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  • The Delhi High Court ruled that in the case of a short deduction of TDS, no disallowance under Section 40 (a)(ia) of the Income Tax Act is required, and that the correct course of action would have been to invoke Section 201 of the Income Tax Act. 
  • The division bench of Justice Manmohan and Justice Manmeet Pritam Singh Arora observed that the Assessing Officer's disallowance under section 40A(2)(b) must be based on compelling evidence or reasoning. 
  • The ITAT ruling has been challenged by the appellant/department. On the issue of remuneration paid to the director, Sunil Baijal, the ITAT issued concurrent findings in favour of the assessee.
  • The ITAT found that the higher salary paid to the director was accepted as remuneration by the assessing officer during the subsequent assessment year's scrutiny. 
  • The ITAT also noted that the Assessing Officer had arbitrarily disallowed 50% of the remuneration without any reason or material facts. 
  • The ITAT determined that the AO had not provided compelling reasons to conclude that the remuneration paid was not commensurate with the market value of the Managing Director's services. 
  • The appellant/department claimed that the ITAT made an error in deleting the disallowance under Section 40a(ia) of the Income Tax Act of 1961 because the assessee took a short tax deduction in violation of Section 197(1).
  • The department claimed that the ITAT erred in deleting the assessing officer's addition of Rs. 1,03,53,150 under Section 40A(2). 
  • During the assessment proceedings, the respondent/assessee failed to justify the service rendered by the director, Sunil Baijal, to the company for which he was earning such a large sum of money. 
  • According to the paper book, the CIT (A) directed the Assessing Officer to verify whether copies of non-deduction of tax or deduction of tax at a lower rate were filed by the assessee before passing the assessment order while disposing of the assessee's appeal.
  • The ITAT noted in the order that the Assessing Officer deleted the disallowance in the order giving effect to it after verifying the tax deduction certificate. 
  • The court relied on the Calcutta High Court's decision in the case of CIT vs. SK Tekriwal. It was determined that section 40 (a)(ia) only refers to the duty to deduct taxes and deposit them in government accounts. 
  • If there is a shortfall as a result of a disagreement as to the taxability of any item or the nature of payments falling under various TDS provisions, the assessee can be declared an assessee in default under section 201. The provisions of Section 40 (a)(ia) of the Act cannot be used to make a disallowance.
  • The court dismissed the department's appeal because no substantial question of law arose during the proceedings.
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