s.40(a)(ia) — Disallowance for failure to deduct tax from payments to residents

Currently operative

The thirty per cent measure applies from 1 April 2015 (section 14 of the Finance (No. 2) Act, 2014, listed on the Department's site under Finance Acts, 2014) and the second proviso from 1 April 2013 (section 11 of the Finance Act, 2012); the text was read in the Department's 2025 edition. The counterpart in the Income-tax Act, 2025 is section 35(b)(i), with the later-year allowance in sub-clause (A) and the deemed payment in sub-clause (B).

Income-tax Act, 1961

s.40(a)(ia)

Income-tax Act, 2025

s.35(b)(i)

In force from 1 April 2026, but s.536(2)(c) preserves the 1961 Act for tax years beginning before that date.

In short

Section 40(a)(ia) of the Income-tax Act, 1961 disallows, in computing profits and gains of business or profession, "thirty per cent of any sum payable to a resident, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139". The first proviso allows the thirty per cent in the year in which the tax is paid, where it was deducted in a later year or paid after that date. The second proviso provides that where the assessee fails to deduct but is not deemed an assessee in default under the first proviso to section 201(1), "it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the payee". In a joint development the withholding provision is section 194-IC: ten per cent, with no threshold, on money consideration paid to a resident under the agreement referred to in section 45(5A). A landowner within section 45(5A) returns that money in the completion certificate year, so the developer's escape opens only when that return is filed; in Sugee Seven Developers (10 October 2025, paragraph 9), an appeal against orders treating the developer as an assessee in default under section 201(1), the Mumbai Tribunal remitted the matter to verify whether the payee had offered the payments in his return for assessment year 2024-25, which the developer said was the completion certificate year, and directed, on the facts of those appeals, that the claim not be denied because Form 26A had not been filed. In section 201 appeals on payments to tenants and members of societies under redevelopment agreements, the Mumbai Tribunal held hardship compensation and rent for alternate accommodation not to be consideration under the agreement in Nathani Parekh Constructions (11 July 2024) and N Rose Developers (30 January 2025), so no tax was deductible under section 194-IC and, on the same reasoning, nothing falls to be disallowed. The counterpart in the Income-tax Act, 2025 is section 35(b)(i), which disallows thirty per cent of a sum payable to a resident on which tax deductible under Chapter XIX-B was not deducted or not paid by the due date in section 263(1), allows it in the year of payment under sub-clause (A) and deems deduction and payment on the payee's return under sub-clause (B), read with section 398(2).

What the provision does

Disallows thirty per cent of a sum payable to a resident where tax deductible on it was not deducted, or not paid by the return due date, allows it in the year the tax is paid, and treats the tax as deducted and paid on the date of the payee's return where the payee has returned the sum and paid tax. It does not decide whether tax was deductible, and it does not say how it operates on a payment carried in work in progress rather than claimed as an expense of the year.

Threshold questions

Is the payer computing income under profits and gains of business or profession and claiming the sum in that computation
Is the payee a resident, and was tax deductible on the sum under Chapter XVII-B, for example section 194-IC or section 194-IA
Is the payment consideration under the agreement, or compensation for hardship or alternate accommodation outside the withholding provisions
Was tax deducted and paid by the due date under section 139(1), or deducted or paid later, which moves the thirty per cent to the year of payment
Has the payee filed a return including the sum and paid the tax, with an accountant's certificate, so that the second proviso applies

The recurring disputes.

Payments carried in work in progress

A developer carries money paid to a landowner as the cost of development rights in its inventory, not as an expense of the year. The Revenue's practice is to disallow and reduce the work in progress: in Shivalik Ventures (ITA 3429/Mum/2024, assessment year 2012-13, an order dated 19 September 2024 on its cover and 16 September 2024 at its foot) the Assessing Officer, in a reassessment under section 147, disallowed Rs 2,33,65,500 of transit rent paid to slum dwellers, treating it as rent within section 194-I, and reduced the work in progress, and the Commissioner (Appeals), confirmed by the Tribunal, directed it to be restored to the extent of the disallowance, the payments having been held outside the withholding provisions. The developer's argument is that the section disallows only a sum claimed in computing income, which a cost held in closing stock is not, so any disallowance bites in the year the cost is released on recognition of revenue. The Revenue's answer is that the words "any sum payable" are not confined to the year's expenses and that inventory cost reaches the computation through the stock. No decision on the timing for joint development cash was found.

Cash to a landowner within section 45(5A) and the second proviso

The owner takes the cash into income only in the completion certificate year. The Revenue's argument is that the first proviso to section 201(1) requires the payee to have included the sum in the return for the year of payment, which a section 45(5A) owner never does, so the developer cannot escape. The developer's answer is that the proviso speaks of "his return of income under section 139" without tying it to any year, and the Mumbai Tribunal in Sugee Seven Developers (paragraph 9), in section 201 proceedings, remitted the matter to verify the owner's return for assessment year 2024-25, which the developer said was the completion certificate year, without the Revenue arguing that the year mattered. On that view the thirty per cent comes back only in the year the owner files that return, which may be years after the payment. The remand points the developer's way but decides nothing on the year; no Tribunal or High Court has ruled on it.

Hardship compensation and rent for alternate accommodation

The Revenue's argument is that every sum paid to an owner under a specified agreement is consideration under it, especially where the agreement calls it rent and the developer agreed to deduct tax. The Mumbai Tribunal held in Nathani Parekh Constructions (paragraph 10) that such a payment "is in the nature of a compensation paid by the developer towards hardship suffered by the owner / tenant due to dispossession" and outside section 194-IC, and N Rose Developers followed it (paragraphs 10 and 11). The Bombay High Court's view in Sarfaraz S. Furniturewala (15 April 2024), read only as reproduced in Shivalik Ventures, is that transit rent is not a revenue receipt at all. Where no tax was deductible, section 40(a)(ia) has nothing to disallow. The Mumbai line is consistent, and no Gujarat order on section 194-IC was found.

Company, firm and society landowners

Whether section 194-IC applies to cash paid to a landowner that is not an individual or Hindu undivided family is open, and with it whether a disallowance can follow. The developer's argument is that section 45(5A) applies only to individuals and Hindu undivided families, so an agreement with a company, firm or society is not "the agreement referred to" in that sub-section. The Revenue's argument is that the definition of specified agreement speaks of "a person owning land or building or both", that section 194-IC has no individual limit, and that if it does not apply, section 194-IA may, at one per cent where the consideration or stamp duty value is fifty lakh rupees or more. In Sugee Seven Developers the Tribunal rejected the argument that a perpetual leaseholder is outside the definition of specified agreement and applied section 194-IC (paragraph 8). No decision on a corporate landowner was found.

Frequently asked.

How much is disallowed under section 40(a)(ia)?

Under section 40(a)(ia) of the Income-tax Act, 1961, thirty per cent of the sum payable to a resident on which tax was deductible under Chapter XVII-B and was not deducted, or was not paid by the due date under section 139(1). It is allowed in the year in which the tax is paid.

Does the disallowance go if the landowner pays tax on the cash?

It moves rather than goes. Under the second proviso to section 40(a)(ia) of the Income-tax Act, 1961, if the landowner has furnished a return including the sum and paid the tax due, and the developer furnishes the accountant's certificate under the first proviso to section 201(1), the tax is deemed deducted and paid on the date of the landowner's return, and the thirty per cent is allowed in the year in which that date falls. For a landowner within section 45(5A) that is the return for the completion certificate year, so the disallowance stays in the year of payment and reverses later.

What is the 2025 Act counterpart of section 40(a)(ia)?

Section 35(b)(i) of the Income-tax Act, 2025, which disallows thirty per cent where tax deductible under Chapter XIX-B on a sum payable to a resident was not deducted or not paid by the due date in section 263(1), with the year-of-payment allowance in sub-clause (A) and the deemed payment through section 398(2) in sub-clause (B).