Disallowance of expenditure


Disallowance of expenditure

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Income Tax
Disallowance of expenditure for non-deduction of tax at source [Section 40(a)(i) & (ia)]

 Disallowance of expenditure for non-deduction of tax at source [Section 40(a)(i) & (ia)] [W.e.f. A.Y.2015-16]

 

(A Time period for deposit of tax deducted at source in case of payment to non-resident also

                    extended till due date of return u/s 139(1) [Section 40(a)(i)]

 

The existing provisions of section 40(a)(i) provide that certain payments such as interest, royalty and fee for technical services made to a non-resident shall not be allowed as deduction for computing business income if tax on such payments was not deducted, or after deduction, was not paid before the end of the previous year on in the subsequent year within the time prescribed under section 200(1). Under section 40(a)(ia) in case of payments made to resident, the deductor is allowed to claim deduction for payments as expenditure in the previous year of payment, if tax is deducted during the previous year and the same is paid on or before the due date specified for filing of return of income under section 139(1).

However, in case of disallowance for non-payment of tax from' payments made to non-residents, this extended time limit of payment up to the date of filing of return of income under section 139(1) is not available.

 

In order to provide similar extended time limit for payment of tax deducted from payments made to non-residents, section 40(a)(i) has been amended to provide that the deductor shall be allowed to claim deduction for payments made to non-residents in the previous year of payment, if tax is deducted during the previous year and the same is paid on or before the due date specified for filing of return under section 139(1).

 

Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in section 139(1), such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.

 

(B)    Section  40(a)(ia)  made  applicable  to  all  sums  payable  to  a  resident  on  which  tax  is deductable at source under Chapter XVII-B but disallowance restricted to 30% instead of

100%

 

In case of non-deduction or non-payment of tax deducted at source (TDS) from certain payments made to residents, the entire amount of expenditure on which tax was deductible is disallowed under section 40(a)(ia) for the purposes of computing income under the head "Profits and gains of business or profession". The disallowance of whole of the amount of expenditure results into undue hardship.

 

In order to reduce the hardship, the Finance (No. 2) Act, 2014 has provided that in case of nondeduction or non-payment of TDS on payments made to residents as specified in section 40(a)(ia), the disallowance shall be restricted to 30% of the amount of expenditure claimed.

 

However, where in respect of any such sum,—

 

(a) tax has been deducted in any subsequent year, or

 

(b) has been deducted during the previous year but paid after the due date specified under section 139(1),

 

30% of such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.

 

Further, existing provisions of section 40(a)(ia) provides that certain payments such as interest, commission, brokerage, rent, royalty fee for technical services and contract payment made to a resident shall not be allowed as deduction for computing business income if tax on such payments was not deducted, or after deduction, was not paid within the time specified under the said section. Chapter XVII-B mandates deduction of tax from certain other payments such as salary, directors fee, which are currently not specified under section 40(a)(ia). The payments on which tax is deductible under Chapter XVII-B but not specified under section 40(a)(ia) may also be claimed as expenditure for the purposes of computation of income under the head "Profits and gains from business or profession".

 

In order to improve the TDS compliance in respect of payments to residents which are currently not specified in section 40(a)(ia), the Act has provided that the disallowance under section 40(a)(ia) shall extend to all expenditure on which tax is deductible under Chapter XVII-B.back

 

 

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