Disallowance under section 40(a)(ia) applies to payable and paid amounts unless payee declared income and paid tax

ITAT DELHI - AT held that disallowance under section 40(a)(ia) applies to both amounts shown as payable and amounts actually paid unless the payee has accounted for the receipt and paid tax, directing the AO to verify the payee's return; the assessee's plea for retrospective application of the 01-04-2015 reduction in disallowance was rejected. Ad hoc disallowance of wages was deleted for lack of basis, and additions for sundry creditors were deleted where regular transactions, bills and bank payments supported the entries. Overall decision favored the assessee, with limited remand for verification under section 40(a)(ia).

---

---

Issues Involved:
1. Disallowance under Section 40(a)(ia) of the Income Tax Act, 1961.
2. Adhoc disallowance of labor expenses.
3. Addition under Section 68 of the Income Tax Act, 1961 for unconfirmed creditors.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40(a)(ia) of the Income Tax Act, 1961:
The revenue contested the deletion of a disallowance of Rs. 97,900 made by the Assessing Officer (AO) under Section 40(a)(ia) due to the assessee's failure to deduct TDS on commission payments. The CIT(A) had deleted the disallowance, relying on the judgment of the Allahabad High Court in CIT v. Vector Shipping Services (P.) Ltd., which held that no disallowance could be made if the amount was shown as paid. However, the Supreme Court in Palam Gas Service v. CIT clarified that disallowance under Section 40(a)(ia) applies to both paid and payable amounts. The Tribunal upheld the Supreme Court's view but remanded the matter to the AO to verify if the payee had accounted for the commission income and paid taxes thereon, as per the second proviso to Section 40(a)(ia) read with the first proviso to Section 201. The Tribunal rejected the assessee's argument that only 30% of the amount should be disallowed retrospectively, as the amendment was prospective.

2. Adhoc Disallowance of Labor Expenses:
The AO had made an adhoc disallowance of 10% of labor expenses amounting to Rs. 14,81,258, citing non-compliance with labor laws and lack of clarity on the muster rolls' authenticity. The CIT(A) deleted the disallowance, noting that the AO had no basis for the 10% disallowance and that compliance with EPF and ESI was not a ground for disallowance under the Income Tax Act. The assessee had provided detailed monthly labor expenses and muster rolls, which clearly showed the company's name and work sites. The Tribunal confirmed the CIT(A)'s deletion, stating that the AO's reasons for the adhoc addition were unsustainable and that there was no evidence of excessive labor payments.

3. Addition under Section 68 for Unconfirmed Creditors:
The AO had added Rs. 2,22,59,664 under Section 68, treating the entire sundry creditors as unexplained due to non-response to notices sent under Section 133(6). The CIT(A) observed that the AO did not provide the assessee an opportunity to object to the non-compliance and noted that the addition during the year was only Rs. 35,36,546. The Tribunal agreed with the CIT(A) that Section 68 could not be applied to amounts representing purchases made on credit, especially when the purchases were accounted for in the profit and loss account. The Tribunal found that the AO had not examined the nature of sundry creditors or the ledger accounts and had made the addition without verifying the books of accounts. The Tribunal confirmed the CIT(A)'s deletion of the addition, noting that the transactions were regular, supported by bills and payment vouchers, and that the trading results were not disturbed.

Conclusion:
The Tribunal restored the issue of disallowance under Section 40(a)(ia) to the AO for verification of the payee's income accounting but confirmed the CIT(A)'s deletion of adhoc disallowance of labor expenses and addition under Section 68 for unconfirmed creditors. The appeal was allowed in favor of the assessee.

---