In DeliverHealth Services Private Limited (earlier known as Transcend MT Services Private Limited) v. Deputy Commissioner of Income Tax, the Delhi Bench of the Income Tax Appellate Tribunal examined the validity of disallowance made under Section 40(a) of the Income-tax Act, 1961 in respect of provision for professional and other expenses for Assessment Year 2021–22.

The assessee had created provisions for expenses payable to Indian resident parties at the year-end and, in the absence of deduction of tax at source at that stage, had suo motu disallowed 30% of such expenditure under Section 40(a)(ia) while filing the return of income. However, due to a typographical error in the tax audit report, the disallowance was incorrectly reflected under Section 40(a)(i), leading the CPC to propose and make an additional disallowance while processing the return.

Although the assessee clarified the error during CPC proceedings, the adjustment was sustained partly by the CIT(A), who allowed only 30% of the expenditure and confirmed the balance, resulting in double disallowance of the same amount.

The Tribunal observed that Section 40(a)(ia) mandates disallowance of only 30% of expenditure on which tax is not deducted at source in respect of payments made to resident parties. Since the assessee had already disallowed the prescribed amount on a suo motu basis, any further disallowance was held to be unjustified and contrary to law. The Tribunal further noted that the provisions of Section 40(a)(i) were not applicable, as the payments were made to Indian residents.

Accordingly, the ITAT deleted the additions sustained by the lower authorities and allowed the appeal of the assessee in full.

 Source Link- https://itat.gov.in/public/files/upload/1767773198-6G8Z3K-1-TO.pdf

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