2014 (5) TMI 1074 - AT - Income Tax

Tribunal upholds CIT(A)'s decision on disallowance under Income Tax Act (A)

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the disallowance under section 40(a)(ia) of the Income Tax Act. It ... Disallowance made u/s. 40(a)(ia) - non deduction of tds - Held that:- In this case as seen from the Profit and Loss A/c., the assessee had debited an expenditure of ₹ 23,38,41,519 out of total expenditure of ₹ 1212,47,48,985 and carried an amount of ₹ 1189,09,04,466 as work-in- progress in Balance Sheet. In other words, the assessee has not claimed this amount of ₹ 16,05,80,987 as an expenditure in the Profit and Loss A/c. In our humble opinion, unless and until the assessee claimed this as an expenditure while computing the income, the provisions of section 40(a)(ia) of the Act cannot be invoked. The judgement relied on the learned DR is on the applicability of provisions of section 40A(3) of the Act in respect of payment made to a person in a day otherwise than by a account payee cheque drawn on a bank or account payee bank draft exceeding ₹ 20,000, no deduction can be made in respect of such expenditure. On the other hand, section 40(a)(ia) is with regard to disallowance in respect of payments where the assessee failed to deduct TDS. These two sections are not para materia.- Decided in favour of assessee Issues Involved:1. Deletion of disallowance made under section 40(a)(ia) of the Income Tax Act.2. Application of section 40(a)(ia) to expenses not claimed in the Profit and Loss Account.3. Determination of whether the expenditure was claimed as an expense or shown as inventory.Issue-wise Detailed Analysis:1. Deletion of Disallowance Made Under Section 40(a)(ia) of the Income Tax Act:The Revenue raised the ground that the CIT(A) erred in deleting the disallowance made under section 40(a)(ia) of the Act amounting to Rs. 16,05,80,987. The Assessing Officer (AO) noted that the assessee did not deduct tax at source for certain project expenses, which led to a disallowance of Rs. 17,76,72,329 under section 40(a)(ia) of the Act. This included interest liabilities, architect fees, and consultancy charges. The CIT(A) observed that since the assessee did not debit these amounts to the Profit and Loss Account, the provisions of section 40(a)(ia) could not be invoked on the expenditure not debited to the Profit and Loss Account. The CIT(A) held that the proportionate disallowance should be worked out on the total amount of Rs. 18,94,76,147, which resulted in a disallowance of Rs. 36,56,890. Since the assessee had already disallowed Rs. 34,96,560, the CIT(A) confirmed the addition to the extent of Rs. 1,60,329 and ordered the deletion of the balance amount.2. Application of Section 40(a)(ia) to Expenses Not Claimed in the Profit and Loss Account:The learned DR argued that even though the assessee did not claim the expenditure in the Profit and Loss Account and showed it as inventory, it would have a deeming effect on the profit of the assessee. The DR relied on the Supreme Court judgment in the case of Attar Singh Gurmukh Singh, which held that the word 'expenditure' is of wide import and includes all outgoings. However, the learned AR contended that the AO's observations were factually incorrect and not legally justified. The AR emphasized that the disallowance under section 40(a)(ia) could only be made if the assessee claimed the expenditure. The AR cited several ITAT decisions, including the cases of Narne Construction (P) Ltd. and Godavari Developers, where it was held that unless the assessee claims the expenditure in the Profit and Loss Account, the provisions of section 40(a)(ia) cannot be invoked.3. Determination of Whether the Expenditure Was Claimed as an Expense or Shown as Inventory:The AR submitted that the assessee followed the project completion method, recognizing income and proportionate expenditure while treating the balance cost of construction as work-in-progress in the Balance Sheet. The AR argued that section 40(a)(ia) applies only to payments claimed as expenditure in the Profit and Loss Account, not to those shown as inventory. The AR relied on the co-ordinate Bench's decisions in the cases of Egwood Industries Pvt. Ltd. and S.P. Real Estate Developers Pvt. Ltd., which supported this view. The CIT(A) and the Tribunal consistently held that if the expenditure is not debited to the Profit and Loss Account, section 40(a)(ia) cannot be invoked. The Tribunal also noted that the AO should correct the work-in-progress amount rather than making an addition to the total income if some expenditure is found not allowable.Conclusion:The Tribunal dismissed the Revenue's appeal, holding that the CIT(A)'s decision was in conformity with the relevant ITAT decisions. The Tribunal emphasized that unless the assessee claims the expenditure in the Profit and Loss Account, the provisions of section 40(a)(ia) cannot be invoked. The Tribunal also distinguished the Supreme Court judgment in the case of Attar Singh Gurmukh Singh, noting that section 40(a)(ia) pertains to disallowance for failure to deduct TDS, which is different from the provisions of section 40A(3) discussed in the Supreme Court case. Consequently, the Tribunal decided the issue in favor of the assessee and against the Revenue.