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July 4, 2020

Non deduction of TDS will lead to 30% Disallowance of expenses in Income Tax

by Rubina Dsouza in Income Tax

Non deduction of TDS will lead to 30% Disallowance of expenses in Income Tax

Disallowance of expenses under section 40 (a) is restricted to 30% and not the entire expenditure


Section 194H of the Income Tax Act pertains to tax to be deducted on any income by way of commission or brokerage, by any person responsible for paying to a resident. However, section 194H does not include insurance commission referred to in section 194D. The person liable to deduct TDS under section 194H is required to deduct TDS @ 5%. No additional surcharge, Education Cess or SHE Cess is to be added to the TDS rate of 5%. However, in the absence of PAN, the deductor would be liable to deduct TDS at the maximum marginal rate i.e. 20%. TDS is not liable to be deduction under Section 194H when the aggregate amount of commission or brokerage credited / paid to the account of the payee does not exceed Rs 15,000.

TDS benefits the taxpayers and the government alike. As TDS is collected at the source, it minimises the chances of tax evasion by individuals and acts as one of the steadiest sources of revenue for the government.

Since almost every individual has to pay TDS in one form or other, the base of tax collection gets expanded. TDS collections are extremely important to the government and in order to mitigate issues such as non-collection of TDS, government has come up with various provisions. One such provision is disallowance of expenses for non-deduction or non-payment of TDS.

Provision of Law

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

In case of non-deduction or non-payment of tax deducted at source (TDS) from certain payments made to residents, the entire amount of expenditure on which tax was deductible is disallowed under section 40(a)(ia) for the purposes of computing income under the head “Profits and gains of business or profession”. The disallowance of whole of the amount of expenditure results into undue hardship.

In order to reduce the hardship, non-deduction or non-payment of TDS on payments made to residents as specified in section 40(a)(ia) of the Act, the disallowance shall be restricted to 30% of the amount of expenditure on which TDS is not deducted

Earlier, 100% of such amount is disallowed. Let us refer to the Income Tax Appellate Tribunal Ruling (ITAT) in the case of Muradul Haque vs Income Tax Officer (New Delhi) (2020)

Facts of the Case

  1. The assessee is an individual and is engaged in the business of trading in fabric and job work.
  2. During the year assessee had paid commission to various persons on which no TDS was deducted.
  3. In the computation of income the amount of commission on which the TDS was not deducted was not disallowed u/s. 40(a)(ia) as the Assessee was of the view that the disallowance u/s. 40(a)(ia) of the Act was attracted only where the amount of expenditure on which the TDS, was payable at the end of the financial year and not when the amount of such expenditure has already been paid during the financial year.
  4. The submission of the assessee for non-applicability of provisions of s. 40(a)(ia) was not found acceptable to AO.
  5. AO was of the view that the non-deduction of TDS would attract provision of u/s. 40(a)(ia) of the Act.
  6. He accordingly made disallowance of the entire amount of commission. When the matter of disallowance was carried by the Assessee before CIT(A), the action of disallowance was upheld by CIT(A).
  7. Aggrieved by the order of CIT(A), Assessee appealed to the Income Tax Appellate Tribunal (ITAT).

Discussions and Findings of ITAT

  1. The issue in the appeal with ITAT is with respect to disallowance to section 40(a)(ia) of the Act.
  2. According to details of the commission paid by the assessee, which is placed in the paper book, it is revealed that out of the total commission which has been disallowed u/s 40(a)(ia), the amounts paid to 4 individuals which individually are below Rs. 10,000 each are included.
  3. Therefore ITAT found force in the argument that on those payments assessee was not required to deduct TDS u/s. 194H of the Act. It was therefore held that the same cannot be disallowed u/s 40(a)(ia) of the Act.
  4. As far as the amounts paid to other persons in the list were concerned, ITAT found the payments to be in excess of Rs 10000 each.
  5. The Finance (No.2) Act has made amendment to section 40(a)(ia) of the Act w.e.f. 01.04.2015.
  6. Various benches of the Tribunals including the Delhi Benches of the Tribunal, have held the amendment made by Finance (No 2) Act to be curative in nature.
  7. The coordinate bench of the Tribunal in the case of R.H. International Vs. ITO (supra) has held that disallowance u/s. 40(a)(ia) of the Act be restricted to 30% of the expenses paid as against 100% because amended provision is curative in nature and the provisions should be applied retrospectively.
  8. There was no contrary binding pointed out by the Revenue.
  9. It was, therefore, held that the disallowance of expenses on account of non-deduction of TDS to be restricted to 30% of the expenses where the amounts paid is in excess of Rs. 10,000.
  10. In the result, the appeal filed by the assessee was partly allowed by the ITAT

Hence, it can be concluded that non compliance of TDS provisions attracts a disallowance of expenses under Section 40(a)(ia), but the same is restricted to 30%.

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