Section 201 of the Income tax Act, 1961 fasten a demand upon a taxpayer if he fails to deduct tds on certain payments. At the same time the taxpayer is disallowed to claim such payments as business expenditure u/s 40(a) to the extent of 30% of such sum. However the taxpayer may escape such consequence if the taxes are paid by the payee directly and taxes are filed by him. That is precisely because of section 191 which casts an obligation upon the payee to pay tax directly where income tax is not deducted by the payer as required by the law.
In a judgement rendered in (2026] 183 taxmann.com 297 (Delhi – Trib.)[06-02-2026] a charitable trust failed to deduct tax on advertisement and interest payments because of which the AO (TDS) treated the trust as ‘assessee-in-default’ under section 201(1) and also levied consequential interest under section 201(1A) for failure to deduct tax at source without making any inquiries whether payees have made payment of such tax. .
The assessee in this case raised jurisdiction and legal grounds where it claimed that the AO exceeded their authority by declaring assessee in default without first ascertaining whether the taxes had been deposited by the recipients under Section 191.
In admitting the additional grounds, the Tribunal remanded the matter, requiring the AO to verify the tax payments made by the recipients and adjudicate the matter afresh.
This judgment clearly indicate a conflict between section 201 and section 191 in as much as if the AO enforces a disallowance or a demand without first investigating whether the payee has fulfilled their liability under Section 191. It effectively defeats the legislative intent of section 191. A finding of “non-filing” or “non-payment” by the payee is necessary to penalize the payer for a TDS default. And it is therefore necessary for the AO to ascertain from the respective AO’s of the Payee’s. In any case the Department cannot recover the same tax twice. If the payee who has a primary obligation to pay tax has already paid tax on the total income (including the payment received from the payer), the payer cannot be held liable for the shortfall.
To this extent therefore any disallowance under section 40(a) is a premature act.