Penalty deleted by Tribunal as disallowance rectified, leading to dismissal of Revenue's appeal

The penalty under section 271(1)(c) was deleted by the Tribunal as the disallowance under section 40(a)(ia) was rectified based on the recipient company paying taxes. The AO was directed to allow the proviso to section 40(a)(ia) if conditions were met, leading to the deletion of additions and acceptance of the returned income. As the basis for penalty levy was removed, the penalty was deemed deleted, and the Tribunal dismissed the Revenue's appeal, upholding the decision of the ld. CIT(A). The appeal was ultimately dismissed on 27/08/2019.

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Issues:
Challenge to deletion of penalty under section 271(1)(c) based on disallowance under section 40(a)(ia).

Analysis:
The Revenue challenged the correctness of the deletion of the penalty under section 271(1)(c) by the ld. CIT(A), New Delhi, based on the disallowance under section 40(a)(ia). The AO found that the assessee company made payments to another company for personnel and travelling expenses, considering them as contractual payments for services rendered. A show cause notice was issued, and the assessee claimed that the other company had reimbursed the actual cost and deducted tax at source, hence Section 194(C) did not apply. However, the AO disallowed the amount under section 40(a)(ia) of the Act.

The matter went to the Tribunal, which remitted it back to the AO, stating that if the recipient of the income had paid tax on the income and no disallowance should be made in the assessee's hands. The Tribunal directed the AO to allow the benefit of the proviso to section 40(a)(ia) if the assessee could satisfy the requirements. Following the Tribunal's directions, the AO deleted the additions made in the first round and accepted the returned income.

Considering that the basis for the penalty levy, i.e., the disallowances in the assessment order, was removed due to the Tribunal's directions, the penalty was deemed to be deleted. The Tribunal declined to interfere with the findings of the ld. CIT(A) and dismissed the Revenue's appeal. Consequently, the appeal by the Revenue was also dismissed, and the order was pronounced on 27/08/2019.

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