The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that purchases from related concerns cannot, by themselves, justify a disallowance for failure to deduct tax at source. The tribunal directed fresh examination of purchase and rent disallowances totalling approximately ₹2.98 crore, emphasising that the statutory TDS conditions and the evidence relating to each supplier and rent recipient must be verified separately.

The bench of Amit Shukla (Judicial Member) and G.M. Doss (Accountant Member) set aside the Commissioner of Income-tax (Appeals)’ findings sustaining a purchase disallowance of ₹2,96,02,117 and a rent disallowance of ₹1,97,100. Both issues were restored to the Assessing Officer for fresh adjudication. 

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The assessee, a partnership firm engaged in cement, logistics and infrastructure, had declared total income of ₹17,86,120.

During scrutiny assessment, the Assessing Officer disallowed 30% of purchases aggregating to ₹9,86,73,725 under Section 40(a)(ia) of the Income-tax Act, 1961, alleging non-deduction of TDS under Section 194Q.

The purchases comprised ₹4,97,31,708 from assessee and ₹4,89,42,017 from Kvalitet Resources LLP. The officer also observed that the suppliers appeared to be related concerns and that the reasonableness of the purchase prices had not been substantiated by reference to comparable market values under Section 40A(2)(b).

Separately, the officer disallowed ₹1,97,100, representing 30% of rent expenditure of ₹6,57,000, on the ground of non-deduction or short deduction of tax. The first appellate authority sustained both disallowances.

The central issue before the tribunal was whether the disallowances could stand without examining the supplier-wise and payee-wise evidence and the conditions governing the obligation to deduct tax.

The tribunal held that the relationship between the assessee and its suppliers could not establish non-deduction of tax under Section 194Q or independently support a disallowance under Section 40(a)(ia).

It distinguished the two provisions invoked in the assessment. Section 40A(2)(b) concerns payments to specified persons and the question of excessive or unreasonable expenditure. Section 40(a)(ia), by contrast, concerns expenditure on which tax was deductible but was not deducted or was not deposited within the prescribed time.

The tribunal explained that the absence of a comparable market-value analysis, without a finding identifying the expenditure considered excessive or unreasonable, could not sustain the 30% disallowance actually made under Section 40(a)(ia).

Accordingly, the Assessing Officer was directed to determine the TDS issue on its statutory requirements and supporting evidence, rather than relying on related-party status or general observations about market value.

The tribunal noted that Section 194Q applies subject to specified conditions. Among them, the buyer’s business sales, gross receipts or turnover in the immediately preceding financial year must have exceeded ₹10 crore. Where applicable, tax is deductible at 0.1% on purchases from a resident seller exceeding ₹50 lakh.

The material referred to before the bench did not establish the assessee’s turnover for the immediately preceding financial year.

For purchases of ₹4,89,42,017 from Kvalitet Resources LLP, the tribunal calculated that TDS on the amount exceeding ₹50 lakh would be approximately ₹43,942. The assessee relied on a Form 16A showing deduction of ₹49,073.

The Assessing Officer was therefore directed to verify the preceding-year turnover, the supplier’s residential status, the purchase amounts and their timing, and the relevant TDS statements and challans. The deduction reflected in Form 16A must also be reconciled with the purchase ledger and quarterly TDS statement.

The bench clarified that no default under Section 194Q could arise if the provision was inapplicable. If it applied and the required tax had been deducted and deposited within the prescribed time, the disallowance could not be sustained on that account.

For purchases from the assessee produced Form 26A and an accountant’s certificate stating that the supplier had included the corresponding receipts in its income and paid tax.

The certificate recorded that the payee filed its return for Assessment Year 2024–25 on October 12, 2024. However, Form 26A and the accountant’s certificate placed before the tribunal were dated October 8, 2026, after the first appellate order. Separate portal material reflected an earlier upload and e-verification, with acceptance pending.

The tribunal held that these documents required verification and did not conclusively resolve the dispute merely upon production.

The Assessing Officer must examine the payee’s return, inclusion of receipts of ₹4,97,31,708, the tax payable and paid, and the prescribed certificate and Form 26A filing status. If the conditions of the first proviso to Section 201(1) are satisfied, the corresponding consequence under the second proviso to Section 40(a)(ia) must follow.

The bench also directed reconciliation of the certificate’s TDS figure of ₹49,731 with the ₹50 lakh threshold under Section 194Q. Any computational discrepancy must be examined on its merits and cannot substitute for verification of the payee-side conditions.

On rent expenditure, the assessment recorded total payments of ₹17,37,000, with tax deducted on ₹10,80,000. The remaining ₹6,57,000 formed the basis of the disputed disallowance.

The assessee furnished a breakup showing ₹2,24,000 paid to Bina Mehta, ₹1,03,000 to Ashok Srinivas, ₹3,00,000 to Real Sign and ₹30,000 to Bharat Infra.

It contended that the payments to three recipients were individually below the applicable threshold, while ₹30,000 had been deducted as TDS on the payment to Real Sign.

The tribunal noted that, for the relevant year, Section 194-I prescribed a threshold of ₹2,40,000 in respect of rent paid or credited to each payee. The inquiry must therefore focus on individual recipients rather than the combined expenditure.

The Assessing Officer was directed to verify the rent ledger, recipients’ identities, payment nature, agreements, TDS returns and challans. If the three smaller payments were individually below the threshold and tax on the Real Sign payment was duly deducted and deposited, the disputed rent disallowance would not be warranted.

The tribunal directed separate verification for each supplier and rent recipient, consideration of the existing records and additional Form 26A material, and a reasonable opportunity of hearing.

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