Section 40 of Income Tax Act, 1961: Amounts not deductible
Updated: Oct 18
If a deductor fails to deduct TDS or fails to deposit it to the credit of the Central Government's account after doing so, the following consequences will follow:
a) Costs that aren't reimbursed: According to section 40(a)(i) of the Income-tax Act, deductions are not permitted for any amount (other than salary) paid outside of India or to a non-resident that is subject to tax in India in the hands of the recipient if tax is not withheld at the source or withheld but not deposited with the Central Government by the due date for filing a return.
However, the expense must be permitted if tax is deducted from or deposited in the following year, as applicable.
Similar to the previous example, section 40(a)(ia) states that any amount paid to a resident that is subject to tax at source deduction will result in a 30% disallowance if tax is paid but not deducted at source or if tax is deducted but not deposited with the Central Government by the due date for filing a return.
However, the expense so disallowed shall be allowed as a deduction in the year in which tax is deducted from or deposited in respect of any such sum, as the case may be.
b) Interest assessment: In accordance with section 201 of the Income-tax Act, if a deductor fails to withhold tax at source or fails to deposit tax to the Central Government's account after withholding it, he will be deemed to be an assessee-in-default and subject to pay simple interest as follows:
(i) at 1% for each month or portion of a month on the amount of the tax from the date the tax was deductible to the date the tax is deducted; and
(ii) at 1.25% for each month or portion of a month on the amount of the tax from the date the tax was deducted to the date.
c) Imposition of Penalty: Section 271C permits the imposition of a fine equal to the tax that was not deducted. If the deductor fails to deduct and pay tax to the credit of the Central Government, a penalty under Section 221 will be applied. The Assessing Officer may impose the penalty to the extent that they see fit, but it cannot total more than the amount of back taxes.
d) Penalties: Failure to pay the tax that has been withheld at source to the credit of the Central Government will result in strict imprisonment for a term that must not be less than three months but may not exceed seven years, as well as a fine.
Taxes deducted at source must be deposited to the Central Government's credit in one of the following ways:
1) Use of electronic payments is required for:
a) All corporate evaluations.
b) All assesses (aside from companies) who are subject to the provisions of section 44AB of the Income Tax Act of 1961.
Physically: By presenting Challan No. 281 at the designated bank branch.
A government office that has deducted or collected tax may send the money to the central government without presenting an income-tax challan and by making only book adjustments. In this situation, it must submit Form No. 24G to NSDL within the allotted time frame.