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smart & easy software for eTDS & eTCS returns

TDSMAN Blog - smart & easy software for eTDS & eTCS returns

If tax is deducted under a wrong provision of the Income-tax Act, the payment is to be disallowed under Section 40(a)(ia) of the said Act

Recently, the Kerala High Court (High Court) in the case of P V S Memorial Hospital Ltd1 (the taxpayer) held that if the tax is deductible under Section 194J2 of the Income-tax Act, 1961 (the Act) but is deducted under Section 194C3 of the Act, the disallowance under Section 40(a)(ia) of the Act is still applicable. The High Court observed that the expression ‘tax deductible at source under Chapter XVII-B’ occurring in Section 40(a)(ia) of the Act has to be understood as tax deductible at source under the appropriate provision of Chapter XVII-B of the Act. Further, the latter part of this Section that such tax has not been deducted again refers to the tax deducted under the appropriate provision of Chapter XVII-B of the Act.

Facts of the case

  • The taxpayer, a hospital, had entered into an agreement with Lakeshore Hospital and Research Centre Limited (Lakeshore). In terms of the agreement, Lakeshore had undertaken to perform various professional services in the taxpayer’s hospital.
  • During Assessment Years (AYs) 2005-06 and 2006-07, the taxpayer made payment to Lakeshore. The taxpayer deducted tax at the rate of 2 per cent under Section 194C of the Act. However, assessment was completed on the basis that the tax is deductible at 5 per cent under Section 194J of the Act and therefore, the entire tax was disallowed under Section 40(a)(ia) of the Act.
  • The Commissioner of Income-tax (Appeals) confirmed the order of the Assessing Officer (AO). The Income-tax Appellate Tribunal (the Tribunal) has also confirmed the order of the lower authorities for AY 2005-06.
  • However, for AY 2006-07, the Tribunal followed the decision of the Calcutta High Court in the case of S. K. Tekriwal4 and held that the conditions laid down under Section 40(a)(ia) of the Act for making an addition is that tax is deductible at source and such tax has not been deducted. If both the conditions are satisfied, then such payment can be disallowed under Section 40(a)(ia) of the Act. It was also held that where tax is deducted by the taxpayer, even if it is under a wrong provision of the law, as in this case, the provisions of Section 40(a)(ia) of the Act cannot be invoked.

High Court’s ruling

  • As per the provisions of the agreement, Lakeshore had undertaken to render professional services to the taxpayer and it was not a case where they were undertaking contract work. If that be so, the tax was deductible under Section 194J of the Act and not under Section 194C as done by the taxpayer.
  • A disallowance under Section 40(a)(ia) of the Act is attracted in cases where fees for professional or technical services is ‘payable on which tax is deductible at source and such tax has not been deducted or after deduction has not been paid.
  • Provision of Section 40(a)(ia) of the Act is not a charging section but is a machinery section and such a provision should be understood in such a manner that the provision is workable. It has been so held by the Supreme Court in the case of Gurusahai Saigal5.
  • If Section 40(a)(ia) of the Act is understood in the manner as laid down by the Supreme Court, it can be observed that the expression ‘tax deductible at source under Chapter XVII-B’ occurring in the Section has to be understood as tax deductible at source under the appropriate provision of Chapter XVII-B of the Act.
  • Therefore, in the present case, if tax is deductible under Section 194J of the Act but is deducted under Section 194C of the Act, such a deduction would not satisfy the requirements of Section 40(a)(ia) of the Act. The latter part of this Section that such tax has not been deducted again refers to the tax deducted under the appropriate provision of Chapter XVII-B of the Act. Thus, a cumulative reading of Section 40(a)(ia) of the Act, indicates that deduction under a wrong provision of law will not save the taxpayer from Section 40(a)(ia) of the Act.
  • The decision of the Calcutta High Court in the case of S.K.Tekriwal relied on by the Tribunal is incorrect. A view cannot be accepted that if the tax is deducted even under a wrong provision of law, Section 40(a)(ia) cannot be invoked.
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Tax implications of fixed deposits

If you are in the higher tax bracket, that is 20% or 30%, make sure that you pay the additional interest before filing your tax returns.

The biggest disadvantage of FDs is that the interest earned is subject to taxation. This eats into the returns.

Taxed as per income bracket

The interest earned on the FDs is added to the depositor’s income and taxed as per income bracket. This reduces its attractiveness, especially for those in the highest tax bracket.

Pay tax even if bank cuts TDS

The bank will cut the tax at source (Tax Deducted at Source) before paying the interest, if the interest exceeds Rs 10,000 in a financial year.  But this is at the marginal rate of 10%. If you are in the higher tax bracket, that is 20% or 30%, make sure that you pay the additional interest before filing your tax returns. This is a common mistake most depositors do. It is a hassle if you receive a notice from the Income-Tax department for non payment of taxes. You will have to prove that not paying the tax was not deliberate and you may have to pay tax plus the penalty for the delay.

For ensuring that the bank has deducted TDS on your FD by checking Form 26AS. But sometimes if the bank deducts TDS but fails to submit the same to the I-T department, you may still get a notice.

If your PAN card details are not updated with the bank, the TDS will be deducted at 20%. And if you are in the 10% tax bracket, this will mean having to file for refund while filing tax returns, which can be a hassle. These are some of the things to keep in mind.

Form 15G and 15H

If your income is below the taxable limit and you have no then submit Form 15G to avoid TDS. For senior citizens whose income is below the taxable limit the form is 15H.

Reduce your TDS

You can also reduce your TDS by spreading your deposits across several banks so that the interest earned in a financial year remains less than Rs 10,000. But this will only reduce the TDS. You will still have to pay income tax as per your tax bracket.

Source: Business Standard

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Basic principles of TDS Compliance

The following are the basic principles of TDS compliance:

  1. Deduction/ Collection of Tax at Correct Rates
  2. Timely Deposit of Tax Deducted at Source
  3. Accurate Reporting of data related to tax deductions/ collections made
  4. Submission of TDS Statements within the due dates
  5. Verification and Issuance of TDS Certificates within time
  6. CPC (TDS) is now sending “Intermediate Default Communication” for PAN Errors and Short Payments, which can be corrected during the interim period of a week of filing TDS Statements, before CPC (TDS) proceeds with computing Defaults for the relevant statement.
  7. User-friendly Online Correction facility can be used for Correction of Deductees, Tagging Unmatched Challans and Payment of Fees/ Interest. (Please navigate to Defaults tab to locate Request for Correction from the drop-down menu. For any assistance, please refer to the e-tutorial available on TRACES).
  8. Aggregated TDS Compliance Report assists the PAN of the Deductor to administer TDS Defaults for associated TANs and to take appropriate action
  9. The Deductor’s Dashboard provides you all necessary information to assist you in “Compliance Self-Assessment” and to take appropriate action.
  10. Non-filing Self-declaration can be made by navigating to Statements / Payments menu and submit details under Declaration for Non-Filing of Statements.
  11. PAN Verification and Consolidated TAN – PAN File facility on TRACES can be used for verifying the deductees.
  12. The Conso Files and Justification Reports downloaded from TRACES help you to identify errors in submission of revised Quarterly TDS Statements.
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Healthy Practices for Error-Free TDS Returns

Healthy practices for error – free TDS returns has been given below:

  1. Deduction/ Collection of Tax at Correct Rates.
  2. Timely Deposit of Tax Deducted at Source.
  3. Accurate Reporting of data related to tax deductions/ collections made.
  4. Submission of TDS Statements within the due dates.
  5. Verification and Issuance of TDS Certificates within time.
  6. CPC (TDS) is now sending “Intermediate Default Communication” for PAN Errors and Short Payments, which can be corrected during the interim period of a week of filing TDS Statements, before CPC (TDS) proceeds with computing Defaults for the relevant statement.
  7. User-friendly Online Correction facility can be used for Correction of Deductees, Tagging Unmatched Challans and Payment of Fees/ Interest. (Please navigate to Defaults tab to locate Request for Correction from the drop-down menu. For any assistance, please refer to the e-tutorial available on TRACES).
  8. Aggregated TDS Compliance Report assists the PAN of the Deductor to administer TDS Defaults for associated TANs and to take appropriate action.
  9. The Deductor’s Dashboard provides you all necessary information to assist you in “Compliance Self-Assessment” and to take appropriate action.
  10. Non-filing Self-declaration can be made by navigating to Statements / Payments menu and submit details under Declaration for Non-Filing of Statements.
  11. PAN Verification and Consolidated TAN – PAN File facility on TRACES can be used for verifying the deductees.
  12. The Conso Files and Justification Reports downloaded from TRACES help you to identify errors in submission of revised Quarterly TDS Statements.
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