chapter XVII-B of the Income Tax Act is disallowed.

Section 40(a)(ia) related controversies

What is the amount that will be disallowed under section 40(a)(ia) due to non-deduction or short-deduction?

Views

1. 30% of the total sum.
2. 30 percent of the amount for which TDS has not been deducted or has been under-deducted (Proportional basis).
3. Only non-deduction of tax at source and not short-deduction of tax are disallowed under section 40(a)(is).

Viewpoint analysis

1. The first viewpoint is nonsensical as if a person deducted and paid tax on the greatest amount but not on the minor amount.
2. The second point of view is the true and fair point of view, which calls for a 30% disallowance on a proportional basis.
3. The third viewpoint is nonsensical because section 40(a)(ia) states that the entire or any part of the tax cannot be deducted.

Some related case laws

In the absence of a principal-agent relationship and technical services, no deduction of TDS u/s 194H or 194J is allowed

The disallowance under Section 40(a)(ia) of Income Tax for non-deduction of TDS u/s 194H and 194J on account of trade offers worth INR 834,92,63,976 provided by the assessee to its distributors (HCL Infosystems Ltd and other distributors) was not justified because there was no principal-agent relationship and thus the benefit extended to distributors could not be treated as commission under Section 194H, and the AO had not given any reasoning or finding.

Short-Deduction of TDS is not subject to the disallowance under section 40(a)(ia)

The following steps are taken to deny the amount under section 40(a)(ia) for which no TDS was deducted. During the appellate processes, the appellant’s AR claims that TDS was deducted at a lower rate and that, as a result, the provisions of section 40(a)(ia) do not apply to the appellant. From a review of the preceding lower appellate discussion, it is evident that this is not a case of TDS non-deduction per se. The assessee had deducted TDS u/s.194C, but at a lower rate, followed by three further head(s) incurring nil deduction: 194-H, 194-I, and 194-J. Furthermore, the Assessing Officer had only denied the disputed amount under the first heading. As a result, the challenged disallowance under section 40(a)(ia) does not apply in a situation involving a short TDS deduction.

If the deductee provided Form 15G or 15H, there is no interest allowance under section 40(a)(ia)

Interest paid to persons who filed Form 15 G and Form 15 H should not be disallowed under section 40a(ia) for failure to deduct TDS because the requirement of filing Form 15G and 15H with the prescribed authority, namely, the CIT, was only procedural and could not result in a disallowance under section 40a (is).

There is no TDS on reimbursement of automobile expenditures under Section 194C

Where the assessee provided a vehicle to the concerned parties and the assessee was to bear the vehicle expenses incurred by the cab owners, which would be reimbursed by the parties concerned, the reimbursement of actual expenses incurred by the assessee could not be treated as payment subject to TDS under section 194C.

There will be no disallowance if the assessee follows section 194C(6) (ia)

The assessee claimed that after obtaining either the declaration contemplated under the second proviso of the pre-amended section 194C(3) or the PAN details under the current section 194C(6), the assessee was not required to make any deduction at source on payments made to the contractor or subcontractor, regardless of whether or not such information was furnished to the authorities as prescribed under the third proviso of the amended section 194C(3) or the current section 194C(6) (7). So, if the assessee complies with section 194C(6) of the Act, disallowance under section 40(a)(ia) does not occur simply because section 194C(7) of the Act is violated.