Section 40(a)(ia) — If tax has been deducted at source and paid to the Government, then no disallowance u/s.40(a)(ia) can be made on the ground that the deduction was at a wrong rate or under an incorrect section.

Section 40(a)(ia) — If tax has been deducted at source and paid to the Government, then no disallowance u/s.40(a)(ia) can be made on the ground that the deduction was at a wrong rate or under an incorrect section.

The assessee was engaged in the business of construction of bridges, roads, dams and canals and heavy earth-moving activities in contract with government and semi-government bodies such as BRO, PWD, NTPC, etc. The assessee filed return of income showing total income at Rs.45,49,360. In the course of assessment proceedings, the Assessing Officer (AO) noted that the assessee had debited Rs.3,37,37,464 in the P & L Account under the head ‘machine hire charges’ and on this tax was deducted at source @ 1%. The AO held that these payments attracted TDS u/s.194I @ 10%. He rejected the submissions of the assessee that the payments were made to sub-contractors for completion of specific work and therefore, tax was deducted @ 1% u/s.194C(2) of the Act and also that the payments were not made for hiring of machines, but the same were wrongly grouped under the head ‘Machine hire charges’. He made a proportionate disallowance u/s.40(a)(ia) of the Act with respect to machinery hire charges. Aggrieved, the assessee preferred an appeal to the CIT(A) who examined the agreements entered into by the assessee and found that the quantity of work was fixed and the rate was fixed with reference to the quantity of work. He found merit in the argument that hire charges depend on the time period for which the machines are used. But in the present case, time consumed by the subcontractors or the period for which machines were used was not at all a factor in deciding the payments to be made to sub-contractors. It was only on the basis of quantity of work that the payments were made. He held that the payments were covered by S. 194C(2) and therefore provisions of S. 40(a)(ia) are not attracted. He deleted the addition made by the AO. Aggrieved, the Revenue preferred an appeal to the ITAT.

Held:

The Tribunal after examining the provisions of S. 40(a)(ia) observed that in the present case tax has been deducted at source, although u/s.194C(2) of the Act, it is not a case of non-deduction of tax or no deduction of tax as is the import of the section. It observed that even if it is considered that the sum under consideration falls u/s.194I, it may be considered that tax has been deducted at lower rate and it cannot be considered to be a case of non-deduction or no deduction. It noted that the C Bench of Mumbai ITAT in the case of Chandabhoy & Jassobhoy (ITA No. 20/Mum./2010, order dated 8-7-2011) the Tribunal was dealing with a case where the assessee deducted tax u/s.192 of the Act, whereas the Revenue contended that the tax should have been deducted u/s.194J of the Act, the Tribunal in that case held that the provisions of S. 40(a)(ia) of the Act can be invoked only in the event of nondeduction of tax but not for lesser deduction of tax. S. 40(a)(ia) has two limbs, one is where inter alia the assessee has to deduct tax and the second where after deducting tax, inter alia, the assessee has to pay the same into Government account. There is nothing in the said section to treat, inter alia, the assessee as a defaulter where there is a shortfall in deduction. S. 40(a)(ia) refers only to the duty to deduct tax and pay to Government account. If there is any shortfall due to any difference of opinion as to the taxability of any item or the nature of payments falling under various TDS provisions, the assessee can be declared to be an assessee in default u/s.201 of the Act and no disallowance can be made by invoking the provisions of S. 40(a)(ia) of the Act.

The Tribunal confirmed the order of the CIT(A) allowing the claim of the assessee. The Tribunal dismissed the appeal filed by the Revenue.