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Payment capitalised, no tds -- effects ?

Dipjyoti Majumdar (CA in service & CS. dipmaj@ rediffmail.com ) (3468 Points)

23 February 2012

Friends

If a payment is capitalised in the books of account of payer and there has not been any tax deduction at source can the payment be disallowed in computation of total income under section 40(a) or any other provision of Income Tax Act 1961 ?

It is noteworthy that as payment is capitalised, no deduction is being claimed by the assessee against income. It is a different matter that non compliance of TDS provisions like section 201 will follow but on disallowance part what could be the action of AO, if any .

Views of Members are solicited.

Regards,

Dipjyoti

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9 Replies

kanagaraj (CHARTERED ACCOUNTANT) (793 Points)
Replied 23 February 2012

If payment is capitalized then there is no need to deduct the tax. 40 a(ia) clearly stipulates that the tds is to be deducted as per chapter XVII B. So, there is no worry. If you clearly mention why it is capitalized i can further explain the matter

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Suguna (VP) (98 Points)
Replied 23 February 2012

the question is not clear.the purpose of the payment made needs to be known to give a view on this.

Max Payne (employed) (2569 Points)
Replied 23 February 2012

AO cannot disallow expenses for which no deduction has been claimed. (This depends - certain capital expenditures, are allowed in lumpsum or in instalments as deduction - these can be disallowed u/s 40(a) by the AO)

But for sure, the assessee will be an assessee in default, liable to pay the TDS and interest and penalty thereon.

Anvesh Desai (Chartered Accountant) (156 Points)
Replied 23 February 2012

please eloborate the nature and purpose of payment?? why you have capitalized it??

CA Virav Dedhia (.) (30 Points)
Replied 24 February 2012

Section 40 (a) (ia) of the Act deals with the disallowance of expenses. When an expense has been capitalised there is no allowance of the expenditure so the machinery of the said Section fails to apply.

Regards.

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CA SUMANTH (LEARNER.....) (294 Points)
Replied 24 February 2012

Query is not clear, some of payment even though capitalised, will cover u/s 194C.

Ameya Makarand Lonkar (CA Final Student) (56 Points)
Replied 28 February 2012

Dipjyoti,

I am giving a hypothetical example. Please tell me if I am wrong. Let us say a company is building a new factory. The first time painting expenses will be capitalised. The Tax is required to be deducted u/s 194C. Now, are you saying what will happen if tax is not deducted as the painting expenses are not claimed as deduction but are added to factory cost?

Dipjyoti Majumdar (CA in service & CS. dipmaj@ rediffmail.com ) (3468 Points)
Replied 29 February 2012

Thanks to Friends in this forum to discuss this. The example given by Ameya Lonkar is perfect one to discuss on this further.

Regards,

Tarun M Guntanur (Pursuing CA Final) (299 Points)
Replied 23 March 2012

In continuation, if any machinery or furniture is installed in the premises and labour charges have been paid, TDS would be applicable. Normally u/s 194C, but this may differ on a case to case basis. So if the labour charges exceeds the threshold limit, we need to deduct TDS.

If not deducted, no disallowance will be applicable. However contravention of TDS provisions will apply and interest and penalty would be applicable.

I would also like to add on that TDS will be apllicable irrespective of its usage. In other words, it will apply even if used for personal purpose. Because nowhere in the TDS provisions it tells that it has to be incurred only for business purpose.