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Disallowance of expense for default in tds

Mohan (Audit Assisstant & Accounts Manager) (489 Points)

23 June 2015

Hello,

Once the expese is disallowed in computation for non deduction of tax or short deduction of tax, whether TDS and subsequently filing of TDS returns thereafter (i.e. filing of return of income) is required? What I.T.Act, says about it? Please site and explain section-wise.

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Manoj BG (Tax Professional and in Service) (1795 Points)
Replied 23 June 2015

Hi Mohan,

Section 40(a)(i) and 40(a)(ia) prescribes disallowance of expenditure on which TDS deductible but not deducted or deducted but not deposited on or before due date of filing of return of income. So disallowance is all depends upon deduction & deposit of TDS and nothing to do with filing of TDS returns. Such disallowance allowed in the subsequent year when you actually deduct and deposit the TDS correspnding to those expenditures.

However, during assessment if AO asked you to substantiate TDS deduction on particular transaction to avoid disallowance u/s 40(a)(i) and 40(a)(ia), you will be in better position if you filed respective deductee details in TDS return.

Hope this solves your query.

Thanks and Regards,

Manoj B. Gavali

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Mohan (Audit Assisstant & Accounts Manager) (489 Points)
Replied 23 June 2015

Hi Manoj,

Thanks for reply but my query is what are the consequences if I don't deduct the tax and file TDS return if the corresponding expense is disallowed in computation for default in TDS? Am I still required to deduct the tax and file TDS return after such disallowance? Because I am OK with disallowance of expense.

Manoj BG (Tax Professional and in Service) (1795 Points)
Replied 23 June 2015

(I) Penalty under section 271H for delayed and non filing of TDS returns :

As per section 271H, where a person fails to file the statement of tax deducted/collect at source i.e. TDS/TCS return on or before the due dates prescribed in this regard, then assessing officer may direct that such person shall pay penalty under section 271H.

Minimum penalty can be levied of Rs. 10,000 which can go uptoRs. 1,00,000. Penalty under section 271H will be in addition to late filing fees prescribed under section 234E

(II) Penalty for failure to deduct tax at source.

Section 271C - If any person fails to deduct the whole or any part of the tax as required by or under the provisions of Chapter XVII-B then, such person shall be liable to pay, by way of penalty, a sum equal to the amount of tax which such person failed to deduct or pay as aforesaid.This penalty is imposable by Joint Commissioner.

(III) Prosecution for failure to deduct /deposit tax at source

Section 276B- If any person fails to deduct the whole or any part of the tax as required by or under the provisions of Chapter XVII-B then, such person he shall be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extend to seven years and with fine.This penalty is imposable by Joint Commissioner

Thanks and Regards,

Manoj B. Gavali

Z ( ) (2965 Points)
Replied 23 June 2015

Other Consequences of failure to deduct or pay.

S.201. (1) Where any person, including the principal officer of a company,—

(a) who is required to deduct any sum in accordance with the provisions of this Act; or

(b) referred to in sub-section (1A) of section 192, being an employer,

does not deduct, or does not pay, or after so deducting fails to pay, the whole or any part of the tax, as required by or under this Act, then, such person, shall, without prejudice to any other consequences which he may incur,[like 40a disallowance] be deemed to be an assessee in default in respect of such tax:

Provided that any person, including the principal officer of a company, who fails to deduct the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid to a resident or on the sum credited to the account of a resident shall not be deemed to be an assessee in default in respect of such tax if such resident—

(i) has furnished his return of income under section 139;

(ii) has taken into account such sum for computing income in such return of income; and

(iii) has paid the tax due on the income declared by him in such return of income,

and the person furnishes a certificate to this effect from an accountant in such form as may be prescribed

Provided further that no penalty shall be charged under section 221 from such person, unless the Assessing Officer is satisfied that such person, without good and sufficient reasons, has failed to deduct and pay such tax.

(1A) Without prejudice to the provisions of sub-section (1), if any such person, principal officer or company as is referred to in that sub-section does not deduct the whole or any part of the tax or after deducting fails to pay the tax as required by or under this Act, he or it shall be liable to pay simple interest,—

(i) at one per cent for every month or part of a month on the amount of such tax from the date on which such tax was deductible to the date on which such tax is deducted; and

(ii) at one and one-half per cent for every month or part of a month on the amount of such tax from the date on which such tax was deducted to the date on which such tax is actually paid,

and such interest shall be paid before furnishing the statement in accordance with the provisions of sub-section (3) of section 200:

Provided that in case any person, including the principal officer of a company fails to deduct the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid to a resident or on the sum credited to the account of a resident but is not deemed to be an assessee in default under the first proviso to sub-section (1), the interest under clause (i) shall be payable from the date on which such tax was deductible to the date of furnishing of return of income by such resident.

(2) Where the tax has not been paid as aforesaid after it is deducted, the amount of the tax together with the amount of simple interest thereon referred to in sub-section (1A) shall be a charge upon all the assets of the person, or the company, as the case may be, referred to in sub-section (1).

Rashi Bajaj (CA) (752 Points)
Replied 23 June 2015

Disallowance of expenditure due to non deduction of TDS and liability to deduct TDS are two different things. As explained by the experts above, while expenditure is disallowed u/s 40(a)(i) and 40 (a)(ia), the assessee is bound to comply with TDS provisions u/s 192 to 196. Failure to deduct Tax would make you liable for penalty as stated above.