Income Tax - TDS and Section 40(a)(ia) - 2012 Amendment
DEEMED date of payment of tax by the resident payee
As per Section 40(a)(ia) of the Income Tax Act, the following deduction is not allowed:
(ia) Any interest, commission or brokerage, fees for professional services or fees for technical services payable to a resident, or amounts credited or paid to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour carrying out any work), on which tax has not been deducted or, after deduction, has not been paid before the expiry of the time prescribed under sub-section (1) of section 200 and in accordance with the other provisions of Chapter XVII-B:
As per the provisions of Chapter XVII-B of the Income Tax Act, a person is required to deduct tax on certain specified payments at the specified rates if the payment exceeds specified threshold. In case of non-deduction of tax in accordance with the provisions of this chapter, he is deemed to be an assessee in default under section 201(1) in respect of the amount of such non-deduction.
However, section 191 of the Act provides that a person shall be deemed to be assessee in default in respect of non/short deduction of tax only in cases where the payee has also failed to pay the tax directly. Therefore, the deductor cannot be treated as assessee in default in respect of non/short deduction of tax if the payee has discharged his tax liability.
The payer is liable to pay interest under section 201(1A) on the amount of non/short deduction of tax from the date on which such tax was deductible to the date on which the payee has discharged his tax liability directly. As there is no one-to-one correlation between the tax to be deducted by the payer and the tax paid by the payee, there is lack of clarity as to when it can be said that payer has paid the taxes directly. Also, there is no clarity on the issue of the cut-off date, i.e. the date on which it can be said that the payee has discharged his tax liability.
In order to provide clarity regarding discharge of tax liability by the resident payee on payment of any sum received by him without deduction of tax, section 201 was amended by Finance Act 2012 to provide that the payer who fails to deduct the whole or any part of the tax on the payment made to a resident payee shall not be deemed to be an assessee in default in respect of such tax if such resident payee -
(i) has furnished his return of income under section 139;
(ii) has taken into account such sum for computing income in such return of income; and
(iii) has paid the tax due on the income declared by him in such return of income,
and the payer furnishes a certificate to this effect from an accountant in such form as may be prescribed.
The date of payment of taxes by the resident payee shall be deemed to be the date on which return has been furnished by the payer.
It was also stipulated that where the payer fails to deduct the whole or any part of the tax on the payment made to a resident and is not deemed to be an assessee in default under section 201(1) on account of payment of taxes by the such resident, the interest under section 201(1A)(i) shall be payable from the date on which such tax was deductible to the date of furnishing of return of income by such resident payee.
These amendments took effect from 1st July, 2012
Disallowance of business expenditure on account of non-deduction of tax on payment to resident payee
A related issue to the above is the disallowance under section 40(a)(ia) of certain business expenditure like interest, commission, brokerage, professional fee, etc. due to non-deduction of tax. It has been provided that in case the tax is deducted in subsequent previous year, the expenditure shall be allowed in that subsequent previous year of deduction.
In order to rationalise the provisions of disallowance on account of non-deduction of tax from the payments made to a resident payee, section 40(a)(ia) was amended to provide that where an assessee makes payment of the nature specified in the said section to a resident payee without deduction of tax and is not deemed to be an assessee in default under section 201(1) on account of payment of taxes by the payee, then, for the purpose of allowing deduction of such sum, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee.
These beneficial provisions are to be applicable only in the case of resident payee.
These amendments took effect from 1st April, 2013 and applied in relation to the assessment year 2013-14 and subsequent assessment years.