Revenue's disallowance claim under Section 40(a)(ia) for TDS non-deduction under Section 195 denied

ITAT Mumbai held that the Revenue's claim for disallowance under section 40(a)(ia) due to non-deduction of TDS under section 195 was not sustainable. Relying on the Bombay HC decision in M. Salgaonkar and Brothers (P.) Ltd., the tribunal found that the case did not fall within the exception under Circular dated 15.03.2024, para 3.1(l), which excludes appeals against deductors for failure to deduct TDS and subsequent recovery from the payer. Consequently, the disallowance was not justified as the liability to deduct tax before remittance abroad was not enforceable in this instance.

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ISSUES:

Whether the appeal filed by the revenue against disallowance under section 40(a)(ia) of the Income-tax Act, 1961 is maintainable despite the tax effect being below the CBDT prescribed monetary limit.Whether the exceptions under paragraph 3.1(l)(i) and (ii) of Circular No.5/2024 dated 15th March, 2024, relating to TDS/TCS disputes, apply to appeals involving disallowance under section 40(a)(ia).The proper interpretation and scope of the exceptions carved out in paragraph 3.1(l) of the said Circular concerning appeals arising from TDS non-deduction and related disallowances.

RULINGS / HOLDINGS:

The appeal filed by the revenue is not maintainable as the tax effect involved is below the prescribed limit and does not fall within the exceptions under paragraph 3.1(l) of Circular No.5/2024.The exceptions under paragraph 3.1(l)(i) and (ii) of the Circular are applicable only to litigation arising out of proceedings under sections 201(1) and 201(1A) of the Act, and do not extend to disallowances under section 40(a)(ia).The disallowance under section 40(a)(ia) arises from non-deduction of TDS and is a collateral consequence distinct from proceedings under section 201, thus appeals against such disallowance must comply with the general monetary limits.

RATIONALE:

The Court applied the framework set out in Circular No.5/2024 dated 15th March, 2024, specifically paragraph 3.1(l), which limits exceptions to monetary thresholds for appeals involving TDS/TCS disputes.The Court relied on the precedent of the Hon'ble Bombay High Court which clarified that paragraph 3.1(l) exceptions apply only to appeals arising from orders under sections 201 and 201(1A), relating to recovery of tax from deductors failing to deduct TDS, and not to disallowances under section 40(a)(ia).The Court distinguished the nature of disallowance under section 40(a)(ia) as a consequence of non-deduction of tax, which is assessed under regular assessment procedures (section 143(3)), and thus subject to the prescribed monetary limits for appeals.No dissent or doctrinal shift was noted; the Court followed binding precedent and statutory interpretation consistent with the CBDT circular.

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