Section 10A and 40(a)(ia)

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Ca Gaurav Barai (Querist)
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16 October 2009 Sir,

I have a client who is eligible for deduction of Section 10A. He had incurred some expense on Computer Job Work, on which he deducted tax @ 2% u/s 194C, but in assessment the AO took stand that as the work is done on Computer the same would come under technical service and TDS would hv to be deducted @ 5% u/s 194J and hence disallowed the whole amount and on recomputation of income also didnot give benifit of Section 10A deduction on the addition of income. What are the remedy in the given case.

* is the expense wholly disallowable due to short fall in deduction of tax (which as per us shld come u/s 194C only)

* is Section 40(a)(ia) applicable to the case, as the amount is paid and not payable, as written in Act

* is Section 10A dedution is not allowable on addition made to income on account of disallowance of some expenditure

regards,

CA Gaurav Barai
Rajkot

Rajeev

Rajeev (Expert)
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17 October 2009 While there is no direct decision on the subject, there are judgements, in the area of short deduction of tax, which show that the issue has to be judged on the basis of the facts and circumstances of each case. If there was bonafide dispute about the liability for tax deduction or about the rate of tax deduction, it may be possible to claim deduction of the expenses in the computation of income even where the deduction was at a lower rate than what was held ultimately in tax litigation. Although sub-section (1) and (1A) of section 201 was amended by Finance Act, 2001 with effect from 01.04.1962 to deem the assessee a defaulter and make him liable to pay interest if there is short deduction yet the nature of responsibility cast on the deductor is to form an honest and bonafide opinion as to the deduction of tax as was held in the case of Gwalior Rayon Silk Co. Ltd. v. CIT ((1983) 140 ITR 832 (MP)

Since you have a bonafide reason to deduct tax @ 2% , i guess appeal will be allowed , no issues seen on the face of it

Contention cannot be sustained , when you say that the word " payable " is written in the provision and all your expenses are paid .
Since accrual system is followed , all expenses will be "payable " first and then will be paid . Contention cannot sustain .

I think the expenses will be allowed since you have a bonafide reason to deduct u/s 194C and not u/s 194J as contended by the Learned AO.