By TIOL News Service

MUMBAI, NOV 22, 2017: THE ISSUE BEFORE THE DIVISION BENCH IS - Whether short deduction of TDS under a wrong bonafide impression, due to difference of opinion as regards taxability of any item, is no basis to declare Assessee as defaulter and hence no disallowance u/s 40(a)(ia) can be invoked. YES is the answer.

Facts of the case:

The AO noted that Assessee during the subject year, had deducted TDS in respect of expenditure on customer support services u/s 194C by applying a rate of 2%, whereas it should have been deducted tax u/s 194J @10%. The AO was of the view that these expenses were incurred mainly for the purpose of solving customer grievances and technical issues raised by such customers. Therefore, the nature of service availed by Assessee was technical and TDS would have been deducted in accordance with section 194J instead of section 194C. The AO, therefore, disallowed a sum of Rs.41,41,92,984/- u/s 40(a)(ia). On appeal, the CIT(A) took the view that it was not a case of non deduction of TDS but at most it could be a case of less deduction of TDS and, therefore, he deleted the disallowance made u/s 40(a)(ia). Similarly, the AO noted that Assessee had paid a sum of Rs.36,61,17,648/- towards CAS, Middleware and SMS charges to Integrated Subscriber Management Services Ltd. on which the assessee had deducted TDS u/s 194C. The AO was of the view that the said expenditure had to be incurred under the provisions of Section 194J. Therefore, he disallowed a sum of Rs.36,61,17,648/-. When the matter went before the CIT(A), he deleted the disallowance in this case also on the basis that this was not a case of no deduction of tax at source but it was a case of less deduction of tax at source.

Tribunal held that,

++ as far as customer support services & SMS charges are concerned, the assessee was of the opinion that tax had to be deducted u/s 194C @2% but the Revenue was of the view that tax has to be deducted u/s 194J @10%. Therefore, the AO applied provisions of Section 40(a)(ia) and made the disallowance in respect of both the expenditures. The DR relied on the decision of Kerala High Court in the case of CIT vs. PVS Memorial Hospital Ltd - 2015-TIOL-1878-HC-KERALA-IT in which it was held that deduction under a wrong provisions of law will not save an assessee from section 40(a)(ia), i.e. where the tax was deductible u/s 194J but was actually deducted u/s 194C, such a deduction would not meet the requirements of section 40(a)(ia). We noted that prior to this decision, the Calcutta High Court in the case of CIT vs. S.K. Tekriwal - 2012-TIOL-1057-HC-KOL-IT taken a view by which the High Court dismissed the appeal of Revenue against the order of the Tribunal by holding that where tax was deducted by the assessee, though under a bona fide wrong impression under wrong provisions, the provisions of Section 40(a)(ia) could not be invoked and if there was any shortfall due to any difference of opinion as to the taxability of any item or the nature of payments falling under various tax deduction at source provisions, the assessee could be declared to be an assessee in default u/s 201 but no disallowance could be made invoking the provisions of Section 40(a)(ia);

++ similarly, Visakhapatnam Bench of this Tribunal in the case of P.S.R. Associates vs. ACIT in ITA No. 345/Viz/2013, had an occasion to consider both the decisions of Calcutta High Court as well as that of Kerala High Court on the same issue and ultimately it was held that the provisions of sec. 40(a)(ia) is applicable, in case there is a failure on the part of assessee to deduct TDS and remit the same to the government account. There is nothing in the said section to treat inter alia that the assessee is defaulter where there is shortfall in deduction of TDS. 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 the various TDS provisions, the assessee can be declared to be an assessee in default u/s 201 and no disallowance can be made by invoking the provisions of section 40(a)(ia). No contrary decision was placed on record. Therefore, we do not find any infirmity or illegality in the order of the CIT(A) in holding that provisions of Section 40(a)(ia) will not be applicable in the case of the assessee as there is nothing in the section to treat the assessee as defaulter where there is shortfall in deduction of TDS.

(See 2017-TIOL-1617-ITAT-MUM)