2014 (6) TMI 430 - AT - Income Tax

Appeal partly allowed for tax disallowances under Sections 40(a)(ia) & 40A(3)

The appeal was partly allowed for statistical purposes. The disallowance under Section 40(a)(ia) was remitted to the Assessing Officer for fresh ... Disallowance made u/s 40(a)(ia) of the Act – Applicability of section 194A of the Act – Held that:- Following Rajeev Kumar Agarwal Versus Additional Commissioner of Income Tax [2014 (6) TMI 79 - ITAT AGRA] - The underlying objective of section 40(a)(ia) was to disallow deduction in respect of expenditure in a situation in which the income embedded in related payments remains untaxed due to non-deduction of tax at source by the assessee - deductibility of expenditure is made contingent upon the income, if any, embedded in such expenditure being brought to tax, if applicable - a deduction for expenditure is not allowed to the assessees, in cases where assessees had tax withholding obligations from the related payments, without corresponding income inclusion by the recipient. Section 40(a)(ia) cannot be seen as intended to be a penal provision to punish the lapses of non-deduction of tax at source from payments for expenditure- particularly when the recipients have taken into account income embedded in the payments, paid due taxes thereon and filed income tax returns in accordance with the law - declining deduction in respect of expenditure relating to the payments of this nature cannot be treated as an “intended consequence” of Section 40(a)(ia) - it cannot be subscribe to the view that it could have been an “intended consequence” to punish the assessees for non-deduction of tax at source by declining the deduction in respect of related payments, even when the corresponding income is duly brought to tax - That will be going much beyond the obvious intention of the section - the insertion of second proviso to Section 40(a)(ia) is declaratory and curative in nature and it has retrospective effect from 1st April, 2005, being the date from which sub clause (ia) of section 40(a) was inserted by the Finance (No. 2) Act, 2004 – thus, the matter is to be remitted back to the AO for fresh adjudication – Decided in favour of Assessee. Disallowance of cash payment for purchase of land – Held that:- Following Jamir Mondal, Kolkata vs. ACIT, Circle-53, Kolkata [2014 (6) TMI 245 - ITAT KOLKATA] - Rule 6DD of the Rules clearly lays down the conditions or exceptions under which the rigor of the provisions of section 40A(3) of the Act may be relaxed and there is no discretion on either of the parties to extend the condition or relax the condition at will. Even the existence, demand or necessity or business expediency does not fall under the provisions of Rule 6DD of the Rules - it cannot be said that the assessee has immunity from the provisions of section 40A(3) of the act - the considerations of business expediency are no longer relevant but this is precisely what constitutes foundation of assessee’s defence – the order of the CIT(A) is upheld – Decided against Assessee. Issues Involved:1. Disallowance under Section 40(a)(ia) of the Income Tax Act, 1961.2. Disallowance under Section 40A(3) of the Income Tax Act, 1961.Issue-wise Detailed Analysis:1. Disallowance under Section 40(a)(ia) of the Income Tax Act, 1961:The primary issue in this appeal concerns the disallowance of Rs. 4,64,337 under Section 40(a)(ia) of the Income Tax Act, 1961. The assessee contended that the disallowance should not be invoked as the recipients of the interest payments had already included the income in their tax returns filed under Section 139. The argument was based on the insertion of the second proviso to Section 40(a)(ia) by the Finance Act, 2012, which the assessee claimed should be given retrospective effect from April 1, 2005.The Tribunal noted that the amendment aimed to mitigate the harshness of the disallowance provision. The second proviso to Section 40(a)(ia) provides that if the recipient has furnished their return of income, taken into account the sum for computing income, and paid the tax due, the assessee shall be deemed to have deducted and paid the tax on such sum. The Tribunal also referred to the first proviso to Section 201(1), which states that a person shall not be deemed to be an assessee in default if the resident has filed their return of income and paid the tax due.The Tribunal observed that the amendment was intended to remove unintended consequences and make the provisions workable, thus it should be treated as retrospective. This view was supported by the Delhi High Court in CIT vs. Rajinder Kumar, which emphasized a fair, just, and equitable interpretation of the law.The Tribunal concluded that the insertion of the second proviso to Section 40(a)(ia) is declaratory and curative in nature, and should be given retrospective effect from April 1, 2005. The matter was remitted to the Assessing Officer for fresh adjudication, with necessary verifications regarding the related payments having been taken into account by the recipients in their income computation, payment of taxes, and filing of returns.2. Disallowance under Section 40A(3) of the Income Tax Act, 1961:The second issue involved the disallowance of Rs. 16,800 on account of cash payment for the purchase of land. The Tribunal noted that an identical issue had been addressed in the case of Rajeev Kumar Agarwal for the assessment year 2007-08, where the grievance of the assessee was rejected.The Assessing Officer had disallowed 20% of the payments made in cash for the purchase of land, which was used as stock in trade in the business. The assessee argued that the disallowance under Section 40A(3) should not apply as the payments were for the purchase of property, not goods. However, the Assessing Officer and the CIT(A) held that since the land was purchased as stock in trade, the disallowance under Section 40A(3) was applicable.The Tribunal upheld the findings of the CIT(A), noting that the considerations of business expediency were no longer relevant. The Tribunal cited the decisions of the ITAT Kolkata in Jamir Mondal vs. ACIT and the ITAT Indore in M/s. Kunjika Construction Pvt. Ltd. vs. ITO, which supported the disallowance under Section 40A(3) for payments made in cash for the purchase of land treated as stock in trade.The Tribunal concluded that there were no legally sustainable reasons for deleting the disallowance and rejected the grievance of the assessee.Conclusion:The appeal was partly allowed for statistical purposes. The disallowance under Section 40(a)(ia) was remitted to the Assessing Officer for fresh adjudication, while the disallowance under Section 40A(3) was upheld. The Tribunal's decision emphasized the importance of fair and equitable interpretation of tax provisions, ensuring that the legislative intent is achieved without causing undue hardship to taxpayers.