2010 (9) TMI 1094 - AT - Income Tax

Tribunal partially allows appeal directing AO on expenditure & TDS, deletes addition & disallowance

The appeal was partly allowed. The tribunal directed the AO not to disallow expenditures accrued before 10.09.2004 and those where TDS was paid before the ... Disallowance u/s.40(a)(ia) - TDS deposited after due date - TDS payment toward Commission, professional fees paid to a resident - scope of amendment - AO held that the assessee company has deposited TDS late in the Government Account - CIT (A) confirmed the order of AO - HELD THAT:- Amendments carried out in Finance Act, 2008 in Sec.40(a)(ia) for extending time limit for the TDS to be made on the last month was with retrospective effect. This would show that the amendment was curative in nature brought into to ameliorate the hardship caused on account of nominal delay in payment of the TDS. Respectfully applying the ratio of the Apex Court in the case of CIT vs. Alom extrusions Ltd. [2009 (11) TMI 27 - SUPREME COURT] we are of the opinion that amendment brought in by the Finance Act, 2010, which totally replaces the earlier amendment and extends the time limit for all TDS payable throughout the year, has also been introduced as a curative measure and therefore would apply to earlier years also. We therefore direct the AO not to disallow the expenditure (i) which have accrued prior to 10.09.2004 when the Finance Act, (No.2) 2004 got the presidential approval, upto which date the provisions of sec.40(a)(ia) will not be applicable and (ii) expenditure in respect of which TDS has been paid by the assessee before the due date of filling of the return. However, expenditure on which TDS has not been paid by the assessee requires to be disallowed u/s.40(a)(ia). Addition to commission income received - assessee earns commission from marketing the membership of club Mahindra. - time difference between the commission income as offered by the assessee and commission income that is determined/payable by MHRIL - assessee therefore submitted that no addition can be made in respects of commission income receivable from MHRIL purely on the basis of the TDS certificate - HELD THAT:- The liability to deduct tax in commission arises only when the amount is credited in the books of the payer. The assessee (recipient) has recognized at the time of admission of the member itself whereas MHRIL recognizes the liability to pay commission only on receipt of installment of membership fees. Hence, the time of accrual of commission expenditure by MHRIL differs. AO cannot merely take the income as per TDS statement and arrive at the undisclosed income without examining the method of accounting of the assessee. Section 199 provides that credit for TDS shall be given in the year in which corresponding income has been offered for taxation. Section itself contemplates timing difference in recognition of the income by the recipient and deduction of tax at source by the payer. Therefore without examining the method of accounting of recognition of income by way of commission and whether the assessee has accrued the entire commission income following the mercantile system of accounting, the Assessing Officer erred in adding this amount purely on the basis of TDS Certificate. Disallowance u/s.40A(2)(b) - Disallowing commision paid to directors - AO comparing of 0.5% seems to be reasonable and disallowed the balance - HELD THAT:- We find that comparison made by the AO between agents and the director is not correct. The company on the basis of the commercial expediency may decide the commission payable to the directors. The marketing agents efforts and responsibility to the assessee company cannot be compared to that of the director who is full time employee of the company and responsible for actions of all employees. Thus commission payable to free lance commission agents cannot be the bench mark for disallowance u/s.40A(2)(b) and holding commission to be excessive. Hence we allow the assessee appeal. Issues Involved:1. Disallowance under Section 40(a)(ia) of the Income Tax Act.2. Addition to commission income based on TDS certificate.3. Disallowance under Section 40A(2)(b) for commission paid to directors.Issue-wise Detailed Analysis:1. Disallowance under Section 40(a)(ia) of the Income Tax Act:The first issue pertains to the disallowance of Rs. 29,52,389/- under Section 40(a)(ia) of the Income Tax Act. The Assessing Officer (AO) noted that the assessee had deducted tax at source (TDS) from payments of commission, professional fees, and payments to directors but had deposited the TDS after the end of the financial year. Consequently, the AO disallowed the amount under Section 40(a)(ia). The assessee argued that the provisions of Section 40(a)(ia) were introduced and amended after the financial year 2004-05 and were not known during that period. The CIT(A) upheld the AO's decision, stating that the provisions were applicable and the amount was rightly added back to the taxable income.Upon appeal, it was highlighted that amendments to Section 40(a)(ia) by the Finance Act, 2008, and Finance Act, 2010, extended the time limit for TDS payment to the due date of filing the return. The tribunal, referencing the Apex Court's decision in CIT vs. Alom Extrusions Ltd., concluded that the amendment was curative in nature and should apply retrospectively. Therefore, the AO was directed not to disallow the expenditure accrued before 10.09.2004 and the expenditure where TDS was paid before the due date of filing the return. However, disallowance was to be made for expenditure where TDS was not paid by the due date.2. Addition to Commission Income Based on TDS Certificate:The second issue involved the addition of Rs. 4,63,054/- to the commission income received from M/s. Mahindra Holidays and Resorts India P Ltd. (MHRIL). The AO added this amount based on the TDS certificate issued by MHRIL, which showed a higher commission than what the assessee had offered. The assessee contended that there was a time difference in recognizing commission income due to the installment-based payment structure of MHRIL.The CIT(A) upheld the AO's addition, noting the assessee's failure to reconcile the difference with documentary evidence. However, the tribunal observed that the AO should not have added the amount purely based on the TDS certificate without examining the assessee's method of accounting. Section 199 provides that credit for TDS should be given in the year the corresponding income is offered for taxation. The tribunal deleted the addition, recognizing the timing difference in income recognition between the assessee and MHRIL.3. Disallowance under Section 40A(2)(b) for Commission Paid to Directors:The third issue concerned the disallowance of Rs. 7,59,588/- under Section 40A(2)(b) for commission paid to directors. The AO disallowed the commission, considering it excessive compared to the commission paid to other employees. The assessee argued that the commission was justified based on the directors' responsibilities and contributions to the company.The CIT(A) upheld the AO's disallowance, stating that the assessee failed to provide documentary evidence of extra services rendered by the directors. However, the tribunal found the AO's comparison between the directors and other employees inappropriate. It noted that the directors' roles and responsibilities were significantly more substantial than those of other employees. The tribunal allowed the assessee's appeal on this issue and deleted the addition, stating that the commission payable to freelance agents cannot be the benchmark for disallowance under Section 40A(2)(b).Conclusion:The appeal was partly allowed. The tribunal directed the AO to not disallow expenditures accrued before 10.09.2004 and those where TDS was paid before the due date of filing the return. The addition based on the TDS certificate was deleted, and the disallowance of commission paid to directors was also deleted.