2012 (8) TMI 122 - AT - Income Tax

Tribunal revises disallowance rule for year-end payable amounts, clarifies Section 40(a)(ia) interpretation.

The tribunal allowed the appeal in part, directing the Assessing Officer to recompute the disallowance amount based on amounts payable at year-end, in ... Addition on account of non-deduction of TDS - Held that:- Provisions of sub clause (ia) of Section 40(a) speaks of amount “payable” on which tax is to be deducted and not in respect of amount of expenditure already paid during the year - Revenue’s argument does not have any merit that payment of earlier years’ outstanding expenses cannot be allowed in subsequent year unless specifically provided in the statute as proviso to s. 40(a)(ia) lays down that earlier year’s provision can be allowed in subsequent years only if TDS is deducted and deposited. Hence, Revenue’s fear is unfounded and the provision of s. 40(a)(ia) covers the situation - The Income-tax Act, 1961, already has a precedent in s. 43B which allows expenses only on payment basis and therefore, the argument of the Revenue that s. 40(a)(ia) would become otiose in cash system of accounting, was without any basis. Restore the matter back to the file of AO with a direction to recompute the amount of disallowance with reference to the amount which remained payable at the end of the year. However, no disallowance is to be made with respect to the amount, which have already been paid and did not remain outstanding at the end of the year - in favour of assessee for statistical purposes. Issues Involved:1. Sustaining total income at Rs. 38,69,627/- against the declared Rs. 30,04,470/-.2. Sustaining Rs. 8,25,200/- on account of non-deduction of TDS as per Section 40a(ia) read with Section 194H of the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Sustaining Total Income:The assessee filed an appeal against the order of the CIT(A) dated 08.08.2011 for the assessment year 2007-08, where the total income was sustained at Rs. 38,69,627/- instead of the declared Rs. 30,04,470/-. The grounds taken by the assessee were that the CIT(A) erred in law by sustaining the higher total income. The records showed that the assessee, engaged in the supply of road safety equipment to government departments, had filed a return of income declaring Rs. 30,04,470/-. However, the Assessing Officer found discrepancies, leading to the higher sustained income.2. Non-deduction of TDS:The core issue revolved around the addition of Rs. 8,25,000/- made by the Assessing Officer due to non-deduction of TDS on payments made to MP Laghu Udyog Nigam (MPLUN). The assessee contended that these payments were not commission payments and hence, no TDS was applicable. The payments were classified under 'Vatav (Commission)' in the Profit & Loss Account due to an inadvertent mistake, and the true nature of the payments was service charges for services rendered by MPLUN to the Government of Madhya Pradesh.The CIT(A) confirmed the addition, leading to the appeal. The assessee argued that the nomenclature in financial statements should not conclusively determine the nature of expenses, and substance should prevail over form. There was no principal-agent relationship between the assessee and MPLUN, and thus, the payments could not be regarded as commission or brokerage.Judgment Analysis:The tribunal considered the rival submissions and the orders of the authorities below. The key argument by the assessee was based on the decision of the I.T.A.T. Special Bench in the case of Merilyn Shipping and Transports, which held that provisions of Section 40(a)(ia) apply only to amounts 'payable' at the year-end and not to amounts already paid during the year. The tribunal noted that the legislative intent was clear in using the term 'payable' to ensure that only outstanding amounts liable for TDS at year-end were disallowed if TDS was not deducted.The tribunal observed that the language of Section 40(a)(ia) was clear and intended to apply only to amounts payable at the end of the year. Respectfully following the decision of the I.T.A.T. Special Bench, the tribunal restored the matter to the file of the Assessing Officer with directions to recompute the disallowance amount concerning the amount payable at the end of the year. No disallowance was to be made for amounts already paid and not outstanding at the year-end.Conclusion:The appeal of the assessee was allowed in part for statistical purposes, with directions to the Assessing Officer to recompute the disallowance amount based on the amounts payable at the end of the year, following the principles laid down by the I.T.A.T. Special Bench in the case of Merilyn Shipping and Transports.