Short deduction of TDS does not trigger disallowance under section 40(a)(ia) where tax was otherwise deducted in good faith.

Section 40(a)(ia) was treated as inapplicable where tax had been deducted, but the Revenue contended that a different TDS provision should have applied. The assessee had deducted tax under section 194C on contractual or reimbursement-related payments, and the tribunal followed coordinate bench authority that mere short deduction due to a bona fide classification dispute does not justify disallowance under section 40(a)(ia). The appropriate consequence in such a case may lie under section 201 for TDS default, but the expenditure is not to be disallowed under section 40(a)(ia).

---

---

Issues: Whether disallowance under section 40(a)(ia) of the Income-tax Act, 1961 could be made where tax had been deducted under section 194C but the Revenue alleged that tax ought to have been deducted under section 194J.

Analysis: The amounts paid were treated by the assessee as contractual or reimbursement-related payments and tax had in fact been deducted at 2% under section 194C. The reasoning adopted followed earlier coordinate bench decisions holding that section 40(a)(ia) is attracted only when tax deductible at source has not been deducted at all, and not where there is merely a short deduction arising from a bona fide dispute about the correct TDS provision. In such cases, the default may lie under section 201, but the expenditure cannot be disallowed under section 40(a)(ia).

Conclusion: Disallowance under section 40(a)(ia) was not sustainable for short deduction of tax, and the assessee was entitled to relief.

---