No Section 40(a)(ia) Disallowance In Case Of Short Deduction Of TDS: Delhi High Court

The division bench of Justice Manmohan and Justice Manmeet Pritam Singh Arora has observed that disallowance under section 40A(2)(b) has to be based on cogent material or reasoning by the Assessing Officer.

The appellant/department has challenged the ruling of the ITAT. The ITAT has given concurrent findings in favour of the assessee on the issue of remuneration paid to the director, Sunil Baijal. The ITAT observed that the higher salary paid to the director was accepted as remuneration by the assessing officer during the scrutiny assessment in the subsequent assessment year. The ITAT also noted that the Assessing Officer, without any reason or material facts, had arbitrarily disallowed 50% of the remuneration. The ITAT held that the AO had not given cogent reasons to conclude that the remuneration paid was not commensurate with the market value of the services rendered by the Managing Director.

The appellant/department contended that the ITAT erred in deleting the disallowance under Section 40a(ia) of the Income Tax Act of 1961 because the assessee took a short tax deduction in violation of Section 197(1).

The department submitted that the ITAT had erred in deleting the addition of Rs. 1,03,53,150 made by the assessing officer under Section 40A (2). The respondent/assessee, during the course of assessment proceedings, failed to justify the service being rendered by the director, Sunil Baijal, to the company for which he was earning such a huge amount of remuneration.

The court noted that, as per the paper book, the CIT (A), while disposing of the appeal filed by the assessee, had directed the Assessing Officer to verify whether copies of non-deduction of tax or deduction of tax at a lower rate were filed by the assessee before passing the assessment order. The ITAT in the order has recorded that the Assessing Officer, after verifying the tax deduction certificate, had deleted the disallowance in the order giving effect to it.

The court relied on the decision of the Calcutta High Court in the case of CIT vs. SK Tekriwal. It was held that section 40 (a)(ia) refers only to the duty to deduct tax and pay into government accounts. 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 under section 201. No disallowance can be made by invoking the provisions of section 40 (a)(ia) of the Act.

The court dismissed the appeal of the department as no substantial question of law arose in the proceedings.

Case Title: Pr. Commissioner of Income Tax-I Versus Future First Info. Services Pvt. Ltd.

Citation: 2022 LiveLaw (Del) 696

Citation: ITA 195/2022

Dated: 14.07.2022

Counsel For Appellant: Senior Standing Counsel Sanjay Kumar, with Advocate Easha Kadian

Counsel For Respondent: Advocate Sumit Lalchandani

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