INCOME TAX ACT, 1961

--Business disallowance under section 40(a)(ia) --Shortfall in deduction of TDS Due to charging under wrong section --Assessee had deducted TDS at 1% under section 194C(2) from payments made to sub-contractors. Assessing officer contended that payment made were in the nature of machinery hire charges falling under the head 'rent' liable to TDS under section 194-I @ 10%. Therefore, he disallowed payments proportionately by invoking section 40(a)(ia). Held: By High Court was not justified as section 40(a)(ia) has two limbs; one is where assessee has to deduct tax and the second where after deducting tax, assessee has to pay into government account. There is nothing in the said section to treat assessee as a defaulter where there is shortfall of deduction. More so, where there is shortfall due to any difference of opinion as to taxability of any item or the nature of payment falling under various TDS provisions, the assessee can only be declared to be an assessee in default under section 201 and no disallowance could be made.

The conditions laid down under section 40(a)(ia) for making 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) but where tax is deducted by the assessee, even under bona fide wrong impression, under wrong provisions of TDS, the provisions of section 40(a)(ia) cannot be invoked.