Disallowance of expenses for non deduction of TDS : Section 40(a)

By | May 28, 2016

Section 40(a)(ia) of Income Tax Act 1961

Disallowance of expenses for non deduction of TDS

Disallowance of expenses for non deduction of TDS : Section 40(a)

BUY

Analysis of Section 40(a)(ia) relating to Disallowance of expenses for non deduction of TDS

  • 30%  disallowance of expenses for non deduction of TDS  under Section 40(a)(ia)
  • This 30% disallowance of expenses for non deduction of TDS  under Section 40(a)(ia) of any sum 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  on or before the due date  specified in sub-section (1) of section 139 : Thus disallowance under section 40(a)(ia) of the Act shall extend to all expenditure on which tax is deductible under Chapter XVII-B of the Act (e.g  30% Expenses will be disallowed if TDS not deducted on salary, directors fee, interest, commission, brokerage, rent, royalty fee for technical services and contract payment made to a resident etc )
  • Disallowance of expenses for non deduction of TDS  under Section 40(a)(ia) if payable to a resident
  • where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, 30% of such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.However the assesse in default is required to pay interest.
    • Thus If tax is deducted during a previous year (say Year 1) and paid before the due date of filing return, then the expenditure on commission, etc., (from which tax is deducted) would be allowable in the same previous year (Year 1);
    • If tax not deducted during a previous year (say Year 1) is deducted in the subsequent previous year (Year 2); and paid, then the expenditure on commission, etc., (from which tax is deducted) would be allowable in the subsequent previous year (Year 2).
  • If an assessee(deductor/Assessee in default) has failed to deduct tax of resident Payee but the resident Payee has discharged his tax liability while filing his return of Income, than the expenditure to deductor/Assessee in default) would be allowed in the year in which the resident payee has furnished his return of income.

Example :-

If ABC Ltd failed to deduct the tax of Mr B on Rs 10000 and Mr C on Rs 20000. during FY 2015-16.ABC Ltd has to file return of Income by 30.09.2016.

Mr B furnishes his return on 30.06.2016 and furnishes certificate from accountant to ABC limited regarding payment of tax on the amount on which TDS was not deducted by ABC limited.

Mr C furnishes his return on 31.10.2016 and furnishes certificate from accountant to ABC limited regarding payment of tax on the amount on which TDS was not deducted by ABC limited.

Expenditure will be allowed to ABC limited as follow

i) in the case of Mr B amount paid Rs 10000 would be allowed in Financial Year 2015-16 (AY 2016-17). (2nd Proviso of Section 40(a)(ia))

ii) in the case of MR C amount paid of Rs 20000 would be allowed in Financial Year 2016-17 (AY 2017-18) [ refer 1st proviso of Section 40(a)(ia) ]

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Disallowance of expenses for non deduction of TDS  after Finance Act 2016

Section – 40 (a) of Income-tax Act, 1961 [ after Finance Act 2016 ]

Amounts not deductible

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”,

(a) in the case of any assessee—

i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable,—

(A) outside India; or

(B) in India to a non-resident, not being a company or to a foreign company,

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 on or before the due date specified in sub-section (1) of section 139 :

Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.

Explanation.—For the purposes of this sub-clause,—

(A) “royalty” shall have the same meaning as in Explanation2 to clause (vi) of sub-section (1) of section 9;

(B) “fees for technical services” shall have the same meaning as in Explanation2 to clause (vii) of sub-section (1) of section 9;

(ia) thirty per cent of any sum payable to a resident, 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  on or before the due date  specified in sub-section (1) of section 139 :

Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139,  thirty per cent of  such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid :

Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso.

Explanation.—For the purposes of this sub-clause,—

(i) “commission or brokerage” shall have the same meaning as in clause (i) of the Explanation to section 194H;

(ii) “fees for technical services” shall have the same meaning as in Explanation2 to clause (vii) of sub-section (1) of section 9;

(iii)”professional services” shall have the same meaning as in clause (a) of the Explanation to section 194J

(iv) “work” shall have the same meaning as in ExplanationIII to section 194C

(v) “rent” shall have the same meaning as in clause (i) to the Explanation to section 194-I;

(vi) “royalty” shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9

(ib) [Inserted by the Finance Act, 2016, w.e.f. 1-6-2016]  any consideration paid or payable to a non-resident for a specified service on which equalisation levy is deductible under the provisions of Chapter VIII of the Finance Act, 2016, and such levy has not been deducted or after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139 :

Provided that where in respect of any such consideration, the equalisation levy has been deducted in any subsequent year or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such levy has been paid;

(ic) any sum paid on account of fringe benefit tax under Chapter XIIH;

(ii)any sum paid on account of any rate or tax levied  on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains.

Explanation 1.—For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes and shall be deemed always to have included any sum eligible for relief of tax under section 90 or, as the case may be, deduction from the Indian income-tax payable under section 91

Explanation 2.—For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes any sum eligible for relief of tax under section 90A;

(iia) any sum paid on account of wealth-tax.

Explanation.—For the purposes of this sub-clause, “wealth-tax” means wealth-tax chargeable under the Wealth-tax Act, 1957 (27 of 1957), or any tax of a similar character chargeable under any law in force in any country outside India or any tax chargeable under such law with reference to the value of the assets of, or the capital employed in, a business or profession carried on by the assessee, whether or not the debts of the business or profession are allowed as a deduction in computing the amount with reference to which such tax is charged, but does not include any tax chargeable with reference to the value of any particular asset of the business or profession;

(iib) any amount-

(A) paid by way of royalty, licence fee, service fee, privilege fee, service charge or any other fee or charge, by whatever name called, which is levied exclusively on; or

(B)which is appropriated, directly or indirectly, from

a State Government undertaking by the State Government.

Explanation.—For the purposes of this sub-clause, a State Government undertaking includes

(i) a corporation established by or under any Act of the State Government

(ii) a company in which more than fifty per cent of the paid-up equity share capital is held by the State Government;

(iii) a company in which more than fifty per cent of the paid-up equity share capital is held by the entity referred to in clause (i) or clause (ii) (whether singly or taken together);

(iv) a company or corporation in which the State Government has the right to appoint the majority of the directors or to control the management or policy decisions, directly or indirectly, including by virtue of its shareholding or management rights or shareholders agreements or voting agreements or in any other manner;

(v) an authority, a board or an institution or a body established or constituted by or under any Act of the State Government or owned or controlled by the State Government;]

(iii) any payment which is chargeable under the head “Salaries”, if it is payable

(A)          outside India; or

(B)          to a non-resident,

               and if the tax has not been paid thereon nor deducted therefrom under Chapter XVII-B;

(iv)         any payment to a provident or other fund established for the benefit of employees of the assessee, unless the assessee has made effective arrangements to secure that tax shall be deducted at source from any payments made from the fund which are chargeable to tax under the head “Salaries”;

(v)       any tax actually paid by an employer referred to in clause (10CC) of section 10;]

Disallowance of expenses for non deduction of TDS : Budget 2014 Speech and Explanatory Memorandum 

The Finance Minister explained the amendments as under:

207. Currently, where an assessee fails to deduct and pay tax on specified payments to residents, 100 per cent of such payments are not allowed as deduction while computing his income. This has caused undue hardship to taxpayers, particularly where the rate of tax is only 1 to 10%. Hence, I propose to provide that instead of 100 per cent, only 30% of such payments will be disallowed.”

The Explanatory Memorandum explains the amendments as under:

As mentioned above, 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, it is proposed that in case of 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 claimed.

Further, existing provisions of section 40(a)(ia) of the Act provides that certain payments such as interest, commission, brokerage, rent, royalty fee for technical services and contract payment made to a resident shall not be allowed as deduction for computing business income if tax on such payments was not deducted, or after deduction, was not paid within the time specified under the said section. Chapter XVII-B of the Act mandates deduction of tax from certain other payments such as salary, directors fee, which are currently not specified under section 40(a)(ia) of the Act. The payments on which tax is deductible under Chapter XVII-B but not specified under section 40(a)(ia) of the Act may also be claimed as expenditure for the purposes of computation of income under the head “Profits and gains from business or profession”.

Section 40(a)(ia) has proved to be an effective tool for ensuring compliance of TDS provisions by the payers. Therefore, in order to improve the TDS compliance in respect of payments to residents which are currently not specified in section 40(a)(ia), it is proposed that the disallowance under section 40(a)(ia) of the Act shall extend to all expenditure on which tax is deductible under Chapter XVII-B of the Act.

These amendments will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent years.

[Clause 14]

Disallowance of expenses for non deduction of TDS  :-

EXPLANATORY NOTES TO THE PROVISIONS OF FINANCE (NO.2) ACT, 2014

CIRCULAR NO.1/2015 [F.NO.142/13/2014-TPL], DATED 21-1-2015

14. Disallowance of expenditure for non- deduction of tax at source

14.1 The provisions of section 40(a)(i) of the Income-tax Act, prior to the amendment by the Act, provided that certain payments such as interest, royalty and fee for technical services made to a non-resident shall not be allowed as deduction in computing business income if tax on such payments had not been deducted, or after deduction, has not been paid within the time prescribed under section 200(1) of the Income-tax Act. The Income-tax Act contains similar provisions for disallowance of business expenditure in respect of certain payments made to residents. 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 Income-tax Act. However, in case of disallowance for non-payment of tax from payments made to non-residents, this extended time limit of payment of tax deducted at source up to the date of filing of return of income under section 139(1) was not available.

14.2 In order to provide similar extended time limit for payment of tax deducted from payments made to non-residents, section 40(a)(i) of the Income-tax Act has been amended so as to provide that the deductor shall be allowed to claim deduction for payments made to non-residents 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 under section 139(1) of the Income-tax Act.

14.3 As mentioned above, in case of non-deduction of tax at source or non-payment of tax so deducted 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 causes hardship, especially in case of payment made to a resident in whose case the withholding of tax is only a mode of collection of tax and does not result into final discharge of tax liability.

14.4 Accordingly, section 40(a)(ia) of the Income-tax Act has been amended to provide that in case of non-deduction of tax at source or non-payment of tax so deducted on payments made to residents as specified insection 40(a)(ia) of the Income-tax Act, the disallowance shall be restricted to 30% of the amount of expenditure claimed.

14.5 Further, the first proviso to section 40(a)(ia) of the Income-tax Act, prior to its amendment by the Act, provided that sum, which was disallowed due to non-deduction of tax at source or non-payment of tax so deducted, shall be allowed deduction in the previous year in which such tax deducted at source has been paid. As the disallowance under the amended section 40(a)(ia) of the Income-tax Act has been restricted to 30% of the amount of expenditure, the first proviso to the said section 40(a)(ia) has also been amended to provide that deduction of 30% of the amount of expenditure shall be allowed in the previous year in which the tax so deducted has been paid. In this regard, it is hereby clarified that in respect of the amount disallowed for assessment year commencing on or before 1st day of April 2014, the deduction for the whole of the amount disallowed under section 40(a)(ia) of the Income-tax Act, shall be allowed under the first proviso to section40(a)(ia) in the previous year in which tax deducted at source has been paid.

14.6 Further, provisions of section 40(a)(ia) of the Income-tax Act, prior to its amendment by the Act, provided that certain payments such as interest, commission, brokerage, rent, royalty fee for technical services and contract payment made to a resident shall not be allowed as deduction for computing business income if tax on such payments was not deducted, or after deduction, was not paid within the time specified under the saidsection. Chapter XVII-B of the Income-tax Act mandates deduction of tax from certain other payments such as salary, directors fee, which were not specified in section 40(a)(ia) of the Income-tax Act. The payments on which tax is deductible under Chapter XVII-B but not specified under section 40(a) (ia) of the Income-tax Act may also be claimed as expenditure for the purposes of computation of income under the head “Profits and gains from business or profession”.

14.7 Section 40(a)(ia) of the Income-tax Act has proved to be an effective tool for ensuring compliance of TDS provisions by the payers. Therefore, in order to improve the TDS compliance in respect of payments to residents which were not specified in section 40(a)(ia) of the Income-tax Act, the said section 40(a)(ia) has been amended to provide that the disallowance under the said section shall extend to all expenditure on which tax is deductible under Chapter XVII-B of the Income-tax Act.

14.8 Applicability:—These amendments takes effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent years.

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