2014 (3) TMI 1187 - AT - Income Tax

Tribunal overturns CIT's decision, no tax loss due to payee's compliance. Sec 40(a)(ia)

Shri Chandrashekar Shivalingappa Bali. Prop Shri Jagadish Trading Co. Versus The Commissioner of Income Tax, Belgaum

The Tribunal allowed the Assessee's appeal, overturning the CIT's order. It was determined that as the payee had accounted for and paid tax on the ginning ... Revision u/s 263 - AO failed to verify the applicability of section 194C as well as Section 40(a)(ia) - assessee has taken the contention that M/s. Motibagh Industries Pvt. Ltd is assessed to tax paid on due income but the Commissioner was of the view that M/s Motibagh Industries has paid the tax is not relevant for applicable of Section 40(a)(ia) - HELD THAT:- We find that Section 40 (a)(ia) of the Act is applicable for non deduction of TDS on the expenditure as per the specified under section 40(a)(ia) of the Act, determines the disallow-ability of any expenditure. Consequently, if the assessee can establish that payee has paid tax and filed the return of income before the due date, the expenditure by the assessee shall be allowed in spite of the fact that tax has not been deducted on the same. The memorandum explaining the Finance Act, 2012 also states, “In order to rationalize the provisions of disallowance on account of non-deduction of tax from the payments made to a resident payee, it is proposed to amend section 40 40(a)(ia) to provide that where an assessee makes payment of the nature specified in the said section to a resident payee without deduction of tax and is not deemed to be an assessee in default under section 201(1) on account of payment of taxes by the payee, then, for the purpose of allowing deduction of such sum, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee.” Then there will be no disallowance under section 40(a)(ia) of the Act. Therefore, we are of the view that the payee has also paid the tax, therefore, we are of the view that there cannot be any disallowance U/s.40(a)(ia) of the Act - when the Commissioner has taken view that this amount has to be added as income U/s 40(a)(ia). As per documents filed by the assessee, it is verified and found that the payee to whom the payments is made i.e. M/s. Motibgh Industries has accounted this amount in his profit and loss account. M/s. Motibagh Industries is assessed to tax. M/s. Motibagh Industries has already accounted the amount of ₹ 3245797/- in its profit and loss account and paid the tax. We find that M/s. Motibagh Industires, the payee, is assessed to tax and paid the tax before due date of his return. As per section 201(1), if the assessee has not deducted the tax but if the payee has furnished his return of income u/s 139 and has taken the amount of sum for computing the income in such return of income and has paid the tax on his income declared by him in such return of income and furnished certificate to this effect from an accountant in such form as may be prescribed, then, assessee will not be regarded as in default. In the instant case the payee has already paid the tax, and the assessee has produced the evidence before us. Therefore, we are of the view that there cannot be disallowance U/s. 40(a)(ia). - Decided in favour of assessee. Issues Involved:1. Invocation of Sec 263 of the Income Tax Act, 19612. Deductibility of ginning and pressing charges under Sec 40a(ia)3. Applicability of amendments to Sec 40a(ia) and Sec 201(1)4. Applicability of Sec 40a(ia) to amounts payable as of 31st March5. Consistency in the application of Sec 194C regarding payments to Motibag Industries Pvt. Ltd.6. Consideration of tax paid by the payeeDetailed Analysis:1. Invocation of Sec 263 of the Income Tax Act, 1961:The Assessee appealed against the CIT's order invoking Sec 263 on the grounds that the assessment order dated 29.11.2010 was erroneous and prejudicial to the interests of the revenue. The CIT believed that the Assessing Officer (AO) failed to verify the applicability of Sec 194C and Sec 40(a)(ia) concerning the payment made to Motibag Industries Pvt. Ltd., thereby rendering the assessment order erroneous.2. Deductibility of Ginning and Pressing Charges under Sec 40a(ia):The CIT held that the ginning and pressing charges of Rs. 32,45,797 paid to Motibag Industries Pvt. Ltd. were not deductible due to non-compliance with Sec 40a(ia). The Assessee argued that there was no written contract necessitating TDS under Sec 194C, and the AO had previously accepted this position. However, the CIT concluded that there was an implied contract, and thus, TDS was applicable, leading to the disallowance of the expenditure under Sec 40(a)(ia).3. Applicability of Amendments to Sec 40a(ia) and Sec 201(1):The Assessee contended that amendments to Sec 40a(ia) and Sec 201(1) were procedural and beneficial, thus applicable to all pending proceedings. The CIT, however, did not accept this argument and maintained the disallowance.4. Applicability of Sec 40a(ia) to Amounts Payable as of 31st March:The Assessee argued that Sec 40a(ia) should only apply to amounts outstanding as of 31st March, which in this case was Rs. 1,33,010, with the rest being paid during the year. The CIT did not accept this view, leading to the entire amount being disallowed.5. Consistency in the Application of Sec 194C Regarding Payments to Motibag Industries Pvt. Ltd.:The Assessee claimed that payments to Motibag Industries Pvt. Ltd. were consistently not covered under Sec 194C in previous years, and this position had been accepted by the Department. The CIT, however, emphasized the existence of an implied contract and the necessity of TDS, thus disallowing the expenditure.6. Consideration of Tax Paid by the Payee:The Assessee argued that Motibag Industries Pvt. Ltd. had duly accounted for and paid tax on the ginning and pressing charges, resulting in no loss of tax revenue. The CIT held that the payment of tax by the payee was irrelevant for the application of Sec 40(a)(ia), leading to the disallowance.Judgment:The Tribunal considered the arguments and found that the payee, Motibag Industries Pvt. Ltd., had accounted for the entire amount in its books and paid the tax. Thus, the Tribunal concluded that there could not be any disallowance under Sec 40(a)(ia) as per the proviso to Sec 201(1), which states that if the payee has paid the tax, the assessee should not be regarded as in default. Consequently, the Tribunal allowed the appeal of the Assessee, reversing the CIT's order.Order Pronouncement:The appeal filed by the Assessee was allowed, and the order was pronounced in the open Court on 28.3.2014.