No disallowance can be made u/s 40(a)(ia) for short deduction of TDS – HC

Disallowance under section 40(a)(ia) of the Income Tax Act, 1961 cannot be made applicable to short deduction of tax at source  – High Court

In a recent judgment Hon’ble Uttarakhand High Court has upheld that disallowance under section 40(a)(ia) of the Income Tax Act, 1961 cannot be made applicable to short deduction of tax at source.

ABCAUS Case Law Citation:
4691 (2025) (08) abcaus.in HC

In the instant case, the Commissioner of Income Tax had challenged the order passed by the ITAT in holding that disallowance under section 40(a)(ia) of the Act cannot be made applicable for short deduction of tax at source (TDS).

The return of the respondent assessee was selected for scrutiny assessment. The Assessing Officer (AO) observed that the assessee had made payments to two parties and deduced tax at source @2% thereon in terms of section 194C of the Act for carrying out electrification work and interior work respectively. The AO concluded that the said work falls under the limb of professional services and fee for technical services warranting deduction of tax at source u/s 194J of the Act @10%.

The AO completed the assessment inter alia making addition for disallowance under Section 40(a)(ia) towards short-deduction of tax at source in respect of payments made for Interior and Electrification Works.

The CIT(A) confirmed the additions made observing that the Kerala High Court had held that if the tax is deductible under Section 194J of the Act but is deducted under Section 194C of the Act, the disallowance under Section 40(a)(ia) of the Act is still applicable. The High Court had observed that the expression ‘tax deductible at source under Chapter XVIIB’ occurring in Section 40(a)(ia) of the Act has to be understood as tax deductible at source under the appropriate provision of Chapter XVII-B of the Act. Further, the latter part of this Section that such tax has not been deducted again refers to the tax deducted under the appropriate provision of Chapter XVII-B of the Act.”

However, the Income Tax Appellate Tribunal allowed the Appeal filed by the assessee. The Tribunal held that the issue whether the provision of section 40(a)(ia) of the Act per se could be made applicable for short deduction of tax at source is no longer res integra in view of the decision of Hon’ble Calcutta High Court wherein it had been categorically held that section 40(a)(ia) of the Act cannot be made applicable to short deduction of tax at source and the disallowance made was deleted. Further the Hon’ble Delhi High Court had also given the same proposition.

The Tribunal noted that the CIT(A) however relied upon the decision of the Hon’ble Kerala High Court and decided the issue against the assessee.

The ITAT further observed that none of the High Court decisions as above were the decisions rendered by the Hon’ble Jurisdictional High Court. The Hon’ble Supreme Court in the case of Vegetable Products Ltd held that when there are divergent views of various non- Jurisdictional High Courts on an identical issue, the construction that is favourable to the assessee should be considered.

The Tribunal following the Calcutta High Court and decision rendered by the Delhi High Court held that section 40(a)(ia) of the Act cannot be made applicable for short deduction of tax at source.

Before the Hon’ble High Court the Revenue submitted that admittedly this was a case pertaining to short deduction of TDS. The TDS was deducted by the assessee under Section 194C at the rate of 2 percent, instead of deduction under Section 194J at the rate of 10 percent, therefore, the Assessing Officer invoked the provision under Section 40(a)(ia) of the Act. In order to buttress his argument, the appellant placed reliance upon the judgment rendered by High Court of Kerala wherein the Court held that If Section 40(a)(ia) is understood in the manner as laid down by the Apex Court, it can be seen that the expression “tax deductible at source under Chapter XVII-B” occurring in the Section has to be understood as tax deductible at source under the appropriate provision of Chapter XVII-B. Therefore, if tax is deductible under Section 194J but is deducted under Section 194C, such a deduction would not satisfy the requirements of Section 40(a)(ia).

On the contrary, the assessee placed reliance on the judgment rendered by Hon’ble Supreme Court that when there are divergent views of various non-jurisdictional High Courts on an identical issue, the construction that is favourable to the assessee should be considered.

The Revenue further submitted that the judgment of Hon’ble Kerala High Court had been challenged before the Hon’ble Supreme Court and the case is lined up for final hearing and is still pending consideration before the Hon’ble Supreme Court, therefore, the hearing of present Appeal may be deferred till decision in the aforesaid Civil Appeal.

The Hon’ble High Court held that in view of the law laid down by Hon’ble Supreme Court there is hesitation in upholding the finding returned by Income Tax Appellate Tribunal that Section 40(a)(ia) of the Income Tax Act, 1961 cannot be made applicable to short deduction of tax at source.

The Hon’ble High Court held that there was no infirmity in the order of the Income Tax Appellate Tribunal.   Accordingly, the appeal was dismissed.

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