Short deduction of tax at source does not trigger disallowance, and payer's TDS failure does not fasten 234B interest on assessee.

Section 40(a)(ia) was treated as inapplicable where tax was deducted, but under the wrong TDS provision and at a lower rate, because the default amounted to short deduction rather than complete non-deduction; the disallowance was therefore not attracted. In relation to interest under section 234B, the principle applied was that where the payer was statutorily bound to deduct tax at source, the recipient assessee is not ordinarily liable for interest for the payer's failure to deduct; the interest was accordingly held not leviable. The appellate relief was thus sustained on both issues.

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Issues: (i) Whether disallowance under section 40(a)(ia) could be sustained where tax was deducted under section 194C instead of section 194J, resulting only in short deduction. (ii) Whether interest under section 234B was chargeable on the assessee where the payer was obliged to deduct tax at source.

Issue (i): Whether disallowance under section 40(a)(ia) could be sustained where tax was deducted under section 194C instead of section 194J, resulting only in short deduction.

Analysis: The relevant principle applied was that section 40(a)(ia) is attracted when tax is not deducted, or after deduction is not paid within the prescribed time. Where tax has in fact been deducted, albeit under a wrong TDS provision and at a lower rate, the matter is one of short deduction and not complete non-deduction. On that footing, the default may have consequences under the TDS provisions, but the disallowance mechanism under section 40(a)(ia) is not triggered.

Conclusion: The disallowance was not sustainable and the assessee succeeded on this issue.

Issue (ii): Whether interest under section 234B was chargeable on the assessee where the payer was obliged to deduct tax at source.

Analysis: The governing rule applied was that when the obligation to deduct tax at source lies on the payer, failure of the payer to do so cannot ordinarily fasten liability for interest under section 234B on the non-resident assessee. The prior judicial view relied upon by the appellate authority was treated as binding in the absence of any stay or contrary effective direction.

Conclusion: Interest under section 234B was not chargeable and the assessee succeeded on this issue.

Final Conclusion: The Revenue's appeal failed in full, and the relief granted by the first appellate authority was upheld.

Ratio Decidendi: Section 40(a)(ia) does not authorise disallowance for mere short deduction of tax at source, and where the payer is statutorily bound to deduct tax, interest under section 234B is not leviable on the recipient assessee for the payer's failure to deduct.

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