Pune ITAT Sends Back Section 40(a)(ia) Disallowance on Section 194Q TDS to CIT(A) for Fresh Decision

Background of the Appeal

The Pune Bench of the Income Tax Appellate Tribunal in the case of Karmyogi Shankarraoji Patil SSK Ltd. Vs ACIT (ITAT Pune) dealt with a dispute revolving around disallowance under Section 40(a)(ia) for alleged non-deduction of tax at source under Section 194Q. The controversy arose in the Assessment Year 2023-24, where the assessee, an Association of Persons (AOP) registered under the Maharashtra Cooperative Societies Act, 1960, had its appeal heard in ITA No. 3320/PUN/2025, culminating in the order dated 28/07/2026.

The appeal was filed against the order dated 07.11.2025 passed by the National Faceless Appeal Centre, Delhi under Section 250 of the Income Tax Act 1961, which had affirmed an assessment order dated 21.03.2025 framed under Section 143(3) read with Section 144B.

The central point before the Tribunal was whether the CIT(A) was justified in sustaining a disallowance under Section 40(a)(ia) amounting to ₹2,89,72,480/- on the premise that the assessee failed to deduct tax at source under Section 194Q on specified purchases.

Facts Leading to the Disallowance

Filing of Return and Selection for Scrutiny

  • The assessee, being an AOP, filed its return of income for A.Y. 2023-24 on 27.10.2023, declaring Nil income.
  • The case was picked up for scrutiny through the CASS mechanism.
  • Statutory notices were issued and duly served to initiate and conduct the assessment proceedings under the faceless scheme (Section 144B).

During the assessment, the Assessing Officer examined the assessee’s purchase transactions and its compliance with the provisions of Section 194Q.

Application of Section 194Q and Working of Disallowance

The Assessing Officer observed that:

  1. The assessee had made purchases of goods aggregating to ₹9,65,74,932/- from specified sellers.
  2. As per Section 194Q, where the value of purchases from a seller exceeds ₹50.00 lakh in a financial year, the buyer is required to deduct tax at source at 0.1% on the amount exceeding the threshold.
  3. In the view of the Assessing Officer, the assessee was required to comply with this TDS obligation in respect of such purchases but had not done so.

On this basis, the Assessing Officer invoked Section 40(a)(ia) and made a disallowance of ₹2,89,72,480/-, being 30% of the total purchases of ₹9,65,74,932/-, computing the assessed income at ₹2,89,72,840/-.

Note: Section 40(a)(ia) allows disallowance of a portion of expenditure (in this context, 30% of specified payments) where tax deductible at source has not been deducted or not deposited within prescribed timelines.

Proceedings Before CIT(A) and Non-Compliance by Assessee

Aggrieved by the assessment order, the assessee approached the CIT(A) (National Faceless Appeal Centre) under Section 250. However, the appeal proceedings were adversely impacted by the assessee’s conduct.

Hearing Notices and Adjournments

The CIT(A) issued multiple notices of hearing on the following dates:

  • 18.07.2025
  • 23.09.2025
  • 08.10.2025