An enquiry under Section 133(6) of the Income-tax Act, 1961 was initiated by the Income-tax Department on 18th Nov. 2025 in the case of XYZ…

Section 40(a) specifies certain amounts which shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”. Under section 40(a) (i) , 100% disallowance attracted with respect to sum paid or payable to a non-resident on which tax is deductible at source and such tax has not been deducted or after deduction has been paid on or before the due date of furnishing return of income under section 139 (1) . Under clause 21, the tax auditor is required to report the details of payment on which tax is not deducted at source and also the details of payment on which tax has been deducted but not paid during the previous year or before due date of filing return of income specified under section 139 (1) . The tax auditor is advised to give details under this clause for each individual payee. As per the Guidance Note on Tax Audit issued by ICAI, the tax auditor is required to report as to whether tax is deductible under any section of Chapter XVII-B and any amount is inadmissible u/s 40(a) (i) under clauses 34(a) and 21(b), respectively. In this case, tax has not been deducted on the basis of a certificate obtained from a Chartered Accountant stating that foreign service providers did not have a Permanent Establishment (PE) in India and therefore, the payments were not chargeable to tax in India. In such case, the tax auditor is required to disclose the same in his report so as to enable the Income-tax Department to know the reason as to why tax was not deducted by the assessee. The tax auditor should exercise due diligence while reporting under various clauses of Form 3CD. In case he has taken a view that tax is not deductible by virtue of a certificate obtained by Management from Chartered Accountant, he should disclose the same in his report. On account of such failure, clause (7) of Part I of the Second Schedule to the Chartered Accountants Act, 1949 for failure to exercise due diligence in discharging his professional responsibilities and failure to obtain sufficient information, may be invoked.