2012 (12) TMI 873 - HC - Income Tax

Disallowance u/s 40(a)(ia) - lesser deduction of tax and also under different head - 194C v/s 194I - Held that - The conditions laid down u/s.40(a)(ia) for making addition is that tax is deductible at source and such tax has not been deducted. If both the conditions are satisfied then such payment cannot be disallowed u/s. 40(a)(ia). Here in the present case the assessee has deducted tax u/s. 194C(2) and not u/s. 194I but there is no allegation that this TDS is not deposited with the Government account. Section 40(a)(ia) refers only to the duty to deduct tax and pay to government account there is nothing in the said section to treat the assessee as defaulter where there is a shortfall in deduction. And if there is any shortfall due to any difference of opinion the assessee can be declared to be an assessee in default u/s. 201 but no disallowance u/s 40(a)(ia) is allowed - no substantial question of law is involved.

Summary

Issues involved:
Interpretation of provisions under section 40(a)(ia) of the Act regarding deduction of tax at source and disallowance of payments.

Detailed Analysis:

The judgment revolves around the interpretation of section 40(a)(ia) of the Act concerning the deduction of tax at source and the subsequent disallowance of payments. The court examined a case where the assessee had deducted tax under section 194C(2) of the Act for payments made to sub-contractors. The revenue, however, contended that the payments should have been treated as machinery hire charges falling under section 194I of the Act, requiring a higher deduction rate. The court emphasized that for disallowance under section 40(a)(ia) to apply, two conditions must be met: tax must be deductible at source, and such tax has not been deducted. It was clarified that if tax is deducted by the assessee, even if under a genuine but mistaken belief, the provisions of section 40(a)(ia) cannot be invoked.

Moreover, the court highlighted that section 40(a)(ia) focuses on the duty to deduct tax and pay it to the government account. In cases where there is a shortfall in deduction due to differences in opinion regarding taxability or nature of payments under TDS provisions, the assessee can be declared an assessee in default under section 201 of the Act, but disallowance cannot be made under section 40(a)(ia). The judgment stressed that the section does not treat the assessee as a defaulter for a deduction shortfall; it only pertains to the obligation to deduct tax and remit it to the government account.

Ultimately, the court upheld the order of the CIT (A) allowing the claim of the assessee, leading to the dismissal of the revenue's appeal. The court found no substantial question of law involved in the case, resulting in the refusal to admit the appeal. Consequently, the connected application was deemed infructuous and dismissed. The judgment concluded by directing the provision of an urgent certified copy of the order to the parties upon compliance with necessary formalities.