Disallowance under Section 40(a)(ia) deleted where payments not covered under TDS provisions and amounts neither paid nor credited

ITAT Mumbai held that disallowance under section 40(a)(ia) was unsustainable where payments to Maharashtra Government were not covered under TDS provisions, and amounts to Village Level Entrepreneurs were neither paid nor credited in the relevant year. The assessee provided documentary evidence showing provisions were made but subsequently reversed, and TDS was complied with when actual payments occurred in later years. Only Rs. 5,000 telephone bill payment was made from disputed amount, which did not attract TDS provisions. AO directed to delete the disallowance. Appeal allowed.

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Issues:
Challenge of disallowance under Section 40(a)(ia) of the Income Tax Act, 1961.

Detailed Analysis:
The appeal was filed against the order passed by the National Faceless Appeal Centre (NFAC), Delhi for the Assessment Year 2017-18. The assessee raised two grounds in the appeal, with Ground No.2 being a general ground not requiring adjudication. Ground No.1 challenged the disallowance of Rs. 31,34,633 under Section 40(a)(ia) of the Income Tax Act, 1961. The Assessing Officer disallowed this amount as the assessee failed to comply with TDS provisions on certain payments made during the year. The assessee contested this disallowance before the First Appellate Authority but was unsuccessful.

The assessee argued that certain payments made to the Government of Maharashtra and other vendors were not subject to TDS provisions. The counsel referred to a similar case decided in favor of the assessee by the Tribunal. Regarding specific payments, the assessee demonstrated that some amounts were not paid or credited in the year under consideration and TDS provisions were complied with when payments were made in subsequent years. The Tribunal found that payments made to the Maharashtra Government were not subject to TDS provisions. Additionally, for other disputed payments, the assessee provided evidence that the amounts were either never paid or the provisions were reversed subsequently, thus not requiring TDS deduction. The Tribunal held that the disallowance made under Section 40(a)(ia) was unsustainable.

Furthermore, the Tribunal observed that out of the disputed amount of Rs. 15,596, only a portion was actually paid towards a telephone bill, and the balance amount was never paid. Therefore, no disallowance could be made under Section 40(a)(ia) for this amount. The Tribunal directed the Assessing Officer to delete the disallowance of Rs. 31,34,633. An additional ground raised by the assessee regarding double disallowance of a provision was also admitted by the Tribunal for consideration. The Tribunal directed the Assessing Officer to verify whether the provision had been reversed for the balance amount of Rs. 10,596. The appeal of the assessee was partly allowed, and the order was pronounced on 22/11/2024.

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