2011 (3) TMI 702 - AT - Income Tax

Disallowing - U/s 40(a)(ia)- Refund of the excess payment of TDS - TDS was adjusted against the excess deposits of tax made in earlier year - The undisputed fact is that the assessee made the payment to sub-contractor and deducted the taxes but the same was not deposited with the government on the pretext that the assessee has adjusted the same against the excess payment in the earlier years - Held that when the assessee undisputedly the deducted the tax but to the extent the same was not deposited with the government the provisions of section 40(a)(ia) are attracted and the claim of the deduction of such expenditure would be disallowed - Thus no bearing on the right of the assessee to claim the refund or adjustment against the current liability of tax - Decided against of assessee.

Summary

Issues involved:
Disallowance of expenses under Section 40(a)(ia) of the IT Act for non-deposit of TDS deducted against subcontracting expenses.

Analysis:

Issue 1: Disallowance of expenses under Section 40(a)(ia)
The appeal challenged the disallowance of Rs.32,87,534 under Section 40(a)(ia) of the IT Act by the AO, upheld by the CIT(A). The AO noted that the assessee deducted tax on payments made to various parties for subcontracting expenses but did not deposit it within the financial year or before the due date. The AO issued a show-cause notice to justify why these expenses should not be disallowed under Section 40(a)(ia) of the Act. The assessee claimed to have adjusted the excess tax deposits from the previous year against the current year's liability. The AO disallowed Rs.35,00,207, out of which Rs.32,87,534 was charged to the profit and loss account. The CIT(A) upheld this disallowance.

Issue 2: Interpretation of legal provisions and circulars
The assessee argued that excess tax deposits from the previous year were adjusted against the current year's liability, citing CBDT Circular No.285, dated 20.10.1980, which allows such adjustments. The assessee relied on a jurisdictional High Court case to support the claim that the circular gives the right to claim a refund of TDS. The assessee contended that the disallowance under Section 40(a)(ia) was unjustified and illegal. On the other hand, the Revenue argued that there is no provision in the Act for such adjustments and that the circular is an administrative measure for refund, not for the assessee to adjust on its own. The Revenue contended that the assessee must deposit the TDS as required by law.

Judgment:
The Tribunal analyzed the contentions and relevant records. It acknowledged the right of the deductor to claim a refund of excess TDS payment as per the CBDT circular and the High Court case cited by the assessee. However, the Tribunal clarified that the issue at hand was the disallowance of the expenditure due to non-deposit of TDS as required by law under Section 40(a)(ia). The Tribunal emphasized that the TDS deducted by the assessee is not the assessee's own tax liability but an obligation to be deposited with the government. Failure to deposit TDS attracts penalties and interest. The Tribunal held that irrespective of the right to claim a refund or adjust excess payment, the assessee must comply with TDS deposit requirements. Therefore, the disallowance under Section 40(a)(ia) was upheld, stating that the assessee cannot withhold TDS deducted, and non-depositing it contradicts the Act's provisions. The Tribunal clarified that this decision does not affect the right to claim a refund or adjustment against current tax liability. Consequently, the appeal of the assessee was dismissed.