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sec.40(ia) disallowance for non-payment of TDS

Started by sai prasad, November 06, 2008, 01:05:40 PM

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sai prasad

the non-payment of TDS by an assessee entails disallowance of the expenditure.In a case , where the receipient already paid tax and filed its return, the  TDS liability is abated u/s.191 Whether the disallowance u/s.40(ia)is still applicable because  during the relevant previous year there existed liability to make TDS.That once the payee paid the tax and there is no need for making TDS as per the sec.191,it must satisfy the requirement of sec.40(ia).In other words , there is no separte liabiity to make TDS  u/s.40(ia).This provision needs elaboration and the opinion of my learned brethern and  any judgments sofar may please be posted at the earliest.
thank you
c.sai prasad.

addition on 24,11.2008

Sec.40a(ia) doesnot disallow the corresponding expenditure but provides that if the TDS is paid in the subsequent years,exp.would be allowed in that subsequent year.Therefore,it implies that where the payee didnot pay tax and the liability to make TDS remians on the payer,it must be paid though in a subsequent year in order to get deduction.Otherwise,making TDS  where payee already paid directly would  amount to paying tax twice and it is not intended.It looks unconvincing that even if payee had  already paid tax, the payer in order to get deduction must make another payment of TDS in favour of the payee.This needs to be kept in view in evaluating the issue.

thanking you
c.sai prasad.


You may pls note that there is an amendment this year to provide no disallowance if the tax is paid before filing the return of income. This is a retrospective amendment effective from AY 2005-2006.
We also posted a similar one on last week of sep in the same website with the similar head.

sivaiah G

Yes, the issue raised is very much relevant and logical. Once, it is proved that tax has been paid by the deductee, then there is no loss to revenue. Therefore, the enforcement of TDS in the hands of deductor appears to be non logical. But there is no answer for the question that TDS provisions will become redundant once this argument is accepted. But other side of the  logic is more reasonable and nobody could find any fault with it. Till a circular is issued by the board in 1997, nobody from revenue side accepted the argument that once the deductee paid  the taxes, decuctor should not be treated as assessee in default in respect of that TDS. Since many courts have accepted the argument and relieved the deductors from the demand u/s 201(1), finally CBDT had issued a circular in 1997 and ultimately made an amendment( not directly but indirectly) in Sec. 191 as per which the above mentioned proposition has been accepted.

                  Further, after this amendment also, many argue that once the deductee pays the tax, demand u/s 201(1) can be waived but not the demand u/s 201(1A). They quote the case law reported in 293 ITR 226 to support their argument. In my opinion, this is also not correct. once it is proved that the deductee paid the taxes alongwith interest u/s 234B and 234C then the department didnot lose anything. Because, the interest received from deductee u/s 234B and 234C is more or less equal to the interest chargeable u/s 201(1A) in the hands of the deductor. Though this is not directly enunciated, but indirectly supported the judgements reported in 271 ITR 395, 287 ITR 354, 288 ITR 379, 304 ITR 338(AT), 253 ITR 310 and 91 ITD 450. I dont say that penalty u/s 271C should also waived once the deductee pays the taxes.

                  Futher, there is no answer to this question that there is no provision existed as on today to prevent the revenue from enforcing the provisions of sec 40a(ia) when it is brought to the notice that deductee had already paid the taxes. Since TDS is not the liability of the assessee and the liability of some body else discharged by the assessee, it cannot be written off in his books and should be reduced from the payment to be made to the deductee or else he should request the deductee to return that amount by issuing a TDS certificate to that effect in case the payment is already made by him. In fact, nothing prevented him from issuing the TDS certificate. Even in the case of deductee also, if no claim is made in the return and two years are already over, he cannot made a frest claim which is against the provisions of Sec. 155(14). But natural justice says the same amount cannot be collected twice. Once from the deductee as a tax liability and secondly from the deductor in the form of enfocing the provisions of Sec. 40a(ia).

                Even the amendment brought in the F.Y. 2008 wherein it has been allowed to pay the TDS deducted before filing of the return of income is applicable only to the deductions made during the month of March of the preceeding F.Y.. For other payments, the amended provision is not applicable and the same should be remitted before the expiry of the F.Y. otherwise, there is every possibility that the relevant expenditure will be disallowed by the A.Os invoking the provisions of Sec. 40a(ia). In view of the above, this issue needs further elobaration and requires further amendment commensurating the argument that provisions of sec 40a(ia) are not applicable when it is proved that deductee had already paid the relevant taxes. But as of now, this argument will not be accepted by the revenue authorities.

I hope I have shared my views on this complicated subject.

ashutosh majumdar

Great discussion. Very useful.




exellant discussion. very useful . keep alive the discussion.


To Mr.Sivaiah's reply: With regard to amendment in FA2008 w.e.f.1.4.2005, it is normally interpreted that only March payments on which TDS deductible is allowed if paid before the due date and for other months' payments, TDS is to be paid before the last day of the previous year.

But if we closely analyze the next proviso, the stress is on the TDS deducted and payment thereof and not to the expenditure on which TDS is deductible.

Therefore it is possible to take a view that where TDS itself is deducted in the last month on the payment pertaining to any month, it can be paid before the due date. If the TDS has already been deducted in earlier months, it should be paid before the year end.

Please elucidate.

sivaiah G

Sorry, I am unable to accept the earlier argument. In the amendment also, it is clearly mentioned that TDS is deductible in the month of March and deducted then the time allowed to deposit the same is before the due date of filing the return of income. The proviso is meant for allowing the expenditure which is disallowed for the purpose of non deduction of TDS. It doesnot, in any way, communicate the meaning that though TDS is deductible during the months of April to Feb but the same can be deducted only during the month of March in order to get the extended time to deposit the deducted TDS into Governement's kitty. There is every possibility to take above stand by the revenue to disallow the relevant expenditure.

With regards.........................

Gopi Krishna

             The topic has generated lot of heat everywhere and suddenly disallowances u/s 40(a)(ia) have become a regular feature. Just as disallowance of personal expenses inherent in overall vehicle and telephone expenses apart from low withdrawals were very common in the incometax assessments, in the present scenario sec 40(a) has provided the dept a shot sure weapon to raise demands in the assessments. Moreover, in the reviews and also audit of assessments, this particular area is commented upon. However the recent amendment may provide some relief.  The discussion in this forum has been lively and informative.
             I would like to ask the forum as to what is the remedy when an assessing officer differs from the assessee with regard to the section applicable when enforcing TDS and accordingly disallows the entire expenditure. This will arise in lot of cases  where the assessee hires vehicles and applies 194C, wheras the AO takes the stand that same would fall within the ambit of 194I. There are also various areas and issues where there can be two opinions on the applicability of a particular section. In such situations, there is no room for the AO to make a proportonate disallowance and therefore the assessee suffers.

CA kishore Maniyar

can you give a citation for a circular of 1997 , refereed herein above , thanks

Sunil Maloo

Instruction : F. No. 275/201/95-IT(B) on 29-1-1997 issued by CBDT

Where taxes have been paid by deductee-assessee

"The Board is of the view that no demand visulasied under section 201(1) of the Income-tax Act should be enforced after the tax deductor has satisfied the officer in charge of TDS that taxes have been paid by the deductee-assessee."

sivaiah G

Though I have expressed my opinion long back with regard to requirement of an amendment in 40a(ia), somebody in the law makers forum had thought in similar way and in the budget announced today, the amendment is brought in. But when I found that it is applicable with effect from 01.04.2013, I felt a little bit disappointed. Had it been given retrospective effect, it would have been more logical. Thnak God! Atleast now, the amendment has come.


The issue involved is discussed by the Hon'ble Mubai Bench in the case of ACIT Vs DICGC Ltd ITA NO 2361/Mum/2011 the date of the judgment is 3.2.2012. In this case it has been held that provisions of section 40(a)(ia) and 201(1) are materially different from each other and there is no impact on disallowance of 40(a)(ia) even if the payee has paid taxes on the receipts

sivaiah G

In my opinion, the Bombay TRibunal has not looked into the logic involved in a proper perspective. If that is correct, then there is no need to bring the amendment in sec. 40a(ia) and sec. 201(1). When the section i.e. 40a(ia) has been introduced, it was stated that only to enforce TDS provisions the said section has been brought into statue. Therefore, a hormonious reading of sections 40a(ia), 201(1)  and 191 is compulsory to understand the implications because they are interdependent on each other. There are numerous instances where higher appellate authorities have reversed the decisions given by lower courts. Of course, I dont say that we need not follow the decision of an high Court or supreme Court. My request is that the sections in Act are logical unless it is a charging section. Normally, they follow logic and made enactments. But in order to get benefit to revenue, this time sec. 201(1A) and 209(1)(d) have been amended without following the logic i.e. date of payment by the deductee and has been enacted till the date of filing return of income. Of course, 201(1A) is also a charging section and therefore, we should not see on logic basis.

sai prasad

the intention in inroducing sec.40(a)(ia) may be to cover cases , where the payees are not assessees. Otherwise, there is no reason in providing that  TDS of one year can be paid in later years only to enable the payer to get corresponding expenditure allowed. In other words if the payee had alredy paid  his taxes ,  making TDS again in respect of the income of the year in  later years . I think legal provisions cannot be that absurd or I  may say rediculous.
Perhaps to make this clear, the provision is brought under the Finance Bil 2012 to setright the anomaly.

the floor is again open now.