• Welcome to itatonline.org Forum.


Contact details of departmental representatives is available.

Main Menu

Disallowance of expenses u/s 40a (ia) for failure of TDS provisions

Started by sahibschoudhary, February 26, 2009, 11:25:16 AM

Previous topic - Next topic


Section 40a (ia) is badly hit the taxpayers whose direct cost (prime cost) comes under TDS provisions. For Example Lorry freight paid to lorry owners by transport operators liable to TDS as sub-contractor u/s 194C. I notice some cases in which almost gross receipt taken as net profit by the AO after applying section 40a(ia) due to that net profit comes 90% of gross receipts instead of 2% to 5% which is normally in this industry. Section 40a (ia) is applicable on expenses claimed u/s 30 to 39. Now question is that the prime cost allowed u/s 28 or 37 because both section are general in nature. Is it possible to claim the lorry freight paid (which is prime cost for transport business) claimed u/s 28 itself? If it claimed u/s 28 then section 40a (ia) not applicable


Dear friend the way you interpretating section 28 and 40(a)(i) is not correct for the following reasons.

1. Section 40(a)(i) is a non-obstante clause.Therefore it overrides the other provisions of the Act
2. Section 28 is a charging section it has nothing to do with the expenses. This section catagorised the various types of incomes chargeble under this head.
If i am incorrect then please correct me

sivaiah G

As expressed by me earlier, 40a(ia) is a draconian provision and it appears contradictory to my logic. The section says that if the expenditure attracts TDS and the TDS is not deducted or deducted tax is not remitted within the time allowed therein then the corresponding expenditure is not allowed in the hands of the deductor for that year, however, the same will be allowed as and when the said TDS is remitted to Government's kitty. I think, while framing the section, the legislation has missed another section 191 as per which taxes on the income of the deductee is to be paid by him ultimately.  Aftral TDS is introduced only to get governement's  share from the expenditure claimed by a person. There is no guarantee that the other person receiving amount will pay tax, therefore, tax will be collected from the payment itself in the form of TDS. Futher, the government will gets its share very easily and throughout the year and by this measure, tax evasion, if any,  of course,  can also be checked. Sec. 191 says if TDS is not deducted, then tax is to be paid the deductee directly. Even the section 201(1) which is for enforcing the TDS provisions  also cannot be invoked if the deductee pays the taxes. The CBDT vide its letter issued in 1997 has explained the above mentioned priniciples and lateron as per the explantion inserted in sec. 191 with effect from 01.06.2003 reiterated the same. The very purpose of TDS is collecting taxes from the expenditure. So when it is proved that the deductee pays the taxes on this particular item, there is no logic appearing in enforcing the TDS provisions again to collect the same taxes. I dont say that penalty u/s 271C cannot be levied. Since the assessee has not discharged the  the onus, no doubt, he is liable for penalty. But enforcing the same amount from him as per the provisions of Sec. 40a(ia), in my opinion, is not correct. A hormonious reading of the sections 201(1), 191 and 40a(ia) appears to be contradictory to me, at least, as one section among these sections appears to be excessive. Once the relevant taxes are paid, as on today, there is no demand u/s 201(1). However, expenditure of deductor is liable to be disallowed under the provisions of 40a(ia). Is it not unjustified. If it is so how? The government has got its share from the deductee and again it is getting its share from the deductor in the form of disallowance of the expenditure. it appears to me double taxation. Then one can argue that it is similar to the provisions of Sec. 43B where even if the taxes are paid by the receipient the payer is not absoved from his liability. This can easily be distinguished as once the amount is paid to the government account the deductor is always at liberty to issue TDS certificate to that extent to the deductee and  no such requirement is there in sec. 43B. Once it is found that TDS is not deducted, then the expenditure  will be allowed only when TDS is deducted and paid to the exchequer. Meanwhile let us assume that the deductee has already discharged his liability. Even then deductors expenditure is allowed only when TDS is remitted. Earlier disallowance is now allowed in his hands. Therefore, he will issue a TDS certificate to the deductee as the said TDS is always the tax liability of the deductee and in noway it is the liability of the deductor. Since the deductee has  already paid the taxes, the said taxes is to be refunded to him alongwith interest. Why to collect from the deductor and refund it to the deductee. Nothing is gained by the government either from the deductor or from the deductee. I find no logic in this activity.  I may be wrong but I wanted to know where I went wrong.

                   My final conclusion is that an amendment is to be made which allows the expenditure of the deductor when he proves that the taxes have already been paid by the deductee on the amounts received from the deductor. Any contradictory view in this regard is whole heartedly welcome and this will help in comprehending the provisions of section. 40a(ia).   

With best regards .......................


S.Rajaratnam, Retd.Member ITAT and columnist  has opined that Sec40(a)(ia) is applicable only to the expenditure claimed from Sec.30 to 38 (as Sec.40 refers only 30 to 38)and not under Sec.28. Hence when the lorry freight being prime cost may not be hit by Sec.40(a). The author's view is right.

sivaiah G

The situation of the assessee is more pathetic because though the expenditure is disallowed u/s 40a(ia) again the demands are being raised u/s 201(1) & 201(1A). It appears to be more illogical at least to me. As  TDS,  government will get only 10%( maximum rate of TDS) when the relevant expenditure is disallowed it gets 30%. So where is the question of demand u/s 201(1). The government has got more than what it is entitled to( leaving the loss making assessees). When the expenditure is allowed in subsequent years, it only allows the expenditure and there is no provision to allow any interest like 244A. When the government has collected more money then where is the question of charging interest u/s201(1A). Since both these provisions are exist in the statute, the revenue is raising demands even u/s 201(1) & 201(1A). They cannot be blamed for this. Proper representation of the facts should go to the law makers so that they can think about this anomaly.

Sumit, FCA, Rjt.

in my humble opinion the claim of prime cost u/s. 28 itself instead of u/s. 37 or other, in order to save from rigours of sec.40(a)(ia) wouldn't not sustain in view of numerous decision covering like points : Commissioner Of Income-Tax vs Ram Chand Gobind Prasad (Patna HC)and many other high courts have taken the similar view that word "Expenditure" would be vider import and would include in its ambit, even "Purchaes" and other price costs.
In such a situation, term "expenditure" would embrace even "Purchases" & "other prime costs" also.


Correct me if i m wrong