The Assessing Officer has disallowed the entire online advertising spend because equalisation levy was not deducted. Is that right, and can the deduction be recovered in a later year?
It is right in principle, and the disallowance is of the whole consideration, not of the six per cent. Section 40(a)(ib) of the Income-tax Act disallows 'any consideration paid or payable to a non-resident for a specified service on which equalisation levy is deductible under the provisions of Chapter VIII of the Finance Act, 2016, and such levy has not been deducted or after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139'. Note where the levy itself lives: Chapter VIII of the Finance Act, 2016, not the Income-tax Act. The proviso restores the deduction — 'where in respect of any such consideration, the equalisation levy has been deducted in any subsequent year or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such levy has been paid'.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text), reported as Section 40(a)(ib) of the Income-tax Act, 1961, as amended up to 2025. It bears on section 40(a)(ib), section 40(a)(ia), section 139(1), section FA 2016 s.165, section FA 2016 s.165(2), section FA 2016 s.165A, section FA 2016 s.166, section FA 2016 s.166A, section FA 2016 s.170, section FA 2016 s.171 of the Income Tax Act 1961, in Deductions & Disallowances and How Tax Law Is Read matters.
Three things about the drafting decide cases. First, the clause bites on consideration 'on which equalisation levy is DEDUCTIBLE'. Only the six per cent levy on specified services under section 165 is deducted — the two per cent levy on e-commerce supply or services under section 165A is paid by the non-resident operator itself under section 166A, and nothing is deductible on it. So section 40(a)(ib) has no application to an e-commerce supply, and a disallowance premised on the two per cent levy is premised on the wrong provision. Second, if the levy was not deductible at all — because the section 165(2) exclusions applied, most commonly because the aggregate consideration from that non-resident in the previous year did not exceed one lakh rupees, or because the payment was not for the purposes of business or profession — then the condition in the clause is not satisfied and there is nothing to disallow. That is the first line of defence and it is a pure question of applying section 165(2). Third, unlike section 40(a)(ia), which restricts the disallowance to thirty per cent of the sum, section 40(a)(ib) carries no percentage: the whole consideration goes. The proviso is a deferral, not a forfeiture — the deduction comes back in the year the levy is actually paid, so the practical exposure of a late payer is a timing loss and the interest and penalty exposure under sections 170 and 171 of the Finance Act 2016, not a permanent disallowance.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
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Not a judgment. Section 40(a)(ib) of the Income-tax Act, 1961 reads: '(ib) any consideration paid or payable to a non-resident for a specified service on which equalisation levy is deductible under the provisions of Chapter VIII of the Finance Act, 2016, and such levy has not been deducted or after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139 : Provided that where in respect of any such consideration, the equalisation levy has been deducted in any subsequent year or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such levy has been paid;'. The sub-clause immediately preceding it, section 40(a)(ia), begins 'thirty per cent of any sum payable to a resident, on which tax is deductible at source under Chapter XVII-B'; sub-clause (ib) contains no equivalent percentage.
Not a judgment. The statutory position is that where equalisation levy was deductible under Chapter VIII of the Finance Act, 2016 on consideration paid or payable to a non-resident for a specified service, and the levy was not deducted, or was deducted but not paid on or before the section 139(1) due date, the WHOLE of that consideration is disallowed in computing business income; that the disallowance is keyed to deductibility, so it does not reach an e-commerce supply or service on which the levy is payable by the non-resident operator and not deductible by the payer; and that the proviso allows the sum as a deduction in the previous year in which the levy is in fact paid, making the disallowance a deferral rather than a permanent loss.
Not a judgment; no judicial reasoning is stated for the clause itself.
any consideration paid or payable to a non-resident for a specified service on which equalisation levy is deductible under the provisions of Chapter VIII of the Finance Act, 2016, and such levy has not been deducted or after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139
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Handle my notice → Ask a CA on WhatsAppIt is right in principle, and the disallowance is of the whole consideration, not of the six per cent. Section 40(a)(ib) of the Income-tax Act disallows 'any consideration paid or payable to a non-resident for a specified service on which equalisation levy is deductible under the provisions of Chapter VIII of the Finance Act, 2016, and such levy has not been deducted or after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139'. Note where the levy itself lives: Chapter VIII of the Finance Act, 2016, not the Income-tax Act. The proviso restores the deduction — 'where in respect of any such consideration, the equalisation levy has been deducted in any subsequent year or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such levy has been paid'. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 40(a)(ib), section 40(a)(ia), section 139(1), section FA 2016 s.165, section FA 2016 s.165(2), section FA 2016 s.165A, section FA 2016 s.166, section FA 2016 s.166A, section FA 2016 s.170, section FA 2016 s.171 of the Income Tax Act 1961. It is reported as Section 40(a)(ib) of the Income-tax Act, 1961, as amended up to 2025. Three things about the drafting decide cases. First, the clause bites on consideration 'on which equalisation levy is DEDUCTIBLE'. Only the six per cent levy on specified services under section 165 is deducted — the two per cent levy on e-commerce supply or services under section 165A is paid by the non-resident operator itself under section 166A, and nothing is deductible on it. So section 40(a)(ib) has no application to an e-commerce supply, and a disallowance premised on the two per cent levy is premised on the wrong provision. Second, if the levy was not deductible at all — because the section 165(2) exclusions applied, most commonly because the aggregate consideration from that non-resident in the previous year did not exceed one lakh rupees, or because the payment was not for the purposes of business or profession — then the condition in the clause is not satisfied and there is nothing to disallow. That is the first line of defence and it is a pure question of applying section 165(2). Third, unlike section 40(a)(ia), which restricts the disallowance to thirty per cent of the sum, section 40(a)(ib) carries no percentage: the whole consideration goes. The proviso is a deferral, not a forfeiture — the deduction comes back in the year the levy is actually paid, so the practical exposure of a late payer is a timing loss and the interest and penalty exposure under sections 170 and 171 of the Finance Act 2016, not a permanent disallowance. If it applies to you, the first step is this: Check first whether the levy was deductible at all. Run section 165(2) of the Finance Act 2016: an effectively connected Indian permanent establishment of the provider, aggregate consideration from that non-resident not exceeding one lakh rupees in the previous year, or a payment not for the purposes of business or profession all mean nothing was deductible and section 40(a)(ib) cannot apply.
Not a judgment. Section 40(a)(ib) of the Income-tax Act, 1961 reads: '(ib) any consideration paid or payable to a non-resident for a specified service on which equalisation levy is deductible under the provisions of Chapter VIII of the Finance Act, 2016, and such levy has not been deducted or after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139 : Provided that where in respect of any such consideration, the equalisation levy has been deducted in any subsequent year or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such levy has been paid;'. The sub-clause immediately preceding it, section 40(a)(ia), begins 'thirty per cent of any sum payable to a resident, on which tax is deductible at source under Chapter XVII-B'; sub-clause (ib) contains no equivalent percentage. It was decided by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. Not a judgment. The statutory position is that where equalisation levy was deductible under Chapter VIII of the Finance Act, 2016 on consideration paid or payable to a non-resident for a specified service, and the levy was not deducted, or was deducted but not paid on or before the section 139(1) due date, the WHOLE of that consideration is disallowed in computing business income; that the disallowance is keyed to deductibility, so it does not reach an e-commerce supply or service on which the levy is payable by the non-resident operator and not deductible by the payer; and that the proviso allows the sum as a deduction in the previous year in which the levy is in fact paid, making the disallowance a deferral rather than a permanent loss.
Not a judgment; no judicial reasoning is stated for the clause itself. In the words reproduced by the source cited on this page: "any consideration paid or payable to a non-resident for a specified service on which equalisation levy is deductible under the provisions of Chapter VIII of the Finance Act, 2016, and such levy has not been deducted or after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139"
It was decided by the CBDT Circulars & Instructions and is reported as Section 40(a)(ib) of the Income-tax Act, 1961, as amended up to 2025. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 40(a)(ib), section 40(a)(ia), section 139(1), section FA 2016 s.165, section FA 2016 s.165(2), section FA 2016 s.165A, section FA 2016 s.166, section FA 2016 s.166A, section FA 2016 s.170, section FA 2016 s.171, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. Not a judgment. The statutory position is that where equalisation levy was deductible under Chapter VIII of the Finance Act, 2016 on consideration paid or payable to a non-resident for a specified service, and the levy was not deducted, or was deducted but not paid on or before the section 139(1) due date, the WHOLE of that consideration is disallowed in computing business income; that the disallowance is keyed to deductibility, so it does not reach an e-commerce supply or service on which the levy is payable by the non-resident operator and not deductible by the payer; and that the proviso allows the sum as a deduction in the previous year in which the levy is in fact paid, making the disallowance a deferral rather than a permanent loss. It arises in Deductions & Disallowances and How Tax Law Is Read matters, on section 40(a)(ib), section 40(a)(ia), section 139(1), section FA 2016 s.165, section FA 2016 s.165(2), section FA 2016 s.165A, section FA 2016 s.166, section FA 2016 s.166A, section FA 2016 s.170, section FA 2016 s.171 of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If the payment was for an e-commerce supply or service rather than a specified service, take the point that no levy was deductible on it and that section 40(a)(ib) is keyed to deductibility. If the levy was deductible and was paid late, pay it and claim the deduction in the year of payment under the proviso rather than fighting the disallowance in the earlier year — the proviso is unconditional as to the year of allowance. Do not concede a thirty per cent figure by analogy with section 40(a)(ia): the clause disallows the whole consideration. Deal with the levy proceeding separately. A section 40(a)(ib) disallowance in the income-tax assessment does not answer the demand for the levy, the interest under section 170 or the penalty under section 171 of the Finance Act 2016, and those are governed by that Chapter alone.
Still good law. The text is taken from the most recent version of section 40 available here, and the sub-clause and its proviso were set out twice from it, the second time expressly checking for every proviso to sub-clause (ib), with the same result. The clause remains on the statute book. It matters for assessment years in which the six per cent levy was chargeable, that is, up to and including consideration received or receivable before 1 April 2025. Two limits on this note. The amendment footnote for sub-clause (ib) is not available, so when the sub-clause was inserted is not stated. And no search directed at decisions construing it has been made: none is recorded here, but that is not a finding that none exists. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Section 40(a)(ib) is an Income-tax Act provision but the levy it refers to is not: the equalisation levy is charged by Chapter VIII of the Finance Act, 2016. The text set out here is taken from section 40 of the Income-tax Act, 1961, under the heading 'Amounts not deductible'. Older copies of section 40 predate the clause entirely and do not contain sub-clause (ib) at all, so a copy that does not carry the sub-clause is not evidence that it does not exist. The footnote recording the Finance Act and date by which sub-clause (ib) was inserted is NOT available here: the only footnotes carried against this part of the section concern rupee figures substituted by Act No. 15 of 2024. The decided_on field is therefore null — the text is verified and only its commencement is not. The comparison with section 40(a)(ia) drawn in this entry is taken from the text of sub-clause (ia) printed immediately above sub-clause (ib) and read in the same continuous run, which begins 'thirty per cent of any sum payable to a resident'. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Not a judgment. The statutory position is that where equalisation levy was deductible under Chapter VIII of the Finance Act, 2016 on consideration paid or payable to a non-resident for a specified service, and the levy was not deducted, or was deducted but not paid on or before the section 139(1) due date, the WHOLE of that consideration is disallowed in computing business income; that the disallowance is keyed to deductibility, so it does not reach an e-commerce supply or service on which the levy is payable by the non-resident operator and not deductible by the payer; and that the proviso allows the sum as a deduction in the previous year in which the levy is in fact paid, making the disallowance a deferral rather than a permanent loss.
TaxSphere, “Statutory position — s.40(a)(ib): the whole payment is disallowed where equalisation levy was deductible on it and was not deducted or not paid by the s.139(1) due date, and the proviso that gives it back”, https://taxnotice.vittsphere.com/caselaw/case/statutory-position-40-a-ib-income-tax-act-disallowance-where-equalisation-levy-was-deductible-and-was-not-paid/ (validity last checked 2026-09-09)
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