2018 (8) TMI 1183 - AT - Income Tax

Tribunal upholds CIT(A)'s decision on Income Tax Act disallowances. (A)

The Tribunal upheld the CIT(A)'s decision to delete disallowances under Sections 40(a)(ia) and 37 of the Income Tax Act. In the first issue, the ... Disallowance u/s.40(a)(ia) for failure to deduct TDS - assessee in default u/s 201 - disallowance of expenses u/s.37 on account of infringement of the law - AO was of the view that the gift given by pharmaceutical and allied health sector industries to medical practitioners and their professional association is prohibited under the Medical Council Act, 1956 - Held that:- no disallowance needs to be made if the recipient has included the payment made by the assessee in its receipts and has paid the taxes thereon. - the claim of the assessee for the interest expenses cannot be denied due to non deduction of TDS under section 194A r.w.s.40(a)(ia) of the Act. - the claim of the assessee for the interest expenses cannot be denied due to non deduction of TDS under section 194A r.w.s.40(a)(ia) of the Act. - Decided against the revenue. Sale promotion expenses - Held that:- CIT(A) reversed the order of AO by observing that the assessee is not a pharmaceutical company. Therefore, the Circular issued by CBDT cannot be applied. The ld. CIT(A) also observed that the assessee had not supplied any item free of cost to the hospitals, but these items were representing part of the machinery and equipments supplied to various parties. - order of CIT(A) confirmed - Decided against the revenue. Issues Involved:1. Disallowance under Section 40(a)(ia) of the Income Tax Act for non-deduction of TDS on interest payments.2. Disallowance of sales promotion expenses under Section 37 of the Income Tax Act.Issue-wise Detailed Analysis:1. Disallowance under Section 40(a)(ia) of the Income Tax Act for non-deduction of TDS on interest payments:The Revenue contended that the CIT(A) erred in deleting the disallowance of Rs. 10,77,754/- made by the AO under Section 194A read with Section 40(a)(ia) of the Income Tax Act due to the assessee's failure to deduct TDS on interest payments to Non-Banking Financial Companies (NBFCs). The assessee argued that it had obtained requisite certificates in Form No. 26A from the NBFCs, confirming that the interest payments were included in their taxable income and taxes were paid. The CIT(A) observed that the requirement to file Form 26A with the DGIT (Systems) was introduced only on 19-02-2013, which was after the relevant assessment year. Therefore, the disallowance was deleted as the interest was included in the income of the NBFCs.The Tribunal upheld the CIT(A)'s decision, referencing the amendment by the Finance Act 2012 and the proviso to Section 201 which states that no disallowance is required if the recipient has paid taxes on the income. The Tribunal also cited the Delhi High Court decision in CIT v. Ansal Land Mark Township (P) Ltd., which held that the amendment is retrospective. Consequently, the Tribunal directed the AO to delete the disallowance.2. Disallowance of sales promotion expenses under Section 37 of the Income Tax Act:The AO disallowed Rs. 47,20,260/- claimed by the assessee as sales promotion expenses, arguing that gifts to medical practitioners are prohibited under the Medical Council Act, 1956, supported by CBDT Circular No.5 of 2012. The assessee contended that the expenses were for accessories supplied to government and other hospitals as part of purchase orders, not as gifts. The CIT(A) agreed with the assessee, noting that the assessee is not a pharmaceutical company, and the items supplied were necessary for the operation of the supplied machinery.The Tribunal affirmed the CIT(A)'s decision, stating that the CBDT circulars are not binding on the Tribunal and the benevolent circulars are binding only on the authorities in the administration of the Act. The Tribunal also noted that the goods were supplied in pursuance of purchase orders, and therefore, the circular does not apply. The Tribunal dismissed the Revenue's appeal, concluding that the disallowance was not justified.Conclusion:The Tribunal dismissed the Revenue's appeal on both grounds, upholding the CIT(A)'s deletion of disallowances under Sections 40(a)(ia) and 37 of the Income Tax Act.