2018 (11) TMI 1795 - AT - Income Tax

ITAT rules in favor of assessee on tax deduction dispute

The ITAT ruled in favor of the assessee, setting aside the disallowance under section 40(a)(ia) of the Income Tax Act. The ITAT held that a shortfall in ... Disallowance u/s 40a (ia) - short deduction of tds - default u/s 201 - HELD THAT:- In the case of CIT vs. S.K. Tekriwal [2012 (12) TMI 873 - CALCUTTA HIGH COURT] had held that in case of any shortfall due to any difference of opinion as to the taxability of any item or nature of payments falling under the various TDS provisions, the assessee can be declared to be the assessee in default u/s 201 of the Act but no disallowance can be made by invoking provisions of section 40a(ia). The Hon’ble High Court of Calcutta observed that the provisions of section 40a(ia) have two limbs; one is where, inter alia, the assessee has to deduct tax and second where after deducting tax, inter alia, the assessee has to pay the same into government account. The Hon’ble High Court of Calcutta went to observe that there was nothing in the said section to treat, inter alia, the assessee as defaulter where there is a shortfall in deduction and further, section 40a(ia) refers only to the duty to deduct tax and pay to government account. Undisputedly, in the present appeal also, there is no allegation that the tax deducted was not paid into the government account and the only fault of the assessee is the failure on its part to deduct tax at the prescribed rate. This, as per the judgement of the Hon’ble High Court of Calcutta, does not attract disallowance u/s 40a (ia) of the Act. - Decided in favour of assessee. Issues:1. Disallowance u/s 40(a)(ia) of the Income Tax Act on account of license fee paid by the assessee.Analysis:The appeal was filed against the order passed by the Ld. Commissioner of Income Tax (Appeals) for the assessment year 2008-09. The case involved the disallowance of Rs. 21,60,000 under section 40(a)(ia) of the Income Tax Act, 1961, due to a discrepancy in tax deduction on license fee paid by the assessee to M/s SRK Travels & Tours Pvt. Ltd. The Assessing Officer contended that tax should have been deducted at a higher rate of 22.6% instead of the 2.26% deducted by the assessee. The Ld. Commissioner of Income Tax (Appeals) upheld the disallowance, leading to the matter being taken before the ITAT for adjudication, among other issues.The Ld. Authorised Representative argued that the payment made was a business transaction, subject to tax deduction at source under section 194C of the Act, as part of the gross operating profit arrangement with the property lessor for running hotels. The AR asserted that similar deductions were made for other lessors, accepted by the Assessing Officer and the Ld. Commissioner of Income Tax (Appeals). The AR contended that disallowance under section 40(a)(ia) would only apply if no tax was deducted, not in cases of short deduction, citing the judgment of the Hon'ble High Court of Calcutta in CIT vs. S.K. Tekriwal.On the other hand, the Ld. Senior Departmental Representative supported the disallowance, emphasizing that the payment was akin to rent, necessitating tax deduction at source under section 194I of the Act, as per the findings of the Ld. Commissioner of Income Tax (Appeals).After considering the submissions and reviewing the facts, the ITAT found the case aligned with the judgment of the Hon'ble Calcutta High Court in CIT vs. S.K. Tekriwal. The ITAT concurred with the Calcutta High Court's interpretation that section 40(a)(ia) does not warrant disallowance in cases of short deduction due to differences in opinion on taxability, as long as the tax deducted was paid to the government. The ITAT also referenced similar decisions by the ITAT Mumbai Bench and the Hon'ble High Court of Karnataka, supporting the view that shortfall in tax deduction does not attract disallowance under section 40(a)(ia). Consequently, the ITAT allowed ground no. 4 of the assessee's appeal, leading to the disallowance being set aside.In conclusion, the ITAT ruled in favor of the assessee, emphasizing that the shortfall in tax deduction did not warrant disallowance under section 40(a)(ia) as long as the tax deducted was remitted to the government, following the legal precedents cited in the judgment.