The AO has disallowed freight, commission and testing charges under s.40(a)(ia) — which of those disallowances can actually be removed?
A engineering components manufacturer with a turnover of Rs 84 crore was assessed under s.143(3) for assessment year 2022-23. The order disallows three items: Rs 1.42 crore of outward freight paid to 19 individual truck operators without deduction, Rs 38 lakh of sales commission paid to four agents without deduction, and Rs 26 lakh of plant testing and commissioning charges paid to a single vendor on which tax was deducted at 2% under s.194C where the officer says 10% was due under s.194J. The freight file contains PAN declarations from every transporter, but the quarterly statements for two quarters carry the transporter details in the wrong annexure. Two of the four commission agents are companies that have filed returns disclosing the commission; the other two are individuals, one of whom has not filed at all. The vendor who did the testing work has filed its return and paid tax on the receipt. The whole of the three amounts has been added back, and interest under s.234B has been charged on the resulting demand of about Rs 62 lakh.
Before answering the officer on the merits, break the addition into three legally different buckets, because they do not travel together. Freight where the transporters' PANs were obtained is a no-deduction-required case, not a default at all; the commission is a genuine non-deduction that has to be cured through the payee's own tax position; the testing charges are a short deduction, which the library treats as a different animal from non-deduction. A single composite reply arguing all three the same way concedes the strongest of the three points, and the officer is entitled to sustain the whole addition if the reply does not distinguish them.
The library's account of s.40(a)(ia) is that the loss is 30% of the sum in the year of the expense, restored in the year the tax is finally deducted and paid, or removed altogether where the payee has paid and the accountant's certificate under the first proviso to s.201(1) is furnished. It also distinguishes short deduction, where the default runs only to the extent of the shortfall and the natural consequence is a small demand under s.201, from non-deduction, which is what exposes the expenditure. Fixing which bucket each item falls in decides which relief is even available.
The library holds that where the assessee obtained the transporters' PANs and reported them, the freight cannot be disallowed under s.40(a)(ia). It goes further and records that even a failure in the reporting requirement attached to that concession does not itself attract the disallowance, the substantive condition being the collection of the PAN. That answers the two quarters where the details went into the wrong annexure, though the consequence for the statement itself is a separate late-statement issue and not a disallowance.
Two High Court entries and a tribunal entry in the library hold that where tax has been deducted, albeit under s.194C at 2% instead of s.194J at 10%, no disallowance under s.40(a)(ia) can be made and the officer's remedy is to proceed under s.201. One High Court entry goes the other way, holding that deduction under an inapplicable provision is not deduction as required by the withholding chapter and the shortfall does attract disallowance. Present the majority line and the s.201 alternative, and be ready for the officer in a jurisdiction that follows the contrary view.
The library treats the second proviso to s.40(a)(ia) as declaratory and curative with retrospective effect, so that where the resident payee has returned the amount and paid the tax on it no disallowance can be made. The mechanism is the same accountant's certificate that takes the deductor out of default under the first proviso to s.201(1): once the deductor is not deemed to be in default, s.40(a)(ia) is treated as complied with. That will clear the two corporate agents and the individual who has filed, and will not clear the agent who has not filed at all. The library now also carries an account of the payee who cannot or will not certify, covering both the payee who returned a loss and the payee who has died, dissolved or will not open its books, together with a tribunal entry that deleted a disallowance without the certificate where the payee had returned the income. That entry is recorded as unverified, is taken from commentary rather than from the order, and turns on a year before the certificate was prescribed, so treat it as an argument on the object of the section rather than as a licence to skip the form.
The library records that the amendment restricting the disallowance to 30% instead of 100% is curative and applies retrospectively, so no part of the addition should be at the full amount. For the year in this file the 30% cap is in any event the plain statutory position described in the library's account of the section. Check the assessment order's arithmetic, because a full add-back is a common drafting default in orders that lift the figure from the tax audit report.
The library holds that amounts paid by way of reimbursement of expenses are not income in the recipient's hands, so no deduction obligation arises and no disallowance can follow. This only works where the reimbursement is separately billed and supported, not where a consolidated bill is split after the event. Identify the separately invoiced items before making the argument, because an unsupported claim here weakens the rest of the reply.
Where the disallowance survives, the library records that the amount comes back as a deduction in the year the tax is finally deducted and paid, so the client should deduct and pay now rather than leave the claim permanently lost. If that claim was not made in the return, the library holds that the assessing officer cannot entertain a fresh claim otherwise than through a revised return, while the appellate authorities are not similarly constrained; the first appellate authority may entertain a bona fide additional ground that could not reasonably have been raised earlier.
The freight normally goes on the PAN point and the testing charges normally go on the short-deduction point outside the jurisdictions that follow the contrary view. The commission is usually resolved payee by payee, so the client ends up with a residual disallowance of 30% of whatever was paid to the agent who did not file. Outcomes vary most on the short-deduction issue, which is genuinely contested in the library, and on how promptly the certificates can be obtained from unwilling payees.
