Tribunal decision: Payments to Scheduled Tribes exempt, non-tribals' tax deduction issue upheld

The Tribunal upheld the CIT(A)'s decision to delete the addition for payments made to Scheduled Tribes due to their exempt income status. However, the disallowance for payments to non-tribals was sustained as tax was not deducted at the source. The cross-objections by the assessee were allowed for verification of payment inclusion in the non-tribal payees' income returns. The case outcome directed the AO to reexamine the non-tribal payees' income inclusion, with the order pronounced on 18.11.2020.

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Issues Involved:

1. Relief granted by CIT(A) on additions made under section 40(a)(ia) for violation of section 197(1) of the Income Tax Act.
2. Applicability of section 195(1) versus section 197(1) in the context of the case.
3. Disallowance of expenses due to non-deduction of tax at source on payments made to non-tribals.
4. Cross-objections by the assessee regarding the inclusion of payments in the return of income by non-tribal payees.

Issue-wise Detailed Analysis:

1. Relief granted by CIT(A) on additions made under section 40(a)(ia) for violation of section 197(1) of the Income Tax Act:

The Revenue challenged the CIT(A)'s decision to allow relief of Rs. 2,18,67,711/- on additions made under section 40(a)(ia) by the Assessing Officer (AO) for violation of section 197(1). The CIT(A) had deleted the addition pertaining to payments made to members of Scheduled Tribes, whose incomes were exempt under section 10(26) of the Act, arguing that there was no occasion for deduction of tax at source when the income was not chargeable to tax.

2. Applicability of section 195(1) versus section 197(1) in the context of the case:

The Revenue contended that the CIT(A) erred by basing his decision on a case involving section 195(1) (related to non-residents) instead of section 197(1). The Tribunal noted that the CIT(A) relied on the Supreme Court's judgment in GE India Technology Centre P. Ltd Vs. CIT, which clarified that no tax deduction at source is required if the income is not chargeable under the Act. This principle was applied to the payments made to Scheduled Tribes, exempt under section 10(26).

3. Disallowance of expenses due to non-deduction of tax at source on payments made to non-tribals:

The CIT(A) partially upheld the AO's addition, sustaining a disallowance of Rs. 30,89,162/- for non-deduction of tax at source on payments made to non-tribals. The Tribunal agreed with the CIT(A)'s findings, noting that the assessee failed to provide evidence that the non-tribal payees had included the payments in their returns of income. Therefore, the disallowance was upheld for payments to non-tribals.

4. Cross-objections by the assessee regarding the inclusion of payments in the return of income by non-tribal payees:

The assessee filed cross-objections, arguing that the disallowance should not be made if the payees had included the payments in their returns of income. The Tribunal directed the AO to verify whether the non-tribal payees had included the receipts in their books of accounts and returns of income. If they had, no disallowance should be made; otherwise, the AO could proceed with the disallowance as per law. This issue was remitted back to the AO for fresh adjudication.

Conclusion:

The Tribunal upheld the CIT(A)'s decision to delete the addition for payments made to Scheduled Tribes but sustained the disallowance for payments to non-tribals due to non-deduction of tax at source. The cross-objections by the assessee were allowed for statistical purposes, directing the AO to verify the inclusion of payments in the returns of income by non-tribal payees. The order was pronounced on 18.11.2020.

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