2016 (3) TMI 445 - AT - Income Tax

Tribunal rules in favor of appellant on tax deduction rates, dismisses revenue's appeal

The Tribunal ruled in favor of the appellant regarding the incorrect rate of tax deduction under sections 194J and 194C, upholding that TDS was correctly ... Short or incorrect deduction of tax at source does not automatically attract disallowance under section 40(a)(ia) - bona fide deduction under a wrong TDS provision - retrospective/curative effect of the second proviso to section 40(a)(ia) - conflicting decisions of non jurisdictional High Courts - principle of following the decision favourable to the assesseeShort or incorrect deduction of tax at source does not automatically attract disallowance under section 40(a)(ia) - bona fide deduction under a wrong TDS provision - Whether deduction of tax at source under an incorrect provision (section 194C instead of section 194J) which results in short deduction disentitles the assessee from claiming the expense by operation of section 40(a)(ia). - HELD THAT: - The Tribunal examined whether the twin conditions in section 40(a)(ia) - that tax deductible at source was not deducted and, after deduction, not paid by the due date - are satisfied merely because tax was deducted under a wrong provision leading to short deduction. Relying upon the decision in CIT vs S K Tekriwal and coordinate Tribunal precedents, the Tribunal held that the provision contemplates failure to deduct or failure to pay tax which is deductible; it does not treat shortfall arising from bona fide deduction under a wrong provision as automatic default attracting disallowance. Where two non jurisdictional High Courts have taken divergent views, the Tribunal applied the settled principle of following the decision favourable to the assessee in the absence of a jurisdictional High Court contrary ruling. Applying these principles to the facts, the assessee having deducted TDS under section 194C (albeit short of the correct rate under section 194J) could not be subjected to disallowance under section 40(a)(ia). [Paras 7, 8]No disallowance under section 40(a)(ia) on account of short deduction where tax was deducted under a wrong provision bona fide.Retrospective/curative effect of the second proviso to section 40(a)(ia) - Whether the second proviso to section 40(a)(ia) (that no disallowance is to be made where the payee has offered the income and paid tax) precludes disallowance in the present case. - HELD THAT: - The Tribunal considered the amendment effected by Finance Act, 2012 (second proviso) and subsequent judicial pronouncements holding that the proviso is directory and curative in nature and should be given retrospective effect. Having noted that the payee (M/s Hathway Cable and Datacom Ltd.) had offered the receipt to tax, the Tribunal accepted the assessee's alternative contention that, in view of the proviso's retrospective/curative character as recognised by higher judicial authority, disallowance could not be sustained. [Paras 9]No disallowance under section 40(a)(ia) in view of the second proviso where the payee has offered the income to tax.Final Conclusion: Revenue's appeal dismissed; assessee entitled to deduction of the payment as no disallowance under section 40(a)(ia) could be sustained either because tax was deducted bona fide under a wrong provision or because the payee had offered the income and the second proviso operates to preclude disallowance. Issues:1. Incorrect rate of tax deduction under sections 194J and 194C.2. Disallowance under section 40(a)(ia) for short deduction of tax.Analysis:Issue 1: Incorrect rate of tax deduction under sections 194J and 194CThe appellant contested the order of the CIT(A) regarding the rate of tax deduction under sections 194J and 194C. The appellant argued that the payment made towards royalty and connection charges did not fall under the definition of 'royalty' as per section 9(1)(vi) and hence, TDS was correctly deducted at 2% under section 194C. The appellant relied on previous decisions and the rule of consistency. The Tribunal noted that the CIT(A) had decided in favor of the appellant for the AY 2009-10 and followed the same decision, ultimately allowing the issue in favor of the appellant.Issue 2: Disallowance under section 40(a)(ia) for short deduction of taxThe appellant further argued that even if there was a short deduction of tax under the wrong provision, no disallowance should be made under section 40(a)(ia). The Tribunal referred to various High Court decisions supporting the appellant's argument, emphasizing that if there are conflicting decisions of non-jurisdictional High Courts, the one favoring the assessee should be followed. The Tribunal held that no disallowance under section 40(a)(ia) should be made for short deduction of tax under different or wrong provisions of the section. Additionally, the appellant pointed out that the payee had shown the income in their return, invoking the second proviso to section 40(a)(ia) to prevent disallowance.In conclusion, the Tribunal dismissed the appeal of the revenue, upholding the decisions made in favor of the appellant regarding the rate of tax deduction and disallowance under section 40(a)(ia). The Tribunal's decision was based on the interpretation of relevant provisions, previous judicial precedents, and the principle of consistency in tax deduction matters.