Form 26A Relief for Deductors under Section 201: Detailed Guide with Case Laws & Interest Calculations

 

Introduction

Picture this: you're a responsible business or employer who paid professional fees or contractor payments to a resident. You missed deducting TDS or deducted it late. The Income Tax Department now labels you as an “assessee-in-default” under Section 201(1) — attracting interest, penalties, and even disallowed expenses under Section 40(a)(ia).

But wait! If the recipient has already reported the income, paid tax, and filed their return, you may escape this harsh tag and the expense disallowance — all by filing Form 26A, certified by a Chartered Accountant, under the proviso to Section 201(1). However, you still need to pay interest under Section 201(1A).

This article dives deep into:

• Legal framework of Section 201(1), its proviso, and Rule 31ACB

• Interest calculation under Section 201(1A)

• Step-by-step process for generating and filing Form 26A on TRACES and e‑filing portal

• Key case laws anchoring deductor relief

• Practical examples, tips, FAQs

📘 Section 201(1) & Proviso Explained

🚩 What happens if TDS isn’t deducted or deposited?

Under Section 201(1) of the Income‑tax Act, anyone obligated to deduct tax (deductor) but fails to do so is deemed an “assessee-in-default”. Consequences include:

• Interest under Sec 201(1A)

• Disallowance of expenditure under Sec 40(a)(ia) (30%)

• Penalties under Sec 271C

• Prosecution under Sec 276B

✅ Relief via proviso + Rule 31ACB (Form 26A)

However, the first proviso to Section 201(1) allows relief if the payee:

1. Filed income-tax return under Section 139

2. Included the income in that return

3. Paid tax due on that income

4. Accompanied with CA-certified Form 26A per Rule 31ACB 

This means:

• You are not deemed in default under Section 201(1)

• Expenditure is allowable instead of being disallowed CAclubindia

Despite this relief, interest under Section 201(1A) for delay is still mandatory 

📊 Calculating Interest under Section 201(1A)

• Rate: 1% per month (or part thereof) on the TDS short or non‑deducted amount

• Start date: Date when TDS was due

• End date: Date on which deductee files return and pays tax, not the date Form 26A is filed 

📌 Illustration:

Details	Amount
Payment made on	10-Apr-23
TDS due (10%)	₹50,000
Deductee’s ITR filed on	31-Jul-24
Months (inclusive)	10-Apr-23 to 31-Jul-24 = 16
Interest = 1% × 50,000 × 16 = ₹8,000

👉 Even if you file Form 26A on 05-Aug‑24, interest stops on 31-Jul‑24.

⚖️ Case Laws Anchoring Form 26A Benefits

1. Hindustan Coca‑Cola Beverage Pvt. Ltd. v. CIT, SC (2007)

Once the payee pays tax and files return, the deductor cannot be pursued again for tax. Form 26A relief foundationally rooted in this verdict .

2. CIT v. Sony India Pvt. Ltd., Delhi HC (2006)

Confirms deductor escapes penalty if payee complied, but interest liability remains under Section 201(1A) 

3. ITA – Bangalore Tribunal (Shriram Properties Ltd.)

Form 26A prevented 30% disallowance under Section 40(a)(ia). Tribunal remanded case to AO with clear legal direction .

4. Sowbhagya Media Ltd. v. ITO, ITAT Hyderabad, 2015

Interest under 201(1A) is computed based on demand under Section 201(1), even when Form 26A has been filed 

🛠️ Who Should Use Form 26A?

• When TDS was fully or partially missed on payments to resident deductees

• If payee has:

  • Filed ITR under Section 139

  • Included such income

  • Paid the related tax

✅ Not required if:

• Deductee is non-resident

• Payee hasn't filed ITR or paid tax

• Income is exempt and not reported

🧭 Step-by-Step: Filing Form 26A (TRACES → e‑Filing)

Based on Rule 31ACB + CBDT Notification 11/2016 

A. On TRACES Portal (Deductor)

1. Request Form 26A: TRACES → Statements & Payments → Request for Form 26A

2. Select FY, form type, transaction type

3. Download sample CSV, fill PAN, amount, TDS gap, section etc.

4. Use TRACES utility to create .nzip file, sign with DSC

5. Upload .nzip; TRACES generates DIN (short deduction) / alphanumeric string (non‑deduction)

B. On e‑Filing (Deductor)

1. Log in → e‑File → Form 26A search → Select TRACES DIN

2. Assign CA (enter ICAI membership no.)

C. On e‑Filing (CA)

1. CA gets access to Annexure A details

2. Furnishes info: payee return details, taxable amount, tax paid

3. Upload certified CSV & digitally sign

D. Back to Deductor

1. Check status (CA certificate submitted)

2. Digitally sign and file Form 26A

Following processing by CPC‑TDS, TRACES recalculates interest and updates status (Processed/Rejected etc.)

💡 Tip:

Retain TRACES screenshots showing processed status to support assessment queries and avoid disputes.

✅ Why Form 26A Matters

• You avoid default label under Sec 201(1)

• Expense deductions remain allowable (Sec 40(a)(ia) relief) 

• Penalties/prosecutions can be averted with proper CA certificate

Yet, remember—interest under Sec 201(1A) still applies — an important cost of delay.

📝 Practical Example

Case: Fresh Foods Pvt. Ltd.

• Paid ₹10 lakh to consultant on 01-Dec‑24, forgot TDS

• Consultant files ITR & pays due tax by 30-Jun‑25

• Deductor requests DIN on TRACES, assigns CA

• CA certifies Annexure A on 05-Jul‑25

• Deductor signs and files Form 26A on 07-Jul‑25

• TRACES marks Processed on 10‑Jul‑25

Interest:
From 01-Dec‑24 to 30-Jun‑25 = 7 months
TDS amount = ₹10,000 → Interest = ₹10,000 × 1% × 7 = ₹700

Deductor submits ₹700 interest, secures relief — and avoids 30% disallowance of ₹10 lakh.

🚀 Pro Tips for Safe Compliance

1. Verify payee’s ITR – ensure they filed return, reported income & paid due tax!

2. Collect ITR proof from deductee if possible

3. Save CA certification and TRACES processed record diligently

4. Time your Form 26A early — interest is stop-gap only when ITR is filed/payable

5. Confirm processed status on TRACES to resolve disallowance issues

✅ Conclusion

Form 26A under Section 201(1) offers a powerful compliance shield for deductors:

• Relieves default liability

• Retains business expense claims

• Minimizes punitive actions

BUT, it’s crucial to follow the correct filing steps, pay interest promptly, and maintain strong documentation. With this guide, Manika TaxWise helps you confidently navigate Form 26A and stay audit-proof.

❓ FAQs

Q1: Who signs Form 26A?
A: A Chartered Accountant signs Annexure A. Deductor or authorized signatory then files it with DSC/EVC.

Q2: Does Form 26A waive interest?
No. Tax liability is waived, but interest continues under Section 201(1A) 

Q3: How long does TRACES take to process?
Typically within 7–10 days, though timing may vary during peak season.

Q4: What if TRACES rejects the Form?
Check error reasons (PAN mismatch, missing return). Fix and re-upload Annexure A with CA assistance.

Q5: Is Form 26A required for non-residents?
No. It is only applicable for resident payees under Section 201(1) proviso.

Keywords to target: Form 26A relief, Section 201 deductor relief, Form 26A interest calculation, Rule 31ACB process, case laws TDS Form 26A, Section 201(1A) interest Form 26A, how to file Form 26A.