ITAT Delhi Holds Duplicate Disallowance Under Section 40(a)(ia) Invalid

Background and Case Overview

The Delhi Bench “E” of the Income Tax Appellate Tribunal, in the case of DeliverHealth Services Private Limited Vs DCIT for Assessment Year 2021-22, examined whether a further disallowance could be sustained under Section 40(a)(ia) when the assessee had already, on its own, disallowed 30% of certain expenditure for non-deduction of TDS.

The controversy arose from a clerical mistake in the tax audit report, where an amount relating to resident payees was incorrectly reported under Section 40(a)(i) instead of the appropriate Section 40(a)(ia). This error led the CPC to make a disallowance, which was partly upheld by the Addl/JCIT (A)-6, Mumbai. The ITAT ultimately ruled that such a mistake cannot be used to create an additional tax burden, particularly when it results in a double disallowance of the same expenditure.

Facts of the Case

Nature of Expenses and Accounting Practice

• The assessee, DeliverHealth Services Private Limited, had booked year-end provisions on 31.03.2021 for:

  • Professional charges
  • Other related expenses

• The assessee consistently followed a practice where:

  1. Provisions are created at year-end for expenses where invoices are expected in the subsequent year.
  2. TDS is actually deducted at the time of payment when the invoice is received, not at the time of creating the provision.

• These expenses were payable to resident parties in India, and this fact was not disputed.

Suo Motu Disallowance Under Section 40(a)(ia)

Since TDS had not been deducted on such year-end provisions by the date of filing the tax audit report, the assessee voluntarily disallowed 30% of such expenditure under Section 40(a)(ia) in its:

• Return of income, and
• Computation of total income

The paper book before the Tribunal (particularly page 88) reflected that the assessee had suo motu disallowed Rs. 5,04,255/- under Section 40(a)(ia) in line with the statutory requirement that only 30% of the expenditure is liable for disallowance in such cases.

Error in Tax Audit Report

During the tax audit, the tax auditor:

• Correctly identified that TDS was not deducted on certain expenses
• However, erroneously reported the disallowance under Section 40(a)(i) instead of Section 40(a)(ia) in the relevant clause of the tax audit report

This mistake related solely to the section reference; the nature of payees (all residents) and the underlying transactions remained unchanged.

CPC Adjustment and First Appeal

Relying on the tax audit report, the CPC, while processing the return, made an adjustment and disallowed Rs. 16,57,106/- on account of non-deduction of TDS, treating it under Section 40(a)(i).

The assessee responded to the proposed adjustment on 30.06.2022, clarifying that:

• The reference to Section 40(a)(i) in the tax audit report was a typographical/clerical error
• The expenses were in respect of resident parties, and thus only Section 40(a)(ia) was relevant
• The assessee had already disallowed the required 30% of such expenditure under Section 40(a)(ia) in its computation

Despite this clarification, the CPC proceeded to disallow the entire amount of Rs. 16,57,106/-.