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Form 26A – A Critical Tool for Avoiding Disallowance of Expenses Due to Non-Deduction of TDS/TCS

Introduction

Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) are crucial compliance mechanisms under the Income Tax Act, 1961, ensuring tax is collected at the time of payment. However, in certain cases, deductors fail to deduct or collect tax, leading to potential disallowance of expenses under Section 40(a)(ia) of the Income Tax Act.

To provide relief in such cases, the government has introduced Form 26A, which allows deductors to certify that the payee has already included the income in their return and paid the necessary taxes. This form acts as a safeguard against disallowance under Section 201(1) and Section 40(a)(ia).

Legal Provisions Governing Form 26A

  1. Section 201(1) – Consequences of Failure to Deduct TDS
    • As per Section 201(1), if a deductor fails to deduct or pay TDS, they are treated as an “assessee-in-default”.
    • However, proviso to Section 201(1) allows relief if the payee has already paid tax on the income received.
  2. Section 40(a)(ia) – Disallowance of Expenses for Non-Deduction of TDS
    • Under Section 40(a)(ia), an expense is disallowed if the deductor fails to comply with TDS provisions.
    • However, relief is available if Form 26A is submitted, certifying that the recipient has included the income in their tax return and paid due taxes.
  3. Rule 31ACB – Prescribed Rule for Furnishing Form 26A
    • Rule 31ACB of the Income Tax Rules, 1962, prescribes the filing of Form 26A by a Chartered Accountant (CA) to certify the payee’s compliance.

When Should Form 26A Be Used?

  1. Non-Deduction of TDS by Deductor
    • Example: A company pays professional fees of ₹10 lakh but forgets to deduct TDS @10% (₹1 lakh). Instead of facing expense disallowance under Section 40(a)(ia), they can submit Form 26A if the professional has already declared the income and paid taxes.
  2. Short Deduction of TDS
    • Example: If a deductor applies 5% TDS instead of 10%, the difference can be regularized through Form 26A, provided the recipient has included the income in their return.
  3. Non-Collection of TCS by Seller
    • Example: If a seller does not collect TCS on the sale of goods, they can use Form 26A to certify that the buyer has already paid the tax.
  4. Applicability in Government & Non-Government Entities
    • Both private companies and government agencies can use Form 26A to avoid tax disallowance and default penalties.

Procedure to File Form 26A

Step 1: Gather Necessary Information

  • Ensure the payee has filed their ITR and paid applicable taxes.
  • Obtain relevant financial records, including payment details.

Step 2: Obtain Certificate from a Chartered Accountant

  • A CA certificate in Form 26A must be prepared, verifying that the recipient has included the income in their tax return and paid taxes.

Step 3: Upload Form 26A on TRACES Portal

Step 4: Verification & Submission to CPC

  • The form undergoes verification by the Income Tax Department before processing.

Step 5: Approval & Impact on Deductor

  • Once accepted, the deductor is no longer considered “assessee-in-default”, and expenses are allowed as deductions.

Recent Updates & Judicial Precedents

1. Amendment Under Finance Act, 2022

  • Recent clarifications reinforce that Form 26A must be filed before the assessment is completed to avoid expense disallowance.

2. Judicial Precedents Supporting Form 26A Claims

  • CIT vs. Hindustan Coca-Cola Beverages Pvt. Ltd. (2007) 293 ITR 226 (SC)
    • The Supreme Court ruled that if the payee has paid tax, the deductor is not an assessee-in-default.
  • G. Shankar vs. ACIT (2016) 69 taxmann.com 103 (Bangalore Trib.)
    • The Tribunal held that Form 26A is a valid defense against disallowance under Section 40(a)(ia).

Challenges & Practical Considerations

  1. Dependency on Payee’s Compliance
    • If the payee does not file their return or pay tax, Form 26A cannot be used.
  2. Timing of Form 26A Filing
    • Must be submitted before assessment proceedings conclude to be considered valid.
  3. Role of Chartered Accountants
    • CAs play a critical role in verifying tax compliance before issuing Form 26A.

Conclusion

Form 26A is a powerful tool that allows deductors to avoid tax disallowance when they have not deducted or collected TDS/TCS. It ensures that genuine business expenses are not disallowed due to procedural non-compliance. With increasing scrutiny by the Income Tax Department, timely filing of Form 26A is crucial to prevent unnecessary tax outflows and legal complications.

Chartered Accountants must educate clients on proactive compliance with TDS and TCS regulations while utilizing Form 26A as a remedy when needed.

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