Law: Income Tax Act, 1961

Section: 40(a)(ia)

Section 194C, read with section 40(a)(ia), of the Income-tax Act, 1961 - Deduction of tax at source - Contractors/sub-contractors, payments to (Applicability of) - Assessment year 2005-06 - Whether requirement to deduct tax at source under section 194C is mandatory and, in case of assessee's failure to do so in respect of contractual payments, disallowance has to be made under section 40(a)(ia) irrespective of fact as to whether assessee is following cash or mercantile system of accounting - Held, yes [Paras 14 and 21] [In favour of revenue] Words and Phrases : Word 'payable' as occurring in section 40(a)(ia) of the Income-tax Act, 1961 FACTS â–  The assessee filed its return declaring certain taxable income. The Assessing Officer, found that the TDS return for the assessment year in question along with proof of payment of TDS was not submitted. The assessee admitted that TDS had not been deducted in respect of the payments made/deemed to have been made who followed the mercantile system. It was also admitted that the TDS deducted had not been deposited to the credit of the Central Government. â–  The Assessing Officer as well as the Tribunal held that where assessee was liable to deduct and pay over TDS under section 194C and the assessee failed to do so, said payments were to be disallowed under section 40(a)(ia). â–  On appeal: HELD â–  The liability to deduct tax at source under the provisions of Chapter XVII is mandatory. A person responsible for paying any sum is also liable to deposit the amount in the Government account. All the sections in Chapter XVII-B require a person to deduct the tax at source at the rates specified therein. The requirement in each of the sections is preceded by the word 'shall'. The provisions are, therefore, mandatory. There is nothing in any of the sections that would warrant reading the word 'shall' as 'may'. The point of time at which the deduction is to be made also establishes that the provisions are mandatory. â–  For instance, under section 194C, a person responsible for paying the sum is required to deduct the tax 'at the time of credit of such sum to the account of the contractor or at the…