The disallowance of amounts mentioned in section 40(a)(ia) will be made if the tax is not deducted at source or after deduction of tax at source has not paid the same on or before the due date specified in section 139(1).

Section 40(a)(ia) provides for disallowance of expenditure in relation to:

• Interest
• Commission or brokerage
• Rent
• Royalty
• Fees for professional services or fees for technical services payable to resident
• Amounts payable to a resident contractor or sub – contractor for carrying out any work including supply of labour.

Two Types of Expenses Disallowed:

(1) Section 40(a)(i):

Following expenses are not allowed:

Any payment made:

• Outside India
• In India to a non-resident
• On which TDS is applicable but TDS is not deducted

Or

• TDS deducted but not deposited within due date of ITR (31 July/30 September)
  (Earlier due date of TDS Deposit was 30 April)
• Examples of such expenses are interest, royalty, fees for technical services etc.
• Payment covered here are interest, royalty, fee for technical services or any other sum chargeable to income tax.
• Circular 3/2015 has clarified that if TDS is not deducted on payment to non-residents, only that portion will be disallowed which is chargeable to income tax and not the whole payment.

Deduction Allowed in Next Year

1. When TDS is actually deducted and deposited in next year (after TDS Deposit date) OR
2. When TDS is deducted in previous year but deposited in next year, then, that expense is allowed in the next year when it was actually deposited.

(2)Section 40(a)(ia)

Payments to residents on which TDS is not deducted

• Any amount payable to residents on which TDS was deductible but TDS not deducted

Or

• TDS deducted but not deposited within due date of ITR (31 July/30 September)
• In such a case, 30% of the amount will be disallowed. (Earlier whole 100% was disallowed)
• Examples of such expenses are interest, royalty, fees for technical services, etc.

Example 1:

Mr. A paid royalty ₹10,00,000 to Mr. B (Resident) without deducting TDS on such payment. In such case how much amount disallowed in ITR?

Answer: 30% amount of ₹10,00,000 = 3,00,000 disallowed in ITR.

CBDT Circular 10/2013

Note:-  Although the section mentions that this section is applicable on “Any Amount payable”. As per CBDT Circular, it is “Any amount paid or payable”. Hence this section is applicable to those cases also when amount has been actually paid to assesse and not only those when amount is payable.

Deduction Allowed in Next Year:

• When TDS is actually deducted and deposited in next year (after ITR due date) Or
• When TDS deducted in previous year but deposited in next year, then, that 30% which was earlier disallowed will be allowed in the next year when it was actually deposited.

Example 2:

Mr. A paid contract fee of ₹10,00,000 to Mr. B in F.Y. 2016-17. He forgot to deduct TDS on such payment. In F.Y. 2017-18 he enters into a new contract with Mr. B of ₹15,00,000 and paid balance amount after deducting TDS on ₹15,00,000 & ₹10,00,000 both.

How much amount can be allowed or disallowed as deduction in income tax return of financial year 2016-17 & 2017-18?

Answer:

In 2016-17 –

30% of amount on which TDS not deducted disallowed as deduction i.e. ₹7,00,000 is allowed as deduction in ITR of F.Y. 2016-17.

In 2017-18 –

Whole amount ₹15,00,000 & ₹3,00,000 (which was disallowed in last year due to non-deduction of TDS) is allowed as deduction in ITR of 2017-18. ₹3,00,000 is allowed as deduction in C.Y. because ₹10,00,000 on which TDS was not deducted in last year but deducted in C.Y.

Note:-

Under Section 40(a)(ia) of the Act – If tax is deducted and paid in a subsequent year, the business expenditure can be reduced from total income in that year. But tax can be deducted if there is another transaction between the assesse and the same payee or some amount should remain outstanding to enable deduction. However, if there was only one transaction and the payment was made in full without deduction of tax, then TDS cannot be deducted in subsequent year and hence such sums will not be allowed in any year.

Which means that the law does not compel a person to do that what he cannot possibly perform. However, this is yet to be decided by the judiciary with respect to Section 40(a)(ia) of the Act.

Since, income tax is a charge on income and not on expenditure; therefore, expenses cannot be denied if they have been incurred for the purpose of business or profession. Disallowance under Section 40(a)(ia) converts the expenditure incurred into artificial income, therefore, this section is strictly construed.

Where tax already paid:

If the payee has already paid tax on income of which there was a short deduction or non-deduction of tax at source, recovery of tax cannot be made once again from the tax deductor.

If a person who is required to deduct TDS does not deduct it or deducted but failed to deposit may be deemed as default under section 201(1).

In other words, the person responsible for deduction of tax is considered as default only when deductee has not filed his ITR or not paid tax on such income.

If the deductee has paid tax on such income then also deductor is required to pay interest under section 201(1A) for the period from the date on which tax is deductible till the date on which the tax was actually paid.

Hi, I am Nikesh Mehta, owner and writer of this site. I’m an analytics professional and also love writing on finance and related industry. I’ve done online course in Financial Markets and Investment Strategy from Indian School of Business. I can be reached at nikeshmehta@allonmoney.com.