Section 40(a)(ia) of the Income-tax Act, 1961 provides for disallowance of 30% of any sum payable to a resident on which tax is deductible at source under Chapter XVII-B, where such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in section 139(1).  Till assessment year 2014-15, the whole of such sum payable was disallowable.

Many a times, a taxpayer deducts TDS under a particular section of the Act, while the tax authorities may take a view that tax should have been deducted under another section of the Act.  If the rate at which tax has been actually deducted by the assessee is lower than the rate at which tax is deductible as per the view of the tax authorities, the tax authorities generally disallow the claim for deduction under section 40(a)(ia) of the Act.

The question which arises for consideration, is whether the tax authorities can make proportionate disallowance for short deduction of TDS ignoring the fact that the tax was in fact deducted though under a different provision of the Act

Case Laws in favour of Assessee

In the case of S. K. Tekriwal 361 ITR 432, the assessee had deducted tax at source from payments made to a machinery contractor under section 194C at the rate of 1%.  The AO took a view that the payments were in the nature of machinery hire charges, which amounted to rent as per the provisions of section 194-I.  Therefore tax ought to be deducted u/s. 194-I at the rate of 10%. The AO therefore, disallowed proportionate payments (90%) by invoking section 40(a)(ia).

In the appeal, the Tribunal deleted the disallowance. The Tribunal noted that section 40(a)(ia) had 2 limbs – one requiring deduction of tax, and the second requiring payment of the tax into the government account.  There was nothing in that section, treating the assessee as a defaulter where there was a shortfall in deduction.  According to the Tribunal, it could not be assumed that on account of the shortfall, there was a default in the deduction.  If there was any shortfall due to any difference of opinion as to the taxability of any item or the nature of payments falling under various TDS provisions, the assessee could be declared to be an assessee in default u/s. 201, and no disallowance can be made.  The Calcutta HC held that no substantial question of law arose.

CIT v. Kishore Rao & Others (HUF) [2017] 79 357 (Karnataka) – The High Court held that section 40(a)(ia) may be invoked only in case of there being an absence of deduction. Further, in case of bona fide wrong impression, if the deduction is at a lesser rate, the same cannot be a ground for disallowance by invoking the provisions of section 40(a)(ia).

Other decisions wherein view favourable to the Assessee has been adopted are as follows:

  • Chandabhoy & Jassobhoy 17 158
  • BLR India Pvt Ltd ITA No.5793/Mum/2010
  • Sunbell Alloys Company of India Ltd [TS-642-ITAT-2012(Mum)]
  • Chiron Behring TS-88-ITAT-2013 (TP) – applied also to 40(a)(i).
  • Nitin M. Panchamiya v Ad.CIT 50 SOT 468 (Mum)
  • Sentini Technologies TS-85-ITAT-2015(HYD)
  • Apollo Tyres Ltd 60 SOT 1 [TS-222-ITAT-2013(COCH)] – No proportionate disallowance u/s 40(a)(ia) for short deduction of tax at source.  The ITAT held that only interest under section 201(1A) should be charged.
  • Three Star Granites (P) Ltd vs. ACIT 32 ITR (Trib) 398
  • Element K India (P.) Ltd. v. ITO [2015] 54 296 (Delhi – Trib.)
  • ACIT v. AON Specialist Services (P.) Ltd [2020] 116 368 (Bangalore – Trib.)

Visakhapatnam Bench of this Tribunal in the case of P.S.R. Associate v. ACIT [IT Appeal No. 345 (Viz) of 2013, dated 6-1-2016] has considered both the decisions of Hon’ble Calcutta High Court as well as that of Hon’ble Kerala High Court on the same issue and ultimately followed the Calcutta HC in Tekriwal on the ground that when there are two reasonable constructions are possible on similar issue i.e. one in favour of the assessee and another in favour of the Revenue, the decision in favour of the assessee should be followed as held by the Hon’ble Supreme Court in the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192.

Case Laws in favour of Revenue

In the case of CIT v P V S Memorial Hospital Ltd [2015] 60 69 (Kerala); 380 ITR 284 (Kerala) the assessee was a hospital, which had entered into an agreement with another hospital, where that other hospital had undertaken to perform various professional services in the assessee’s hospital. The assessee deducted tax at source at 2% u/s. 194C on payment to the other hospital for its services.  The AO took a view that the tax was deductible at 5% u/s. 194J, and therefore disallowed the entire payment u/s. 40(a)(ia).

The Kerala High Court, after examining the issue, noted that in the case before it, tax was deductible u/s. 194J and not u/s. 194C.  The Kerala High Court on examination of the provisions of section 40(a)(ia), expressed the view that the section was not a charging section but was a machinery section, and that such a provision should therefore be understood in such a manner that it was made workable.

The HC held that “tax deductible at source under chapter XVII-B” had to be understood as a tax deductible at source under the appropriate provision of chapter XVII-B. Therefore, if tax was deductible u/s. 194J but was deducted u/s. 194C, such a deduction did not satisfy the requirements of section 40(a)(ia).  The HC observed that the latter part of the section that ‘such tax had not been deducted’, again referred to the tax deducted under the appropriate provision of chapter XII-B.  Thus, a cumulative reading of this provision shows that deduction under a wrong provision of law will not save an assessee from section 40(a)(ia).

Our Comments

As per literal reading of section 40(a)(ia), it is gathered that the said provision requires a disallowance in a case where there is a failure to deduct tax at source, where it was deductible, or after deduction the same has not been paid on or before the due date specified u/s. 139(1). It does not, expressly cover a case of a partial non-deduction on the lines similar to the one provided u/s. 201 which provides for the consequences of the failure to deduct tax at source.  Section 201 specifically uses the term “wholly or partly”.  It could be argued that the legislature by not including the above terms “ wholly or partly” in section 40(a)(ia) have sought to cover the cases of the absolute failure to deduct tax and not the case of the partial failure to deduct.  

Further, section 201, as it originally stood, did not provide for the cases of partial deduction and hence did not seek to penalise an assessee in a case where there was a short deduction of tax by him. Section 201 was subsequently amended to rope in the cases of even a partial failure to pay the deducted taxes The Andhra Pradesh High Court, in the case of P. V. Rajagopal vs. Union of India 99 Taxman 475, held, in the context of the provisions of section 201 as it then stood [the language of which was similar to the language used in section 40(a)(ia)], that if there was any shortfall due to any difference of opinion as to the taxability of any item, the employer could not be declared to be an assessee in default.  The Tribunal in various cases has followed this view and held that the provisions of section 40(a)(ia) would be attracted only in the case of total failure to deduct tax at source, and where tax had partly been deducted at source, it could not be said that tax had not been deducted at source.

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