Tribunal upholds CIT(A)'s decisions on TDS non-deduction & expenses disallowance under Sections 40(a)(ia) & 14A

The Assistant Commissioner of Income Tax, Circle 4 (1) (1), Bangalore Versus M/s. Karle International Pvt. Ltd.

The Assistant Commissioner of Income Tax, Circle 4 (1) (1), Bangalore Versus M/s. Karle International Pvt. Ltd. - TMI Issues Involved:
1. Disallowance under Section 40(a)(ia) for non-deduction of TDS.
2. Disallowance under Section 14A for expenses related to tax-exempt income.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40(a)(ia) for non-deduction of TDS:

The primary issue was whether the CIT(A) was correct in allowing the appeal of the assessee by easing the provisions of Section 40(a)(ia) in favor of the assessee, despite the assessee being a chronic defaulter of TDS. The assessee, engaged in the manufacture of readymade garments, outsourced some manufacturing work and paid Rs. 29,72,63,800 to M/s. L.T. Karle & Co. without deducting TDS as required by Section 194C. The AO added this amount to the total income under Section 40(a)(ia) for non-deduction of TDS.

The assessee contended that the recipient included the payment in their income and paid taxes, supported by Form 26A from an auditor. The CIT(A) referred to the second proviso to Section 40(a)(ia) and the first proviso to Section 201(1), which state that if the payee has included the payment in their income and paid taxes, the payer should not be deemed in default, and no disallowance should be made.

The CIT(A) obtained a remand report from the AO, who did not dispute the certificate but noted it was not filed during the assessment. The CIT(A) deleted the addition, citing various judicial pronouncements, including the Supreme Court's decision in Hindustan Coca Cola Beverages Pvt. Ltd. v. CIT, which held that if the recipient has paid taxes, the same amount cannot be taxed again.

The Tribunal upheld the CIT(A)'s decision, noting that the Delhi High Court in CIT v. Ansal Land Mark Township (P) Ltd. and the Calcutta High Court in M/s. Tirupati Construction held that the second proviso to Section 40(a)(ia) is retrospective and applies from 1.4.2005. Since the recipient included the payment in their income and paid taxes, no disallowance should be made under Section 40(a)(ia).

2. Disallowance under Section 14A for expenses related to tax-exempt income:

The second issue was whether the CIT(A) was right in allowing the appeal of the assessee by not disallowing expenses under Section 14A read with Rule 8D, despite the assessee not earning any exempt income during the relevant year. The AO disallowed Rs. 11,977 under Section 14A, considering the interest expenses and investments likely to yield tax-free income.

The CIT(A) deleted the disallowance, reasoning that no disallowance of expenses under Section 14A can be made when no exempt income is earned during the relevant year. The Tribunal upheld this decision, referencing the Bangalore Bench of ITAT in M/s UB Infrastructure Projects Ltd. v. DCIT and the Delhi High Court in Cheminvest Ltd. v. CIT, which held that Section 14A cannot be invoked when there is no exempt income.

Conclusion:

The Tribunal dismissed the revenue's appeal, affirming the CIT(A)'s decisions on both issues. The Tribunal concluded that the CIT(A) was justified in allowing the relief to the assessee under Section 40(a)(ia) and in deleting the disallowance under Section 14A, as there was no exempt income earned during the relevant year. The appeal by the revenue was thus dismissed.