No S. 271(1)(c) penalty for s. 40(a)(i) disallowance if TDS deducted next year

Dynatron Private Limited vs. DCIT (ITAT Mumbai)

The assessee incurred expenditure towards “fees for technical services” on which TDS was not deducted by the end of the year. Though the auditor stated in the tax audit report that the amount had to be disallowed u/s 40(a)(i), the assessee still claimed a deduction. The TDS was paid in the subsequent financial year. The AO disallowed the deduction and imposed penalty u/s 271(1)(c) which was affirmed by the CIT(A). On appeal by the assessee to the Tribunal, HELD allowing the appeal:

S. 40(a)(i) does not impose an absolute disallowance for failure to deduct TDS. It provides that the deduction shall be allowed in the year of deduction of the TDS. As the assessee had in fact deducted TDS in the immediately succeeding year, it had substantially complied with the provision. Also, as the fact that TDS was not deducted was stated in the tax audit report which was filed with the return, it could not be said that the assessee has not disclosed the correct particulars of income.