The Income Tax Appellate Tribunal (ITAT), Rajkot Bench, has allowed a deduction of ₹10,48,139 for expenditure disallowed in an earlier assessment year due to a tax deducted at source (TDS) payment default, holding that the deduction became allowable in the subsequent year when the TDS was deposited.
The bench of Dr. Arjun Lal Saini (Accountant Member) granted relief even though the company had not claimed the deduction in its original income tax return and had subsequently raised the claim through a letter during assessment proceedings. It directed the Assessing Officer to allow the statutory deduction under the proviso to Section 40(a)(ia) of the Income-tax Act, 1961.
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The company, engaged in the erection and repair of construction and engineering equipment, had incurred expenditure in the earlier assessment year on which TDS was deducted but was not deposited within the prescribed time.
The Tribunal recorded that the company had incurred expenditure of ₹38,27,130 on which TDS of ₹93,719 had been deducted. Since the tax was not paid on or before the applicable return-filing due date under Section 139(1), a disallowance had been made in Assessment Year 2017-18 under Section 40(a)(ia).
The company subsequently deposited the TDS on March 21 and March 22, 2018, during Financial Year 2017-18, corresponding to Assessment Year 2018-19. It therefore sought a deduction of ₹10,48,139 in that assessment year for the amount previously disallowed.
However, the deduction had not been claimed in the original return filed on October 26, 2018. The company instead raised the additional claim through a letter dated January 10, 2020, during assessment proceedings.
The case had been selected for limited scrutiny on issues concerning TDS default and the related disallowance. The Assessing Officer accepted the returned income in the assessment order dated February 14, 2020, without granting the additional deduction.
The Commissioner of Income Tax (Appeals), through the National Faceless Appeal Centre, upheld the Assessing Officer’s action by an order dated March 6, 2026.
The appellate authority treated the absence of a revised return as a central procedural obstacle. Relying on the Supreme Court’s decision in Goetze (India) Ltd. v. CIT, it observed that the Assessing Officer could not entertain a fresh deduction claim made through written submissions instead of a revised return under Section 139(5).
It also questioned the factual substantiation of the claim, observing that the company had not provided a comprehensive reconciliation linking the TDS deposited in March 2018 with the specific expenditure disallowed for Assessment Year 2017-18.
Although the appellate authority acknowledged its power to admit new claims, it declined to exercise that power. It reasoned that the company knew about the TDS payment when filing its original return and had not explained why it omitted the deduction or failed to file a revised return.
The company’s reliance on CBDT Circular No. 14 of 1955 also did not persuade the appellate authority, which held that a departmental circular could not override statutory procedural requirements or the law declared by the Supreme Court.
Before the Tribunal, the company argued that the proviso to Section 40(a)(ia) entitled it to claim the previously disallowed expenditure in the year in which the TDS was actually paid.
Its counsel explained that the tax had been deducted in relation to the earlier year but deposited in March 2018. The company therefore sought the corresponding deduction for Assessment Year 2018-19.
The company further submitted that the Tribunal could entertain the claim despite its omission from the return and direct the Assessing Officer to grant the relief.
The department supported the findings of the Assessing Officer and the first appellate authority.
The Tribunal accepted the company’s position after considering the submissions and the documents on record.
It found that the TDS had been deposited during Financial Year 2017-18 and that the deduction for the expenditure previously disallowed was consequently allowable in Assessment Year 2018-19 under the proviso to Section 40(a)(ia).
The Tribunal treated the ₹10,48,139 claim as a statutory deduction arising from the subsequent deposit of TDS. It entertained and allowed the additional claim despite the procedural objection concerning the absence of a revised return.
The Tribunal referred to Termo Penpol Ltd. v. ACIT, reported at 59 taxmann.com 90, in which the Cochin Bench had recognised that deductions covered by the relevant provisos to Sections 40(a)(ia) and 40(a)(i) were allowable in the year in which the tax was actually paid.
The Tribunal directed the Assessing Officer to allow the deduction and allowed the company’s appeal.
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