Clarification regarding disallowance under section 40 (a) (i) for failure to deduct TDS under section 195

GOVERNMENT OF INDIA
MINISTRY OF FINANCE
DEPARTMENT OF REVENUE
CENTRAL BOARD OF DIRECT TAXES
NEW DELHI
 

Circular
No. 3/2015, Dated: February 12, 2015
 

Subject:-
Clarification regarding ‘Amounts not deductible’ under sub-clause (i) of clause
(a) of section 40 of Income-tax Act, 1961 (‘Act’)-regarding.

 

Section
40(a)(i) of the Act stipulates that
in computing the income chargeable under the head “Profits or gains of business
or profession”, any interest, royalty, fees for technical services or other sum
chargeable under this Act either payable in India to a non-resident (not being
a company)/a foreign company or payable outside India, shall not be allowed as
a deducation, if there has been a failure in deduction or in payment of tax
deducted in respect of such amounts under Chapter XVII-B of the Act.

2.
Disallowance regarding ‘other sum chargeable’ under section 40(a)(i) is
triggered when the deductor fails to withhold tax as per provisions of section 195 of the Act. Doubts have been raised
about the interpretation of the term ‘other sum chargeable’ i.e. whether this
term refers to the whole sum being remitted or only the portion representing
the sum chargeable to income-tax under relevant provisions of the Act.

3.
Central Board of Direct Taxes has already issued Instruction No. 02/2014 dated
26.02.2014 (F.No. 500/33/2013-FTD-I) regarding deduction of tax at source
under sub-section (1) of section 195 read with section 201 of the Act relating
to payments made to non-residents in cases where no application is filed by the
deductor for determining the sum so chargeable under sub-section (2) of section
195 of the Act. Vide this Instruction, Board has clarified that in cases where
tax is not deducted at source under section 195 of the Act, the Assessing
Officer shall determine the appropriate portion of the sum chargeable to tax,
as mentioned in sub-section (1) of section 195, to ascertain the tax-liability
on which the deductor shall be deemed to be an assessee in default under
section 201 of the Act. It has been further clarified that such appropriate
portion of the said sum will depend on the facts and circumstances of each case
taking into account the nature of remittances, income component therein or any
other fact relevant to determine such appropriate proportion.

4.
As disallowance of amount under section 40(a)(i) of the Act in case of a
deductor is interlinked with the sum chargeable under the Act as mentioned in
section 195 of the Act for the purposes of tax deduction at source, the Central
Board of Direct Taxes, in exercise of powers conferred under section 119 of the
Act, hereby clarifies that for the purpose of making disallowance of ‘other sum
chargeable’ under section 40(a)(i) of the Act, the appropriate portion of the
sum which is chargeable to tax under the Act shall form the basis of such
disallowance and shall be the same as determined by the Assessing Officer
having jurisdiction for the purpose of sub-section (1) of section 195 of the
Act as per Instruction No.02/2014
dated 26.02.2014 of CBDT.
Further, where determination of ‘other sum chargeable’ has been made under
sub-sections (2), (3) or (7) of section 195 of the Act, such a determination
will form the basis for disallowance, if any, under section 40(a)(i) of the
Act.

5. This may be
brought to the notice of all concerned.

6. Hindi version to
follow.

F.No.225/201/2014-ITA.II

SD/-

(Rohit Garg)
Deputy Secretary to the Government of India

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