My payee had a loss, or has died, dissolved or simply will not help. Can I still get out of the s.40(a)(ia) disallowance and out of assessee-in-default status?
It depends, and the honest answer is that the ground is not settled. The first proviso to s.201(1) has three conditions and the third is that the resident 'has paid the tax due on the income declared by him in such return of income' — which is either satisfied trivially where a loss return leaves no tax due, or not satisfied at all, and I found no corroborated decision on the point. On the certificate, one Tribunal has deleted a disallowance without Form 26A where the payee had returned the income, and the Delhi High Court has refused a mandamus compelling an accountant's certificate where the underlying records no longer exist.
Start with the words, because everything here turns on them. The first proviso to s.201(1) of the Income-tax Act, 1961 provides that a person who fails to deduct on a sum paid or credited to a resident 'shall not be deemed to be an assessee in default in respect of such tax if such resident— (i) has furnished his return of income under section 139; (ii) has taken into account such sum for computing income in such return of income; and (iii) has paid the tax due on the income declared by him in such return of income, and the person furnishes a certificate to this effect from an accountant in such form as may be prescribed'. The prescribed form is Form 26A under rule 31ACB, notified by Notification No. 37/2012 dated 12 September 2012. The second proviso to s.40(a)(ia) then treats a deductor who is not deemed an assessee in default under that proviso as having deducted and paid the tax, which brings the disallowed expenditure back.
**The loss-making payee.** The three conditions are cumulative. The first two are plainly satisfied by a payee who files a return and offers the receipt, whatever its overall result. The third is the difficulty. On one reading, 'the tax due on the income declared by him in such return of income' is nil where the return declares a loss, nothing was payable and nothing was left unpaid, so the condition is met and the certificate can be given. On the other reading, the condition presupposes a tax that was due and was paid, and where no tax is due there is nothing that answers the description — a commentary in the Bombay Chartered Accountants' Society journal on the related interest question takes that view, observing that where no tax is due the condition cannot be satisfied. I could not corroborate any decision either way on a second host, so this entry does not tell you which reading a Tribunal will take. What can be said is that the underlying principle in Hindustan Coca-Cola Beverage P. Ltd. v. CIT — that the same tax cannot be collected twice, once from the payee and again from the deductor — has nothing to bite on where the payee paid no tax, which is why the department resists the extension. The practical course is to obtain Form 26A stating the position truthfully, including a nil tax figure, and to argue condition (iii) as satisfied because nothing was due.
The same reading question runs through the interest proviso. The proviso to s.201(1A) caps the 1 per cent limb at 'the date of furnishing of return of income by such resident', and it operates only where the deductor 'is not deemed to be an assessee in default under the first proviso to sub-section (1)'. So if the loss-making payee does not bring you inside the first proviso, the interest cap does not apply either, and the two arguments stand or fall together.
**The payee who cannot certify.** Form 26A is not a form you can complete alone. Annexure A is an accountant's certificate given after examining the payee's accounts and records — it records the payee's return particulars, the total income returned, the tax due and deposited, and confirms that your payment was taken into account in computing that income. If the payee is dead, dissolved, struck off, in liquidation or simply will not open its books, that examination cannot be made.
Two decisions mark the boundaries. On the taxpayer's side, the Kolkata Tribunal in Madhu Transport Company P. Ltd. v. ITO deleted a s.40(a)(ia) disallowance where the recipient had returned the interest and paid tax on it although no Form 26A had been filed — but that was assessment year 2008-09, before rule 31ACB and Form 26A existed, and the reasoning is expressly tied to that. On the other side, the Delhi High Court in Kohinoor Educational Services (P.) Ltd. v. Union of India refused a mandamus to compel the issue of a Form 26A certificate where the records on which it would have to rest had been destroyed, holding that 'a writ of mandamus cannot be issued to command a public or corporate authority to provide a factual certification when the records upon which that certification must responsibly rest do not exist', and drawing a distinction that matters: 'There is a material distinction between proof of filing of a return and proof that a specific receipt from a specific payer was accounted for in that return.' RTI replies showing that the payee had filed returns were held not to bridge that gap. I could corroborate the Kohinoor decision on only one host, so it is not written up as a separate entry — treat it as a warning about what will not work rather than as authority you can cite.
That distinction is the practical lesson. Condition (ii) of the proviso — that the payee took *this sum* into account — is the one that fails in the uncooperative-payee case, and it is not met by showing that a return was filed. What you can do instead is build the equivalent evidence and ask the officer to verify it himself: he has power under s.131 and s.133(6) to call for the payee's records directly, and the Tribunal route in practice is a remand with a direction to allow the relief if the receipt is found to have been offered. That is a request for verification, not a substitute certificate, and it is the most that the material I could source supports.
The second proviso is presented in most commentary as a clean escape from a 30 per cent disallowance, and in the field it usually is not, because it depends entirely on a third party. Knowing exactly which of the three conditions is failing — the return, the inclusion of your sum, or the payment of tax — decides whether you are arguing about evidence, about statutory construction, or about nothing at all. It also stops a practitioner promising relief that turns on a certificate the client will never obtain.
We sell prepaid SIMs and vouchers to distributors below list price. Is that margin commission under 194H?
I have paid the short-deducted tax and the interest to close the matter — can the department still levy penalty under section 271C?
We pay interconnect and port charges to another telecom operator — is that fees for technical services on which we must deduct tax under section 194J?
I deducted TDS during the year but paid it after 31 March, though before I filed my return — can the expense still be disallowed under section 40(a)(ia)?
The TDS officer says I under-deducted under s.192. If my estimate was made honestly, does that answer the demand, the interest and the penalty?
My employees exercised stock options but the shares are locked in and non-transferable. Was I supposed to deduct tax on the market value less what they paid?
We paid stock exchange transaction charges without TDS. Are those fees for technical services under 194J?
As an employer, must I collect bills and tickets from employees before treating leave travel concession or conveyance allowance as exempt while deducting tax under section 192?
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