Disallowance of Expenditure u/s 40(a)(ia) for Failure to comply TDS provisions
SECTION 40(a) (ia)
Sub clause (ia) of Section 40(a) has been inserted by the Finance (No. 2) Act 2004 relating to disallowance for non deduction of TDS. Under section 40(a)(ia) notwithstanding anything to the contrary in section 30 to 38, specified expenses shall not be deducted in computing income under the head profit and gains from business or profession on which tax is deductible at source under Chapter XVII-B and such tax had not been deducted or, after deduction had not been paid.
Applicability of Section 40(a) (ia)
Section 40(a) (ia) is not applicable on all expenses. It is applicable on the expenses specifically mentioned in the section 40(a) (ia) which are as follows:
Interest [Sec 193 or 194A]
Commission of Brokerage [Sec 194H]
Fees for technical services [Sec 194J]
Fees for Professional Services [Sec 194J]
Payment to Contact/sub-contractor [Sec 194C]
Rent [Sec 194I]
Payment of Royalty to a resident [Sec 194J]
Consequences of non-deduction or non-deposit after deduction
| Case | Is Expenditure allowed in the current previous year | Is Expenditure Allowed in any subsequent previous year |
| Tax deductible but not deducted | No | If tax deducted and deposited in any subsequent previous year, the expenditure will be allowed in that previous year in which TDS deposited. |
| TDS deducted up to month of February but not deposited on or before 31st March of Previous year | No | If deposited in any subsequent previous year, the expenditure will be allowed in that previous year in which TDS deposited. |
| TDS deducted up to the month of February and deposited on or before 31st March of the Previous year | Yes | - |
| TDS deducted in the last month of previous year i.e. March | If TDS deposited on or before the due date of filing the return u/s 139, expenditure will be allowed in current previous year. | - |
| TDS deducted in the last month of previous year i.e. March | If TDS deposited after the due date of filing the return u/s 139, expenditure not allowed in current previous year. | If TDS deposited after the due date of filing the return u/s 139, expenditure will allowed in that previous year in which TDS deposited. |
Whether section 40(a) (ia) applicable on other Heads
Provision of section 40(a) (ia) is applicable to expenses claimed as deduction under section 30 to 38 for computation of income from business or profession. It does not apply to expenses claimed against any other heads of income. In other word if any expenses claimed as deduction for computation of Income from House Property, Capital Gain and Other sources then provisions of section 40(a)(ia) is not applicable.
Whether section 40(a) (ia) applicable to expenses actually paid or payable
Provision of section 40(a) (ia) is as follows:
40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head Profits and gains of business or profession,
(ia) any interest, commission or brokerage, [rent, royalty,] fees for professional services or 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 XVII-B and such tax has not been deducted or, after deduction, [has not been paid,
If we go by strict interpretation of the section, then expenses payable would have been disallowed instead of the whole expenditure amount i.e., the expenses amount actually “paid” should not attract the section and should have been allowed even though the tax has not been deducted at Source. However, it would be difficult for assessee to convince assessing officer by this interpretation.
Other Consequences of failure to deduct/collect and pay the tax at source [sec 201(1) or 206C (7)]
If any person fails to deduct tax under section 192 to 196C and Collect tax under section 206C wholly or partly, and after deduction/collection fails to deposit then the person shall be treated as assessee in default.
An assessee in default is liable for payment of interest on TDS at the rate of 1% per month (or part of month thereof) [sec 201(1A)].
Penalty for failure to deduct the tax wholly or partly, or failure to pay wholly or partly [sec 271C].
If any person fails to deduct whole or any party of the tax as required by or under the provision of chapter XVII-B or pay the whole or any part of the tax then such person shall be liable to pay, by way of penalty, a sum equal to the amount of tax which such person has failed to deduct or pay.
Penalty for failure to collect tax at source [sec 271CA]
If any person fails to collect whole or any part of the tax or pay the whole or any part of the tax then such person shall be liable to pay, by way of penalty, a sum equal to the amount of tax which such person failed to collect or pay.
Conclusion
Provisions for not deducting or not depositing TDS are rigorous. For Example if a person fails to deduct tax Rs. 2000/- on Rs. 100000/- @ 2% u/s 194C, the liability would be Rs. 37660 (approx) [TDS + Penalty u/s 271C + 33.66% tax liability due to disallowance of expenditure u/s 40(a)(ia)]
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CA Sahib S Choudhary
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