TDS liability under section 194C absent below turnover threshold, so section 40(a)(ia) disallowance failed; salary relief partly granted.

Where the assessee's preceding-year turnover did not exceed the section 44AB threshold, no liability to deduct tax at source arose under section 194C in the pre-1 June 2008 position, so the consequential disallowance under section 40(a)(ia) was deleted. The ad hoc disallowance from salary was also deleted because employee-wise details were supported and no contrary material was produced, while the disallowance from other expenses was restricted to 10% as excessive on the facts. Disallowance of depreciation on computers for half the year was upheld because the finding that they were put to use only after September 2006 remained unrebutted.

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Issues: (i) Whether the assessee was liable to deduct tax at source under section 194C and, in consequence, whether disallowance under section 40(a)(ia) could be made on the payments treated as commission, freight and reimbursements; (ii) whether the ad hoc disallowance made out of salary and other expenses was sustainable; (iii) whether the disallowance of depreciation on computers for half of the year was justified.

Issue (i): Whether the assessee was liable to deduct tax at source under section 194C and, in consequence, whether disallowance under section 40(a)(ia) could be made on the payments treated as commission, freight and reimbursements.

Analysis: The assessee's receipts in the immediately preceding year had not crossed the monetary limit prescribed under section 44AB. On that footing, and having regard to the pre-01.06.2008 position of section 194C, the statutory liability to deduct tax at source did not arise. Once no such liability existed, the consequent disallowance under section 40(a)(ia) could not survive.

Conclusion: The issue was decided in favour of the assessee and the disallowance under section 40(a)(ia) was deleted.

Issue (ii): Whether the ad hoc disallowance made out of salary and other expenses was sustainable.

Analysis: Salary payments were supported by employee-wise details including names, designations and addresses, and the record did not rebut those particulars. In the absence of any contrary material, an ad hoc percentage disallowance out of salary was not justified. As regards other expenses, the disallowance was considered excessive on the facts and was scaled down.

Conclusion: The salary disallowance was deleted and the disallowance from other expenses was restricted to 10%, resulting in partial relief to the assessee.

Issue (iii): Whether the disallowance of depreciation on computers for half of the year was justified.

Analysis: The finding that the computers were put to use after September 2006 was not rebutted, and the claim for full-year depreciation was unsupported on the record.

Conclusion: The disallowance of depreciation was upheld.

Final Conclusion: The assessee succeeded on the TDS disallowance and on part of the expense disallowance, but failed on depreciation; the revenue's overlapping grounds were rejected.

Ratio Decidendi: Where the assessee's turnover in the immediately preceding year does not exceed the section 44AB threshold, no obligation to deduct tax under section 194C arises, and a disallowance under section 40(a)(ia) cannot be made in the absence of such statutory liability.

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