Scrutiny adjustments, section 79 and TDS default
Meridian Polymers Pvt Ltd, a domestic company, filed its return for AY 2025-26 showing total income of ₹1.20 crore under the normal provisions. The assessing officer's draft scrutiny notice raises five items. First, the company revalued its factory building upward by ₹50 lakh in FY 2020-21 and has since claimed depreciation on the revalued amount; the excess depreciation for FY 2024-25 is ₹4.50 lakh. Second, ₹18 lakh was paid to a resident erection contractor in December 2024 without deducting tax at source; the company says the contractor will pay the tax. Third, employee contributions to provident fund of ₹4.20 lakh were deposited 20 days after the due date under the EPF Act. Fourth, a ₹25,000 cash payment was made in a single day to a goods transporter. Fifth, the company set off brought-forward business loss of ₹40 lakh from AY 2018-19; during FY 2023-24 a new investor acquired 55% of the shares, reducing the original shareholders to 45%. The company also paid ₹6 lakh of GST on 5 November 2025, after the return-filing due date of 31 October 2025.
1. Compute the additions and disallowances and the revised total income, with reasons for each item.
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Additions to returned income
| Item | Amount (₹ lakh) | Treatment | Reason |
|---|---|---|---|
| Excess depreciation on revalued building | 4.50 | Add | Explanation 3 to section 32 allows depreciation only on actual cost; the revaluation uplift is not eligible. |
| Payment to resident contractor without TDS | 5.40 | Add | Section 40(a)(ia) disallows 30% of ₹18 lakh. The payer's obligation is independent of the payee's promise to pay. |
| Late deposit of employee PF contribution | 4.20 | Add | Section 36(1)(va) read with section 43B requires deposit by the due date under the EPF Act; late deposit is not deductible. |
| Cash payment to goods transporter | Nil | Allow | Section 40A(3) limit for a transporter is ₹35,000 per day; ₹25,000 is within the limit. |
| Brought-forward business loss | 40.00 | Add back | Section 79 denies carry-forward because the original shareholders hold only 45%, below 51%. |
| GST paid after the return due date | 6.00 | Add | Section 43B allows a tax only if paid by the due date for filing the return under section 139(1); payment on 5 November 2025 is after 31 October 2025. |
Revised total income = ₹1,20,00,000 + ₹4,50,000 + ₹5,40,000 + ₹4,20,000 + ₹40,00,000 + ₹6,00,000 = ₹1,80,10,000 (₹180.10 lakh).
Note: the 40(a)(ia) disallowance is 30%, not 100%. If the tax is deposited in a later year, the proviso to section 40(a)(ia) allows the expenditure in the year of deposit, but interest under section 201(1A) and penalty under section 271C may still apply. The recipient's payment does not cure the payer's default unless the conditions in the proviso (return and tax paid by the resident payee, with the prescribed certificate) are satisfied.
2. Explain the treatment of the brought-forward business loss and unabsorbed depreciation, and whether the outcome changes if the new investor had acquired only 45%.
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Section 79 and unabsorbed depreciation
Section 79 applies to a company in which the public are not substantially interested. If, on the last day of the previous year, shares carrying at least 51% of the voting power are not beneficially held by the same persons who held them on the last day of the year in which the loss was incurred, the loss cannot be carried forward. Here the new investor holds 55%, so the original holders are down to 45%; the ₹40 lakh business loss of AY 2018-19 lapses. Continuity of the same business under section 72(1) is a separate requirement.
Unabsorbed depreciation is different. It is carried forward under section 32(2) and is not a 'loss' for section 79; it can be set off against any head of income in later years even if shareholding changes. The exception in section 79 for a company whose financial reconstruction or revival is under an approved scheme, or which is under insolvency resolution, is not on these facts.
If the new investor had acquired only 45%, the original holders would retain 55% (at least 51%), and the brought-forward loss would survive, subject to section 72(1) and the time limit. The answer would therefore change.
3. The company argues that the TDS default should be ignored because the contractor has offered to pay the tax. Evaluate this argument and state whether the disallowance can be reversed later.
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TDS default cannot be wished away by the contractor's offer
Section 40(a)(ia) operates on the payer. If tax is not deducted on a payment to a resident, 30% of the expenditure is disallowed in the year of payment. The contractor's promise to pay its own tax does not satisfy the payer's statutory obligation, and it does not automatically remove the disallowance. The payer is treated as an assessee in default under section 201(1) and is liable to interest under section 201(1A); penalty under section 271C is possible.
There are two escape routes. First, if the resident payee has furnished its return, paid the tax and the prescribed certificate is furnished, the proviso to section 40(a)(ia) can treat the tax as deducted and paid. Second, if the tax is deducted and paid in a later year, the proviso allows the 30% disallowance to be reversed and the expenditure allowed in the year of payment. Neither route is established here merely by the contractor's statement.
Practical step: verify whether the contractor has paid the tax and filed its return; if so, obtain the certificate and consider the proviso. Otherwise, deposit the tax and claim the deduction in the year of deposit, while budgeting for interest. The 30% disallowance is not a permanent loss; it is a timing adjustment.