The Hindu : Business : Disallowance of payments without TDS

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Monday, Feb 11, 2008
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Disallowance of payments without TDS

As a practitioner in a mofussil town in Kerala, I advise a number of firms, which get hit by disallowance under Sec. 40(a)(i) and section 40(a)(ia) of payments of tax deductible amount without deducting tax or deducting it later or having deducted, not depositing the tax within the same year. It is fair enough that interest is charged for the omission or delay. Even penalty may be justified to enforce discipline and tax compliance. But these provisions disallow the payment itself in computation of income, till such time deduction is made and deposited. In quite a few cases, tax is meanwhile paid directly by the parties, so that even tax deduction cannot be enforced in view of Explanation to Sec. 191. Where the payment is of freight or payments to sub-contractors, which is usually sizable, the disallowance even where it is postponed jacks up the income for the year, with the tax and interest, on the disallowance exceeding the income and eroding the capital. It is, therefore, necessary that Tax Forum should advise the taxpayers about the seriousness of TDS duty.

The reader is right that Sec. 40(a)(i) and 40(a)(ia) are too harsh, when there are ample provisions for the enforcement of collection of tax failed to be deducted along with interest and possible penalty.

These provisions for disallowance of payments are expropriatory and amounts to a tax not on the real income of the assessee, but on a notional income vastly higher than the tax failed to be deducted.

Consequent interest on failure to pay advance tax and self-assessment tax would further increase the burden.

Where there has been a delay in depositing the tax deducted or there is satisfactory explanation for failure to deduct tax, the Board has got power to relax the time limit under Sec. 119(2)(b) of the Act till the date of delayed payment in genuine cases.

The Board should delegate the power of relaxation to the Chief Commissioners or Commissioners in genuine cases, where it has normally been found that there is no damage to revenue, because of the omission or the delay on the part of the person obliged to deduct tax.

Where direct payment is made, there should be no case for enforcing these provisions in view of Explanation to Sec. 191 irrespective of the date of direct payments.

As regards payments like freight or payments to sub-contractors, Sec. 40(a)(ia) should have no application, since these are not deductions falling under sections 30 to 38, but a charge on the gross profit being deductible under Sec. 28 itself, while Sec. 40 starts with a non obstante clause ruling out the applicability of only sections 30 to 38.

These are also matters to be taken into consideration.

S. RAJARATNAM

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