2016 (9) TMI 5 - AT - Income Tax

Tribunal partially allows appeal, remands for payees' tax verification

The Tribunal partly allowed the appeal, deleting the addition of Rs. 1,89,900/- for payments to mechanics and confirming the disallowance of Rs. ... Disallowance under section 40(a)(ia) - tax deduction at source under section 194H - principal to principal versus principal-agent relationship - first proviso to section 201(1) - relief where payee has filed return - second proviso to section 40(a)(ia) - declaratory/curative and retrospective effectTax deduction at source under section 194H - Applicability of section 194H/TDS to payments made to mechanics and deletion of related disallowance. - HELD THAT: - The Tribunal examined monthly payments made to mechanics (aggregate shown at Rs. 1,89,900/-) and noted that individual payments to each payee did not exceed the statutory threshold for TDS under section 194H. In view of the threshold, the payments to mechanics did not attract TDS liability and the corresponding disallowance under section 40(a)(ia) was not sustainable. The Tribunal therefore deleted the addition in respect of amounts paid to mechanics. [Paras 12]Addition relating to payments to mechanics deleted.Disallowance under section 40(a)(ia) - principal to principal versus principal-agent relationship - first proviso to section 201(1) - relief where payee has filed return - second proviso to section 40(a)(ia) - declaratory/curative and retrospective effect - Whether payments to sub-dealers were commission attracting disallowance under section 40(a)(ia), and the effect of payees having declared such receipts in their returns under the provisos. - HELD THAT: - On facts, the Tribunal accepted the AO's conclusion that payments to sub-dealers were in the nature of commission because there was no written agreement establishing a principal to principal relationship and the payments had been treated as 'commission' in the books; accordingly the CIT(A)'s confirmation of the AO's view insofar as it related to the aggregate paid to sub dealers was sustained. However, the Tribunal also considered the impact of the first proviso to section 201(1) and the second proviso to section 40(a)(ia) as interpreted by the Delhi High Court and the Agra Bench of the Tribunal, observing that the second proviso is declaratory/curative and retrospective from 1 4 2005. If the payees have furnished returns under section 139 disclosing the sums and paid tax thereon, the assessee should not be treated as a defaulter and the disallowance may not be warranted. In consequence, the Tribunal set aside the impugned confirmation and restored the matter to the AO to decide afresh in the light of the provisos and on verification whether the payees have included the receipts in their returns and discharged tax liability. [Paras 13, 14, 17]Confirmation of disallowance as regards payments to sub dealers sustained on characterisation, but the matter is set aside and remitted to the AO to verify whether payees have filed returns and paid tax; decision to be reopened in light of the provisos.Final Conclusion: The appeal is partly allowed: disallowance in respect of payments to mechanics is deleted; the finding that payments to sub dealers were commission is recognised but the matter is set aside and remanded to the assessing officer for fresh decision in light of the first proviso to section 201(1) and the second proviso to section 40(a)(ia) after verifying whether the payees have disclosed the receipts and paid tax. Appeal disposed of partly in favour of the assessee for statistical purposes. Issues Involved:1. Whether the CIT-A was justified in confirming the order of AO in disallowing the amounts under Section 40(a)(ia) of the Act.2. Whether the amounts paid were in the nature of commission requiring tax deduction at source under Section 194H of the Act.Detailed Analysis:Issue 1: Confirmation of Disallowance under Section 40(a)(ia)The appellant assessee contested the disallowance of Rs. 13,79,179/- under Section 40(a)(ia) of the Income Tax Act, arguing that the amount paid was not in the nature of commission. The CIT-A had confirmed the AO's order, leading to the appeal before the Tribunal.The assessee, a dealer of TVS brand motorcycles, offered discounts to sub-dealers and mechanics. The AO and CIT-A treated these discounts as commission, necessitating tax deduction under Section 194H. The Tribunal reviewed the nature of these payments and the relationship between the assessee and sub-dealers, concluding that the payments to sub-dealers were indeed commission, thus upholding the disallowance by the AO.However, the Tribunal found that the payments to mechanics aggregating Rs. 1,89,900/- did not exceed Rs. 2,500/- per person, and thus, Section 194H was not applicable. Consequently, the addition of Rs. 1,89,900/- was deleted.Issue 2: Nature of Payments and Requirement of Tax Deduction under Section 194HThe assessee argued that the payments were discounts, not commissions, and cited the Ahmedabad Stamp Vendors Association vs. Union Of India case to support the principal-to-principal relationship. The Tribunal, however, noted the lack of written agreements with sub-dealers and the AO's observations that the transactions were akin to commission payments. The Tribunal agreed with the AO that the payments to sub-dealers were commissions, thus requiring tax deduction under Section 194H.The Tribunal also addressed the assessee's contention regarding the retrospective application of the second proviso to Section 40(a)(ia) and Section 201(1). It referred to the Delhi High Court's judgment, which stated that if the payee has filed returns and paid taxes, the assessee should not be deemed in default. The Tribunal directed the AO to verify if the payees had included the payments in their returns and paid taxes, potentially relieving the assessee from the disallowance under Section 40(a)(ia).Conclusion:The Tribunal partly allowed the appeal, deleting the addition of Rs. 1,89,900/- for payments to mechanics and confirming the disallowance of Rs. 12,00,170/- for payments to sub-dealers. The matter was remanded to the AO for verification of payees' tax compliance, in line with the principles set out by the Delhi High Court. The appeal was allowed for statistical purposes, providing the assessee an opportunity to demonstrate compliance with the relevant tax provisions.