A shortfall in the tax deducted at source (TDS) because of a bonafide error in applying the provisions of the Income-tax Act, is not a valid reason to disallow the entire amount, according to a recent judgment by the Calcutta High Court.

The division bench that made the ruling comprised Justice Girish Chandra Gupta and Justice Mrinal Kanti Sinha. In this case, taxpayer SK Tekriwal paid machinery hire charges on which he deducted TDS at 1% under section 194 C of the Income-tax Act. The assessing officer disputed the claim of the taxpayer. According to him, the amount deducted by the taxpayer was "rent" for which TDS should have been deducted at the rate of 10% under section 194-I of the I-T Act.

The assessing officer, therefore, concluded that there was a failure on the part of the taxpayer to deduct TDS and hence made a dis-allowance under section 40 (a) (ia) of the Income-tax Act. The taxpayer then moved the Income-tax Appellate Tribunal (ITAT), the apex appellate body for deciding tax disputes. The ITAT upheld the taxpayer's view that disallowance under section 40 (a) (ia) could not be applied, in this case, as here tax had been already deducted at source.

There may be a shortfall because of a wrong application of the provisions of the Incometax Act, but that cannot be a reason for invoking section 40 (a) (ia) of the Income-tax Act which deals with situations such as tax not being deducted at source despite a legal requirement to do the same.

The Calcutta High Court upheld the Income-tax Appellate Tribunal's ruling in favour of the taxpayer. The High Court held that there are two pre-conditions to invoke section 40 (a) (ia) of the Incometax Act — tax must be deductible at source and, the tax has not been deducted.

Where tax is deducted by the assessee under wrong provisions of TDS and there is a shortfall, disallowance under section 40(a)( ia) cannot be made, the court ruled. The Calcutta High Court observed that section 40 (a) (ai) of the Income-tax Act only refers to the duty to deduct tax and pay the amount to the government.

If there is any shortfall due to any difference of opinion as to the taxability of any item or nature of payments falling under various Tax Deductible at Source (TDS) provisions, the assessee can be declared to be one in default, under section 201. However, no disallowance can be made by invoking the provision of section 140 (a) (ai) of the Act, the Calcutta High Court ruled. (ET)