Expenses are incurred by a company, Partnership firm, proprietor and other persons to generate income in their day to day business operations.
These expenses are allowed as tax deductible if its incurred for business purpose and satisfy the terms and conditions of tax laws.
As per our law, certain expenses are allowed as tax deductible only when you have deducted and deposited TDS amount as required to be deducted under different sections of Income Tax Act,1961.
For better compliance to these provisions, you have to know whether TDS provisions are applicable to your type of business or not. If its applicable, then you have to find out whether individual payments for the transactions are required to be tax deducted or not.
Non compliance to TDS provisions can be very painful as it attracts interest and penalties.
In this article, we will be discussing provisions of section 40 (a) i.e. expenses which can be specifically disallowed for non deduction of TDS amount.
Before we start our discussion, we would like to suggest you to be in touch with a finance professional to get legal advice and help you on your daily business transactions as he can analyze different applicable tax provisions by looking at your business structure and requirements.
Provisions of Section 40 (a) deals with payments made to a resident, non residents or foreign companies.
When any sum payable or paid to a resident but tax not deducted at source
As per section 40 (a) (ia), if any sum is payable or paid to a resident on which tax is deductible but it has not been deducted, then 30% of such expenses will be disallowed in computing the income of the previous year.
In cases where after deduction of tax, it has not been paid or deposited with the government, within the time limit allowed under section 139(1) (i.e. due date for filing return of income ), then 30% of the such expenses on which TDS deducted but not deposited shall not be allowed as deduction in the current previous year while computing the tax liability of the previous year.
If 30% of the amount is disallowed for non deduction of TDS amount, then it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee. This will be considered only when the deductor is not deemed to be an assessee in default u/s 201(1).
This means 30% of the payment will be disallowed in the year in which tax has not been deducted and allowed as expenses in the year of TDS remittance or in which the return of income is furnished by the resident payee.
For instance, if your company is paying rent of Rs 8,00,000 in the previous year 2017-18 to a resident, then as per provisions of section 194I you are required to deduct tax from it. For non deduction of TDS on rent, Rs 2,40,000 (i.e. 30% of Rs 800000) is not deductible for computing income of the previous year 2017-18. This means balance Rs 5,60,000 is deductible for the previous year 2017-18.
If your company deducts and deposits TDS amount in any subsequent year, then Rs 2,40,000, that is disallowed in the previous year 2017-18, will be allowed as tax deductible expenditure in the year in which TDS amount is deposited with the government.
When payments are made to a non resident, foreign company or outside India
If payments are made to a person outside India or non residents not being a company or foreign company, then tax has to be deducted at source as per the provisions of income tax act, 1961.
While making payments for interest, royalty, fees for technical services or other similar sum on which tax is chargeable in India and the sum is payable outside India or to a non-resident not being a company or foreign company, tax has not been deducted at source then such expenses will be disallowed in the year of non deduction.
If in above cases, TDS amount has been deducted but not paid on or before the due date of filing return of income under section 139(1), then also the whole amount paid towards such expenses will be disallowed in the year of noncompliance.
As per provisions of section 40(a)(i), following conditions are to be satisfied if you want the expenses to be allowed as tax deductible in the year of payment;
- Nature of expenses is interest, royalty, technical fees or any other sum which is chargeable to tax in India in the hands of the recipient;
- For these expenses amount is payable outside India or to a non-resident or foreign company.
- TDS amount has not been deducted from such expenses while making payment or credit given to a foreign company or non-resident or paid outside india.
- TDS amount has been deducted from such expenses but it is not deposited on or before the due date of submission of the return of income under section 139(1).
However, in the above cases expenses will be allowed as tax deductible in the previous year in which such TDS amount deducted earlier has been deposited with the government.
This means, if after the date of filing return of income, tax has been deposited, then the expense will be disallowed in the year in which its paid to the party but on the year of payment of TDS, it will be allowed as tax deductible.
For instance, if Rs. 8,00,000 has been paid towards rent by your company to a non-resident by not deducting tax from it, then the whole amount (i.e. Rs. 8,00,000) is not deductible from computing income of the previous year 2017-18. It will be allowed as deduction in the year in which TDS amount is deposited by the company.
