AO can’t use reverse computation using TDS amount for disallowance u/s 40(a)(ia)

AO cannot use reverse computation of gross payment using TDS amount to determine the amount disallowable u/s 40(a)(ia) – ITAT

In a recent judgment, ITAT Delhi has held that the AO cannot resort to reverse mechanism using TDS amount to determine the gross amount of payment to workout amount disallowable u/s 40(a)(ia) which should be based on actual payable amount.

ABCAUS Case Law Citation:
4953 (2025) (12) abcaus.in ITAT

In the instant case, the Revenue had challenged the order passed by the CIT(A) in deleting the addition 40(a)(ia) of the Income Tax Act 1961 (the Act) made by the Assessing Officer (AO) due to non-deduction of TDS on payment.

The addition made by the AO was computed on the basis of TDS deposited after the close of the financial year. The Assessing Officer applied a reverse calculation method to determine the corresponding expenditure, arriving at a gross payment and disallowed 30% thereof, resulting in the disallowance under question. 

On appeal the CIT(A) noted that the assessee had paid interest to a non-resident and the applicable rate of TDS was 15% as per the provisions of the Act read with the relevant DTAA. However, the assessee had deposited a higher amount resulting in an excess TDS deposit which worked out more than 25 percent of the interest payment.

The CIT(A) observed that the TDS was duly deposited within the prescribed due date under the relevant provisions of the Act. Hence, no disallowance under section 40(a)(ia) was warranted.

The CIT(A) categorically concluded that this was a case of excess TDS deposit and not one of delayed deposit and the difference computed by the Assessing Officer through a reverse calculation method was arbitrary, devoid of merit, and legally untenable.

Before the Tribunal, the assessee defended the order of CIT(A) and submitted that the Assessing Officer applied a reverse calculation method to determine the corresponding interest expenditure and arriving at a gross interest payment to disallowed 30% thereof. 

The Tribunal observed that the issue was rightly adjudicated by CIT(A) based on the facts that the assessee had deposited excess rather than delay in remitting the tax collection under consideration.

The Tribunal opined that AO cannot resort to reverse mechanism to determine the amount to be disallowable. It should be based on actual payable amount.

Therefore, the ground raised by the Revenue was dismissed. 

Download Full Judgment Click Here >>

• Form 26 to replace Form 3CD of tax audit report by a CA from Tax Year 2026-27
• When no addition is made on the basis of reasons recorded, reopening is bad in law
• No separate compensation for loss of love and affection under MV Act – SC
• Trust accredited by National Open School eligible for registration u/s 12AB & u/s 80G
• Delay in furnishing Form 10B – Covid Period to be excluded as per decision of Supreme Court