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Disallowance for TDS default

ThinkLedger Editorial
11 min read

Introduction

If tax is not deducted from the payment made to resident or non-resident, as the case may be, in accordance with Chapter XIX-B, or after deduction tax is not deposited with the Central Govt. on or before the due date for filing of return, the expenditure shall be disallowed in accordance with this provision. Such expenditure shall be allowed as deduction in the year in which tax is deducted and deposited to the credit of Central Govt.

1. Disallowance from payment made to non-resident [Section 35(b)(ii)]

1.1. When disallowance is made?

The disallowance under this provision is made if tax is not deducted (and deposited) in accordance with provisions of Chapter XIX-B, or after deduction tax is not deposited with the Central Govt. on or before the due date for filing of return, from the amount payable in respect of interest, royalty, technical fees or any other sum (but not salary), outside India or in India to a non-resident person or a foreign company and it is chargeable to tax in the hands of the recipient in India.

If tax has not been deducted or, after deduction, has not been paid from the payment of salary outside India or to a non-resident person, the disallowance of such salary expense shall be made in accordance with the provisions of Section 35(c).

The disallowance under this provision shall be made if tax is not deducted in accordance with following provisions:

(a) Section 393(3) [Table S. No. 1] - Winnings from Lotteries, Crossword Puzzles, etc.

(b) Section 393(3) [Table S. No. 2]– Winnings from online games

(c) Section 393(3) [Table: S. No. 3] - Winnings from race horses

(d) Section 393(2) [Table S. No. 1] - Payment to Non-resident Sportsmen or Sports Association

(e) Section 393(3) [Table S. No. 4] - Commission and other payments on sale of lottery tickets

(f) Section 393(2) [Table S. No. 5] - Interest from Infrastructure Debt Fund

(g) Section 393(2) [Table S. No. 6 and 7] - Income distributed by a Business Trust

(h) Section 393(2) [Table S. No. 8] - Income in respect of units of Investment Fund

(i) Section 393(2) [Table S. No. 9] - Income in respect of investment in Securitization Trust

(j) Section 393(2) [Table S. No. 2] - Income by way of Interest in respect of foreign borrowings

(k) Section 393(2) [Table S. No. 3 and 4] - Income by way of Interest on Rupee Denominated Bonds and Government Securities

(l) Section 393(3) [Table S. No. 7] - Payment of Salary, Remuneration, Interest, Bonus or Commission by Partnership Firm to Partners

(m) Section 393(2) [Table S. No. 17] - Any other sum chargeable to tax

(n) Section 393(2) [Table S. No. 10] – Income in respect of units of mutual fund

(o) Section 393(2) [Table S. No. 11 & 12] – Income or capital gain arising from units purchased in foreign currency

(p) Section 393(2) [Table S. No. 13 & 14] - Interest, dividend or capital gains arising from Bonds or GDRs

(q) Section 393(2) [Table S. No. 15] - Income payable to FIIs in respect of securities

1.2. How much disallowance is made?

100% of the expenditure shall be disallowed if tax has not been deducted from the sum paid or payable or if tax has been deducted but it has not been paid to the credit of Central Govt. on or before the due date of furnishing the return of income.

1.3. Whether expenditure may be allowed in subsequent years?

The expenditure so disallowed, on failure to deduct or deposit the tax, shall be allowed in the subsequent years in the following cases.

1.3-1. If disallowance was made due to non-deduction of tax

If disallowance of an expenditure has been made due to non-deduction of tax at source, the said expenditure shall be allowed as deduction in the subsequent year in which tax is deducted and deposited by the assessee with the Government.

1.3-2. If disallowance was made due to non-payment of tax

If an expenditure was disallowed because the tax deducted was not deposited with the Central Govt. on or before the due date for filing of return, the said expenditure shall be allowed as deduction in the subsequent year in which tax is deposited by the assessee with the Government.

1.4. No disallowance if tax is paid by deductee

No disallowance shall be made even if assessee has not deducted the tax at source from any sum paid to a payee, if following conditions are satisfied:

(a) The recipient has furnished his return of income.

(b) He has taken into account the above income in such return of income

(c) He has paid the tax due on the income declared in such return of income; and

(d) Payer obtains a certificate from Chartered Accountant in Form 149 and electronically furnishes it to the Income-tax Dept.

2. Disallowance from payment made to resident [Section 35(b)(i)]

2.1. When disallowance is made?

The disallowance under this provision is made if tax is not deducted (and deposited) in accordance with provisions of Chapter XIX-B from any sum payable to a resident person. This provision is applicable in respect of expenses claimed as deduction under the head ‘Profits and gains of business or profession’ or under the head ‘Income from other sources’. Expenses claimed as deduction under any other head are not covered by this provision.

The disallowance under this provision shall be made if tax is not deducted in accordance with following provisions:

(a) Section 392 – Salary

(b) Section 393(1) [Table S. No. 5(i)] – Interest on Securities

(c) Section 393(1) [Table S. No. 5(ii) and 5(iii)] - Interest other than interest on Securities

(d) Section 393(3) [Table S. No. 1] - Winning from Lotteries, Crossword Puzzles, etc.

(e) Section 393(3) [Table S. No. 2]– Winning from online games

(f) Section 393(3) [Table: S. No. 3] - Winning from race horses

(g) Section 393(1) [Table S. No. 6(i)]– Payment to Contractors

(h) Section 393(1) [Table S. No. 1(i)] - Insurance Commission

(i) Section 393(1) [Table S. No. 8(i)] - Payment in respect of Life Insurance Policy

(j) Section 393(3) [Table S. No. 6] - Payment in respect of deposits under National Saving Scheme

(k) Section 194F - Repurchase of Units by Mutual Fund or UTI

(l) Section 393(3) [Table S. No. 4] - Commission and other payments on sale of lottery tickets

(m) Section 393(1) [Table S. No. 1(ii)]– Commission and Brokerage

(n) Section 393(1) [Table S. No. 2(ii)] – Rent

(o) Section 393(1) [Table S. No. 3(i)] - Consideration to buy an Immovable Property for the purpose of business other than rural agricultural land

(p) Section 393(1) [Table S. No. 2(i)] - Payment of Rent for the purpose of business by Certain Individuals or HUF

(q) Section 393(1) [Table S. No. 3(ii)] - Payment made for the purpose of business under Joint Development Agreement

(r) Section 393(1) [Table S. No. 6(iii)] - Royalty and Fees for Professional or Technical Services

(s) Section 393(1) [Table S. No. 4(i)] – Income in respect of units of mutual fund

(t) Section 393(1) [Table S. No. 3(iii)] - Compensation on account of compulsory acquisition of an immovable property (other than agriculture land)

(u) Section 393(1) [Table S. No. 4(ii)] – Income distributed by business trust

(v) Section 393(1) [Table S. No. 4(iii)] - Income in respect of units of Investment Fund

(w) Section 393(1) [Table S. No. 4(iv)] - Income in respect of investment in Securitization Trust

(x) Section 393(1) [Table S. No. 6(ii)] – Payment to contractor, commission agent, broker, or professional by certain individuals or HUF

(y) Section 393(1) [Table S. No. 8(v)] – Payment by e-commerce operator to e-commerce participant

(z) Section 393(1) [Table S. No. 8(iii)] – Pension income of Senior Citizen

(aa)Section 393(1) [Table S. No. 8(ii)] – Purchase of Goods

(bb)Section 393(1) [Table S. No. 8(iv)] – Benefit or perquisite arising from business or profession

(cc)Section 393(1) [Table S. No. 8(vi)] – Payment on transfer of Virtual Digital Asset

(dd) Section 393(3) [Table S. No. 7] - Payment of Salary, Remuneration, Interest, Bonus or Commission by Partnership Firm to Partners

2.2. How much disallowance is made?

30% of the expenditure shall be disallowed if tax has not been deducted from the sum paid or payable or if tax has been deducted but it has not been paid to the credit of Central Govt. on or before the due date of furnishing the return of income.

Exception: No disallowance if tax is paid by deductee

No disallowance shall be made even if assessee has not deducted the tax at source from any sum paid to a payee, if following conditions are satisfied:

(a) The recipient has furnished his return of income

(b) He has taken into account the above income in such return of income

(c) He has paid the tax due on the income declared in such return of income; and

(d) Payer obtains a certificate from Chartered Accountant in Form 149 and electronically furnishes it to the Income-tax Dept.

2.3. Whether expenditure may be allowed in subsequent years?

The expenditure so disallowed, on failure to deduct or deposit the tax, shall be allowed in the subsequent years in the following cases.

2.3-1. If disallowance was made due to non-deduction of tax

2.3-2. If disallowance was made due to non-payment of tax

3. Disallowance from payment of salary to non-resident [Section 35(c)]

3.1. When disallowance is made?

Payment of salary to the following persons shall not be allowed as a deduction, if tax has not been deducted or after deduction, has not been paid:

(a) Salary payable outside India, whether to a resident or to non-resident;

(b) Salary payable to a non-resident in India.

There remains a difference in the provisions of sections 35(b)(i), 35(b)(ii) and 35(d) vis-à-vis section 35(c). In case of former sections, the deduction during the tax year is not allowable only if TDS is deducted but has not been paid up to the due date to file the return of income as specified in section 263(1). However, in case of section 35(c), the deduction during the tax year is not allowable if TDS is deducted but has not been paid during that tax year. Thus, the extra timeline (i.e., payment of TDS up to the due date) has not been extended to the provisions of section 35(c), making this provision stricter and more restrictive than the former ones.

If tax has not been deducted from the payment of salary in India, to a resident person, the disallowance of such salary expense shall be made in accordance with provisions of Section 35(b)(i).

4. Key Issues

4.1. Whether disallowance is made in case of short-deduction?

If tax is deducted at source but there is some shortfall due to difference of opinion about provisions applicable, the Courts

Example, the assessee deducts tax under Section 393(1) [Table S. No. 6(i)] from payment of rent instead of Section 393(1) [Table S. No. 2(ii)], he shall be deemed to be in default and accordingly, he shall be liable to pay interest and penalty. However, the rent expenditure may not be disallowed.

4.2. Whether disallowance is made for TDS default from capital expenditure?

Interest on borrowings for the period before an asset is put to use shall be added to the actual cost of asset. If there is a TDS default under section 194A or Section 393(2) [Table S. No. 17] from such

4.3. Whether disallowance is made for procedural defaults?

Disallowance shall not be made under these provisions if default have been made in complying with TDS procedures:

(a) Delay in filing of TDS return

(b) Payer fails to give PAN details of transporter in Form 140 as required by Section 393(1) [Table S. No. 6(i)]

References

CIT v. K.K. Builders (P.) Ltd. [2015] 62 taxmann.com 187 (Patna), CIT v. Kishore Rao [2016] 387 ITR 196 (Kar.).

CIT v. P V S Memorial Hospital Ltd. [2015] 234 Taxman 46 (Ker.).

SAB Miller India Ltd. v. CIT [2015] 63 taxmann.com 341 (Mum.).

CIT v. Valibhai Khanbhai Mankad [2013] 216 Taxman 18 (Guj.)

Karwat Steel Traders v. ITO [2013] 145 ITD 370 (Mum.), Vijaya Bank v. ITO [2014] 66 SOT 20 (Delhi)

This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.