2014 (6) TMI 110 - AT - Income Tax

Tribunal modifies disallowance under Section 40(a)(ia) emphasizing substance over form

The Tribunal partially allowed the appeal, directing an addition of Rs. 20 lakhs instead of the entire disallowance under Section 40(a)(ia). The decision ... Disallowance made u/s 40(a) - Non-deduction of Tax - scope of term payable as on 31st March – TDS u/s 194C - taking looms and other machineries on rent from sister concerns - Confirmation of entire expenses – outstanding expenses - Held that:- A.O has only proceeded on the basis of presumption that the entire expenses are liable for TDS deduction. We are of the view that the entire expenses cannot be considered for disallowance u/s. 40(a)(ia) on the basis of presumption only as there is no material brought on record by the Revenue to suggest that the change in the policy of the Assessee in taking machines and other facilities of sister concern on rent was fictitious and therefore the addition made u/s. 40(a)(ia) is deleted. Further as per the Assessee if the entire expenses are disallowed, the Gross Profit ratio would work out to more than 35% as against the Gross Profit of 2.91% shown by the Assessee which is unrealistic The accounts of Assessee do not reflect the correct state of affairs of the Assessee – ends of justice shall be met if the addition is made at ₹ 20 lacs in the trading result of the Assessee – Decided partly in favour of Assessee. Issues Involved:1. Disallowance under Section 40(a)(ia) for non-deduction of TDS on payments made to sister concerns.2. Interpretation of the term 'amount payable' in Section 40(a)(ia).Issue-wise Detailed Analysis:1. Disallowance under Section 40(a)(ia) for non-deduction of TDS on payments made to sister concerns:The Assessee, a firm involved in manufacturing grey cloth and textile goods, filed its return of income for A.Y. 2005-06, declaring a total income of Rs. 2,20,907/-. However, the assessment was completed under Section 143(3), determining the total income at Rs. 1,42,54,030/-. The primary contention was the disallowance of Rs. 1,40,33,118/- under Section 40(a)(ia) due to non-deduction of TDS on payments made to sister concerns.The Assessee argued that the payments to sister concerns were reimbursements for expenses and not contract payments, thus not liable for TDS. The Assessing Officer (A.O.) disagreed, noting that the Assessee had previously deducted TDS on similar payments, which were treated as job work charges. The A.O. viewed the arrangement as a scheme to avoid TDS provisions and disallowed the expenses under Section 40(a)(ia).The CIT(A) upheld the A.O.'s decision, stating that the nature of the transactions had not materially changed from previous years, and the payments were essentially for job work, thus attracting TDS provisions. The CIT(A) also rejected the Assessee's argument that Section 40(a)(ia) only applied to amounts outstanding at year-end.2. Interpretation of the term 'amount payable' in Section 40(a)(ia):The Assessee contended that Section 40(a)(ia) should only apply to amounts outstanding at the year-end, not to payments already made. The CIT(A) disagreed, interpreting 'amount payable' as an obligation to make payment, regardless of whether the payment was made before or after the year-end. The CIT(A) emphasized that the legislative intent was to ensure TDS compliance on all relevant payments, not just those outstanding at year-end.Tribunal's Decision:The Tribunal found that the Assessee's business activities and the nature of transactions with sister concerns had not significantly changed from previous years. However, it noted that the A.O. had not doubted the genuineness of the expenses or rejected the Assessee's books of accounts. The Tribunal also considered the Assessee's argument that disallowing the entire expense would result in an unrealistic Gross Profit ratio.The Tribunal concluded that the entire expenses could not be disallowed under Section 40(a)(ia) based on presumptions. It directed a partial addition of Rs. 20 lakhs to the Assessee's trading results, considering the peculiarities and totality of the facts.Conclusion:The appeal was partly allowed, with the Tribunal directing an addition of Rs. 20 lakhs instead of the entire disallowance under Section 40(a)(ia). The decision emphasized the importance of substance over form in assessing the nature of transactions and the need for a realistic approach in determining disallowances.