Short deduction of TDS is not non-deduction, so Section 40(a)(ia) disallowance does not apply.

Where tax has been deducted at source, but under an incorrect provision or at a lower rate, the default is treated as short deduction rather than complete failure to deduct. In that situation, the proper enquiry is under Section 201 of the Income-tax Act, 1961, and disallowance under Section 40(a)(ia) is not attracted. The court applied a strict construction to this deterrent provision and preferred the interpretation favourable to the assessee where conflicting views existed, leaving short deduction to be dealt with under the TDS default framework rather than expense disallowance.

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Issues: Whether short deduction of tax at source attracts disallowance under Section 40(a)(ia) of the Income-tax Act, 1961.

Analysis: The Tribunal's view was examined in the light of conflicting High Court decisions on whether deduction of tax under a wrong TDS provision, or at a lesser rate, amounts to non-deduction for the purposes of Section 40(a)(ia). The Court adopted the line of authority holding that where tax has in fact been deducted, though under a different or incorrect provision, the case is one of short deduction and not total failure to deduct. In such a situation, the proper consequence is to examine default under Section 201 of the Income-tax Act, 1961, and not to invoke disallowance under Section 40(a)(ia). The Court also relied on the strict construction applicable to deterrent and penal provisions, and preferred the interpretation favourable to the assessee where divergent views existed.

Conclusion: Short deduction of tax at source does not warrant disallowance under Section 40(a)(ia) of the Income-tax Act, 1961, and the issue was decided against the Revenue and in favour of the assessee.

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