2017 (6) TMI 128 - AT - Income Tax

Tribunal rules expenses not subject to tax deduction under section 40(a)(ia)

The Tribunal allowed the appeal, deleting the addition made by the Assessing Officer and sustained by the Commissioner of Income Tax (Appeals). The ... Reopening of assessment - addition made u/s 40(a)(ia) - Held that:- In the present case, it is noticed that the assessee acted only as an intermediary and there was no privity of contract between the assessee and client of carriers of goods. The assessee was clearing and forwarding agent and made the payments to the transporters which were reimbursed by the principal who deducted the TDS. On perusing the copy of profit and loss account placed at page no. 30 of the assessee’s paper book. It is noticed that no such expenses were debited in the profit and loss account. The provisions contained in the said Section 40(a)(ia) says that these provisions are applicable when any amount has been debited in the profit and loss account and deducted in computing the income chargeable under the head profits and gains of business or profession. In the present case, nothing has been deducted by the assessee from the income in the profit and loss account. Therefore, provisions of Section 40(a)(ia) of the Act are not applicable to the facts of the present case. See CIT Vs Hardarshan Singh [2013 (1) TMI 314 - DELHI HIGH COURT]. - Decided in favour of assessee. Issues:1. Dismissal of appeal by CIT(A)2. Validity of action under sections 147 and 1483. Liability to deduct tax under section 40(a)(ia)4. Addition of Rs. 11,93,446 by AO5. Justification of action under sections 147/1486. Applicability of provisions of section 40(a)(ia)7. Default in tax deduction under section 40(a)(ia)8. Claimed expenses not reflected in profit and loss accountIssue 1 - Dismissal of appeal by CIT(A):The appeal was filed against the order of CIT(A) dated 03.09.2014. The grounds raised by the assessee included the incorrect dismissal of the appeal by CIT(A). The main grievance related to the addition of Rs. 11,93,446 made by the AO under section 40(a)(ia) of the Income-tax Act, 1961.Issue 2 - Validity of action under sections 147 and 148:The AO initiated proceedings under section 148 as the assessee had not deducted TDS on direct expenses exceeding the threshold limit prescribed under section 194C. The AO observed that the assessee had failed to deduct tax on payments made to transporters, leading to the addition of Rs. 11,93,446. The reasons recorded for action under sections 147/148 were challenged by the assessee.Issue 3 - Liability to deduct tax under section 40(a)(ia):The AO made the impugned addition under section 40(a)(ia) due to the assessee's failure to deduct TDS on payments to transporters. The CIT(A) sustained this addition, emphasizing the responsibility of the assessee to deduct tax at source under section 40(a)(ia) while making payments to contractors.Issue 4 - Addition of Rs. 11,93,446 by AO:The AO added Rs. 11,93,446 to the income of the assessee for failure to deduct tax on freight payments to transporters. The CIT(A) upheld this addition, stating that the responsibility to make payments to transport contractors lay with the assessee, making them liable for the tax deduction under section 40(a)(ia).Issue 5 - Justification of action under sections 147/148:The assessee contested the correctness of the action taken under sections 147/148, arguing that the reasons recorded did not satisfy the condition of income escaping assessment due to failure to disclose all material facts. However, the addition made by the AO was upheld by the CIT(A) based on the responsibility of the assessee to deduct tax under section 40(a)(ia).Issue 6 - Applicability of provisions of section 40(a)(ia):The assessee claimed that the provisions of section 40(a)(ia) were not applicable as the expenses were not claimed in the profit and loss account. The Tribunal noted that since no such expenses were debited in the profit and loss account, the provisions of section 40(a)(ia) were not applicable to the facts of the case.Issue 7 - Default in tax deduction under section 40(a)(ia):The Tribunal considered the nature of the contract between the assessee and the transporters, concluding that the assessee acted as an intermediary without a direct contract with the carriers of goods. As the expenses were reimbursed by the principal after deducting TDS, the Tribunal held that the assessee was not liable for tax deduction under section 40(a)(ia).Issue 8 - Claimed expenses not reflected in profit and loss account:The Tribunal referred to relevant case laws and held that since the expenses were not claimed as expenditure in the profit and loss account and were reimbursed by the principal after TDS deduction, the disallowance made by the AO under section 40(a)(ia) was not justified. The Tribunal allowed the appeal, deleting the addition made by the AO and sustained by the CIT(A).