Library / Income-tax Act, 2025: The Professional's Master Guide

60. Case Study 13: Correcting a TDS Default

Facts. Maple Tech Pvt. Ltd. paid professional fees of Rs. 12 lakh to a consultant on 15 June 2026 without deducting TDS. The error is found during the tax audit in May 2027. The company deducts nothing from the consultant (the payment is already made) but deposits the TDS of Rs. 1,20,000 from its own funds on 20 May 2027, with interest.

60.1 Step 1: interest

TDS required: 10% of Rs. 12,00,000	1,20,000
Interest for failure to deduct: 1% a month from June 2026 to May 2027 (12 months)	14,400

60.2 Step 2: disallowance under section 35

The TDS was paid on 20 May 2027, before the return due date of 31 October 2027. Therefore no disallowance arises for Tax Year 2026-27. Had the TDS been paid after the return due date, 30% of Rs. 12 lakh (Rs. 3,60,000) would have been disallowed in Tax Year 2026-27 and allowed in the year of payment.

60.3 Step 3: reporting and other consequences

File a correction statement for the June 2026 quarter (Form 140) adding the deductee record, so that the consultant gets credit in Form 168; a fee for delayed reporting may apply.
Issue the TDS certificate (Form 131) to the consultant.
The tax audit report (Form 26) reports the delay in deduction and payment.
A penalty equal to the TDS not deducted is possible, but where the default is corrected voluntarily with interest before any proceedings, it is usually not levied because of reasonable cause.
If the company does not recover the Rs. 1,20,000 from the consultant, it is in substance additional consideration, and its deductibility and the TDS on the grossed up amount must be examined. The simpler course is to recover it from the consultant, who gets full credit for it.

Key point

The cheapest fix for a missed TDS is to pay it before the return due date. Interest is small compared with a 30% disallowance, penalty exposure and loss of goodwill with the vendor.