ITAT Rules: Section 40(a)(ia) of Income Tax Act Cannot Be Applied In Case of Short Deduction of TDS

The Income Tax Appellate Tribunal (ITAT) recently ruled in the case of Advait Agrotech Private Limited vs Principal Commissioner of Income Tax-1. The ITAT based its decision on a previous judgment by the Honorable Gujarat High Court in the case of CIT Vs. Prayas Engineering Ltd. (Tax Appeal No. 1237 of 2014, order dated 17/11/2014). 

The ITAT concluded that the provisions of section 40(a)(ia) of the Act cannot be applied when there is a shortfall in the deduction of TDS.

Based on the information provided in the lower authorities' order, it is important to note that the assessee in this particular case is a private limited company. The case of the assessee underwent limited scrutiny to verify if the payments were made while deducting the TDS (Tax Deducted at Source) under section 194C of the Act. 

However, during the assessment proceedings, the Assessing Officer (AO) acknowledged only the income declared by the assessee, which amounted to Rs. 40,22,070/-.

Later on, upon reviewing the assessment records, Ld. PCIT found that the assessee had deducted TDS on the contractual payment made to M/s Bansal Cargo Movers at a rate of 1%, whereas the relevant rate as per section 194C was 2%. 

Consequently, the Ld. PCIT concluded that the assessee had under-deducted the TDS amount, and this particular matter had not been examined by the Assessing Officer (AO) during the assessment proceedings. 

Therefore, the Ld. PCIT deemed it necessary to make a proportionate disallowance under the provisions of section 194C read with section 40(a)(ia) of the Act, due to the shortfall in TDS deduction. Consequently, the Ld. PCIT deemed the assessment order to be erroneous to the extent that it was detrimental to the interests of the Revenue.

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ITAT ORDER

8.1 From the above judgment, there remains no IOTA of doubt that the provisions of section 40(a)(ia) of the Act cannot be invoked in the event of a short deduction of TDS. Accordingly, the assessment framed by the AO cannot be held as erroneous in so far prejudicial to the interest of revenue on account of the non-deduction of TDS.

8.2 Furthermore, it is worth mentioning that the Assessing Officer (AO) conducted the required verification regarding the payment made to M/s Bansal Cargo Movers, as evident from the assessment order itself. Therefore, we are of the view that the assessment order has been framed by the AO after due application of mind. Accordingly, the same cannot be held as erroneous in so far prejudicial to the interest of revenue because of non-verification. Accordingly, we hold that the order passed by the Ld. PCIT u/s 263 of the Act, is not sustainable. Hence, we quashed the same. The ground of appeal of the assessee is allowed.

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